by Louis Navellier
November 8, 2022
There are four important events this November, with the Federal Open Market Committee (FOMC) meeting on November 2 being the first. The second big event in November is obviously the mid-term elections, where an anticipated “red wave” would trigger a leadership change in Congress. If that happens, President Biden can choose to follow Bill Clinton’s example in 1994, following the Republican Revolution then, and work with the new Congress – or he can be openly hostile and use his veto pen.
Above and beyond the special events awaiting us this month, November is a seasonally strong month and our friends at Bespoke documented that in the past 20 years, the Dow Industrial Index rose an average of nearly 2% (1.99%), making it the second-best month (to April’s average 2.21% gain) in the past 20 years.
Even better, November kicks off the seasonally strongest six months. Bespoke documented that since 1988, the S&P 500 has risen a cumulative 958% between November 1 and April 30, while the S&P has risen just 196% between May 1 and October 31 – or about five times the gains in the colder months.
Another statistical trend that Bespoke documented is that since WWII, there has been a mid-term election cycle for the S&P 500 that commences in October and gains strength in November and December, so we should be just at the start of an impressive year-end rally. Bespoke found that since 1928, year three (next year) is the strongest year in the four-year Presidential election cycle by far. Here are the averages
As you can see, Year #3 (+13.51%) delivers almost as much gain as the other three years combined (+16.24%) and, based on historical charts of this Presidential cycle, the S&P 500 typically takes off just before the November mid-term elections, so no matter how you dissect historical stock market trends, the seasonally strong time of year has finally arrived! This is important because Election Day is today!
Wall Street generally wants the return of gridlock and fewer restrictions on business, but most Americans want our elected leaders to work with each other rather than engage in perpetual character assassination like we have witnessed in recent years. For example, I was at a friend’s birthday party the other day talking to an ex-Department of Justice prosecutor under former Attorney General Janet Reno and I asked him if Hunter Biden would take a plea deal before the new Congressional leadership takes over in January, while the Democrats are still in power. To my amazement, the ex-Department of Justice prosecutor said that he did not believe Hunter Biden would ever accept a plea deal, despite his obvious IRS violations as well as influence peddling and firearms infractions. This means that the new Congressional leadership, which is anticipated to be led by Kevin McCarthy, will have to explain to President Biden that if he does not want to work with the new Congress, the new Republican House committees can launch investigations and make life hell for Hunter Biden, Homeland Security Secretary Alejandro Mayorkas, and other Biden officials.
The third big event to happen this month will be the G20 meeting in Indonesia, November 15-16, when all eyes will be on whether or not Russian President Vladimir Putin will show up. Ukrainian President Volodymyr Zelenskyy has been invited to be a special guest, so there will naturally be tremendous tension if Putin and Zelenskyy are in the same room. Obviously, the best outcome would be a cease fire between Russia and Ukraine, since winter is fast approaching, and fighting is very difficult in winter. My guess is that Vladimir Putin will continue to hide out from his own people as well as the G20 leaders.
The final big event in November will be Thanksgiving itself on November 24, and the long (nearly four-day) market break, with just a half-day of light trading on Friday. The stock market traditionally rallies from mid-November to year-end, especially small capitalization stocks that are often characterized by an “early January effect.” The reason that the stock market is seasonally strong leading up to Thanksgiving is that consumers tend to be happy when they gather with family and friends for food, football, and relaxation. The only glitch leading up to Thanksgiving this year is the tight supply of diesel and other distillates (e.g., heating oil and jet fuel), which could potentially delay some deliveries and air travel.
Some Lingering Impediments to Food and Fuel Delivery This Winter
The G20 will be particularly concerned about soaring food and fuel prices. The big news last week was that food prices are soaring again after Russia backed away from agreeing to allow Ukraine to ship grain from Odessa. However, Turkey said Russia agreed on Wednesday that Ukraine grain shipments could resume.
Turkey originally brokered the Black Sea Grain Initiative back in July, which allowed Ukraine to ship grain, and Russia to ship fertilizer. Vladimir Putin is obviously upset that Ukraine successfully attacked at least three Russian warships via a drone swarm in the Black Sea and so he is seeking to punish Ukraine, which remains defiant and is continuing to ship grain this week, so peace is not on the horizon quite yet.
Eurostat announced last week that consumer inflation in the eurozone ran at a 10.7% annual pace in October. Italy led the way with a 12.8% annual rate, followed by Germany with an 11.6% annual rate. Germany’s influential IG Metall union, representing some 2.2 million industrial workers, has demanded an 8% pay increase over 12 months to compensate for surging consumer prices. Protests in the Czech Republic, France, and Germany are spreading and may get worse since food prices are soaring again.
U.S. diesel production has fallen by 400,000 barrels per day. America’s diesel and distillate shortage is partially caused by our high level of petroleum exports, much of it coming from our 1 million barrel per day release from the Strategic Petroleum Reserve (SPR). The diesel and distillates shortage is also being caused by the fact that many U.S. refineries are making ‘green diesel’ from animal fats and organic waste.
This is a good time to point out that many of the President’s “green initiatives” are inherently inflationary. Although the Biden Administration tried to offset its restrictions by draining the SPR to its lowest level since 1980, if you combine the one million barrel per day release from the SPR ending soon, with OPEC+ striving to curtail crude oil production by up to two million barrels a day, I’d say $120 per barrel crude oil is likely in the spring, when worldwide crude oil production naturally picks up. In other words, energy inflation is here for at least 6-9 months. In fact, crude oil prices surged 5% on Friday on fears that a tight supply, especially as China’s economy recovers from its Covid Zero lockdowns in the upcoming months.
Amazingly, Wall Street’s anti-fossil fuel and ESG push drove energy stocks down to less than 2% of the S&P 500 a year ago. Now, energy stocks are the best performing sector, pushing energy stocks up to 6% of the S&P 500. Just two years ago, fossil fuels represented 80% of worldwide energy production. 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, despite many “Green’ measures. Europe has proven that ESG polices are an expensive failure, since they just cause electricity prices to soar! Within 2-3 years, I expect energy stocks to quadruple with the sector reaching 30% of the S&P!
The reason that I am so confident that energy stocks will reach a 30% weight in the S&P 500, up from about 6% now, is because the tracking managers will be systematically forced to buy more energy stocks as leading tech stocks falter and leading energy stocks announce great earnings and continue to steadily rise. When energy stocks were less than 2% of the S&P last year, technology was approximately 48%, which was equally unbalanced. I predict that in 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 unloading technology stocks as the two sectors’ weights reach near-parity.
U.S. Economic Indicators Remain “Mixed” – Hovering Near Recession Territory
The economic news last week was mixed. The Institute of Supply Management (ISM) on Tuesday announced that its manufacturing index slipped to 50.2 in October, down from 50.9 in September. Any reading over 50 signals an expansion, so the manufacturing side of the U.S. economy is barely expanding, but there were some “green shoots.” The new orders component is still underwater at 49.2 in October, but it is up from 47.1 in September. The production component is encouraging and rose to 52.3 in October, up from 50.6 in September. Unfortunately, the backlog of new orders plunged to 45.3 in October, down from 50.9 in September. A minority (8 of 18) industries ISM surveyed said they expanded in October.
On Wednesday, ADP announced that private payrolls rose 239,000 in October, higher than economists’ consensus estimate of 195,000. Interestingly, leisure and hospitality added 210,000 new private payroll jobs, or 88% of all new private payroll jobs. Wage growth accelerated 11.2% in the hospitality sector, while overall wage growth rose 7.7% in the past 12 months. Manufacturing lost 20,000 jobs in October and many other key industries showed job losses, including construction, information technology, financial services, and professional and business services, so some job weakness has finally materialized.
On Thursday, the Labor Department announced that unemployment claims in the latest week declined slightly to 217,000, down from a revised 218,000 in the previous week, but continuing unemployment claims rose to 1.485 million in the latest week, up from 1.438 million in the previous week. The four-week average of continuing claims continues to rise, so it is becoming inevitable that the unemployment rate will rise in the upcoming months, causing the Fed to pause hiking key interest rates.
Finally, the Labor Department announced on Friday that 261,000 payroll jobs were created in October, which was significantly higher than economists’ consensus estimate of 205,000. August and September payrolls were also revised 29,000 higher. The unemployment rate rose to 3.7% in October, up from 3.5% in September, due to a shrinking workforce, as the labor force participation rate declined to 62.2% in October, down from 62.3% in September. Average hourly earnings rose by 9 cents or 0.4% to $27.86 per hour in October and wages rose only 4.7% in the past 12 months. Since the job growth was stronger than anticipated, the Fed may keep raising interest rates, but wage growth is not keeping up with inflation.
Turning to China, the official China purchasing managers index (PMI) declined to 49.2 in October, down from 50.1 in September. The service PMI was even worse, dipping to 47 in October, down from 48.9 in September. Since any reading under 50 signals a contraction, the impact of China’s Covid Zero policies is unquestionably hurting China’s GDP growth. China’s supply chains are continually being halted or interrupted, so Indonesia, Malaysia, Thailand, and Vietnam are expected to be the primary beneficiaries.
China’s Covid Zero policies obviously remain in place, as Apple supplier Foxconn is now moving its production around China after workers were fleeing its main production hub in Shanghai due to another Covid lockdown. Specifically, Foxconn’s Zhengzhou plant was under lockdown and city officials reported that the company failed to provide adequate food and a safe working environment.
Fully 60% of Apple’s iPhone production comes from Foxconn’s Zhengzhou plant during peak demand for iPhone’s recent update. Not that long ago, Apple suspended its plan to manufacture iPhones in India, but on Friday Apple reactivated its plan to build the iPhone 14 in India through its manufacturer Pegatron.
Navellier & Associates owns Apple Computer (AAPL), in managed accounts. Louis Navellier and his family own Apple Computer (AAPL) in a personal account.