The world seems to be in the midst of a perpetual political crisis, especially in Europe, where Britain and France remain in chaos. On Tuesday, British Prime Minister Theresa May suffered a massive Brexit defeat in the House of Commons by a resounding vote of 432 to 202, which subsequently triggered a “no confidence” debate that Prime Minister May barely survived. Ironically, no one really wants to be the British Prime Minister leading up to the implementation of Brexit on March 29th, so the British pound remains volatile as international capital flight seeks safer shores.
Another Brexit referendum is possible, but it has to be done before March 29th when the European Union (EU) is scheduled to boot Britain out. The reason that there could be another referendum is that there are substantial majorities in Parliament that apparently do not want to exit the EU. In the meantime, the euro also remains weak due to the ongoing Brexit chaos and the uncertainty about exit fees that the EU wants to impose – although Britain is increasingly unwilling to pay the EU any significant exit fees.
If this were not enough chaos, China’s woes are still making some investors nervous, but the U.S. trade talks are no longer the country’s biggest problem. On Friday, China offered to go on a six-year buying spree to ramp up imports from the U.S., which signaled that the trade talks may be going well.
Despite all the international chaos, fourth-quarter announcement season is off to a strong start, led by Netflix, which continued to surge in the wake of raising its monthly fees by 13% to 18%. On Thursday, the company announced that it added 8.8 million new subscribers last quarter, substantially higher than analyst estimates of 7.5 million. In the fourth quarter, Netflix sales rose 27.4% to $4.19 billion, compared with $3.29 billion in the same quarter a year ago. The company’s fourth-quarter earnings were $133.9 million or 30 cents per share, 25% higher than analysts’ consensus estimate of 24 cents. Overall, Netflix trades more on its new subscriber growth, but its price increases should insure steady earnings growth.
Navellier & Associates owns NFLX in managed accounts and or our sub-advised mutual fund. Louis Navellier and his family own NFLX, via the sub-advised mutual fund and in a personal account.
Now that the fourth-quarter announcement season is underway, a “retest” of the Christmas lows is less likely. So far, companies in the S&P 500 that have announced fourth-quarter results have posted 7.8% annual sales growth and 21.5% annual earnings growth. Typically, the good sales and earnings announcements come out early, so I expect the S&P 500’s fourth-quarter sales growth will decelerate to a 6% annual pace and fourth-quarter earnings growth will decelerate to about a 16% annual pace in the upcoming weeks.
I should also add that our friends at Bespoke Investment Group issued an excellent report last week that implied that since the S&P 500 has resurged by 13% from its Christmas lows, a retest is becoming less likely. They looked at prior periods in which the S&P 500 fell 15%+ in three months or less and then proceeded to rally by 10% in the span of 10 or fewer trading days. They found that the S&P 500’s average and median forward return over the next one, three, six, and 12 months was better than the historical average for all periods, but it wasn’t typically a smooth ride, so be prepared for volatility.
We saw such wide swings twice in this bull market, first as the bull market began, with a 27.6% drop in early 2009 followed by an 11% rise in 10 days, then in the late summer of 2011 we saw an 18.8% drop in August and September followed by an 11.4% rise in 10 days. In both cases, the market never looked back – there were no “lower lows” to come – and the overall market kept rising throughout the coming year:
Most Economic Indicators Argue Against Fed Rate Increases
On Tuesday, the Labor Department announced that the Producer Price Index (PPI) declined 0.2% in December, the biggest monthly decline in more than two years and one notch more than economists’ expectations of a 0.1% decline. Wholesale gasoline prices declined 13.1% in December, while food prices rose 2.6. The core PPI, excluding food and energy, was unchanged in December. Wholesale service costs declined by 0.1% in December, which represents the first decline in four months.
In the past 12 months, the PPI and core PPI have risen 2.5% and 2.8%, respectively, but those numbers are coming down. Overall, the PPI provided more evidence that inflationary pressures are “decelerating,” which means that the Fed can be “patient” and not raise key interest rates for the foreseeable future.
December retail sales data from the Commerce Department was not released due to the government shutdown but based on credit card sales, it appears the holiday shopping season was stunning. However, retail sales may stall in the upcoming months due to approximately 800,000 furloughed government employees. The situation for government contractors is dire, since their back pay will not be restored.
Speaking of dire, the University of Michigan on Friday stated that its consumer sentiment index dropped sharply to 90.7 in January, down from 98.3 in December to the lowest level since October 2016, before President Trump was elected. This is a clear sign that the ongoing government shutdown is impacting consumer sentiment. This is a bad omen. Slower consumer spending may slow overall GDP growth.
The Fed announced on Friday that Industrial Production rose 0.3% in December, slightly better than the economists’ consensus estimate of a 0.2% rise. For all of 2018, Industrial Production rose an impressive 4% and was led by the domestic energy boom. In December alone, mining (includes energy production) rose a robust 1.5%, while utility output declined 6.3% due largely to abnormally warm weather. The best earnings for the next couple of quarters are expected to be predominately energy-related stocks, as the domestic energy boom is expected to continue, boosting Industrial Production in the upcoming months.
Speaking of energy, I should add that, thanks to the boom in shale oil production, the U.S. is now producing more crude oil at 11.8 million barrels per day than Russia and Saudi Arabia. Furthermore, U.S. crude oil production is expected to expand by another 1.1 million barrels per day in 2019, so by the end of the year, domestic crude oil production will be near 13 billion barrels per day and significantly higher than Saudi Arabia ever produced (its maximum was 12 billion barrels per day), so the U.S. will displace Saudi Arabia as the #1 producer of crude oil and dictate crude oil prices worldwide.
Overall, we are essentially in the midst of an interesting “libertarian experiment” to see how much the U.S. economy and stock market might rally without the federal government fully functioning. Amidst the shutdown, multiple Federal Reserve regional Presidents, both doves and hawks, have clarified that there is no reason for further interest rate increases in the foreseeable future, which is good news for stocks.
Frankly, I am happy that the stock market has reverted to following fundamentals versus being “spooked” by external events. There will always be crises in the world, but stocks mostly move based on earnings. I think we could make a lot of money this quarter as stocks celebrate outstanding fourth-quarter results!