March 26, 2019

In our highly rated ETF portfolios, we sold a major position in the iShares 7-10 Year Treasury Bond (IEF) at a near-term high after the disappointing Brexit delay was announced that pushed the 10-year Treasury yields lower. I find that the ETF market is being influenced predominantly by index buying pressure, primarily from the S&P 500 (SPY) and the NASDAQ 100 (QQQ), so there are only three or four sectors where we can move now, depending on the ETF family. As a result, 2019 is shaping up to be more of a stock picking year than a sector year, because the stock market is getting increasingly narrow.

Essentially, we are now entering a “funnel.”  I fully expect that I will be holding 30% fewer stock names in the upcoming months as the stock market’s breadth and power decays after the 2019 pension funding season draws to a close and the first-quarter announcement season commences. This funnel should cause more money to flow into the stocks that post strong sales and earnings, while the overall stock market is struggling with more difficult year-over-year comparisons. My quantitative grades for stocks in both my Dividend Grader and Stock Grader lock in on institutional buying pressure, so as certain stocks fall in rank, they will be replaced by stocks rising in rank that are benefitting from institutional buying pressure.

Currently, the S&P 500 yields about 1.93% and most of those dividends are taxed at a maximum federal rate of 23.8%. Investors can get out of the stock market, but ironically, they may earn less, since interest income is taxed at a maximum federal rate of 40.8%. As a result, money continues to pour into index funds, despite the fact that earnings will likely remain lackluster during the first three quarters of 2019.

In my opinion, an investor’s best “defense” is a strong offense of fundamentally superior stocks that are characterized by rising dividends, stock buy-backs, and a track record of strong sales and earnings momentum. These fundamentally superior stocks are becoming increasingly scarce. That’s why I say the stock market is entering a “funnel” that will likely become much more narrow in the upcoming months.

The stocks that I expect to emerge as market leaders and the biggest winners will be our fundamentally superior dividend growth and conservative growth stocks. The relative strength that our stocks have exhibited bodes well for this week’s quarter-end window dressing as well as 90-day smart Beta ETF rebalancing. Overall, we are entering a stock picker’s market at which I expect our firm to excel.

The Fed Signals “All Clear” on Rate Increases This Year

Interestingly, so far this year, the stock market seems to be taking its cue more from an accommodative Fed, especially as other central banks, especially the European Central Bank (ECB), prepare to offer more stimulus to member banks. Speaking of the Fed, its Federal Open Market Committee (FOMC) announcement on Wednesday was incredibly dovish. Specifically, the FOMC announcement said that due to slower economic growth that no key interest rate increase is anticipated this year.

The FOMC also remains very sensitive to global events, like slowing growth in China and Europe, so the Fed clearly does not want to change its interest rate policy at the present time. I should add that the Fed is anticipating slower (2.1%) GDP growth in 2019, so it can afford to be “patient” moving forward.

As far as unwinding its balance sheet is concerned, the FOMC implied that it would reduce the monthly Treasury securities it sells from $30 billion per month to $15 billion per month, beginning in May. Furthermore, the Fed will have completed its selling of mortgage back securities by September 2019. Eventually, the Fed plans to shrink its balance sheet to approximately $3.5 trillion in 2019.

Overall, the dovish FOMC statement caused Treasury bond yields to decline to their lowest level in the past 12 months, which is very bullish for higher stock prices, especially dividend growth stocks. The Fed has also been blessed by a lack of inflation in recent months, but that may change due to rising oil prices.

Specifically, crude oil prices hit a four-month high last week after the Energy Information Administration (EIA) on Wednesday reported a 9.6 million barrel drop in domestic inventories in the latest week. This drawdown is normal in the spring, when demand naturally rises as the weather improves. Additionally, the “crack spread” between sour and sweet crude oil has tightened, due to the fact that the U.S. will no longer pay for Venezuela’s sour crude oil as long as President Maduro remains in power. This is expected to squeeze the earnings of many refiners. Overall, the U.S. is producing more crude oil than ever before and is now in control of worldwide crude oil prices, so I would be surprised if crude oil rises too much.

In summary, we remain in a “Goldilocks” environment with an accommodative Fed that has no intention of raising key interest rates any time soon. Brexit has caused chaos in Europe and now many countries have negative interest rates. Furthermore, the European Central Bank (ECB) is planning to provide even more stimulus, since negative interest rates are apparently not enough stimulus.

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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