by Louis Navellier
December 21, 2021
Although a federal judge overrode the Biden Administration’s ban on drilling on federal land, Biden’s advisors remain hostile to energy independence, so energy production within the U.S. has ebbed in 2021.
One unexpected consequence of the drilling ban is that many independent operators abandoned natural gas wells in the Permian Basin, especially in Southeastern New Mexico, so tons of methane and natural gas have needlessly escaped into the atmosphere, which is not what climate activists wanted.
Part of the proposed Build Back Better Act authorizes hundreds of millions of dollars to cap abandoned wells. It seems that the Energy Department could simply honor the federal judge’s ruling, reactivate these wells, stop the leakage, and help get energy prices lower, but I suppose you can’t change rigid ideologies.
The Biden Administration is also still allowing solar panels to be imported, despite the fact that they are largely made in Chinese slave labor camps by Uyghurs. Another interesting fact is that California proposed substantial changes to its solar energy incentive program last week that included higher monthly utility fees to cut “net energy metering” when utility customers sell excess electricity to the utility grid.
Although solar energy is required on all new homes in California, when the state reduces the electricity homeowners can sell back to the electric grid, existing customers may now install more Powerwalls, so that they can better utilize their excess electricity versus selling it back to the utilities at reduced rates.
Meanwhile, China is becoming increasingly isolated as it asks countries to break diplomatic ties with Taiwan. Although Nicaragua sided with China and cut its ties with Taiwan, Lithuania pulled its diplomats out of China after it strengthened ties with Taiwan. As China tries to wield its influence around the world, its domestic economic growth continues to decelerate in the wake of Evergrande defaults, which have helped to push property prices down for three consecutive months. According to China’s National Bureau of Statistics, retail sales decelerated to a 3.9% annual pace in November, below the expected 4.5% rate.
Complicating matters further, the Biden Administration “blacklisted” eight Chinese companies last week, including DJI (the largest commercial drone manufacturer), for suppressing Uyghur Muslim minorities.
The Positive Side of Inflation – Most Markets Are Up!
After we went to press last Tuesday morning, the Labor Department announced that the Producer Price Index (PPI) surged 0.8% (a 10% annual rate) in November. Wholesale food prices rose 1.2% and energy prices surged 2.6%. Excluding food, energy, and trade margins, the core PPI rose 0.7% in November, so it is no longer just related to higher food and energy prices. For example, the wholesale cost of goods rose 1.2% in November, while wholesale services rose 0.7%, so clearly inflation is no longer “transitory.”
In the past 12 months, the headline PPI and core PPI have risen 9.6% and 6.9%, respectively. Yikes!
The positive side of this inflation is that the bull markets in residential real estate and stocks remain the best way to protect yourself against inflation, so growth stocks and dividend growth stocks are expected to remain an oasis for investors. Since the market began to recover after its initial decline in March 2020, millions of new investors have opened brokerage accounts as these investors increasingly are turning to stocks to protect themselves against the highest inflation rates we’ve seen in 39 years (since 1982).
The net result is that 2021 has been a great year for most markets, but the financial media continue to try to scare investors away from stocks by pointing out that Elon Musk and other billionaires are selling a record number of shares. The bears are insinuating that if “smart money” is selling, then a stock market correction must be imminent. However, The Wall Street Journal pointed out that in the third quarter, stock buy-backs rose to $234.5 billion, an all-time record. This may explain why companies continue to post better-than-expected earnings, since stock buy-backs tend to boost the underlying earnings per share.
As far as a correction being “imminent,” we already had a 5% decline in the S&P 500 (intraday) between Thanksgiving week and December 3rd, when the stock market overreacted to the Covid-19 Omicron variant, as well as unnecessary fears of Fed tapering. NASDAQ fell almost 8% in the same time frame, then it successfully retested those December 3rd lows on Friday, December 17th. This retest occurred on light trading volume, which tells me that it should be safe to invest in the stock market, since most of the risk has been wrung out. As I have mentioned several times, the last week of the year (between Christmas and New Year’s) is an excellent time to invest, since most year-end tax selling has been exhausted.
Fortunately, the Treasury Department recently conducted successful Treasury securities auctions and although intermediate yields rose slightly, but briefly, the 10-year Treasury and other long bond yields remain remarkably stable. As I reported last week, the Treasury Department sold $36 billion in 10-year bonds, with foreign buyers accounting for just under 69% of all bidders. The bid-to-cover ratio was a very healthy 2.43, so the 10-year bond yield only rose slightly and has since fallen. Due to robust international demand for Treasury securities, the Fed will continue to taper and further reduce its quantitative easing.
As we close out 2021, the U.S. dollar remains very strong, as international investors increasingly turn to the U.S., since we have positive interest rates (versus flat-to-negative interest rates in Japan and most of Europe) and a strong currency. Our economy is also in better shape than Europe’s or Japan’s. The ISM service index is at a record high, and the ISM manufacturing index remains robust, so fourth-quarter GDP growth is shaping up to make 2022 a year for the record books! Since approximately half the sales for the S&P 500 are outside of the U.S., a strong U.S. dollar should help create record sales and boost earnings.
Looking forward to 2022, I expect that our growth stocks and dividend growth stocks will prosper. Why?
- First, although year-over-year earnings comparisons will become more difficult in 2022, a narrower market is good news for us and bad news for the “index fund” crowd, since our stocks have traditionally prospered in a narrowing, more selective, stock market environment like this.
- Second, the Fed will likely remain reasonably accommodative after winding down its quantitative easing by March and perhaps raising key interest rates, starting in March – but in a gradual manner.
- Third, inflation will eventually decelerate, but it will likely remain above the Fed’s target rate through 2022. Inflation may fall under 3% by late 2022, which the stock market will likely celebrate.
- Fourth, the leadership of both the House of Representatives and the Senate are expected to change due to the mid-term elections, so Wall Street will finally get the divided government that it craves.
Overall, I expect that our growth and dividend growth stocks will remain an oasis amidst the inflationary bubbles rolling through the U.S. and world economy. As other countries persist with their draconian lockdowns due to Covid-19, here in the U.S. lockdowns are no longer politically practical, since everyone who wants a vaccine has gotten one or can get one. For example, despite record hospitalizations in Michigan, the governor does not dare impose more lockdowns, since she is running for reelection. The simple fact of the matter is that the U.S. remains an oasis of relative freedom, compared to most of the rest of the world.
One other big change is that the pandemic accelerated technological change and boosted productivity in the U.S., so companies can now make more money with fewer workers. Investors can profit in artificial intelligence (with companies like Nvidia); cybersecurity (Crowdstrike and Fortinet); 5G (Alphabet, Cadence Design System, EPAM Systems, and Keysight Technologies); electric vehicles (Ford, Panasonic, and VW Group); and semiconductor industries (KLA Corporation and United Microelectronics). These and a few other companies are leading this new wave of higher productivity.
As investors, we have a lot to be excited about, and I promise to keep recommending the crème de la crème of available stocks. I am immensely proud that our growth and dividend growth stocks represent a critical path to prosperity and the independence that successful investors enjoy!
Navellier & Associates owns Nvidia (NVDA), Crowdstrike Holdings (CRWD), Fortinet Inc. (FTNT), Alphabet (GOOGL), Cadence Design System (CDNS), EPAM Systems (EPAM), Keysight Technologies, (KEYS), Ford, (F), Panasonic Corp (PCRFY), VW Group (VWAGY), KLA Corporation (KLAC), and United Microelectronics (UMC), in managed accounts. Louie Navellier and his family personally own Nvidia (NVDA), Alphabet (GOOGL), Cadence Design System (CDNS), EPAM Systems (EPAM), Keysight Technologies, (KEYS), Ford, (F), Panasonic Corp (PCRFY), VW Group (VWAGY), and United Microelectronics (UMC), via a Navellier managed account, but do not own Crowdstrike Holdings (CRWD), KLA Corporation (KLAC), or Fortinet Inc. (FTNT),
Retail Sales Disappointed – But the Fed is Still Accelerating the “Taper”
Last Wednesday, the Commerce Department announced that retail sales rose just 0.3% in November, substantially below economists’ consensus estimate of a 0.8% increase. Electronics & appliance store sales declined 4.6%, while gas station sales rose 1.7%. General merchandise store sales declined 1.2%, led by a 5.4% drop in department store sales. Non-store (online) retailers were unchanged. Sporting goods store sales rose 1.3% and were likely boosted by gun and ammunition sales. Excluding gasoline sales, retail sales rose only 0.1% in November, but over the past 12 months, retail sales have risen 16.2%.
Overall, the November retail sales report was very disappointing and will undoubtedly lead to downward fourth-quarter GDP revisions. In fact, the Atlanta Fed on Wednesday reduced its fourth-quarter GDP estimate to a 7.0% annual pace, down from its previous estimate of an 8.7% annual pace. It appears that higher gas prices are “zapping” consumer buying power and may be impacting consumer sentiment.
The other big news on Wednesday was that the Federal Open Market Committee (FOMC) statement was surprisingly dovish in the wake of that morning’s disappointing retail sales report. Specifically, even though the FOMC statement implied that there would be three key interest rates hikes of 0.25% each for the federal funds rate in 2022, these rate hikes would not commence until the Fed ended its tapering.
The Labor Department on Thursday announced that new claims for unemployment in the latest week rose to 206,000, compared to a revised 188,000 in the previous week. Continuing unemployment claims fell to 1.845 million, vs. a revised 1.999 million in the previous week. New unemployment claims remain near a 52-year low, and the fact that continuing unemployment claims keep declining is very good news. In my opinion, the Fed has fulfilled its unemployment mandate and can now concentrate on fighting inflation.