April 2, 2019

The relentless bids in the U.S. Treasury market continue, with the 10-year Treasury yield closing last week at 2.41%. Given the fierce rebound in the high-yield market – with key high yield ETFs trading at fresh 52-week highs – I would have expected “risk free” investments like Treasuries to have higher yields but the global economy is much weaker than the U.S. economy and the U.S. offers the highest interest rates of any developed market. Simply put, there aren’t any government bonds to buy other than the U.S.

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

My experience tells me that a strong high-yield market means a strong economy. By the looks of the largest high-yield ETF, the economy is doing fine. I know that the technical inversion of the 10-Year Treasury trading below some short-term interest rates has raised some eyebrows, but this is not a real inversion, as the more closely-watched 2-10 spread is still positive. The technical inversion stems from the fact that both 10-year German bunds and Japanese Government Bonds (JGBs) are in negative territory so the 10-year Treasury is being pulled lower by negative interest rates in the other key global markets.

Both Treasury and high-yield bonds seeing falling market-driven rates means that the interest rate spread between high-yield bonds and Treasuries has stopped falling and is moving sideways. At 408 basis points (4.08%) the junk bond composite is 100 basis points lower than when Mr. Trump was elected President.

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

I know that the economy has slowed some from the first sugar high of the Trump tax cuts, but this was to be expected. If we follow the pattern of the Bush tax cuts of 2003, there will be a sugar high, a pause, and then a second leg up in economic activity. My conversations with investors suggest that very few are looking for a second-half reacceleration in the economy, yet this is precisely what may happen next.

The strength of the high-yield market certainly suggests the economy is doing fine, despite this soft patch.

Aggregate EPS Still Growing in 2019

First-quarter earnings will be the first quarter since 2016 to see negative EPS growth for the S&P 500. Current estimates are to the tune of -3.9%. The main culprit was the tax cut and the much higher EPS growth rate we saw for the S&P 500 in 1Q2018 and 2Q2018 — hence the difficult y/y comparisons.

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

In addition to the difficult comparisons with 2018, the consensus estimates dropped rather dramatically as the quarter progressed. To get to the present -3.9% projections, consensus estimates were cut by 7.2%, which was much more than the typical EPS cut as a quarter progresses. As things stand at the end of the first quarter, the consensus for the full-year 2019 calls for 3.7% EPS growth and 4.8% annual revenue growth.

In the brave new world of quantitative tightening – where the size of the Federal Reserve balance sheet disproportionately impacts the aggregate level of asset prices in the system – we had a situation in 2018 where better than 20% EPS growth was met with a 4.5% decline in the S&P 500 (counting dividends), so it is entirely conceivable that we could see only a 3.7% EPS gain and a better than 20% rise in the S&P 500 in 2019, as the 2018 anomaly is being reversed: The market flips around but makes modest net gains.

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

There is every indication that there won’t be any rate hikes in 2019 and the Fed balance sheet unwinding will stop, as per the Fed Chairman’s own words. Still, the United States is a heavily-indebted economy and market-driven interest rates still matter. If indeed the 10-year Treasury yield is driven lower by the troubles in Germany and Japan, the bond market has already given the U.S. economy an interest rate cut with falling yields of both Treasuries and high-yield debt, which is not a combination that one sees often.

I think the chances of a soft landing in the U.S. economy are very high, similar to what we saw in the mid-1990s under the Greenspan Fed. Chinese economic data has again perked up, with every indication that a trade deal is near completion, so I suspect that the present EPS estimates for the S&P 500 may be rather conservative. Consensus estimates call for a 3100 target for the S&P 500 by the end of 2019.

That seems about right to me.

About The Author

Ivan Martchev

Ivan Martchev is an investment strategist with Navellier.  Previously, Ivan served as editorial director at InvestorPlace Media. Ivan was editor of Louis Rukeyser’s Mutual Funds and associate editor of Personal Finance. Ivan is also co-author of The Silk Road to Riches (Financial Times Press). The book provided analysis of geopolitical issues and investment strategy in natural resources and emerging markets with an emphasis on Asia. The book also correctly predicted the collapse in the U.S. real estate market, the rise of precious metals, and the resulting increased investor interest in emerging markets. Ivan’s commentaries have been published by MSNBC, The Motley Fool, MarketWatch, and others. *All content of “Global Mail” represents the opinion of Ivan Martchev*


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 intended as an offer or 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.

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 of any offer 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 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 you. 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. Results presented include the reinvestment of all dividends and other earnings.

Past performance is no indication of future results.

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 intended or 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 hypothetical 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 hypothetical performances should be considered mere “paper” or proforma hypothetical performance results and are not actual performance of real world trades.  Navellier & Associates, Inc. does not have any relation to or affiliation with the owner of these newsletters. There are material differences between Navellier Investment Products’ portfolios and the InvestorPlace Media, LLC newsletter portfolios authored by Louis Navellier. The InvestorPlace Media, LLC newsletters contain hypothetical performance that do not include transaction costs, advisory fees, or other fees a client might incur if actual investments and trades were being made by an investor. As a result, newsletter performance should not be used to evaluate Navellier Investment services which are separate and different from the newsletters. The owner of the newsletters is InvestorPlace Media, LLC and any questions concerning the newsletters, including any newsletter advertising or hypothetical Newsletter performance claims, (which are calculated solely by Investor Place Media and not Navellier) 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. Request here a list of recommendations made by Navellier & Associates, Inc. for the preceding twelve months, please contact Tim Hope at (775) 785-9416.

Marketmail Archives