by Louis Navellier

February 1, 2022

Last Tuesday, The Wall Street Journal published a great article entitled, “Investors Lose Appetite for Stocks of Unprofitable Companies.” Specifically, this article discussed how “investors have been shedding speculative investments, from tech stocks to cryptocurrencies.” The Journal went on to argue that the Russell 2000 index was getting hit harder “in large part because of the high proportion of small-caps that aren’t making money.” According to The Journal’s research, 31% of the stocks in the Russell 2000 were “unprofitable at the end of 2021.” Frankly, I like the WSJ’s focus on earnings, since the more Wall Street focuses on earnings, the better it is for the fundamentally superior stocks that we recommend.

The truth of the matter is that the current correction is merely a “mean reversion” after the previous surge. In a severe correction like we have been experiencing, most stocks get hit, but fundamentally superior stocks should bounce like “fresh tennis balls,” while many other stocks will not bounce – like “rocks.”

Speaking of the coming bounce, our friends at Bespoke Investment Group issued a report that illustrated that NASDAQ is now more oversold than it was in March of 2020, when the pandemic frightened investors so badly that we had our worst one-month market decline since 1987. Specifically, Bespoke documented that there have been 32 instances since 1971 when NASDAQ has been similarly oversold and the median NASDAQ Composite returns have been +1.63% (one month later), +7.87% (three months later), +9.12% (six months later), and +20.13% (a year later), so that is a phenomenal potential recovery.

I should add that I am keenly aware that many folks are in shock at the magnitude of the recent correction and are baffled why our fundamentally focused growth stocks were swept up in the correction. Basically, when the stock market corrects moderately, say 5%, our fundamentally superior stocks can be resilient. However, when the overall stock market corrects 10% or more, essentially nothing works, and Wall Street starts throwing out the babies with the bathwater. Due to the fact that most of the selling pressure is emanating from ETFs and index funds, all stocks end up succumbing to the selling pressure. In the end, the stock market is a manic crowd, and crowds are basically dumb, since they “react” before they think.

Fortunately, this fourth-quarter announcement season is forcing all investors to “think again,” and since we have smart investors as clients, who are holding stocks that will likely post better-than-expected sales, earnings, and positive guidance, I expect we’ll see an impressive rebound for many of our growth stocks.

As we look at last week’s earnings results, we’re starting to see the momentum build. Microsoft’s better-than-expected results on Tuesday after the close helped to lift the overall stock market. Additionally, Tesla’s better-than-expected results on Wednesday also helped, then Apple posted better-than-expected results on Thursday. Since these three bellwether stocks all beat analyst expectations, it will certainly help the overall stock market to rebound in the upcoming weeks. I should add that in the past three months, the analyst community has revised their consensus earnings estimate up 12.1% higher for Large Cap Growth stocks. This is a good sign, since positive earnings revisions typically precede positive earnings surprises.

Navellier & Associates owns Apple Computer (AAPL), Microsoft (MSFT), and a few accounts own Tesla (TSLA), per client request in managed accounts. Louis Navellier and his family own Apple Computer (AAPL), via a Navellier managed account and Apple Computer (AAPL) in a personal account. He does not own Tesla (TSLA), or Microsoft (MSFT), personally.

Biden’s War Against Domestic Energy Continues

The market’s positive fundamentals are the good news. The bad news is that the Biden Administration’s war against domestic energy and businesses persists. According to President Biden, the reason why prices at the pump and in the grocery store are higher is due to greedy businesses, not his energy policies.

I find this war against domestic energy frustrating, since a federal judge in Louisiana has already overturned President Biden’s drilling ban on federal land. But, both the Energy Department and the EPA have been hostile toward domestic energy production, especially the fracking wastewater in the Permian Basin, which could shut down the most productive source of domestic energy production.

Currently, energy is the strongest stock market sector so far this year, but the forward guidance is not as strong as I would like to see, due to the ongoing harassment from the Energy Department and the EPA.

Furthermore, President Biden shocked the world by saying he expected Russia to invade Ukraine when even the leaders of Ukraine doubt that will happen. This fatalistic attitude left most reporters speechless, especially President Biden’s added gaffe that a “minor incursion” might trigger less severe sanctions.

Amidst all these political distractions, U.S. Treasury bond yields settled down a bit after initially surging earlier in January. Also, new weekly unemployment claims hit a three-month high and remain elevated, which may cause the Fed to rethink its rate increases if unemployment claims continue to rise.

To break the back of inflation, the Fed needs to engineer a “soft landing,” which is easier said than done. Furthermore, the Fed’s toolbox is now compromised due to the fact that if they raise key interest rates too high, the interest burden on the almost $30 trillion in federal government debt will be unmanageable.

Last Wednesday, the Fed clarified via its Federal Open Market Committee (FOMC) statement that it is going to wind down its quantitative easing (QE) in early March, which will effectively free the Fed to raise the federal funds rate from zero to 0.25% at its March FOMC meeting. The FOMC statement referred to a strong economic recovery and cited “solid” job gains in recent months. Specifically, the Fed said, “With inflation well above 2% and a strong labor market, the committee (FOMC) expects it will soon be appropriate to raise the federal funds rate.” Despite any small future rate increases, I’d say the Fed will maintain its “Goldilocks” environment of low interest rates amidst strong economic growth.

At his press conference on Wednesday, Fed Chairman Jerome Powell confirmed that inflation continues to exceed his expectations. There is no doubt that due to rising energy prices in January, the upcoming consumer and wholesale inflation announcements in mid-February are going to be truly horrible.

The most important thing that Chairman Powell said at his press conference was that low overseas yields would likely cause the Fed to effectively cap how much the Fed can raise interest rates. Specifically, since the Fed is telegraphing that it will raise key short-term interest rates soon, the U.S. dollar continues to strengthen, which in turn just attracts more foreign buying pressure for U.S. Treasury securities.

Since there were no big surprises in the FOMC statement, the market recovered last week. The net result is that inflation hedges like fundamentally superior growth stocks should remain an oasis for investors.

Preliminary GDP Figures Soar to +6.9% Annual Rate

Among the economic statistics, the big surprise last week was that the Commerce Department announced its preliminary estimate for fourth-quarter GDP growth was a torrid annual pace of 6.9%, well above the economists’ consensus expectation of a 5.5% annual pace. For all of 2021, U.S. GDP grew at a 5.7% pace, the strongest annual rate since 1984. Overall, the GDP report was simply stunning and is likely to cause more “demand push” inflation, which is why the Fed will start tapping the brakes soon.

In other news, the Conference Board announced on Wednesday that new home sales surged 11.9% in December to an annual pace of 811,000, the strongest annual rate since last March. Sales were especially strong in the Midwest (up 56.4%) and South (up 14.9%), while rising slightly in the West (up 0.4%) and falling in the East (a 15.6% decline). Median new home prices rose 3.4% to $377,000 in December vs. a year ago. The inventory of new homes for sale now stands at a 6-month supply, down from a 6.6-month supply in November. Also, November’s new home sales were revised lower to a 725,000 annual pace.

And finally, the Labor Department on Thursday reported that new weekly unemployment claims were 260,000 in the latest week, down from a revised 290,000 the previous week. Continuing unemployment claims came in at 1.675 million in the latest week, up from a revised 1.624 million in the previous week. This is the second week in a row that weekly and continuing unemployment claims rose. The rise in weekly unemployment claims to the highest level in three months may be related to severe winter weather in the Northeast and the South, so these elevated unemployment claims may continue a while longer.

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

Please see important disclosures below.

Also In This Issue

A Look Ahead by Louis Navellier
The Fundamentals Still Apply, As Time Goes By

Income Mail by Bryan Perry
Income Investing Just Got Simplified

Growth Mail by Gary Alexander
Since When Did “Grow Rich” Become Four-Letter Words?

Global Mail by Ivan Martchev
January Reflects Powell’s Influence in the Stock Market

Sector Spotlight by Jason Bodner
When Will the Market Hit Bottom?

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Louis Navellier
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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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