by Louis Navellier
November 2, 2021
Last Thursday, the Commerce Department announced that its preliminary estimate for third-quarter growth was an anemic 2%. This was partly due to the fact that consumer spending grew at only a 1.6% annual pace, down from a torrid 12% annual pace in the second quarter. It is important to remember that this estimate will be revised, since some September details, like the trade deficit data, are not yet finalized.
The Commerce Department blamed the Covid-19 Delta variant, the port bottlenecks, and supply chain glitches for the abrupt deceleration in U.S. economic growth. That’s true to an extent, but inflation is now a major by-product of these product delays. I was told by a logistics expert that truckers are being paid up to $14,000 per day to “sit” as big box retailers outbid smaller retailers. This logistics expert also informed me that Costco has taken control of much of its own distribution. I also discussed on Fox Business News that many of these big box retailers should be OK, since they also control much of their own distribution.
In addition to the shipping stocks that I recommend, some other companies that prosper in the current environment include Expeditors International of Washington (EXPD) in logistics coordination and TFI International (TFII) in trucking, as port bottlenecks cause more uncertainty and help fuel inflation.
Since much of the current wave of inflation is related to food and energy, the poor are hurt the most. Despite a 25% increase in food stamps and a 5.9% increase for Social Security, Americans are not used to seeing empty store shelves, gasoline prices doubling, or the prices of most food staples rising rapidly.
The same is true worldwide. The economic problems now enveloping the world could fuel a major recession in China, Europe, and most emerging economies. The reason that emerging market economies are so vulnerable is that as they spend more on food and energy as those prices for staples soar, these poor consumers have less money in their pockets for other items, so other economic activity naturally stalls.
The Fed has ignored inflation for too long after they boosted the money supply in their initial attempt to stimulate the U.S. economy and employment growth, which is one of their two major Congressional mandates. The good news is that, despite approximately five million missing jobs since the pandemic began, the Fed has fulfilled its unemployment mandate and now must turn its attention to its other major mandate, namely fighting inflation. As a result, the November 3rd Federal Open Market Committee (FOMC) statement will be closely scrutinized. Wall Street expects guidance on both tapering its $120 billion per month in quantitative easing as well as its dot plot of forecasted interest rate increases in 2022.
The reason the Fed will likely raise key interest rates is that market rates have already risen, especially intermediate rates, as inflation has spun out of control. The Fed cannot fight market rates, so this week’s FOMC statement will likely clarify the Fed’s next moves. Complicating matters further, Fed Chairman Jerome Powell is up for nomination for a possible second term. He is backed by Treasury Secretary Janet Yellen. Powell is known as a consensus builder, but it is possible that President Biden would ignore Secretary Yellen’s advice and not reappoint Chairman Powell, especially if the Biden Administration needs a scapegoat for the stagflation that is systematically destroying U.S. economic momentum.
Concerned about inflation? Everyone is, but growth stocks (especially dividend growth stocks) and real estate are historically your best defense against rising inflation. As interest rates rise, residential real estate can lose its “mojo,” so as you look around the world for a place to seek inflation protection, your best bet continues to be predominantly growth stocks, with a focus on dividend growth stocks!
Why I Think the U.S. Will Avoid a Recession This Year (and Probably in 2022)
Overall, due to the fact that big order backlogs still persist, I do not anticipate that the U.S. will slip into an “official” recession any time soon. Instead, I expect that Americans will do what they always do, namely innovate and learn how to prosper, regardless of the underlying environment. I, for one, am excited and expect that the stock market will get increasingly narrow and more fundamentally focused. Since our stocks represent the “crème de la crème,” I expect that the money flowing into our stocks will get even stronger as the market becomes more selective and seeks out recession resistant companies.
The S&P CoreLogic Case-Shiller National Home Price Index was released on Tuesday, and, through August, home prices in 20 major metropolitan areas rose 19.7% in the previous 12 months. Phoenix remains the hottest housing market in the U.S. for 27 straight months, with an annual appreciation of 33.3%. I should add that new homes sales rose in September for the fifth straight month, rising 14% to an annual sales rate of 800,000. However, in the past 12 months, new home sales have declined by 17.6% from a 971,000 annual pace a year ago, so affordability issues continue to impede new home sales.
Fortunately, when both housing prices and stock prices are rising, consumers feel more confident. For example, the Conference Board on Tuesday announced that its consumer confidence index rose to 113.8 in October, up from 109.8 in September. I was especially impressed that the Present Situation component rose to 147.4 in October (up from 144.3 in September) and the Expectations component rose to 91.3 (up from 86.7 in September). In other words, consumers feel good about both their present situation and their high expectations for the future. This bodes well for retail sales in the upcoming holiday shopping season!
On Wednesday, the Commerce Department reported that durable goods orders fell 0.4% in September, but that was substantially better than economists’ expectations of a 1% decline. This was the first monthly decline since last April. It was largely caused by supply chain glitches and port bottlenecks. Orders for August were also revised lower to a 1.3% gain, down from the +1.8% previously estimated. Orders have risen in 15 of the past 17 months. So far this year, overall new orders for durable goods numbers are up 23.4%, but shipments are up only 13.6%, due to order backlogs from the supply chain glitches.
On Thursday, the Labor Department reported that weekly jobless claims declined to 281,000 in the latest week, down from a revised 291,000 in the previous week. Continuing claims came in at 2.243 million in the latest week, down considerably from a revised 2.48 million in the previous week.
Economists were expecting continuing claims to come in at 2.42 million, so this was a positive surprise. I should also add that weekly jobless claims are now at a post-pandemic low, so, in my opinion, the Fed has basically fulfilled its unemployment mandate and must now focus primarily on its inflation mandate.
This is a good time to remind you that November is a seasonally strong month – the best historic market month. Thanksgiving is mostly viewed as a happy time of year when we gather with family and friends. This feeling of goodwill often rubs off on investors, which may explain why there is often an early “January effect” that helps boost small capitalization stocks. After publishing for 40+ years, I remain amazed at how small-cap stocks often surge at this time of year. I should add that due to better than expected third-quarter results, many of our small-cap stocks, like MarineMax (HZO), surged last week.
The G-20 Meeting in Italy Missed Many Major Leaders
The G20 meeting was held in Rome last weekend, but China’s President Xi Jinping, Russia’s President Vladimir Putin, and Japan’s Prime Minister Fumio Kishida were all absent, although China’s Xi and Japan’s Kishida participated via video. The fact that Chinese President Xi was absent signals that China’s domestic problems are very serious – and China does not like to be criticized by any other nation.
The G20 meeting will be followed by the COP26 climate summit in Glasgow, Scotland, where China and Russia will not attend, since they do not want to comply with the climate summit’s carbon emission goals. Both China and India refuse to phase out the use of coal for generating electricity, so I suspect the world’s carbon emission goals may be extended. The bottom line is the world is not unified on emission goals.
Before leaving for Italy, President Joe Biden thought he had the framework on a new spending plan for infrastructure and social priorities, but his spending plan of new taxes on folks earning over $10 million will fail after his plan on taxing billionaires failed. Trust me, if Congress cannot tax billionaires, they will likely fail to tax medium-sized business owners who earn over $10 million. As a result, I expect that the proposed infrastructure and social spending plans will fail over raising taxes in a softening economy.
Before the G20 met, the European Central Bank (ECB) met on Thursday and endlessly debated inflation, which is running at a 4.1% annual pace in the eurozone. However, the ECB has no intention on curtailing its negative interest rate policy and is not very specific on exactly how much it is willing to curtail its quantitative easing. Due to softening economic growth, the ECB does not want to “tap the brakes” and will likely continue its easy money policies. I should add that I expect the Fed to be much more transparent at its Federal Open Market Committee (FOMC) meeting this week, including its statement (tomorrow).
Navellier & Associates owns Expeditors International of Washington (EXPD), MarineMax (HZO), and TFI International (TFII) in managed accounts. Louis Navellier and his family personally own Expeditors International of Washington (EXPD), MarineMax (HZO), and TFI International (TFII) via a Navellier managed account.