By Bryan Perry
March 17, 2020
On Sunday night, for what can only be viewed as a pre-emptive measure to keep markets from seizing up, the Fed went ahead and slashed the short-term benchmark rate by a full 100 basis points, taking the Fed Funds rate to 0.00%-0.25% in a dramatic move. In addition to the rate cut, the Fed re-started QE, purchasing $700 billion worth of Treasuries and mortgage-backed securities while striking a deal with five other central banks to lower their rates on currency swaps, making U.S. dollars, the safe-haven currency in times of crisis, cheaper for banks around the world and to keep global financial markets functioning in an orderly manner. Equity markets are viewing these moves on the part of the Fed with great caution and trepidation, as the phrase “emergency action” has investors clearly spooked.
The President’s travel ban on all European flights and a possible yet-to-be-announced quarantine on U.S. hotspots, as they are called, with a high propensity of widespread outbreak of COVID-19, will only provide more anxiety to the investing public. The hour-by-hour updates being fed to us by media outlets show the worst of the virus has yet to be felt, with Europe clearly seeing the fastest rise in caseloads.
Just how serious is it? Well, the Irish government is considering extra restrictions on pubs after footage of bars filled with drinkers in defiance of guidelines, according to Finance Minister Paschal Donohoe. Industry groups say it’s impossible to police all guidelines, and they expect an imminent shutdown on St. Patrick’s Day. This could spark massive hoarding of Guinness beer and Jameson Whiskey!
As the world rapidly comes to terms with how best to cope with the onset of COVID-19 and the difficult course it is taking, before it is ultimately arrested and eradicated, the open-ended discussion of how deep and wide the impact will be on business conditions remains full of unknowns.
As of last Wednesday, March 11:
“The Conference Board’s economic forecast assumes that the number of cases will peak in April and then begin to diminish. Under this assumption, we expect a sizeable disruption to certain areas of the economy over the coming two to three months – most notably travel, tourism, and entertainment activities, which account for about 7% of GDP. Other sectors, such as restaurants and industries, which are heavily dependent on global supply chains, are likely to suffer as well.
“In particular, we forecast consumer spending to contract by 1.7 percent in Q2. Combined with other impacts, real GDP growth is expected to contract by 1.0 percent that quarter. The economy should begin to return to its long-term trajectory in the second half of 2020 as consumer spending rebounds. For the year as a whole, some significant economic damage is done as we expect real GDP growth to fall to 1.4 percent from 2.3 percent in 2019. But currently we see a full-fledged recession as the less likely outcome for 2020.”
This analysis feels about right for now. Time will tell.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Having just traveled the 100 miles to Washington D.C. from my home in Richmond, VA last week, my railroad car on Amtrak had only six people in it. Union Station near the U.S. Capitol was sparsely occupied with travelers, and there was no one buying from the food trucks anywhere along the streets. I feel for these vendors and all the other “little guys” that are getting crushed by the vacant city streets.
What seems to be a more pressing matter is how the Fed plans to fight what are now fresh deflationary pressures brought on by the sudden impact of the global slowdown in economic activity. Back on January 5, ECB President Mario Draghi told a conference in San Diego that the Eurozone risks falling into a Japan-like funk, which translates into negligible growth, low inflation, and zero interest rates that do little to revive things. “I believe that for the euro area, there is some risk of Japanification,” Draghi said.
Fast forward to this week, and Europe is now in recession – there is no way to put any other spin on it. There will be at least two, maybe three quarters of negative growth for the Eurozone depending on several factors, the greatest being coronavirus. This new reality has put European stock markets in a vulnerable position, whereas the trajectory for the U.S. economy was booming right before the virus hit and thus the U.S. economy can stage a brisk rebound if signs of virus caseloads plateau.
The bad news is that the U.S. risks its own funk. At the same January 5 event, former Federal Reserve chair Janet Yellen talked of secular stagnation in the U.S., an outcome on which former Treasury Secretary Lawrence Summers has long opined. They worry that conventional tools that used to boost growth – particularly easy central banks policies – lose potency, as has been the case in Japan since 1990.
The stock market has been addicted to financial steroids and needing ever-bigger doses to keep up appearances of being healthy. This was the year when earnings growth would justify the performance of 2019, when the S&P suffered four straight quarters of negative earnings growth. Now, without a speedy recovery, the U.S. risks falling into a secular trend of flatlining growth and flat consumer prices.
The current relief package (H.R. 6201: “Families First Coronavirus Response Act”) unleashes $50 billion to target medical needs and provide a financial bridge to small businesses, but it doesn’t move the economy forward. It isn’t clear if and how there will be assistance to the devastated airline, hospitality, and entertainment industries, but it’s safe to say the extra $1.5 trillion in capital injections the Fed announced on March 12 virtually opens a firehose of credit lines to these and other stressed businesses.
According to The Wall Street Journal this past weekend, “Investors are fleeing stock funds at the fastest pace since the bruising market selloff at the end of 2018, while racing into government bond funds at a record clip. They pulled $47.4 billion out of global stock-focused mutual funds and exchange-traded funds in the three weeks as of last Wednesday.” Inflows into Treasuries topped $26 billion. The only period to ever see larger outflows was a stretch in 2008, in the midst of the financial crisis.
However, the outflows from stock funds for last week were “only” $4.7 billion, by far the slimmest drawdown during the current market slide. So, just maybe we’re finally seeing some seller exhaustion –Friday’s late rally would tend to support that notion. It is shocking to see how each time – in 2000, 2008, 2016, and 2018 – the stampede to the exits by investors preceded the next major rally phase for equities.
With this climate of selling everything – and then asking questions later – what does this backdrop mean to investors that desperately need investment income, or even those that don’t need income? Well, after the forced liquidation of all 11 sectors that make up the S&P 500, I would argue strongly that careful stock selection within the Consumer Staples (XLP), Health Care (XLV), Real Estate (XLRE), and Utilities (XLU) sectors is a prudent path to take.
Within the top 10 holdings of each of these ETFs, one can find stocks that pay dividend yields north of 3%, with some paying above 5%, all with bullet-proof balance sheets. We’re also talking qualified dividends (ex-REITS) taxed at a maximum rate of 15% for those with incomes under $425,800 and 20% for those with reportable income over $425,800. Assuming the 10-year Treasury stays around 1.0%, investors can receive three times that yield at a capped tax rate in addition to long-term capital gains.
This is a winning formula for managing the market slump while taking full advantage of the disparity in yield between Treasuries taxed at ordinary rates and defensive blue-chip stocks with growing dividends.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
In a world where forward price deflation is likely to exist, the four sectors noted above will likely endure in the months ahead much better than the other seven sectors due to their recession-resistant nature. They provide the things we need, not the things we want – a winning formula in trying times like these.
Also In This Issue
A Look Ahead by Louis Navellier
Markets “React” First, then “Think” a Lot Later
Income Mail by Bryan Perry
Deflationary Pressures Should Boost Defensive Dividend Stocks
Growth Mail by Gary Alexander
History Indicates That This Market Will Recover…Fast
Global Mail by Ivan Martchev
The Covid-19 Panic Tsunami Is Almost Over
Sector Spotlight by Jason Bodner
We’ve Seen the Biggest Week of Selling in Mapsignal’s 30-Year History
View Full Archive
Read Past Issues Here
Bryan Perry is a Senior Director with Navellier Private Client Group, advising and facilitating high net worth investors in the pursuit of their financial goals.
Bryan’s financial services career spanning the past three decades includes over 20 years of wealth management experience with Wall Street firms that include Bear Stearns, Lehman Brothers and Paine Webber, working with both retail and institutional clients. Bryan earned a B.A. in Political Science from Virginia Polytechnic Institute & State University and currently holds a Series 65 license. All content of “Income Mail” represents the opinion of Bryan Perry
Although information in these reports has been obtained from and is based upon sources that Navellier believes to be reliable, Navellier does not guarantee its accuracy and it may be incomplete or condensed. All opinions and estimates constitute Navellier’s judgment as of the date the report was created and are subject to change without notice. These reports are for informational purposes only and are not a solicitation for the purchase or sale of a security. Any decision to purchase securities mentioned in these reports must take into account existing public information on such securities or any registered prospectus.To the extent permitted by law, neither Navellier & Associates, Inc., nor any of its affiliates, agents, or service providers assumes any liability or responsibility nor owes any duty of care for any consequences of any person acting or refraining to act in reliance on the information contained in this communication or for any decision based on it.
Past performance is no indication of future results. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. It should not be assumed that any securities recommendations made by Navellier. in the future will be profitable or equal the performance of securities made in this report. Dividend payments are not guaranteed. The amount of a dividend payment, if any, can vary over time and issuers may reduce dividends paid on securities in the event of a recession or adverse event affecting a specific industry or issuer.
None of the stock information, data, and company information presented herein constitutes a recommendation by Navellier or a solicitation to buy or sell any securities. Any specific securities identified and described do not represent all of the securities purchased, sold, or recommended for advisory clients. The holdings identified do not represent all of the securities purchased, sold, or recommended for advisory clients and the reader should not assume that investments in the securities identified and discussed were or will be profitable.
Information presented is general information that does not take into account your individual circumstances, financial situation, or needs, nor does it present a personalized recommendation to you. Individual stocks presented may not be suitable for every investor. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. Investment in fixed income securities has the potential for the investment return and principal value of an investment to fluctuate so that an investor’s holdings, when redeemed, may be worth less than their original cost.
One cannot invest directly in an index. Index is unmanaged and index performance does not reflect deduction of fees, expenses, or taxes. Presentation of Index data does not reflect a belief by Navellier that any stock index constitutes an investment alternative to any Navellier equity strategy or is necessarily comparable to such strategies. Among the most important differences between the Indices and Navellier strategies are that the Navellier equity strategies may (1) incur material management fees, (2) concentrate its investments in relatively few stocks, industries, or sectors, (3) have significantly greater trading activity and related costs, and (4) be significantly more or less volatile than the Indices.
ETF Risk: We may invest in exchange traded funds (“ETFs”) and some of our investment strategies are generally fully invested in ETFs. Like traditional mutual funds, ETFs charge asset-based fees, but they generally do not charge initial sales charges or redemption fees and investors typically pay only customary brokerage fees to buy and sell ETF shares. The fees and costs charged by ETFs held in client accounts will not be deducted from the compensation the client pays Navellier. ETF prices can fluctuate up or down, and a client account could lose money investing in an ETF if the prices of the securities owned by the ETF go down. ETFs are subject to additional risks:
- ETF shares may trade above or below their net asset value;
- An active trading market for an ETF’s shares may not develop or be maintained;
- The value of an ETF may be more volatile than the underlying portfolio of securities the ETF is designed to track;
- The cost of owning shares of the ETF may exceed those a client would incur by directly investing in the underlying securities; and
- Trading of an ETF’s shares may be halted if the listing exchange’s officials deem it appropriate, the shares are delisted from the exchange, or the activation of market-wide “circuit breakers” (which are tied to large decreases in stock prices) halts stock trading generally.
Grader Disclosures: Investment in equity strategies involves substantial risk and has the potential for partial or complete loss of funds invested. The sample portfolio and any accompanying charts are for informational purposes only and are not to be construed as a solicitation to buy or sell any financial instrument and should not be relied upon as the sole factor in an investment making decision. As a matter of normal and important disclosures to you, as a potential investor, please consider the following: The performance presented is not based on any actual securities trading, portfolio, or accounts, and the reported performance of the A, B, C, D, and F portfolios (collectively the “model portfolios”) should be considered mere “paper” or pro forma performance results based on Navellier’s research.
Investors evaluating any of Navellier & Associates, Inc.’s, (or its affiliates’) Investment Products must not use any information presented here, including the performance figures of the model portfolios, in their evaluation of any Navellier Investment Products. Navellier Investment Products include the firm’s mutual funds and managed accounts. The model portfolios, charts, and other information presented do not represent actual funded trades and are not actual funded portfolios. There are material differences between Navellier Investment Products’ portfolios and the model portfolios, research, and performance figures presented here. The model portfolios and the research results (1) may contain stocks or ETFs that are illiquid and difficult to trade; (2) may contain stock or ETF holdings materially different from actual funded Navellier Investment Product portfolios; (3) include the reinvestment of all dividends and other earnings, estimated trading costs, commissions, or management fees; and, (4) may not reflect prices obtained in an actual funded Navellier Investment Product portfolio. For these and other reasons, the reported performances of model portfolios do not reflect the performance results of Navellier’s actually funded and traded Investment Products. In most cases, Navellier’s Investment Products have materially lower performance results than the performances of the model portfolios presented.
This report contains statements that are, or may be considered to be, forward-looking statements. All statements that are not historical facts, including statements about our beliefs or expectations, are “forward-looking statements” within the meaning of The U.S. Private Securities Litigation Reform Act of 1995. These statements may be identified by such forward-looking terminology as “expect,” “estimate,” “plan,” “intend,” “believe,” “anticipate,” “may,” “will,” “should,” “could,” “continue,” “project,” or similar statements or variations of such terms. Our forward-looking statements are based on a series of expectations, assumptions, and projections, are not guarantees of future results or performance, and involve substantial risks and uncertainty as described in Form ADV Part 2A of our filing with the Securities and Exchange Commission (SEC), which is available at www.adviserinfo.sec.gov or by requesting a copy by emailing firstname.lastname@example.org. All of our forward-looking statements are as of the date of this report only. We can give no assurance that such expectations or forward-looking statements will prove to be correct. Actual results may differ materially. You are urged to carefully consider all such factors.
FEDERAL TAX ADVICE DISCLAIMER: As required by U.S. Treasury Regulations, you are informed that, to the extent this presentation includes any federal tax advice, the presentation is not written by Navellier to be used, and cannot be used, for the purpose of avoiding federal tax penalties. Navellier does not advise on any income tax requirements or issues. Use of any information presented by Navellier is for general information only and does not represent tax advice either express or implied. You are encouraged to seek professional tax advice for income tax questions and assistance.
IMPORTANT NEWSLETTER DISCLOSURE: The performance results for investment newsletters that are authored or edited by Louis Navellier, including Louis Navellier’s Growth Investor, Louis Navellier’s Breakthrough Stocks, Louis Navellier’s Accelerated Profits, and Louis Navellier’s Platinum Club, are not based on any actual securities trading, portfolio, or accounts, and the newsletters’ reported performances should be considered mere “paper” or proforma performance results. Navellier & Associates, Inc. does not have any relation to or affiliation with the owner of these newsletters. There are material differences between Navellier & Associates’ Investment Products and the InvestorPlace Media, LLC newsletter portfolios authored by Louis Navellier. The InvestorPlace Media, LLC newsletters and advertising materials authored by Louis Navellier typically contain performance claims that do not include transaction costs, advisory fees, or other fees a client may incur. As a result, newsletter performance should not be used to evaluate Navellier Investment Products. The owner of the newsletters is InvestorPlace Media, LLC and any questions concerning the newsletters, including any newsletter advertising or performance claims, should be referred to InvestorPlace Media, LLC at (800) 718-8289.
Please note that Navellier & Associates and the Navellier Private Client Group are managed completely independent of the newsletters owned and published by InvestorPlace Media, LLC and written and edited by Louis Navellier, and investment performance of the newsletters should in no way be considered indicative of potential future investment performance for any Navellier & Associates separately managed account portfolio. Potential investors should consult with their financial advisor before investing in any Navellier Investment Product.
Navellier claims compliance with Global Investment Performance Standards (GIPS). To receive a complete list and descriptions of Navellier’s composites and/or a presentation that adheres to the GIPS standards, please contact Navellier or click here. It should not be assumed that any securities recommendations made by Navellier & Associates, Inc. in the future will be profitable or equal the performance of securities made in this report.
FactSet Disclosure: Navellier does not independently calculate the statistical information included in the attached report. The calculation and the information are provided by FactSet, a company not related to Navellier. Although information contained in the report has been obtained from FactSet and is based on sources Navellier believes to be reliable, Navellier does not guarantee its accuracy, and it may be incomplete or condensed. The report and the related FactSet sourced information are provided on an “as is” basis. The user assumes the entire risk of any use made of this information. Investors should consider the report as only a single factor in making their investment decision. The report is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security. FactSet sourced information is the exclusive property of FactSet. Without prior written permission of FactSet, this information may not be reproduced, disseminated or used to create any financial products. All indices are unmanaged and performance of the indices include reinvestment of dividends and interest income, unless otherwise noted, are not illustrative of any particular investment and an investment cannot be made in any index. Past performance is no guarantee of future results.