by Louis Navellier

December 8, 2020

Made in China Image

As I mentioned in my podcasts last week, China may be the only major economy that will demonstrate significant growth in 2020. China’s National Bureau of Statistics last week announced that its Purchasing Manager Index (PMI) rose to 52.1 in November, up from 51.4 in October, marking its ninth consecutive monthly increase. Economists were expecting China’s PMI to rise just one tick to 51.5, so this was a significant surprise. The International Monetary Fund (IMF) now expects China’s GDP to grow 1.9% in 2020, down from 6.1% in 2019. Due to a weak U.S. dollar and the perception that a Biden Administration will be more friendly to China, I remain very bullish on the Chinese stocks that I recommend.

I should also add that China passed the U.S. to become the European Union’s (EU) largest trading partner in 2020. The EU’s official European Statistical Office showed that the volume of Chinese-EU trade from January through September of 2020 was 425.5 billion euros (about $515 billion at the current $1.21 euro exchange rate), which surpassed the U.S./EU trade of about $500 billion in the same time frame.

“In the first nine months of 2020, China was the main partner for the EU,” Eurostat reported, mainly due to a 4.5% increase of imports from China (while exports remained unchanged). For the same nine months of 2020, “The United States recorded a significant drop in both imports (-11.4%) and exports (-10.0%).”

Although China is facing rising anger and frustration in Europe – especially after China seemed to blame Italy for the coronavirus outbreak – the EU is not planning to retaliate against Chinese trade.

Speaking of trade, the Commerce Department announced last week that the U.S. trade deficit rose 1.7% to $63.1 billion in October, while September’s trade deficit was revised down to $62.1 billion, from $63.9 billion previously reported. Imports in October rose by 2.1% to $245.1 billion and exports rose by 2.2% to $182 billion. Due to a weak U.S. dollar, U.S. exports may continue to rise in the upcoming months.

A Busy Statistical Week – From “Cyber Monday” to “Jobs Friday”

Last week’s economic indicators continued to be mostly positive. According to Adobe Analytics, Cyber Monday’s sales rose 15.1% to $10.8 billion compared with a year ago, which bodes well for the upcoming holiday (online) shopping season. However, Adobe Analytics was expecting a 30% increase to over $12 billion. As a result, Adobe Analytics cut its estimate for the entire online holiday shopping season sales to a 30% gain of $184 billion, down from its previous estimate of $189 billion. Due to rising Covid-19 cases, there is no doubt that this year is shaping up to be the biggest year ever for on-line sales!

The Atlanta Fed’s “GDPNow” estimate of annualized fourth-quarter GDP growth was updated twice last week. In mid-November, the estimate was a fairly dismal +5.6%, but last week it was revised to double those levels, +11.1% on Tuesday and +11.2% GDP growth on Friday. The primary reason for this large upward revision was that real personal expenditure growth is now estimated at 2.6% and private domestic investment growth is +28.4%. In other words, contrary to downbeat news reports, we are “nesting” at home, traveling less, investing more, and spending more money on our homes, boosting GDP growth.

GDP-Now Gross Domestic Product Estimate Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Speaking of nesting, the National Association of Homebuilders on Tuesday announced that pending home sales declined 1.1% in October but home sales are up an impressive 20.2% in the past 12 months. Due to the low supply of existing homes, as well as the economic disruption to many working families, it is getting tougher for some home buyers to qualify for mortgages, especially as median home prices rise. New home sales are now up over 40% in the past 12 months as builders appear to be striving to build smaller, more affordable homes. As long as inventories remain tight, home prices are likely to increase.

The Institute of Supply Management announced on Tuesday that its ISM manufacturing index slipped to 57.5 in November, down from 59.3 in October. Economists were expecting the ISM manufacturing index to come in at 58, so it was a bit below expectations. However, any reading over 50 signals an expansion, so the manufacturing sector is continuing to expand. The ISM components that remain healthy are new orders at 65.1, production at 60.8, and backlog at 56.9. As long as auto and housing sales remain strong, I expect that the U.S. manufacturing sector will remain positive. I should also add that now that the U.S. dollar is at a 2½-year low, U.S. manufacturers will be more competitive and can export more goods – such as the new Ford Bronco, which, like the Jeep brand, is popular around the world.

On Thursday, ISM announced that its non-manufacturing (service) index declined to 55.9 in November, down from 56.6 in October. Since any reading over 50 signals an expansion, the service sector is still expanding, but at a slower pace. The ISM components that remain the healthiest are business activity at 58, new orders at 57.2, and supplier deliveries at 57. Fully 14 of the 18 industries surveyed reported an expansion in November, so the service sector remains relatively healthy.

On Wednesday, the Fed released its latest Beige Book Survey in preparation for its next Federal Open Market Committee (FOMC) meeting. The Beige Book reported “modest to moderate” growth in eight of its 12 Fed districts and “little or no growth” in four districts. The survey reported that banks are reporting deteriorating loan portfolios, especially related to retail, hospitality, and leisure businesses. These flags guarantee that the FOMC will keep key interest rates at 0% and may increase its quantitative easing.

The Confusing Jobs and “Jobless Claims” Situation

On Wednesday, ADP reported that 307,000 private payroll jobs were created in November. Although this is an impressive figure, it was down from a revised 404,000 private payroll jobs in October (vs. the 365,000 initially estimated) and economists’ consensus estimate of 475,000 private payroll jobs. Overall, the private sector continues to adapt to the coronavirus restrictions and is steadily creating new jobs.

On Thursday, the Labor Department reported that unemployment claims in the latest week declined to 712,000, down from a revised 787,000 the previous week. This was the first decline in three weeks and substantially better than economists’ consensus estimate of 775,000. Continuing unemployment claims declined to 5.552 million in the latest week compared to a revised 6.089 million in the previous week.

I should point out that this figure is coming into question because the Government Accountability Office (GAO) has said that unemployment claims have been “inaccurate” due to lower-than-appropriate payments to millions of workers during the pandemic due largely to errors from various states.

Specifically, the GAO report said that the Labor Department’s weekly jobless claims published “flawed estimates of the number of individuals receiving benefits each week throughout the pandemic.”

Regarding the states, the GAO said, “Given the unique challenges of the Covid virus, multiple weeks of retroactivity in the new Cares Act UI programs, and the states’ large backlogs across all programs, this approximation was less accurate than before.” As I mentioned on one of my podcasts last week, many states like California temporarily stopped processing unemployment claims due to widespread fraudulent claims. This is just one reason why Congress is reluctant to implement a second stimulus package, even though unemployment benefits are scheduled to expire at the end of the year for millions of workers.

And finally, on Friday the Labor Department reported that 245,000 payroll jobs were created in November, substantially below economists’ consensus expectation of 610,000. Government employees declined for the third consecutive month as 93,000 census workers were laid off. Transportation and warehousing added 145,000 new jobs in November, reflecting job gains in the on-line shopping boom.

The unemployment rate declined to 6.7% in November, down from 6.9% in October. Average hourly earnings rose by 9 cents per hour (+0.3%) to $29.58 per hour and have risen 4.4% in the past year. The labor force participation rate declined to 61.5% in November and remains 1.9% below where it was back in February, pre-pandemic. Overall, this was a disappointing payroll report and raises the probability of Congress passing another stimulus bill to aid struggling workers while the Covid-19 restrictions persist.

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

Please see important disclosures below.

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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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