by Louis Navellier
December 27, 2023
First, let me revisit the inflation news I brought you last week: Consumer prices are falling around the world. China’s National Bureau of Statistics reported that its consumer prices declined 0.5% in November, reaching the fastest 12-month decline in three years. Germany’s consumer price inflation also declined 0.3% in November. That means our imports from China and Germany are falling in price, which contributed to the Producer Price Index (PPI) declining 0.8% and rising only 0.9% in the past 12 months.
And now, last Friday, the Fed’s favorite inflation indicator was released – the Personal Consumption Expenditure (PCE) index – which declined 0.1% in November, the first monthly decline since Apri1 of 2020. In both October and November, the core PCE, excluding food and energy, rose only 0.1%. In fact, the core PCE is running at a 1.9% annual pace over the past six months, so the Fed’s 2% inflation target is finally within sight, if not fully accomplished. The Fed can now finally say, “Mission accomplished.”
That’s probably why the Fed so clearly pivoted from “higher for longer”, to “rate cuts sooner than later” at its mid-December Federal Open Market Committee (FOMC) meeting, in which they revealed that their “dot plot” from 17 FOMC voting members revealed an expected three rate cuts in 2024. Furthermore, these Fed officials also anticipated three to four more rates cuts in 2025, taking the key Fed funds rate to a range of 3.5% to 3.75%. However, if the Fed wants to stay in good graces with the President (and also say that they are “staying out of politics”), they might make all six or seven 25-basis-point rates cuts before the November Presidential elections, super-charging the economy, plus consumer and investor sentiment.
In other economic news, Santa Claus is also alive and well: Real disposal income rose 0.4% in November, the fastest monthly rise since March. Consumer spending rose 0.2% in November, up from 0.1% in October. This latest data bodes well for strong consumer spending through this holiday shopping season.
The good news kept pouring in last Friday, when the Commerce Department reported that durable goods orders surged by 5.4% in November, due to a 15.3% surge in transportation orders. The Commerce Department also revised October durable goods orders slightly upward to a 5.1% decline (from the 5.4% decline initially reported), due predominately to a 13.4% decline in transportation orders. Clearly, commercial aircraft orders, which surged 80.1% at Boeing in November, have been dominating the monthly durable goods data. Fortunately, core capital goods orders also rose 0.8% in November, after declining 0.3% in October. Overall, this durable goods report is signaling improving economic growth.
The Commerce Department previously announced that retail sales rose 0.3% in November, which was substantially better than the economists’ consensus estimate of a -0.1% decline. Excluding vehicle and gasoline sales, retail sales rose by a much more robust 0.6% in November, which is better than the 0.1% increase in October! In the past 12 months, retail sales have risen 4.1%. Spending at bars and restaurants surged 1.6% in November, which is a good sign that consumers are out and about. Due to these improvements in the November data, we can expect an upward revision in fourth-quarter GDP estimates.
Some investors have been confused about why the U.S. economy seemed to be decelerating from a nearly 5% annual GDP growth rate in the third quarter to about half that level, an estimated 2.7% GDP growth in the fourth quarter. The biggest change is inventories, since there was a big inventory rise in the third quarter, just before the holiday shopping season. Typically, inventories are depleted during the holiday shopping season. Furthermore, energy prices have fallen slightly, so the robust GDP growth in the third quarter from the exports of LNG, crude oil and refined products slowed just a bit in the fourth quarter.
For the first quarter of 2024, I expect inventories to be rebuilt, energy prices to firm up by February as seasonal demand rises, and consumers to spend more as interest rates continue to moderate, so I see GDP rising at a fairly healthy rate in the opening quarter of 2024 as well.
Rising Global Tensions Should Help Our Energy Stocks in 2024
The year ahead still contains some wild cards. There have now been over 100 attacks on U.S. military facilities and ships in the Middle East since Hamas attacked Israel on October 7th. The Iran-backed Houthi rebels in Yemen have been very aggressive in trying to hit the USS Carney and USS Mason, as well as a British Navy ship (HMS Diamond), in what some are calling a game of “Battleship.” Obviously, Britain and/or the U.S. will have to respond decisively, otherwise they are just encouraging more attacks by Iranian proxies. Due to escalating attacks in the Red Sea, commercial traffic is now being diverted.
The price of some consumer goods could rise if these shipping disruptions persist. Last week, the U.S. announced a 10-nation force to combat the Houthi attacks on ships in the Red Sea. Those nations include vessels from Bahrain, Britain, Canada, France, Italy, the Netherlands, Norway, Seychelles and Spain.
In another war that is now nearly two years old, Ukrainian President Zelensky has vowed to mobilize 500,000 troops for a counter-offensive with Russia. The problem is that both Russia and Ukraine are running out of troops to fight that war of attrition. The war has been an incredible tragedy for all involved. I suspect that Zelensky will not be able to mobilize 500,000 men. In the meantime, Russia is losing 1,000 men per day as it maintains attacks on six fronts. This is a war of attrition that both sides are losing.
I have reported here, in the past, on Ukraine’s apparent attack on the Trans-Siberian Railway in two locations deep in Eastern Russia, designed to hinder trade between Russia and China. Ukraine has not taken responsibility for the attack. Here are my latest comments on Russian oil from CNBC Asia.
Recently, I have also reported on a new potential war front, in which Venezuela asked its citizens to vote to take over approximately two thirds of Guyana, which is the hottest crude oil producer in Latin America and “the fastest offshore oil development in the history of the world,” according to energy expert Daniel Yergin. Approximately 95% of 10.5 million voters in Venezuela approved of this territorial theft.
These wars in oil-rich areas are just some of the reasons why I believe it is imperative that we continue to hold on to our energy stocks, since not only is the U.S. producing an all-time record crude oil and natural gas, but in the event of (1) another pipeline incident in Russia, or other rising tensions in Russia, or (2) more ships being diverted in the Middle East due to relentless attacks in the Red Sea or (3) Venezuela seizing parts of Guyana, our energy stocks are a hedge to protect us in case of rising global tensions.
Speaking of energy, I should add that Angola formally announced that it is leaving OPEC after 16 years in that cartel, due to a disagreement over quotas. As a result, OPEC will shrink to just 12 crude oil producers. Angola Mineral Resources Minister, Diamantino Azevedo, said, “Our role in the organization was not deemed relevant.” In recent years, Ecuador, Indonesia and Qatar have also left OPEC.
Presidential Election Years are Also Positive for Stocks
I should add that Presidential election years are also typically positive for the stock market, since the candidates typically run around and promise us everything and anything. Joe Biden obviously cannot campaign like the other candidates, so he will be underwriting a lot of Super Bowl ads to make his pitch.
Since onshoring largely failed for a big semiconductor plant in Arizona (scheduled to open in 2025) and multiple EV battery plants in Michigan and other states were canceled due to a lack of demand, some key elements of Bidenomics have failed. Since the U.S. manufacturing sector has contracted for 13 straight months, according to ISM, many swing states like Arizona and Michigan are now up for grabs.
Around the world, the candidates that are winning are largely ‘Upstarts with Big Hair,” like Argentina’s Javier Milei or the Netherlands’ Geert Wilders. So that essentially means that the next U.S. president could be Gavin Newsom, Nikki Haley, Vivek Ramaswamy or Donald Trump. Furthermore, the winning candidate may not get 50% of the vote due to Robert F. Kennedy, Jr. running as an Independent. If history repeats, the stock market should rally right up to the November election, aided by endless campaign promises as well as multiple Fed rate cuts. As a result, I am expecting a very prosperous New Year!
Speaking of Argentina’s new President Javier Milei, he took the first step to privatize government-run companies last week, with a sweeping decree that opens the door for private businesses to take control of these government-run operations. In a televised message, Milei said, “Repeal rules that impede the privatization of state companies.” Specifically, the Argentina national airline, rail networks, state media companies, water and sewage companies are all expected to be taken over by private entities. Argentina’s energy company, YPF, may take up to two years to privatize, since it is more entrenched and requires 2/3 approval by congress to sell its government-owned shares, due to a 2012 nationalization law.
S&P 500 earnings are now at an all-time record high, and earnings will be accelerating for the next three quarters due to favorable year-over-year comparisons. Several companies announced share buybacks or special dividends. In other words, many companies are literally throwing money at shareholders. So, barring something catastrophic like another pandemic to disrupt Presidential voting, or a flare-up in one of the multiple wars (e.g., Ukraine, the Middle East and now potentially Venezuela) that the U.S. is involved with around the globe, the market should do well. Since the U.S. has the lowest troop level – 1.3 million – since before World War II, we have to be careful about any new conflicts we get involved in.
Fortunately, most national leaders (except Hamas) realize that wars are futile. Even Russia now realizes that war can be problematic, after losing 315,000 troops and much of its military readiness. Although I realize that anything can happen, I want you to know that short of a mushroom cloud blowing up part of the world, the stock market is likely to soar! Due to falling Treasury yields, easy year-over-year earnings comparisons, an accommodative Fed, resurging economic growth, growing U.S. energy production and Presidential candidates promising prosperity, I expect the market to explode to the upside! Why else would some of our companies buy back 20% of their outstanding stock or pay extraordinary dividends?
In summary, I recommend investors use these final few trading days of the year to get fully invested in our recommended growth stocks before an anticipated January surge. January is often characterized by strong trading volume, so if we could surge on light trading volume in recent holiday weeks, then we could potentially surge 15% or more in January. Then, starting in late January, I expect wave after wave of better-than-expected fourth-quarter earnings for our growth stocks, sending our stocks soaring!