By Louis Navellier

February 19, 2020

2020 Election Logo Image

Since this is President’s Day weekend, it should be appropriate to discuss the role that presidential elections can have on stock markets. One reason the market is doing well in recent weeks – despite the outbreak of the coronavirus and other concerns – is that businessman Michael Bloomberg is emerging as a force in the Democratic candidate’s race, with no clear winner emerging during the early primaries.

While it is true that Senator Bernie Sanders won the New Hampshire primary on Tuesday after also getting the most votes in the controversial Iowa caucus (Bernie took second because there is double voting in Iowa), he didn’t do as well in New Hampshire as he did in 2016. Bernie is clearly on a roll and has the most energized supporters, but other choices remain: Mike Bloomberg, Pete Buttigieg, Amy Klobuchar, or a potential outlier (including Hillary Clinton) as a nominee. Since Bernie Sanders is not well liked by many in the media and the DNC, a “brokered” outcome is becoming increasingly likely.

The more chaos there is at the DNC, the higher President Trump’s re-election chances rise. The stock market now clearly expects a President Trump victory, but it may become even more clear after voting on “Super Tuesday” (March 3), when Bloomberg is expected to do well from his big advertising campaigns.

Wall Street would likely see a campaign between two New York businessmen as a no-lose proposition, but President Trump’s biggest opponent remains himself. For instance, he had to delete one of his tweets about Bloomberg last week, but most Presidential elections are good for the stock market since candidates tend to promise us everything and anything, which naturally helps to boost consumer confidence.

The Fed Will Likely Avoid Disrupting the Election Process

Meanwhile, Fed Chairman Jerome Powell testified before Congress last week and it was predictably boring. In his testimony, Chairman Powell said, “We are closely monitoring the emergence of the coronavirus, which could lead to disruptions in China that spill over to the rest of the global economy.”

Despite the fact that crude oil prices have plunged 18% so far this year, Chairman Powell said, “Over the next few months, we expect inflation to move closer to 2%.”  This last comment was shocking, since not only are global growth concerns suppressing commodity prices, but a strong U.S. dollar is suppressing commodity prices. As a result, the inflation outlook is ultralow, so I respectfully disagree with Powell.

To illustrate my point, the Labor Department reported on Thursday that the Consumer Price Index (CPI) rose only 0.1% in January, less than economists’ consensus estimate of a 0.2% increase. Energy prices declined 0.7% in January, led by a 1.6% decline in gasoline prices. Excluding food and energy, the core CPI rose 0.2% in January and 2.3% in the past 12 months. Overall, consumer inflation is cooling off fast.

Interestingly, when testifying before the Senate Banking Committee on Wednesday, Chairman Powell said that the Fed had two recession-fighting tools, namely (1) quantitative easing (QE), purchasing large amounts of government debt to drive long-term interest rates lower) and (2) communicating with financial markets via its forward guidance on interest rate policy. Powell stressed that “We will use those tools — I believe we will use them aggressively, should the need arise to do so.”  I am glad that the Fed Chairman did not mention “negative interest rates” as a policy tool, but I am discouraged he mentioned QE, since that was an extraordinary step the Fed took after 2008 and it should not be used without sufficient cause, since it will tend to undermine the U.S. dollar and potentially hurt the rock-solid image of the dollar.

Quantitative easing (QE) is still being conducted by the Bank of Japan as well as the European Central Bank and the net result has been negative interest rates that have undermined their respective currencies and hurt retirees’ savings. Overall, Chairman Powell did not do anything to undermine the dollar last week, but I hope he stops talking about QE, since it is something that the Fed should avoid in the future.

In other news, the Commerce Department announced on Friday that January retail sales rose 0.3%, which was in-line with economists’ consensus expectation. Gasoline sales declined 0.5%, but only due to lower prices. The big surprise was that clothing sales declined 3.1%, due likely to abnormally warm winter weather. Sales at bars and restaurants rose a healthy 1.2%, which is very positive. Overall, consumers have more money in their pockets from lower fuel prices so I expect consumer spending to remain strong.

Global Growth is Threatened by Coronavirus, Especially in Asia

In late news released Sunday, Japan’s GDP plunged 1.6% in the fourth quarter (a 6.3% annual rate), the largest contraction in almost six years (since the second quarter of 2014).  A sales tax hike to 10% (up from 8%) hindered Japan’s consumer spending, but now with some Chinese supply chains disrupted by the coronavirus and impacting Nissan and other major manufacturers, fears are spreading that Japan’s first-quarter GDP will also be negative. If Japan, the third largest economy in the world, slips into a recession, combined with Germany’s 0% GDP growth last quarter, global growth could be threatened.

Apple announced this week that it will not be able to hit its first-quarter sales guidance due to the supply chain disruption from coronavirus as well as a drop in demand for iPhones in China.  Specifically, regarding its Foxconn supplier, Apple said, “Work is starting to resume around the country, but we are experiencing a slower return to normal conditions than we had anticipated.”  I expect that Apple will be the first of many companies to issue lower guidance in the upcoming weeks. Since China, Japan, and Germany (the #2, #3, and #4 economies) are struggling, many multinational companies will undoubtedly be impacted.

Navellier & Associates owns AAPL, in some managed accounts and or sub-advised mutual fund.  Louis Navellier does own AAPL in personal accounts.

That is the bad news, but the good news is that global demand for U.S. Treasury securities is relentless. Bloomberg had a good article this week titled, “There’s a Wall of Cash Eager to Buy Treasuries on Any Price Drop.” One institutional manager boldly predicted that the 10-year Treasury bond would hit 0% within two years!  I will not make that prediction, but I can confirm that based on the bid-to-cover ratios, there is plenty of demand for U.S. Treasury securities, especially from international investors that are benefitting from a strong U.S. dollar and seeking higher U.S. yields in a negative interest-rate world.

So long as global GDP growth continues to flounder, the U.S. remains an oasis.  Since commodities are priced in U.S. dollars, I expect copper, crude oil, and other key commodities will continue to flounder.  Crude oil could trade in a range of $45 to $48 per barrel in the upcoming months due to a supply glut that is caused by a drop in global demand as well as rising inventories of crude oil.

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

Please see important disclosures below.

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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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