November 27, 2018
Looking forward, I expect dividend growth stocks to lead the stock market recovery. Additionally, I expect that the stocks that can sustain strong sales and earnings momentum will also emerge as market leaders in the upcoming weeks. As I mentioned on my Tuesday podcast, virtually all industry sectors have broken down, so only stock picking will prevail in the upcoming weeks and months.
In addition, I would stay away from mainstream ETFs. Most ETF investors have no idea of the hidden transaction costs from ETF premiums or discounts to Intraday Indicative Value. (I discussed these contingent risks in a white paper entitled “How the Robo Advisor Revolution May Be Leading Up to an Impending Disaster,” which you can read here.) You can probably tell from all the ETF whitepapers that my management firm provides that we are trying to educate everyone about potential ETF trade execution pitfalls. However, it would certainly help if the SEC improved ETF disclosure requirements merely by forcing the NYSE to publish ETF premium/discounts relative to Intraday Indicative Value.
The bottom line is that ETFs are increasingly complicating the trading on Wall Street, especially during corrections and fast market conditions like we’ve seen in October and November. The fact that most investors have virtually no idea of the premium or discount that they have to pay relative to Intraday Indicative Value remains a major problem. This ETF execution problem could be fixed simply by forcing the NYSE to publish the Intraday Indicative Value – like Morningstar does for most ETFs.
At least that is my Thanksgiving (and Christmas) wish.
The Economy – Especially Housing – Has Slipped Recently
The National Association of Home Builders (NAHB) reported that confidence slipped to 60 in November, down from 68 in October, and is now at the lowest level in more than two years. Although a reading of 60 is still deemed positive, homebuilders are clearly struggling with labor shortages, higher interest rates, and tariffs impacting lumber and imported supplies. The only time this index has declined more than eight points in one month was immediately after the 9/11 terrorist attack. Chillingly, the buyer traffic index slipped to 45 in November from 53 in October, as the NAHB said, “Customers are taking a pause.”
Last Tuesday, the Commerce Department announced that housing starts rose 1.5% in October to an annual pace of 1.228 million. This increase in housing starts was entirely due to an increase in multi-family starts, which surged 10.3% to an annual pace of 363,000 in October. Single-family home starts declined 1.8% to an 865,000 annual pace in October. I should also add that the Commerce Department reported that building permits declined 0.6% in October to an annual pace of 1.263 million. Overall, the housing market remains hindered by higher interest rates, affordability issues, and an acute labor shortage.
The National Association of Realtors on Wednesday announced that existing home sales rose 1.4% in October to an annual pace of 5.22 million, slightly better than economists’ consensus estimate of 5.19 million. In the past 12 months, existing home sales are off 5.1%, which represents the largest annual decline since 2014. Median home prices have risen 3.8% to $255,400 in the past 12 months. At the current sales pace, there is a 4.3-month supply of existing homes for sale, so inventories remain tight.
On Wednesday, the Commerce Department announced that durable goods orders declined 4.4% in October, the largest monthly decline since July 2017 and substantially below economists’ consensus estimate of a 2.6% decline. A 21.4% decline in commercial aircraft orders was largely responsible for the abrupt decline. In the first 10 months of 2018, business investment is up 6.4% and durable goods orders are up 8.7%, compared to the same period a year ago. Recently, however, a cautious business community is signaling that GDP growth is expected to slow in the fourth quarter.
Speaking of GDP growth, the Atlanta Fed on Wednesday reduced its fourth-quarter GDP estimate to an annual pace of 2.5%. Consumer spending remains the primary catalyst for GDP growth so the shopping activity on Black Friday and Cyber Monday will be closely scrutinized. Due to falling gasoline prices, I suspect that consumers will remain upbeat and there will be record spending this holiday season.
The Conference Board on Wednesday announced that its Leading Economic Index (LEI) rose 0.1% in October, which is in line with the economists’ consensus estimate. Economist Ataman Ozyildirim at the Conference Board said, “The (LEI) index still points to robust economic growth in early 2019, but the rapid pace of growth may already have peaked. While near-term economic growth should remain strong, longer-term growth is likely to moderate to about 2.5% by mid-to-late 2019.”
Brent light sweet crude oil fell below $60 per barrel on Friday on speculation that President Trump has convinced Saudi Arabia to keep up its production of crude oil. Russia, Saudi Arabia, and the U.S. are all producing record amounts of crude oil. Despite widely reported cuts being implemented at the upcoming OPEC meeting, Saudi Arabia remains in control of OPEC’s crude oil production and may comply with President Trump’s wishes, especially after the U.S. imposed sanctions on 17 high profile Saudis after the Khashoggi killing. Regardless of what Russia and Saudi Arabia do, the fact that a natural gas pipeline in the Permian Basin is being upgraded to transport crude oil means U.S. crude oil production is expected to rise steadily in 2019 and further disrupt crude oil prices worldwide.
Now that crude oil prices have plunged, and inflation is cooling off fast, it is possible that the Fed may reconsider its anticipated December key interest hike. However, as I have repeatedly said, only plunging Treasury yields may be enough to cause the Fed to postpone its planned December key interest rate hike. However, if the Fed, via its Federal Open Market Committee (FOMC) statement in December, says that it will pause raising key interest rates, I expect that the stock market will explode to the upside!