December 18, 2018

The market doesn’t seem to care much about corporate earnings or the economy these days. It rises or falls from hour to hour based on the latest political headlines. The financial media tells us that the market sold off last Monday due to the postponement of the Brexit vote. Then it briefly rallied on Tuesday due to China slashing its tariffs on U.S. vehicles to 15%, down from 40%. Then it sold off late Tuesday when President Trump had a public spat with incoming House Majority Leader Nancy Pelosi and Senate Minority Leader Chuck Schumer, in which he threatened to shut down the federal government if he does not get funding for his border wall. Then on Wednesday the financial media cited optimism on the China trade talks as the reason that the stock market was rallying. Finally, the stock market finished the week on a sour note after China announced that its industrial production and retail sales were soft in November.

The truth of the matter is that there will always be macro events that influence markets, but right now the market is merely trying to find firmer footing after multiple retests of the lows on light trading volume.

The situation in Britain seems to have calmed down a bit, since Prime Minister Theresa May prevailed on Wednesday night in a confidence vote despite 117 members of Parliament calling for her to be replaced. After staying in power, Prime Minister May said that she will not seek re-election. The truth of the matter is that the Brexit mess is very polarizing and apparently no one wants to be Prime Minister until after the Brexit situation is resolved. Although Prime Minister May remains in power, the challenge to oust her has reduced her influence. The European Union (EU) does not mind if Britain leaves – just as long as Britain pays the EU to exit. Essentially, this “exit fee” to the EU has politicians enraged, so it will be interesting to see if Prime Minister May can eventually successfully implement Brexit. The net result is that the British pound will likely remain weak and political chaos will persist for the foreseeable future.

When it comes to the economic fundamentals, however, the U.S. is doing quite well. The Commerce Department on Friday announced that retail sales rose 0.2% in November, slightly better than economists’ consensus estimate of a 0.1% rise. Excluding sales at gas stations (which declined 2.3% due to lower fuel prices), retail sales rose a much more impressive 0.5% in November. Also encouraging is that October’s retail sales were revised up to a 1.1% increase, up from 0.9% previously estimated. On-line retail sales were especially strong in November, rising 2.3%. In the past 12 months, retail sales have risen 4.2%. Fourth quarter GDP estimates maybe now be revised a bit higher by many economists due to better-than-expected retail sales. The Atlanta Fed is now estimating 3.0% fourth quarter GDP growth, up from 2.4%.

Sharply Falling Prices Should Put Pressure on the Fed to Leave Rates Alone

Amidst all these distractions, market interest rates have meandered lower. This is putting pressure on the Fed to stop raising key interest rates in 2019, which will be clarified at this week’s Federal Open Market Committee (FOMC) meeting. Further putting pressure on the Fed, President Trump made it clear last week that the Fed should not raise rates at this meeting. Buttressing Trump’s case, there was some very positive inflation news last week, which will likely put pressure on the FOMC to not raise rates this week.

Specifically, the Labor Department announced that the November Producer Price Index (PPI) rose just 0.1%. The 14% plunge in wholesale gasoline prices in November was biggest monthly drop in almost three years, while natural gas prices plunged by twice that, 28% in one month. The cost of wholesale goods declined 0.4% in November and the price of raw materials are down 0.7% in the past 12 months.

On Wednesday, the Labor Department announced that its Consumer Price Index (CPI) was unchanged in November. Energy prices declined 2.2% in November, led by a 4.2% decline in gasoline prices. Excluding food and energy, the core CPI rose 0.2% in November and 2.2% in the past 12 months.

The Fed’s mandate is to keep unemployment low and strive for 2% inflation based on the Personal Consumption Expenditure (PCE) index. With unemployment currently at 3.7% and the PCE at a 1.8% annual pace and likely to decelerate further in the upcoming months due to lower energy and commodity prices, the Fed should stop raising key interest rates. Furthermore, by raising key interest rates previously, the Fed has “pricked” the housing bubble, as home prices are flat, and home sales continue to slow.

The primary reason that President Trump does not want the Fed to continue raising key interest rates is that higher interest rates have not only impacted home sales, but also auto sales, due to higher financing costs. Furthermore, now that General Motors is laying off auto workers and closing plants due to poor sales, President Trump is blaming the Fed for hurting the domestic auto industry. I should add that I was in Ohio last week and there is a lot of anxiety about the GM layoffs hurting Ohio workers. The bottom line is that there is a tremendous amount of pressure on the Fed imposed by President Trump and Wall Street, which has posted trillions of dollars of losses since October, partially on the fear of higher rates.

(Navellier & Associates Inc. does not own GM, in managed accounts or mutual fund.  Louis Navellier & his family do not own GM in personal accounts.)

So, this week’s FOMC meeting is going to be a big deal. Under no circumstances does the Fed want to be manipulated by President Trump, since it is supposed to be independent, but if the Fed does not raise key interest rates, it has to come up with a good reason – such as weakness in home sales, domestic vehicle production, inflation fizzling faster than anticipated, slowing global growth, etc. If the Fed raises key interest rates to get more in line with market rates, which most economists expect, then the FOMC better have a super-dovish statement to reassure financial markets that future rate hikes in 2019 are less likely due to market rates stabilizing, slowing inflation, moderating economic growth and global events.

Let’s all keep our fingers crossed that the Fed does the right thing and issues a dovish FOMC statement, which should help the stock market erase much of the damage that has been inflicted since October!

About The Author

Louis Navellier
CHIEF INVESTMENT OFFICER

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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