March 26, 2019

Two weeks ago, my concerns over “Recession Inertia Building in Europe” were summarily ignored by the raging bulls, who seemed hell bent on taking the S&P 500 up and through major technical resistance at 2,815 on the notion that regardless of how dysfunctional the socialist European Union was operating, the European Central Bank (ECB) would provide the juice necessary to rescue their already-failed economic model with enough funds to advance the socialist democratic utopian society they envision.

Well, the raging euro-bulls seem to be twisting in the wind. Not only did ECB President Mario Draghi provide point blank a 50% lower growth forecast – of only 1.1% from the 2.2% estimate laid out earlier in 2018 – this past week, we have U.S. Fed Chairman Jerome Powell taking his “we’re a long way from normalizing rates” statement in early October to saying the Fed will now leave rates unchanged for 2019.

This is a bold departure from what was a robust forward economic outlook to one with the full appearance of a man back-peddling at a breakneck pace. I find this kind of 180-degree pivot by those with their fingers on the pulse of the largest and most magnificent economy in the world transparently arrogant.

This is what happens when you let academics with no real-world private sector experience run the entire banking system. They are so out of touch with reality – relying instead on their textbook historical models – that they are blinded by backward-looking data. But when reality hits, as it did in last week’s Fed policy statement, we witness a complete about face on Fed policy that is, quite frankly, now too late.

Every quarter-point increase in interest rates takes nine to 12 months to be fully absorbed into the economy. Under this assumption, the effects of the last four interest rate hikes have yet to be fully felt by the economy. Bear in mind that while China, Europe, and Japan have exhibited slower growth in GDP for the past year and a half, the Federal Reserve has raised interest rates nine times in the last three years.

I have written about the effects of sky-high taxes on the EU economy. I have also laid out the global 10-year sovereign bond yields, showing rates tumbling lower. That means inflation is not a threat. Deflation on a global scale is the 800-pound gorilla in the room. When one considers that central banks for the past decade have pumped more than $12 trillion into the global financial system to counter the deepest financial crisis since the Great Depression, you’d think that inflation would be at least a talking point.

Instead, the big picture is eerily deflationary. The widely-followed Reuters/Jefferies CRB Index shows that the next big leg for commodities may be lower to challenge levels not seen since the first quarter of 2016. Last Friday’s trap door sell-off was a telltale sign of exactly what big institutional clients are skeptical of, while recent data from Europe, Japan, and China support a case for a likely global recession.

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

I wish I could spin the evidence any other way, but based on the breakdown of trade negotiations with China, the delay and likelihood of a hard Brexit, the contraction of the export-reliant economy of Japan, and the rise of socialism in the U.S., I’m of the view that investors should pivot hard into the safety of dividend-paying and growth-dividend strategies going forward for 2019. The second-half earnings recovery story all sounds good, and I wrote about it last week as that case was building momentum, but the data simply doesn’t support it after the release of EU and German PMI numbers hitting six-year lows.

Money is Moving into Quality Dividend Stocks

So, here’s the deal. The world is awash in money – over $12 trillion more than 10 years ago – and it has to go somewhere. When global bond yields are crashing to levels well below those of qualified dividend yields of blue-chip U.S. companies with pristine balance sheets, there is only one thing to do – buy them!

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

For starters, look at PepsiCo Inc. (PEP) which pays a dividend yield of 3.07% and owns brands like Diet Pepsi, Aquafina, Doritos, Lays, Lipton, Gatorade, Fritos, and Mountain Dew. Kimberley Clark (KMB) pays 3.38% and is gapping higher against the global deflation trade, as are Dominion Energy (D) paying 4.86% and PPL Corp. (PPL) paying 5.13%. and Verizon (VZ) paying 4.06%.

(Navellier & Associates does not own PPL, VZ or KMB in managed accounts but does own D, and Pep in some managed accounts. Navellier & Associates does not own PEP, PPL, D, VZ or KMB in our sub-advised mutual fund.  Bryan Perry does not own PEP, PPL, D, VZ or KMB in personal accounts.)

Ladies and gentlemen…the shift to bullet-proof, all-weather, best-of-breed dividend stocks is underway. Yes, there are phenomenal growth stocks in the cloud, big data, 5G, media streaming, mobile ecommerce, and biotech/medical device spaces that offer outsized opportunities. There is a bull market somewhere in some ‘stealth’ company, but it’s my view that the smooth ride of 2019 is about to get much more volatile.

This volatility is part and parcel of a capitalist system, the system that is attacked daily by the likes of Bernie Sanders, Alexandria Ocasio-Cortez (AOC), and other soak-the-rich candidates. It’s reported now that AOC’s mother moved from New York to Florida because she didn’t want to pay the eye-popping property tax on her home. I guess Bernie, AOC, and their friends haven’t figured out that, on a global scale, when you were born in America, you already hit the lottery. But hey, this is just one man’s opinion.

About The Author

Bryan Perry

Bryan Perry
SENIOR DIRECTOR

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*

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