January 29, 2019

Despite a positive undercurrent, volatility returned last week. I have been carefully monitoring ETF spreads to see if the stock market is finally becoming “normalized.” I am happy to report that the abnormally-wide ETF spreads in the fourth quarter – which complicated and deepened the correction – tightened up, which is important for investor confidence. Unfortunately, ETF spreads remain elevated.

For example, last Wednesday, an hour after the market opening, DVY was trading at a 19-cent spread (0.2%), while SPY was trading at a $1.08 spread (0.4%), according to Morningstar’s Intraday Indicative Value. DVY and SPY are two of the biggest and most liquid ETFs traded. ETF spreads tend to tighten up at the market’s close, so if you are trading ETFs, I strongly recommend that you buy or sell ETFs near Morningstar’s Intraday Indicative Value via a limit order, or near the market close, when spreads tighten.

To give you an idea of the wide spreads that dominated the ETF market in 2018, according to research by our friends at Bespoke Investment Group, SPY rose 13.1% in 2018 “after hours,” when the stock market was closed, but it declined 17.2% during regular trading hours in 2018. Clearly, this 30.3% performance differential in the most liquid, largest, and oldest ETF is disturbing, as it undermines investor confidence.

I should add that Wall Street’s new invention of “no transaction fee ETF trading” does not eliminate the ETF spread, just the brokerage commission. Essentially, this is how selected ETF firms pay brokerage firms for order flows, but there are all-too-often extra charges if an investor sells ETFs a bit too quickly.

The ETF spread dilemma is thoroughly discussed in Jason Bodner’s new report, ETF-DOOM Sharks. This white paper also discusses how the growth in both algorithmic trading and ETFs has made the stock market much more volatile, which essentially triggered the recent stock market correction. Jason is a former institutional ETF trader and has unique insights into ETF trading that serious investors must read.

Interestingly, Jim Cramer is calling for the SEC to investigate the “Christmas Eve crash” that was caused largely by panic ETF selling pressure. Ironically, Christmas Eve marked the recent low for all major market averages – and the first day of the government shutdown. The SEC was one of the first agencies shut down – since it ran out of funding on December 26th, the day the market started recovering.

Major Governments Bypass Davos for Political Reason

The World Economic Forum in Davos, Switzerland last week was not anywhere as big as it had been in previous years. President Trump and all official U.S. government delegates canceled their trip due to the U.S. federal government shutdown, while French President Emmanuel Macron and British Prime Minister Theresa May also bypassed Davos due to domestic unrest and the Brexit mess.

Nonetheless, Ray Dalio, founder of Bridgewater Associates, the world’s largest hedge fund, got attention in Davos when he said, “What scares me the most longer-term is that we have limitations to monetary policy … which is our most valuable tool [and] we have greater political and social antagonism.”  Dalio said that the Fed’s limited monetary policy toolbox, rising populist pressures, and other issues, including rising global trade tensions, are similar to the backdrop leading to the Great Depression in the late 1920s. Obviously, by implying that the current environment is increasingly like the years that preceded the Great Depression, Dalio got a lot of media attention, but his comments did not impact the financial markets.

If there is an impending global event that we need to pay attention to, it is the implementation of Brexit on March 29th. Britain apparently has no intention of paying the billions of pounds or euros in exit fees that the European Union (EU) is demanding. Furthermore, the euro and the British pound are not acting well on fears of what might happen. If anything, the U.S. is expected to continue to be an oasis for international foreign capital that may be fleeing both the euro and the British pound. As a result, Treasury yields may decline sharply as we approach March 29th if Brexit does not go smoothly.

Venezuela is in the midst of a crisis as some military members increasingly reject President Nicolas Maduro. On Wednesday, the U.S. followed Brazil and other Latin America countries by recognizing Juan Guaido as Interim President of Venezuela. Guaido is the head of the Venezuelan National Assembly and is increasingly backed by Venezuela’s citizens and military leaders. In the meantime, President Maduro terminated diplomatic relations with the U.S. and gave U.S. diplomatic personnel 72 hours’ notice to leave. It is uncertain how any Venezuelan oil refined in the U.S. will be impacted by this chaos.

Despite the deal on Friday to temporarily reopen the federal government for three weeks, the State of the Union will likely be delayed until after the Super Bowl. In the meantime, the relationship between President Trump and Speaker Pelosi appears to be worse than ever, because Ms. Pelosi informed President Trump earlier last week that he was not welcome to speak in the House Chambers while there was a federal government shutdown. Specifically, Speaker Pelosi said that President Trump would be welcome to speak on “a mutually agreeable date for this address when the government has been opened.”

Interestingly, the stock market rose well over 10% during the federal government shutdown, so I would not worry overly about the market’s reaction to another possible shutdown in upcoming months.

First-quarter GDP is now expected to be flat due to the federal government shutdown and severe winter weather in the Midwest and Northeast. Furthermore, the economic news released last week was not very promising. On Thursday, the Conference Board announced that its Leading Economic Index (LEI) declined 0.1% in December, which is not surprising, since the stock market, Treasury interest rate spreads, and building permits are some key LEI indicators. Ataman Ozyildirim, Director of Economic Research at The Conference Board, said, “While the effects of the government shutdown are not yet reflected here, the LEI suggests that the economy could decelerate towards 2% growth by the end of 2019.”

On Tuesday, the National Association of Realtors announced that existing home sales plunged 6.4% in December to an annual pace of 4.99 million, the slowest annual pace in over three years (since November 2015). In 2018, existing home sales declined 3.1% to 5.34 million as higher interest rates and rising home prices curtailed sales. Median home prices rose 2.9% in 2018 to $253,600 and are expected to continue to moderate in the upcoming months due to fewer buyers. Overall, due to the federal government shutdown and severe winter weather, existing home sales are expected to remain weak for the next two months.

About The Author

Louis Navellier
CHIEF INVESTMENT OFFICER

Louis Navellier is Founder, Chairman of the Board, Chief Investment Officer and Chief Compliance Officer of Navellier & Associates, Inc., located in Reno, Nevada. With decades of experience translating what had been purely academic techniques into real market applications, he believes that disciplined, quantitative analysis can select stocks that will significantly outperform the overall market. *All content in this “A Look Ahead” section of Market Mail represents the opinion of Louis Navellier of Navellier & Associates, Inc.*

Disclosures

Although information in these reports has been obtained from and is based upon sources that Navellier believes to be reliable, Navellier does not guarantee its accuracy and it may be incomplete or condensed. All opinions and estimates constitute Navellier’s judgment as of the date the report was created and are subject to change without notice. These reports are for informational purposes only and are not intended as an offer or solicitation for the purchase or sale of a security. Any decision to purchase securities mentioned in these reports must take into account existing public information on such securities or any registered prospectus.

Past performance is no indication of future results. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. It should not be assumed that any securities recommendations made by Navellier. in the future will be profitable or equal the performance of securities made in this report.

Dividend payments are not guaranteed. The amount of a dividend payment, if any, can vary over time and issuers may reduce dividends paid on securities in the event of a recession or adverse event affecting a specific industry or issuer.

None of the stock information, data, and company information presented herein constitutes a recommendation by Navellier or a solicitation of any offer to buy or sell any securities. Any specific securities identified and described do not represent all of the securities purchased, sold, or recommended for advisory clients. The reader should not assume that investments in the securities identified and discussed were or will be profitable.

Information presented is general information that does not take into account your individual circumstances, financial situation, or needs, nor does it present a personalized recommendation to you. Individual stocks presented may not be suitable for you. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. Investment in fixed income securities has the potential for the investment return and principal value of an investment to fluctuate so that an investor’s holdings, when redeemed, may be worth less than their original cost.

One cannot invest directly in an index. Results presented include the reinvestment of all dividends and other earnings.

Past performance is no indication of future results.

FEDERAL TAX ADVICE DISCLAIMER: As required by U.S. Treasury Regulations, you are informed that, to the extent this presentation includes any federal tax advice, the presentation is not intended or written by Navellier to be used, and cannot be used, for the purpose of avoiding federal tax penalties. Navellier does not advise on any income tax requirements or issues. Use of any information presented by Navellier is for general information only and does not represent tax advice either express or implied. You are encouraged to seek professional tax advice for income tax questions and assistance.

IMPORTANT NEWSLETTER DISCLOSURE: The hypothetical performance results for investment newsletters that are authored or edited by Louis Navellier, including Louis Navellier’s Growth Investor, Louis Navellier’s Breakthrough Stocks, Louis Navellier’s Accelerated Profits, and Louis Navellier’s Platinum Club, are not based on any actual securities trading, portfolio, or accounts, and the newsletters’ reported hypothetical performances should be considered mere “paper” or proforma hypothetical performance results and are not actual performance of real world trades.  Navellier & Associates, Inc. does not have any relation to or affiliation with the owner of these newsletters. There are material differences between Navellier Investment Products’ portfolios and the InvestorPlace Media, LLC newsletter portfolios authored by Louis Navellier. The InvestorPlace Media, LLC newsletters contain hypothetical performance that do not include transaction costs, advisory fees, or other fees a client might incur if actual investments and trades were being made by an investor. As a result, newsletter performance should not be used to evaluate Navellier Investment services which are separate and different from the newsletters. The owner of the newsletters is InvestorPlace Media, LLC and any questions concerning the newsletters, including any newsletter advertising or hypothetical Newsletter performance claims, (which are calculated solely by Investor Place Media and not Navellier) should be referred to InvestorPlace Media, LLC at (800) 718-8289.

Please note that Navellier & Associates and the Navellier Private Client Group are managed completely independent of the newsletters owned and published by InvestorPlace Media, LLC and written and edited by Louis Navellier, and investment performance of the newsletters should in no way be considered indicative of potential future investment performance for any Navellier & Associates separately managed account portfolio. Potential investors should consult with their financial advisor before investing in any Navellier Investment Product.

Navellier claims compliance with Global Investment Performance Standards (GIPS). To receive a complete list and descriptions of Navellier’s composites and/or a presentation that adheres to the GIPS standards, please contact Navellier or click here. It should not be assumed that any securities recommendations made by Navellier & Associates, Inc. in the future will be profitable or equal the performance of securities made in this report. Request here a list of recommendations made by Navellier & Associates, Inc. for the preceding twelve months, please contact Tim Hope at (775) 785-9416.

Marketmail Archives