April 30, 2019

The 10-year Treasury closed at 2.50% on Friday while the 2-year note closed at 2.29%. That’s a positive 2-10 spread of 21 basis points. As the classic measure of the slope of the Treasury yield curve, that means it has not yet inverted. It is true that the 10-year Treasury closed below some shorter-term government rates like T-bills and the like quite a few times in 2019, but I do not believe that this is a kosher inversion.

Longer-term Treasury yields are being pulled by action in the German and Japanese bond markets, where 10-year bunds close at -0.02% while 10-year JGBs closed at -0.03%. There simply isn’t enough yield in key global bond markets, so multinational financial companies end up in the U.S. Treasury market.

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

This is what is behind the fresh 52-week high in the U.S. Dollar Index and the fresh 52-week low in the euro. Europe has a deflationary problem that the delayed Brexit has intensified. In that environment, I expect further gains in the dollar and further lows in the euro. Under a certain scenario that is not all that unlikely, the euro can hit parity (1:1) to the U.S. dollar later in 2019.

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

I don’t base my decisions on the fascinating world of charts alone, but there is a “head-and-shoulders top” in the euro with the head near $1.25 and the “neckline” around $1.12-1.13. The breakdown below that neckline, which happened last week, points to an exchange rate of $1. The way the currency markets work is that they stay in a state of suppressed volatility for a while and then they violently break in the direction where the imbalances have been building up. That direction for the euro is down.

If U.S. interest rates rebound later in 2019 because of better U.S. economic performance, this will expand the interest-rate differential again in favor of the U.S. dollar and it will have nowhere to go but up, particularly if  the “trade deal of the century” with China is a done deal by then.

U.S. interest rates have a chance of rebounding as major tax cuts tend to have a second surge in economic activity, which may come by the end of 2019. There was a similar pattern following the 2003 Bush tax cuts, in which there was a first sugar high, a pause, and then another second wave of heightened economic activity. The same pattern may happen now, which would mean no recession in either 2019 or 2020.

Implications for the Stock Market

The Nasdaq 100 and the S&P 500 have already made fresh closing highs and the Dow Industrials are less than 1% off all-time highs. Unless the Chinese trade deal that is 90% done completely fails because of some dumb holdup, we are likely to see further gains in share prices in 2019. I know the stock market is up a lot in 2019, but that’s simply normalizing the abnormal performance in 4Q’18. Stocks today are where they were at the end of last September, after experiencing a giant swoon lower and a surge higher.

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

December 2018 (through Christmas Eve) was the worst December since 1931. It was truly a challenge to explain to clients that sell-offs in a good and growing economy tend to reverse pretty quickly. Not every sell-off in a good economy reverses immediately, but they are very different than real bear markets, where earnings per share (EPS) for the index tends to shrink dramatically for 1-2 years during a recession.

The fact that EPS for the S&P 500 could decline marginally when all companies have reported is not real “shrinkage,” as George Costanza would say. This is simply a factor of the sugar rush from the Trump tax cuts and the fact that EPS growth in Q1, Q2, and Q3 in 2018 was very strong. EPS growth should return by late 2019 and into 2020.

A lot of investors are scratching their heads as the stock market is going up “without earnings.” That’s simply a lack of perspective. Today’s stock market action is just a mirror image of it going down lot in Q4 2018 “with earnings,” or a “reversion to the mean” of sorts. The stock market is a forward-looking mechanism. What the stock market sees right now is no recession in 2020 and normalized EPS growth.

I do not believe that the Fed overshot on monetary tightening, but because the pace of quantitative tightening (aka, balance sheet shrinkage) picked up so dramatically in 2018, that alone could be the simplest explanation for the pickup in volatility in 2018. Quantitative tightening is simply the removal of electronic cash from the financial system. It is still ongoing as the shrinking Fed balance sheet indicates.

Also, the Trump Twitter attacks on the Fed Chairman did not help, nor did Chairman Powell’s backlash at the President by sounding firmer than appropriate at the December 19 FOMC press conference and his “autopilot” comments when it comes to the Fed balance sheet. With a President like Donald Trump, it is admittedly easy to lose one’s temper, particularly if one is the subject of his legendary Twitter diatribes.

Chairman Powell appears to have learned a valuable lesson that, as a Fed Chairman, it’s not just what you say that moves the markets, but it’s also how you say it.

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