November 27, 2018

After two decades in the trenches in the fascinating world of finance, I have seen the stock market weak in November and December only twice – in 2000 and 2007. In both cases, such reverse seasonality preceded big bear markets in the following years. Needless to say, I do not like what I see in November as none of the tried and true indicators that tend to foresee a recession indicate a coming recession right now. That makes the present weakness in this seasonally-strongest time of the year rather perplexing.

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

The Conference Board’s Leading Economic Index (LEI) has 10 components. They are:

  • Average weekly hours, manufacturing
  • Average weekly initial claims for unemployment insurance
  • Manufacturers’ new orders, consumer goods and materials
  • ISM® Index of New Orders
  • Manufacturers’ new orders, nondefense capital goods excluding aircraft orders
  • Building permits, new private housing units
  • Stock prices, 500 common stocks
  • Leading Credit Index™
  • Interest rate spread, 10-year Treasury bonds less federal funds
  • Average consumer expectations for business conditions

Some of these 10 indicators are soft – not the least of which is #6 (housing), due to rising interest rates, as expected, and #7 (the stock market), likely due to trade frictions and the Fed, but as a whole the LEI does not foretell a recession in 2019. Is it conceivable that both November and December will end up being weak if there is no trade deal with China at the G-20 meeting in Argentina this coming weekend? I suppose it is possible, even though the statistical likelihood of this happening seems rather unlikely.

Typically, if the stock market sells off in a good economy it tends to rebound rather swiftly. There have been over half a dozen sell-offs of the present magnitude in the past 10 years and one that went almost 20% down – in the summer of 2011 – and they all ended up being buying opportunities.

Granted, we have two big complicating factors this time – the Federal Reserve and China. When it comes to the Fed, it seems that President Trump shot himself in the foot with his well-intentioned but poorly-timed tax cut. While I have nothing against lower taxes, if they are accompanied with prudent fiscal management, the President and Congress blew up the federal deficit in a booming economy.

It would have been a lot better for the tax cut to be offset with a spending cut, so this unfortunate deficit situation would not have materialized. One has to do a tax cut in a situation when the economy is much weaker so that it helps spur a recovery, rather than pushing the economy into overdrive.

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

It is entirely possible that this poorly-timed fiscal stimulus, likely driven by considerations of the midterm elections, caused the Federal Reserve to press harder on the monetary brakes for fear that the economy would overheat in a late-stage economic expansion. It is not inconceivable that faster monetary tightening, which at the present time is executed by hiking the fed funds rate and letting the runoff rate of the Fed’s balance sheet accelerate, is causing the current problems in the stock market.

In other words, too much of a good thing in the form of a poorly-timed tax cut (without spending cuts) may end up boomeranging in a stumbling stock market, courtesy of the Federal Reserve.

Still, if the Fed does not overdo it and there is no recession in 2019, it would be unheard of for the stock market to decline in a situation where EPS growth in the S&P 500 would be up more than 20% in 2018 and 10% or more in 2019, based on present consensus estimates. That means the S&P 500 would not budge in response to better-than-30% EPS growth over two years – which is not likely.

The China Factor

Because of the way the President has timed his agenda, we now have the double whammy of China trade frictions and an overzealous Fed muddying the waters. If one of those factors goes away or shows signs of improvement, the stock market is likely to celebrate in the seasonally strongest time of the year.

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

There are some early signs that Trump wants to close a trade deal with China in Argentina this coming Friday and Saturday. Both the Chinese and the U.S. trade teams are going to Buenos Aires, so an agreement on a framework – it is unlikely to be a final deal – would likely be viewed as a positive by the stock markets in the United States and China.

The stock market in China has much more serious problems, exacerbated by trade frictions courtesy of the credit bubble that has been inflated in China over the past 25 years, so any bounce would likely be an opportunity to sell. As to the stock market in the U.S., we are too far away from a recession at the moment to be worrying about a big bear market at this point.

About The Author

Ivan Martchev

Ivan Martchev is an investment strategist with Navellier.  Previously, Ivan served as editorial director at InvestorPlace Media. Ivan was editor of Louis Rukeyser’s Mutual Funds and associate editor of Personal Finance. Ivan is also co-author of The Silk Road to Riches (Financial Times Press). The book provided analysis of geopolitical issues and investment strategy in natural resources and emerging markets with an emphasis on Asia. The book also correctly predicted the collapse in the U.S. real estate market, the rise of precious metals, and the resulting increased investor interest in emerging markets. Ivan’s commentaries have been published by MSNBC, The Motley Fool, MarketWatch, and others. *All content of “Global Mail” represents the opinion of Ivan Martchev*


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