by Louis Navellier

January 9, 2024

For months, Iranian proxies have been very busily attacking Israeli and U.S. facilities in the Middle East. Houthi rebels in Yemen have fired on British and U.S. warships, as well as cargo ships in the Red Sea. Iran has also dispatched its warships in the Red Sea, so tensions reached the point of explosion last week.

After enduring seemingly endless drone strikes, the U.S. Navy recently sank three Houthi rebel ships in the Red Sea, in response to a distress call from a Maersk container vessel. Iran has threatened to “close” the Mediterranean Sea if the fighting persists in Gaza. This has effectively forced the insurance industry to redirect ships away from the Red Sea. This will likely increase the costs of LNG and container goods.

Also, two bomb blasts inside Iran on Wednesday killed at least 95 people and injured perhaps 270 others attending a commemoration of the fourth anniversary of the assassination of General Qassem Soleimani by the Trump Administration. Crude oil prices surged after these blasts, since it reinforced the notion that the Middle East is a tinder box, where fighting can break out at any time. The Islamic State group claimed responsibility, so Iran is expected to retaliate when it finds out the specific group that set off these bombs.

Another wild card in the energy markets is that India’s imports of Russian crude oil in December plunged to their lowest level in 11 months after six Russian crude oil tankers could not deliver their product due to tighter sanctions and payment issues. Five of these idled tankers were diverted to China, while the other tanker is apparently headed to Sri Lanka. Furthermore, Libya’s largest crude oil field, one that produces 300,000 barrels per day, was shut down Tuesday due to protests. The Energy Information Administration (EIA) also reported a decline in crude oil inventories of over 20 million barrels in the past three weeks. Crude oil prices are expected to remain volatile week to week until seasonal demand picks up in February.

In Ukraine, severe winter weather may now curtail some of the fighting there, so hopefully both sides will consider a cease fire before the war’s third year begins, since both sides have suffered major casualties.

The House of Representatives remains divided over additional aid to Ukraine unless U.S. border security is restored. This is an interesting showdown, where neither side wants to budge, so it will be interesting to see if this persists heading into the November Presidential elections. Amazingly, the aid to Ukraine from the U.S. has exceeded all federal spending on infrastructure, so some priorities are being questioned.

Since the Biden Administration apparently has no intention of cooperating with the Republican House in tying Ukrainian aid to U.S. border security, so it is now looking at seizing approximately $300 billion of frozen Russian assets to fund Ukraine’s government and war efforts. The Biden Administration also met with Mexican officials in Mexico City to see if Mexico can help with the Southern border crisis, since it appears that there is no political solution to the border crisis. Democratic strongholds, like Chicago and New York continue to ask the Biden Administration for aid to house new migrants dumped in their cities.

Inside a Seemingly Bullish (but Mixed) Jobs Report and Downbeat ISM Data

Last Thursday, ADP reported that 164,000 private payroll jobs were created in December, which was higher than the economists’ consensus expectation of 130,000. Then, the Labor Department’s Friday report was also seemingly bullish, in the headline, reporting that 216,000 payroll jobs were created in December, versus the economists’ consensus expectation of only 170,000. However, the previous two monthly payroll totals were revised down by 71,000 jobs, and the unemployment rate remained at 3.7%, even though 845,000 workers disappeared from the labor force in December, since the labor force participation rate declined by a whopping 0.3% to 62.5%, the biggest monthly drop in almost three years (since January 2021). With next month’s (January) payroll report predictably distorted by upward seasonal adjustments, we may have to wait until March to get a better grasp of 2024 job trends.

The ISM indexes were also mixed, with the lagging manufacturing sector rising a bit, and the healthier service sector falling! First, last Wednesday, the Institute of Supply Management (ISM) announced that its manufacturing index rose to 47.4 in December, up from 46.7 in November. Since any reading below 50 signals a contraction, the manufacturing sector has been in a recession for the past 14 months, but now there is one green shoot, the production component, which rose to 50.3, up from 48.5 in November.

All the other manufacturing sub-indexes remain below 50, namely, new orders (47.1), prices (45.2), backlog of orders (45.3), inventories (44.3), imports (46.4), and supplier components (47). Worse yet, only one of the 17 manufacturing industries (Primary Metals) reported an expansion in December. Since the prices component decreased by 4.7 points in the past month, that is at least indicative that deflation on the wholesale level may persist, which could encourage the Fed to speed up its key interest rate cuts.

On Friday, ISM announced that its non-manufacturing (service) index plunged to 50.3 in December, down from 52.7 in November. This was a big shock, since economists were expecting a “flat” reading of 52.6. Since any reading below 50 signals a contraction, the service sector is dangerously close to slipping into a recession. Only nine (half) of the 18 industries that ISM surveyed reported an expansion. Three key sectors – new orders, employment and inventories components – all posted sharp declines in December.

Adding in these new indicators, the Atlanta Fed is still estimating a reasonably healthy 2.5% annual GDP growth rate in the fourth quarter, but I expect a downward revision in the wake of the ISM service report.

In addition, the Federal Open Market Committee (FOMC) minutes were released on Wednesday. They revealed that, “Participants viewed the policy rate as likely at or near its peak for this tightening cycle.”  The FOMC minutes also “reaffirmed that it would be appropriate for policy to remain at a restrictive stance for some time until inflation was clearly moving down sustainably.” These FOMC comments occurred before it was announced that the November personal consumption expenditure (PCE) index (the Fed’s favorite inflation index) declined -0.1%. Furthermore, the ISM manufacturing prices component decreased by 4.7 points in December, which is indicative that deflation on the wholesale level will appear in the upcoming December Producer Price Index (PPI). The truth of the matter is that deflation is spreading after China reported that its consumer prices declined two months in a row. German consumer prices fell in November, so there is lots of evidence that deflationary pressures are spreading around the globe.

With All These Problems, Why Am I Still So Optimistic About 2024?

Each week I write about problems like this, so you might wonder why I am still so optimistic? Well, the U.S. is an oasis, since we are food- and energy-independent, while China, Japan, Britain and the European Union are much more dependent on imports for their food and energy.  Second, the U.S. is naturally entrepreneurial, because our 50 states always compete with one another, no matter who is our President.

Also, I am on record as saying that the Fed will cut key interest rates more than the three times they signaled for 2024 in their “dot plot.”  The primary reason is that the Fed funds rate is currently well above market rates, so they will have to cut rates fast to get in line with market rates. These Fed rate cuts will help stimulate the economy and coax much of the cash on the sidelines to pour back into the stock market.

Inflation is fizzling fast, and U.S. economic growth is expected to resurge in 2024 due to falling interest rates and growing economic optimism. Another reason I am optimistic is that the stock market has very favorable year-over-year earnings comparisons for the next three quarters, so rising earnings will help compress price-to-earnings ratios further and propel wave after wave of positive earnings surprises.

Since 2024 is a Presidential election year, the stock market traditionally rallies in the middle two quarters, right up to the November election, since the candidates tend to lift both consumer and investor confidence with their endless promises. The attempts to block Donald Trump off of some state ballots should not hinder him, since the Supreme Court is expected to intervene and, even if Trump is blocked in certain states, these attempts to block Trump are in blue states where he is not expected to win anyway.

The good news is that the U.S. economy will be the #1 election issue, followed by border security and foreign wars. The situation for the U.S. economy is that it is good for the top 20%, but poor for the bottom 20%. Essentially, the top 20% tend to own homes and stocks, which are both appreciating, while the bottom 20% struggle with inflation and rising rents. Since the bottom 20% are dominated by younger people and some minorities, President Biden’s base has some severe cracks. Since Biden cannot campaign like most candidates, due to his age and other impediments, he is counting on Super Bowl ads and endless fund-raising help. However, the candidate with the most energy and inspirational message typically wins.

There will surely be plenty of surprises in this Presidential election cycle. I am also on record saying that Gavin Newsom may be nominated as the Presidential candidate at the 2024 Democratic Convention by the Super Delegates if President Biden has too many health issues. Donald Trump is also a wildcard due to endless legal assaults, but since some of these legal cases have been delayed, they are now less likely to interfere with the election cycle. However, Trump also has to deliver a strong showing in Iowa next week and New Hampshire to gather the necessary momentum and make his Republican challengers withdraw.

However it all works out, we can be certain that change is coming in 2024. Who will ultimately prevail is unknown, but the candidate with the most energy is likely to become the next President. As the candidates promise voters everything and anything, investor and consumer confidence typically rises. The Fed will also be cutting key interest rates right up to Labor Day, if not during election week, which will also help boost investor and consumer confidence. As a result, I expect stocks to steadily appreciate all year.

All content above represents the opinion of Louis Navellier of Navellier & Associates, Inc.

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Louis Navellier

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.

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