by Louis Navellier
November 1, 2022
The Commerce Department shocked many economists (and certainly pleased the Biden Administration) on Thursday when they announced the preliminary estimate for third-quarter GDP growth at a 2.6% annual pace following negative growth in the first two quarters. What I find most amazing is that virtually all of the third-quarter GDP growth was attributable to a lower trade deficit that added 2.77% to GDP growth, and most of that came from higher petroleum exports, due largely to one million barrels per day being released from the Strategic Petroleum Reserve (SPR), which, as its name implies, is only to be used for national emergencies, not to lower the price of gasoline at the pump right before a mid-term election.
So, this bloated GDP figure is mostly an artificial number ginned up to get gas prices down before an election. Without the reduced trade deficit, due largely to oil exports, GDP growth would be close to zero.
Speaking of the SPR, the Biden Administration offered to begin refilling the SPR when (if) crude oil prices fall to between $67 and $72 per barrel. That may never happen if demand increases at the current rate. The SPR can hold 714 million barrels of crude oil, but the SPR now stands at just 405 million barrels, a 38-year low. Furthermore, the Biden Administration’s criticism of the crude oil industry’s desire to return any excess profits to its shareholders via dividends has raised the public’s mistrust level with Big Energy.
This kind of bias against fossil fuels in favor of ESG once drove energy stocks down to less than 2% of the S&P 500’s capitalization a year ago. Now, energy stocks are the best performing sector and have risen to approximately 6% of the S&P 500. In two to three years, I expect energy stocks will soar to 30% of the S&P 500 and appreciate 100% per year for the next couple of years! Why am I so bullish? Primarily because the strategy of releasing those million barrels per day from the SPR cannot continue much longer and crude oil demand will likely pick up in the spring, so $120 per barrel crude oil is possible next spring.
Just two years ago, fossil fuels represented 80% of worldwide energy production, and that was thought to be too high, hence the push to “green” or “clean” energy. That has backfired. This year, due largely to the surging demand for coal in China, Europe, Indonesia, India, and the U.S., fossil fuels are expected to rise to 84% of worldwide energy production. Europe has proven that ESG polices are an expensive failure, since it just causes electricity prices to soar! These misguided policies are pushing Europe into recession.
Europe is already in recession. S&P Global’s composite purchasing managers index (PMI) for eurozone nations declined to 47.1 in October, down from 48.1 in September. This is the fourth consecutive month the index has been below 50, signaling contraction. Fuel rationing is very possible this winter in Europe if it becomes too cold, so the eurozone PMI could fall further in winter months. These recession fears are causing government bond yields in Europe to decline, which should help U.S. yields to moderate as well.
America is Not in Recession Yet – Just a Recession in Confidence
The Conference Board announced on Tuesday that its consumer confidence index declined sharply to 102.5 in October, down from 107.8 in September. The components of the consumer confidence index were not very encouraging: The “present situation” component declined to 138.9 in October (down from 150.2 in September) and the “expectations” component slipped to 78.1 in October (down from 79.5 in September). The big (11+ point) drop in the present situation component bodes poorly for fourth-quarter GDP growth, so an economic deceleration is likely underway, but not yet a measurable recession.
One reason that consumers may be so moody is that home prices are declining. The S&P CoreLogic Case-Shiller National Home Price index declined 1.1% in August, the second straight monthly decline. The Case-Shiller index is still up 13% in the past 12 months. However, some previously hot housing markets have cooled off: San Francisco home prices declined 4.3% in August, while Seattle prices slipped 3.9%. In the past 12 months, median home prices have risen 8.4% to $384,800 according to the National Association of Home Builders, but high mortgage rates near 7% are expected to hinder future price gains.
The Commerce Department on Wednesday announced that new home sales have declined 17.6% in the past 12 months. Interestingly, the median price of new homes sold in September rose to $470,600, up from $436,800 in August, so it appears that the more expensive single-family homes are selling more than multi-family homes. In the past 12 months, new home prices have risen 13.9%. Mortgage applications have fallen 42% in the latest week, so it seems that home sales volume is expected to slow due to higher rates.
In summary, consumers remain resilient, consumer confidence has been consistently waning, and higher interest rates are hindering home sales as well as other interest rate-sensitive parts of the U.S. economy.
The Skies Darken in Europe – As Winter Approaches
Speaking of interest rates, the European Central Bank (ECB) on Thursday raised its key rate by 0.75% to 1.5%, the highest rate since 2009. Both French President Emmanuel Macron and Italian Prime Minister Giorgia Meloni were critical of the ECB raising these key rates, but the ECB remains behind other central banks, and is desperately trying to catch up. In the wake of a weak eurozone PMI in the past four months, the eurozone is almost certainly in recession, so the ECB criticism from Macron and Meloni may escalate.
The inflation statistics in Europe are truly shocking, so the ECB has its hands full, especially as political criticism mounts. Britain’s new Prime Minister, Rishi Sunak, on Tuesday stated that Britain “is facing a profound economic crisis.” Sunak, who is the third prime minister in just the past two months, said that he would prioritize “economic stability and confidence,” which “will mean difficult decisions to come.”
Prime Minister Sunak has a Stanford MBA and a home in Santa Monica, California. He is very smart and wealthy (even richer than King Charles), so it will be interesting to see if the average person in Britain can relate to him. Still, considering Britain’s dire fiscal state, with an erratic government bond market, Sunak’s expertise, gained at Goldman Sachs and a hedge fund, may be the right skills for these times.
Earnings Continue to Be Strong for Most of Our Stocks
Last week was a great week so for most of our stocks’ earnings announcements, with stocks like Archer Daniels Midland (ADM) and Enphase Energy (ENPH) beating on sales, earnings, and guiding higher.
However, mega-stocks like Amazon.com (AMZN), Google (GOOG), and Meta Platforms (META) all reported disappointing sales and earnings. Additionally, Microsoft (MSFT) and Texas Instruments (TXN) both beat on their sales and earnings but lowered their respective guidance. As a result, technology stocks remain very nervous, and a leadership change is underway. As I have said on some of my podcasts, it is now every stock for itself, and the stock market is expected to get narrower in the upcoming weeks.
Although electric vehicles are causing “sticker shock” for car buyers in the U.S. and Europe, Tesla cut the prices of its Model Y and 3 models in China as much as 9.4% due to lower material costs in China. Interestingly, the Chinese-made vehicles in Shanghai largely utilize cheaper iron phosphate batteries, while U.S.-made Tesla vehicles utilize more expensive lithium-ion batteries. Increasing competition in China for EVs was also likely a factor behind Tesla’s price cut, so while EV prices are rising around the world due to high prices for lithium, nickel, and cobalt in lithium-ion batteries, Tesla is either about to capture more market share and/or sacrifice its lucrative profits from its Shanghai manufacturing plant.
I should explain that Wall Street is dominated by “tracking managers” who must not over-allocate too much to any industry in the S&P 500, since most money managers must have a high correlation (R2) to their respective benchmarks. I had an interesting call last week with a prospective client where I had to explain that I could not qualify for most investment platforms, since my 60% weight in energy stocks is literally 10 times that of the S&P 500. Most money management firms do not allow managers to be overweight more than 2 to 1, so the maximum energy weight in a tracking portfolio would be just 12%.
The reason that I am so confident that energy stocks will reach a 30% weight in the S&P 500, up from approximately 6% currently, is because the tracking manager crowd will be systematically forced to buy more energy stocks as leading technology stocks falter (e.g., Amazon.com, Google, Meta Platforms, Microsoft, etc.), while leading energy stocks announce great earnings and continue to steadily rise.
Just to put everything in perspective, energy was less than 2% of the S&P a year ago, while technology was about 48%. I predict that by early 2025, energy stocks will be 30% of the S&P 500 and tech stocks will fall to about 32%. In other words, the tracking managers will be systematically buying energy stocks and be trimming technology stocks as the sector weights in the S&P 500 change for the next few years!
Navellier & Associates owns Archer-Daniels-Midland Co.(ADM), Enphase Energy, Inc.(ENPH), Amazon.Com Inc. (AMZN), Microsoft Corp. (MSFT), Meta Platforms (META), Texas Instruments Inc. (TXN), and a few accounts own Tesla (TSLA), per client request in managed accounts. Louis Navellier and his family own Archer-Daniels-Midland Co.(ADM), Enphase Energy, Inc.(ENPH), Amazon.Com Inc. (AMZN), Microsoft Corp. (MSFT), Meta Platforms (META), Texas Instruments Inc. (TXN), via a Navellier managed account, and Enphase Energy, Inc. (ENPH), and Amazon.Com Inc. (AMZN), in a personal account. He does not own Tesla (TSLA) personally.