February 20, 2019

With 2020 fast approaching, the news media will finally start focusing more on the Democratic Presidential challengers in 2020, rather than dwelling on all the President’s alleged past mistakes.

It is also now widely being reported that special counsel Robert Mueller’s investigation is winding down. ABC News reported last week that a final report may never be issued. Furthermore, the Senate Intelligence Committee is in the process of concluding its investigation into the 2016 election and has not uncovered any direct evidence of a conspiracy between the Trump campaign and Russia.

As a result, President Trump’s political enemies are “reloading” via the House of Representatives, which is expected to investigate his banking relationships, seek access to his tax returns, and continue to try to taint his legacy. However, since past allegations have not been proven, many in the media are baffled as well as embarrassed, so any new House investigation may not receive as much media attention.

The 2020 Presidential campaign is already underway, so the folks in Iowa and New Hampshire will likely be courted by a perpetually expanding list of candidates. Americans tend to like candidates that inspire them, so it will be interesting to see what inspirational theme “sticks.” Joe Biden’s brother lives down the street from me and I expect that Joe will enter the race when there is a Democratic theme that emerges as a potential winner. The current themes of a “Green New Deal” and “Medicare for All” have not gained traction, so Biden is wisely waiting for other candidates to test various themes. I fully expect that the 2020 election will be decided by swing states, especially Michigan, Ohio, Pennsylvania, and Wisconsin.

The fact that General Motors recently announced white collar layoffs and is shutting its manufacturing plant in Lordstown, Ohio will likely be pivotal in the 2020 campaign, since GM continues to expand its operations in China and Mexico. It will be interesting to see how fast the 4,000 laid off GM workers will find employment. I suspect that many will easily find work, but there is no doubt that Lordstown, Ohio will suffer from the plant closure, so Ohio may become the swing state that determines the 2020 election.

The Economic News Continues to Argue Against Rate Increases

In the meantime, Treasury yields remain remarkably stable and the Fed is not anticipated to raise rates anytime soon, which bodes well for more stock market appreciation. Furthermore, inflation remains non-existent. On Wednesday, the Labor Department reported that the Consumer Price Index (CPI) was unchanged in January, below economists’ consensus estimate of a 0.1% rise. Excluding food and energy, the core CPI rose 0.2%. In the past 12 months, the CPI has risen 1.6% and the core CPI has risen 2.2%.

On Thursday, the Labor Department reported that the Producer Price Index (PPI) declined by 0.1% in January, which was below economists’ consensus estimate of a 0.1% rise. This was the second straight month that the PPI declined by 0.1%. Wholesale energy prices declined by 3.8% in January, after falling 4.3% in December. Excluding food, energy, and trade services, the core PPI rose 0.2% in January after being unchanged in December. In the past 12 months, the PPI has risen 2.1% and the core PPI has risen 2.5%, but there is no need for the Fed to raise key interest rates, since inflation is now decelerating.

Speaking of deceleration, the surprising news last week was that the Commerce Department reported on Thursday that retail sales declined 1.2% in December – the biggest monthly drop since September 2009 and substantially below economists’ consensus estimate of a 0.1% rise. Internet retail sales declined by 3.9% and department store sales slipped 3.3%, while health and personal care store sales fell by 2%.

Apparently, an early Thanksgiving caused an early start to the holiday shopping season, hurting the total for December sales, but the biggest reason for the drop was that sales at gas stations plunged by 5.1% due to falling gasoline prices. Overall, retail sales rose 2.3% for the full year of 2018. Since falling gasoline prices put more money in consumers’ pockets, plus new job creation remains robust, retail sales are expected to steadily improve in 2019, despite the disappointing December retail sales report.

It was widely reported last week that a record seven million Americans are now at least 90 days behind on their vehicle payments. According to the New York Fed, there are now one million more Americans delinquent on their vehicle payments than there were back in 2010. This is a clear warning sign for the automotive industry. Consumers under 30 tend to have low credit scores and have not been buying vehicles like previous generations. Overall, this is the first sign of a potential credit problem, so I am glad that I do not own any financial stocks, which are also being hindered by a relatively flat yield curve.

The other disappointing economic news was that the Fed reported on Friday that industrial production declined 0.6% in January, substantially below the economists’ consensus estimate of a 0.3% gain. This was the first monthly decline since May 2018. Meanwhile, December’s industrial production was revised down to a 0.1% increase, from +0.3% previously estimated. Excluding vehicle production, factory output declined by 0.2% in December. Capacity utilization declined by 0.6% in January to 78.2%, impacted by an 8.8% decline in the automotive sector. Overall, it appears that rising vehicle loan delinquencies are now significantly hindering the automotive industry.

So far, with the fourth-quarter announcement season winding down, the S&P 500’s annual sales growth is running over 7% and annual earnings growth is over 13%, which are both above analysts’ consensus estimates. However, looking forward, year-over-year comparisons are becoming more difficult, so S&P 500 earnings results are expected to decelerate sharply in the upcoming months. As a result, stock market leadership is expected to become increasingly narrow.

Typically, my stock portfolios prosper in selective market environments like this – as long as I can find companies that are continuing to post strong sales and earnings in a decelerating earnings environment. The sectors that I believe will perform the best in the upcoming months are energy, healthcare/medical, specialty retail, and cloud computing/cyber security. However, I won’t buy the whole sector, since I believe that 2019 will be more about stock picking and less about locking in on the strongest sectors.

About The Author

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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