November 13, 2018

Following the sharp three-day rebound that preceded the midterm election and accelerated the day after, the markets consolidated those gains in what I would view as a very constructive week. The major averages are all playing tug-of-war with their 200-day moving averages, and that will play itself out to some extent this week, along with some key economic data points that the market must digest.

Friday’s session saw the S&P 500 struggling with a loss of 1%, as investors continue to digest Thursday’s policy directive from the Fed, which showed that the central bank remains on a path of gradual tightening. The dollar index rallied on the Fed’s policy statement, while bond yields actually ticked lower, with the 2-year Treasury at 2.93% and the 10-year Treasury at 3.19%.

What is getting almost no attention is the fact that the 30-year Treasury is on the verge of breaking above its 20-year downtrend line, which runs counter to the current narrative – that a recession will materialize within a couple of years. If this were the case, long-term yields wouldn’t be pushing higher now, so we’re getting some mixed signals. This is yet another reason why an overhang of uncertainty is still prevalent.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

On the economic data front, the Producer Price Index for October, released Friday, showed a higher-than-expected increase of 0.6% (consensus +0.2%). The core reading, excluding volatile energy and oil, also came in above consensus (+0.5% actual vs +0.2% consensus). The headline pressures will stoke concerns about pass-through inflation to consumers, and, in turn, strengthen the Fed’s case for additional rate hikes.

The preliminary University of Michigan Index of Consumer Sentiment for November (also released last Friday) held steady, edging down to 98.3 (consensus 98.0) from the final reading of 98.6 for October. The key takeaway is that the stock market sell-off in October had no real impact on consumer sentiment, which is rooted in favorable views about income expectations and job growth, key drivers of consumer spending. Preliminary indications for the holiday shopping season have estimates running as high as a record $1 trillion in spending, which bodes well for the retail sector and for year-end stock market momentum.

Even with last week’s snap-back rally, investors have taken a defensive approach, as defensive-oriented sectors outperformed growth sectors. Big pharma, consumer discretionary, and utilities have been on the receiving end of constant fund flows during these volatile times, with a few consumer staples thrown into the defensive mix. It’s as if the Fed’s optimistic tone is falling on deaf ears.

A few good names in these sectors – namely Johnson & Johnson, Merck, Ely Lilly, Proctor & Gamble, McDonalds, Pfizer, McCormick, and Costco and Wal-Mart are showing excellent relative strength. It seems a bit ironic that the Fed is consumed with fighting inflation while the market doesn’t want to reward those sectors that tend to be inflation-friendly, like financials and industrials.

Navellier & Associates does not hold Johnson & Johnson, Merck, Ely Lilly, Proctor & Gamble, McDonalds, Pfizer, McCormick, and Costco and Wal-Mart in managed accounts or a sub-advised mutual fund.  Bryan Perry does not own Johnson & Johnson, Merck, Ely Lilly, Proctor & Gamble, McDonalds, Pfizer, McCormick, Costco and Wal-Mart.

Low Oil Prices Might be the Inflation Hedge the Bull Market Needs

Separately, WTI crude oil has continued to extend its steep losses from its October 3 high of $76.90 per barrel. Crude recently dipped below $60 and is testing a key technical and psychological support level. The best exposure to the energy sector is through ownership in the refining stocks, as refiners are virtually printing money with gasoline and jet fuel in strong demand against cheaper crude inputs.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

The sell-off in crude will greatly temper forward inflation data, even though food and energy are typically stripped out of the core readings. However, the bond market digests everything – empirical, anecdotal, and perceived – and that is probably why bond yields didn’t rise further last week against falling oil. prices.

Heading into this week, the market will be pretty much devoid of any new catalysts to drive stocks dramatically higher or lower into the following Thanksgiving holiday weekend. Typically, Black Friday, the day after Thanksgiving, is when the market should begin to show the first signs of a year-end rally. By then we should already have an idea of whether there is a trade deal with China in the works.

With early evidence of upward pricing pressure attributed to tariffs, any failure to make headway in the trade war will only give bond bears more fodder. In the meantime, we should all be cheering lower energy prices and our oil refining stocks. It’s hard enough fighting the Fed, but if inflation can remain tame, the market will sense we are closer to the end of the rate-tightening cycle, and that can’t come soon enough.

About The Author

Bryan Perry

Bryan Perry

Bryan Perry is a Senior Director with Navellier Private Client Group, advising and facilitating high net worth investors in the pursuit of their financial goals.

Bryan’s financial services career spanning the past three decades includes over 20 years of wealth management experience with Wall Street firms that include Bear Stearns, Lehman Brothers and Paine Webber, working with both retail and institutional clients. Bryan earned a B.A. in Political Science from Virginia Polytechnic Institute & State University and currently holds a Series 65 license.


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