December 4, 2018

President Trump provided the Washington Post last Tuesday with a scathing interview, in which he expressed his dissatisfaction with both General Motors and Fed Chairman Jerome Powell. Specifically, President Trump said that he blames Fed Chairman Powell and GM’s decision to close a number of plants and lay off workers for Wall Street’s recent sell-off. Trump said that rising interest rates were hurting the U.S. economy and added that he regrets appointing Powell as Fed Chairman, adding that “I’m not even a little bit happy with my selection of Jay. Not even a little bit.”  Interestingly, President Trump also said that “I’m not blaming anybody, but I’m just telling you that I think the Fed is way off-base with what they’re doing.”  Clearly, if the FOMC raises key interest rates at its December 19th meeting, as many economists anticipate, President Trump’s subsequent reaction is likely to be very assertive!

The Fed loves to raise key interest rates in late December, since it expects to get less grief when we are all distracted around Christmas. However, President Trump is almost guaranteed to belittle the Fed in a vicious tweet or two (or more) if the Fed raises interest rates, as most economists now expect them to do.

Speaking of the automotive industry, GM’s announcement last week to cut up to 14,800 jobs in Canada and the U.S. caused President Trump to tweet: “If GM doesn’t want to keep their jobs in the United States, they should pay back the $11.2 billion bailout that was funded by the American taxpayer.”

GM is essentially following Ford in shutting down its less profitable car lines to focus on its much more profitable truck business. President Trump also tweeted that “We are now looking at cutting all GM subsidies, including for electric cars.”  Ironically, the Chevy Volt plug-in hybrid, was one of the cars that was already on the chopping block, although the all-electric Chevy Bolt will likely survive.

Obviously, the politicians in Maryland, Michigan, and Ohio, where jobs will be lost, were also furious. It will be interesting what plays out moving forward, but since GM is not cutting jobs in China and Mexico, President Trump may get even more furious, and higher tariffs on imported cars may be forthcoming.

Adding to the President’s outrage, there has also been a sudden deceleration in the housing market. On Wednesday, the Commerce Department announced that new home sales plunged 8.9% on October to an annual rate of 544,000, substantially below economists’ consensus estimate of 589,000. In the past 12 months, new home sales declined 12%. The supply of new homes for sale surged to a 7.4-month supply.

On Thursday, the National Association of Realtors (NAR) announced that existing home sales declined 2.6% in October to the lowest level since June 2014. A dramatic 8.9% decline in the West accounted for the majority of the decline, since sales in the Northeast rose 0.7%. The NAR is now forecasting existing home sales to decline by 3.1% in 2018 and for median home prices to decline 2.5% in 2019.

On Tuesday, Case-Shiller reported that its 20-city home price index was flat in September, below the economists’ consensus estimate of a 0.3% increase. In the past 12 months, the Case-Shiller 20-city index was up 5.1%, which was the slowest pace since 2016. Furthermore, now that previously hot markets like Dallas and Denver are cooling off, home price appreciation is expected to continue to slow. Of the 20 cities that Case-Shiller surveyed, eight reported price declines, led by Seattle, San Diego, Los Angeles, and Washington DC, so if the Fed is looking for an excuse to stop raising rates, just look at housing.

The Consumer Remains the Brightest Spot in the Economy

The holiday shopping season is one bright spot. Amazon.com announced that Cyber Monday was its biggest shopping day ever. From Thanksgiving through Cyber Monday, Amazon.com said that over 180 million items were ordered during this five-day span. Clearly, the holiday shopping season is off to a strong start. Furthermore, since Amazon.com is a market leader, there is now much more hope for a stock market recovery. Clearly, consumers are doing their part to insure strong fourth-quarter GDP growth.

The Commerce Department on Thursday reported that personal income rose by 0.5% in October, which represents the largest monthly gain since January and bodes well for continued strong consumer spending. The savings rate slowed to 6.2%, the lowest in almost a year, as consumers are clearly spending more.

The Commerce Department also reported that the Fed’s favorite inflation indicator, namely the Personal Consumption Expenditure (PCE) index rose to a 2% annual pace, due largely to increases for prescription drugs, electricity, and natural gas. Excluding food and energy, the core PCE rose at a 1.8% annual pace. If the PCE decelerates due to lower crude oil prices, the Fed will be more inclined to stop raising rates.

Regarding GDP growth, the Commerce Department on Wednesday reaffirmed that third-quarter GDP rose at a 3.5% annual pace. They also confirmed that corporate profits hit a six-year high. In the past 12 months, corporate profits have risen 10.3%. The Commerce Department also reported that business spending in the third quarter was a bit stronger than previously estimated.

Consumer spending was revised to a 3.6% annual pace in the third quarter, down from 4% previously estimated due to slower spending on vehicles. The amount of unsold inventories in the third quarter rose to $86.6 billion, up from $76.3 billion previously estimated, so inventory growth as well as consumer spending accounted for the bulk of third-quarter GDP growth.

The only glitch is that when there is a big inventory buildup, the next quarter’s GDP growth all too often decelerates, so fourth-quarter GDP is currently estimated at only a 2.5% annual pace by the Atlanta Fed. Perhaps this GDP slowdown could tell a “data dependent” Fed to take it easy on interest rate increases.

(Navellier & Associates owns AMZN in managed accounts and a sub-advised mutual fund.  Louis Navellier and his family own AMZN via the sub-advised mutual fund but does not own GM or Ford.)

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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