by Louis Navellier

March 5, 2024

When markets are down, I like to search for the silver lining and the critical path forward. Likewise, when markets keep rising, like now, I think it’s wise to ask ourselves what could upset the apple cart?

Well, the first caution flag I see is that the U.S. is clearly entangled in too many wars around the world – not only in Ukraine and the Middle East, but also with troops in Iraq, Syria, Somalia, the Congo and other “hot spots.” The U.S. military is not yet in Guyana, but Venezuela has moved light tanks and missile-equipped patrol boats to the Guyana border. The Venezuelan Minister of Defense, Vladimir Padrino, has accused Exxon-Mobil of relying on the American military for its security, but Exxon-Mobil stood firm: “We are not going anywhere; our focus remains on developing the resources efficiently and responsibly.”

Another risk is that Congress keeps going right up to the deadline of a government shutdown, then passes a continuing resolution before going on a break, neglecting to do the necessary work to cut spending!

This election cycle is another wild card, since the candidates are not arguing about the economy, but about border control, international aid, wars and inflation, which hurts the bottom 20% of Americans the most.

The State of the Union speech on March 7, two days after Super Tuesday, should be interesting. President Biden’s disgust with Congress, which controls federal spending, could potentially lead to some fireworks.

Presidential elections are generally good for both consumer and investor confidence. Candidates tend to promise anything and everything. For instance, President Biden is already generating more student loan relief, even though the Supreme Court ruled that student loan relief was illegal. The President bragged that, “The Supreme Court blocked it,” but “that didn’t stop me.” Candidate Trump is also pointing out that he is being prosecuted unfairly by some courts and the Department of Justice, which recently dropped a classified documents case against Joe Biden due to the fact that he is an “elderly man with poor memory.”

A screenwriter could not make up a script with more bizarre drama than the current Presidential Election plot twists. Obviously, this is more entertaining than most elections, but it is also incredibly sad, since, in my opinion, running Joe Biden again borders on elder abuse. When President Biden finally went to East Palestine, Ohio, he gave an awkward speech as he shuffled cue cards and asked an aide, “Why am I here?” when looking at where the train derailed. East Palestine resident Rich McHugh said the photo-op of President Biden drinking local tap water was “disgusting,” then described it as the “final nail in the coffin.”

Residents of East Palestine, Ohio and many Americans do not understand why the Biden Administration is spending billions of dollars in overseas aid while not taking care of Americans in need. Since the 14+ million people that fled Ukraine are not expected to return, the future of Ukraine remains uncertain. Obviously, wars are tragic and the fact that they have exploded around the world under the Biden Administration will likely be cited by Donald Trump, who is proud of the peace attained during his term.

Many Americans, including myself, do not understand the Biden Administration’s war on natural gas as well as natural gas appliances. The truth of the matter is that natural gas is largely a waste product from crude oil production, so if we do not use it, it will get flared and burnt anyway, which is why when you fly over North Dakota at night, it is brighter than Minneapolis due to all the natural gas flaring, so if you are a global warming advocate and want to reduce carbon dioxide emissions, you want to use this gas, not needlessly flare it, especially since natural gas has approximately half of the carbon dioxide emissions of coal. In fact, the best way to reduce carbon dioxide emissions is to flood the world with cheap natural gas.

Regarding our energy stocks, natural gas prices are low due to an abnormally warm winter that caused lower than expected demand. Crude oil prices are expected to benefit from strong seasonal demand that should peak in early September. Furthermore, the chaos in the Middle East and the war between Russia and Ukraine remain wild cards that could easily disrupt crude oil production and send prices to $100 per barrel. The energy stocks that I hold are expected to report strong first and second-quarter earnings due to firm crude oil prices and favorable seasonal year-over-year comparisons. However, by September, I am currently planning on selling my remaining energy stocks due to the expected seasonal swoon in the fall, as demand drops – and especially if the probability of Donald Trump becoming President increases.

Let me explain. After the August Democratic Convention in Chicago, we will know if Joe Biden will be nominated or if he is replaced by Gavin Newsom (or someone else), through the auspices of some very powerful Super Delegates. If Biden is the nominee, this means the odds of Donald Trump being elected in November will likely increase by September. Since candidate Trump wants to “drill, baby, drill.” I suspect that crude oil prices may decline under Trump, so I may sell my remaining energy stocks then.

The Fed’s Hesitancy in Cutting Rates May Push America Toward Recession

Perhaps the biggest risk is that the Fed will wait too long to start lowering interest rates, slowing GDP growth, pushing us toward the recession they have so masterfully dodged, until now. The Fed certainly waited too long to recognize high inflation and start raising interest rates, so caution is their middle name.

The longer they wait, the more the Fed will want to avoid interfering with the election outcome, so I still remain convinced that the Fed should start cutting interest rates no later than at its Federal Open Market Committee (FOMC) on May 1st. However, the Fed continues to signal that its first rate cut will be later.

Unfortunately, the Fed’s favorite inflation indicator, the Personal Consumption Expenditure (PCE) Index is rising once again. The Commerce Department announced that the PCE index rose 0.3% in January and 2.4% in the past 12 months. The more closely watched “core” PCE, excluding food and energy, rose 0.4% in January and 2.8% in the last year. In the past six months, the core PCE is now running at a 2.5% annual pace, up from just over 2% in the previous couple of months. Since the core PCE just posted its largest monthly gain in a year, I’d say the Fed is now more likely to wait until its June meeting to cut rates.

Despite the rising PCE index, I’d argue that wholesale good prices have declined for the past four months, as the U.S. continues to import deflation from China, and the rest of the world is struggling with recession – like the economies in Japan, Britain, Germany and maybe even China, whose statistics are suspect. All economists are trained to fight deflation first, so it is imperative that the Fed stimulates the U.S. economy with key interest rate cuts, before deflationary forces spread and cause consumers to postpone purchases.

If you are curious about how China’s deflation has spread to the U.S., you do not have to look any further than the glut of electric vehicles (EVs) on dealer lots. China produces more batteries than it can consume, so there is now a lithium battery glut that caused the Big 3 to abruptly cancel their new U.S. battery plants with their Chinese and South Korean partners, so the goal of on-shoring battery manufacturing in the U.S. was just a Biden Administration pipe dream.

The only electric vehicle (EV) stock that I recommend, namely Li Auto (LI), surged after announcing this week that it posted $1.7 billion in profits in 2023. Li Auto delivered 376,030 vehicles in 2023, up 182.2% from 133,246 in 2022. In 2023, Li Auto’s operating margins expanded to 21.5%, up from 19.1% in 2022.

So – what is Li Auto doing right amidst a global EV glut?  Well, Li Auto makes premium EVs that are taking away market share from Tesla. Essentially, Li Auto is outdoing Tesla in China with better prices and quality, plus offers to make autonomous-driving standard for all its vehicles. There is no doubt that Tesla is under attack in China and both BYD and Li Auto are continuing to shrink Tesla’s market share.

The bulk of the economic indicators point to the possibility of a recession if the Fed leaves rates too high, too long. The Commerce Department reported last week that the median home price declined to $420,700 in January, the fifth straight monthly decline. The supply of new homes for sale rose to 456,000, which represents an 8.3-month supply, the highest inventory in over a year, so further price declines are likely.

The biggest surprise last week was that the Conference Board on Tuesday announced that its Consumer Confidence Index declined sharply to 106.7 in February, down from a revised 110.9 in January (down from 114.8 previously reported). The main culprit for the big drop in consumer confidence was that the present situation component declined to 147.2 in February, down from 154.9 in January. The expectations component also declined to 79.8 in February, down from a revised 81.8 in January. Clearly, consumers are growing increasingly cautious, so perhaps the Fed should cut key interest rates sooner rather than later.

Another reason to cut rates sooner is that the Institute of Supply Management (ISM) reported on Friday that its manufacturing index declined to 47.8 in February, down from 49.1 in January. This is a big disappointment, and the 16th straight monthly decline – likely exasperated by Boeing’s woes. The new orders component dropped to 49.2 in February, down sharply from 52.5 in January, also due to Boeing’s big order drop!  The bright spot was that the new export orders component rose to 51.6 in February, up sharply from 45.2 in January. Interestingly, eight of the 15 industries that ISM surveyed reported growth in February, so there is some hope that manufacturing may pull out of its slump in the upcoming months.

This is a long list of risks, but I think the positives of rising corporate earnings and an election year that may turn suddenly positive in the summer should deliver strong 2024 gains in carefully selected stocks.

I’ll close with the good news that the U.S. is in much better shape than Britain, Japan and Germany, which are in the midst of recessions or acute economic slowdowns. Furthermore, we are energy-and food-independent. We are not forced to kill livestock to comply with the Paris Climate Accord and do not have farmers protesting in the streets, like in Europe. In the U.S., we are blessed to have low natural gas prices and an abundance of nitrogen fertilizer, which is increasingly disappearing around the world.

Before 2022, Ukraine was the breadbasket of the world, but after 35% of the population fled, it is hard to maintain crop production there. Furthermore, Russia is a big supplier of fertilizers, so European farmers are now out of luck. The truth of the matter is that America remains an oasis in a fast-changing world.

With $8.8 trillion in money market assets on the sidelines, there is plenty of fuel to feed the next buying frenzy in our stocks. The Fed will be aiding this institutional feeding frenzy as they commence cutting key interest rates no later than June. I realize some of our Presidential candidates are a bit cranky and older than normal, but I expect that our growth stocks will rally right up the November elections and be propelled by strong earnings as well as falling interest rates, so a strong economy can transcend politics.

Navellier & Associates owns Li Auto (LI) and Exxon Mobil Corporation (XOM) in managed accounts. A few accounts own Tesla (TSLA) by client request only. Louis Navellier and his family own Li Auto (LI) and Exxon Mobil Corporation (XOM) via a Navellier managed account. He does not personally own Tesla (TSLA).

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

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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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