by Louis Navellier

November 9, 2021

Americans are naturally optimistic. Everyone who wants a job now can get one, and wages have risen at the fastest pace in the past 20 years. The unemployment rate has fallen as the U.S. workforce has shrunk and many workers have decided to retire, and many working mothers decided to stay home. Furthermore, despite some airline cancellations due to the vaccination mandate and staff shortages, holiday travel is expected to hit a record this year, providing that Covid-19 fails to derail the economy. This optimism should rub off on consumers, so I expect a robust holiday season despite port delays and supply shortages.

The jobs situation is picking up, perhaps due to less incidence of COVID cases in the recent Delta variant.

ADP reported on Wednesday that 571,000 new private payroll jobs were created in October, substantially higher than economists’ consensus estimate of 395,000. This was the strongest ADP private payroll report in the past four months. The leisure and hospitality sector led the way by creating 185,000 new jobs. The largest businesses (those with over 500 employees) led the October job creation totals, creating 342,000 new jobs. The construction sector added 54,000 jobs, while manufacturing created 53,000 new jobs.

The Labor Department then reported on Thursday that weekly unemployment claims declined to 269,000 in the latest week, down from a revised 283,000 in the previous week. Continuing unemployment claims also declined to 2.105 million in the latest week, down from a revised 2.239 million in the previous week.

On Friday, the Labor Department reported that 531,000 net new payroll jobs were added in October, substantially more than the economists’ consensus estimate of 450,000. Also, the September payroll report was revised up substantially, to 312,000 from 194,000 previously reported, while the August payroll report was revised up to 483,000, from 366,000 previously reported. That means we’ve added at least 1.3 million new jobs in the last three months. But even with these positive payroll reports for the past three months, the U.S. economy is still four million jobs short of where it was prior to the pandemic.

The labor force participation rate is now 61.6%, down from 63.3% pre-pandemic. The unemployment rate declined to 4.6% in October, down from 4.8% in September. Average hourly earnings rose 0.4% (or 11 cents) to $30.96 per hour in October and have risen 4.9% in the past year. These numbers are solid, so I stand by my statement that the Fed has met its jobs mandate and must now focus on fighting inflation.

I say this because the Fed’s favorite inflation indicator, the Personal Consumption Expenditure (PCE) index, is now running at a 4.4% annual pace through September, the fastest pace in 30 years. Excluding food and energy, the PCE is running at a slightly more tolerable 3.6% annual pace. Since much of the inflation is related to food and energy – the working poor are being hurt the most. Despite a 25% increase in food stamps and a 5.9% increase in 2021 for Social Security, Americans are not used to empty store shelves, gasoline prices doubling (in most regions), and the prices of most food staples rising rapidly.

The Federal Open Market Committee (FOMC) met last week and their statement on Wednesday was very dovish. As expected, the FOMC announced that it would begin to taper its quantitative easing (QE) by $15 billion per month starting this month. The FOMC statement also reiterated the Fed’s previous statements that inflation is “transitory,” noting that “supply and demand imbalances related to the pandemic and the reopening of the economy have contributed to sizable price increases in some sectors.”

Overall, it is very apparent to me that Fed Chairman Jerome Powell wants to keep his job; and so, he will strive to avoid “rocking the boat” by keeping monetary policy super accommodative through February, when his term is slated to end and President Biden will either re-nominate him or nominate someone else.

U.S. Economic Growth Slowing While Europe Recovers But Faces a Cold Winter

Last week, I reported that the U.S. economic growth decelerated rapidly in the third quarter to an annual pace of 2% in the first official estimate, but I added that the third-quarter GDP estimate will continue to be revised in the upcoming weeks since all the September data was not in, like trade deficit data.

Well, the Commerce Department reported last Thursday that the trade deficit in September soared 11.2% to a record $89 billion, as imports rose 0.6% to $288.5 billion, while exports plunged 3% to $207.6 billion. There is no doubt that Hurricane Ida curtailed U.S. exports somewhat in September, but whatever the cause, third-quarter GDP estimates are now likely to be revised lower due to this record trade deficit.

Looking ahead to this quarter, the Atlanta Fed is now forecasting an amazing +8.5% annual GDP growth for the fourth quarter, but I should add that the Atlanta Fed was over-estimating third-quarter GDP growth at over a 6% annual pace as of last August, so these early estimates can be wildly off, or misleading.

While U.S. growth slowed dramatically in the third quarter, the eurozone’s GDP surged at an annual rate of 9.1% in the third quarter according to Eurostat, but Europe is climbing out of a deeper economic hole than the U.S. and has yet to exceed pre-pandemic levels. Like the U.S., the eurozone has a growing order backlog due to the shortage of semiconductors and other goods. Also, China’s economic slowdown may curtail some of Europe’s growth, since Germany and other eurozone nations are major exporters to China.

The Institute of Supply Management (ISM) announced that its manufacturing index slipped to 60.8 in October, down from 61.1 in September. Interestingly, ISM reported that 26 commodities were in short supply in October, with some commodities having up to a 13-month wait time!  Not surprisingly, the prices that manufacturers paid surged to a lofty 85.7 in October, up from 81.2 in September. The good news is that the deliveries component rose to 75.6 in October, up from 73.4 in September. The bad news was that the new order component fell to 59.8 in October, down from a more robust 66.7 in September. Nonetheless, factories are still reporting substantial order backlogs, which bodes well for GDP growth.

On Wednesday, ISM reported that its non-manufacturing (service) index surged to 66.7 in October, up from 61.9 in September. This is the highest reading the service index ever reported and much stronger than the economists’ consensus estimate of 62. Especially encouraging, the new orders component surged to 75.6 in October, up from 68.8 in September. As a sign that service inflation is becoming permanent, the prices component soared over five points to 82.9 in October, up from 77.5 in September. Overall, the ISM service index was very bullish for both economic growth and continued inflationary pressure.

President Joe Biden described the recent G-20 meeting in Rome, Italy as “disappointing,” because Russia and China “basically didn’t show up” with climate change commitments. Increasingly, it is now “every country for itself,” which will be evident this winter, since many European countries, with the exception of France, are not ready for a cold winter, since they did not build sufficient natural gas stockpiles.

Russia is widely expected to use its vast natural gas output for political influence, so this winter will be very interesting. Fortunately, even though President Biden issued an executive order curtailing crude oil and natural gas production on federal land, which has since been overturned by a Federal District Court judge in Louisiana, in the U.S. we are much less likely to be held hostage by higher natural gas prices.

In an “Overbought” Market, Stock Selection is Vital

Just like it is now “every country for itself” and international leadership is changing, it is also “every stock for itself” and a major leadership change is underway, especially after both Apple and Amazon announced disappointing third-quarter results. I am proud that I am recommending two companies that are up over 1,100%, namely Digital Turbine (APPS) and Enphase Energy (ENPH), which are examples of the leadership change that is now underway. In fact, both of these stocks are in the NASDAQ 100 and are expected to account for a higher proportion of NASDAQ’s flagship index. Although I expect that Apple and will rebound and surprise investors in upcoming quarters, these two stocks already represent approximately 10% of the S&P 500 and a whopping 17.65% of the NASDAQ 100.

Navellier & Associates owns Enphase Energy, Inc. (ENPH), Digital Turbine (APPS), Apple Computer (AAPL) and Amazon  (AMZN) in managed accounts. Louis Navellier and his family personally own. (ENPH), Digital Turbine (APPS), Apple Computer (AAPL) and Amazon (AMZN) via a Navellier managed account and Apple Computer, Enphase Energy, Inc. (ENPH), and Amazon (AMZN) in a personal account.

The truth of the matter is that stock market investment themes come and go, but in the end, you simply cannot ignore fundamentals.  Essentially, we are now in the midst of a renaissance era for powerful growth stocks, which are increasingly emerging as market leaders by announcing better quarterly results than the overall market. The current inflationary environment is causing a major stock market rotation into quality stocks characterized by strong sales and earnings momentum. In other words, the stock market has come our way and money is increasingly flowing into the powerful growth stocks I follow.

Finally, I must add that in the wake of the surprising Virginia governor’s race as well as an ultra-close governor’s race in New Jersey, the Biden Administration is unlikely to pass a tax increase this year. If President Biden has good survival instincts, he will pivot to the center and try to be more inclusive, just like President Clinton had to do when his party lost control of Congress in 1994.

Although the Democratic Party has not lost the House of Representatives yet, Tuesday’s election outcome was an “earthquake” that will likely cause more Representatives to “act independently,” like Senators Joe Manchin and Kyrston Sinema. Wall Street typically likes divided government and gridlock, so I suspect that as various politicians reflect on their fate next November, the stock market will continue to prosper.

All content above represents the opinion of Louis Navellier of Navellier & Associates, Inc.

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About The Author

Louis Navellier

Louis Navellier is Founder, Chairman of the Board, Chief Investment Officer and Chief Compliance Officer of Navellier & Associates, Inc., located in Reno, Nevada. With decades of experience translating what had been purely academic techniques into real market applications, he believes that disciplined, quantitative analysis can select stocks that will significantly outperform the overall market. All content in this “A Look Ahead” section of Market Mail represents the opinion of Louis Navellier of Navellier & Associates, Inc.

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