by Louis Navellier
May 10, 2022
The Bank of England raised key interest rates last Thursday by 0.25% to 1%, and they also forecast a recession later this year as high energy prices are taking a toll on economic growth, but amazingly Japan has refused to change its interest rate policy due to inflation, and Christine Lagarde, President of the European Central Bank (ECB), recently rejected increasing interest rates, despite soaring inflation rates.
Due to the fact that both Japan and the ECB have refused to increase interest rates, the U.S. dollar remains very strong, which means that domestic companies have a big advantage compared with multinational companies suffering from lackluster international economic activity and getting paid in weak currencies.
Some astute stock market observers are pointing out that due to inflation, a massive P/E (price-to-earnings ratio) compression is now underway. That is an understatement, since our average growth stock trades at only 15.9 times median current earnings and a microscopic 4.1 times median forecasted earnings! Under no rational circumstances can I justify seeing such low valuations, which seem to price Armageddon into the market – a nuclear war. While Russian television has indeed depicted nuclear annihilation of Ireland and Britain, that was just propaganda. Clearly, Ukraine is suffering enough from conventional missiles.
The European Union (EU) proposed its sixth package of penalties against Russia last week, but the biggest news is that the EU is proposing a ban on all Russian oil that will be phased in over the next six months. There is also a proposed ban on all refined Russian crude oil products by the end of 2022.
Hungary and Slovakia are particularly reliant on Russian crude oil and will have until 2023 to comply with the import ban. In fact, Slovakia is asking for a three-year exception to change its refineries and pipelines. If the EU succeeds in implementing this crude oil ban for its 27 member nations, it will help keep crude oil prices high in the fall and winter months, when global crude oil demand normally drops.
This is bad news for consumers but great news for all the oil and oil service companies that I recommend.
Don’t Believe the Negative GDP Figures – At Least Not Yet
As I said last week, you can’t have a negative quarter when nearly all the constituent components of GDP are rising! According to the Commerce Department, the primary reason for its negative GDP estimate for the first quarter was due to inflation, trade imbalances and supply chain disruptions, but I have a hard time believing that supply chain disruptions from China’s Covid lockdowns have triggered a U.S. recession! Do we really buy all our stuff from China? I have never seen a recession begin when the ISM manufacturing and service surveys are both positive. Consumer spending and sentiment remains positive! And the Commerce Department flash GDP estimate for the first quarter doesn’t include March trade data.
Looking ahead to the second quarter, the Atlanta Fed on Wednesday revised its second-quarter GDP estimate to a 2.2% annual pace, up from its previous estimate of a 1.6% annual pace. The consensus of most economists ranges from a 1.6% to a 4% annual pace, so the Atlanta Fed is in the middle of those estimates. If the supply chain bottlenecks diminish in the second quarter, I expect GDP growth to resume.
There is mounting evidence that inflation peaked in March as crude oil and other commodity prices fell back. The fact that China’s Covid lockdown has spread outside of Shanghai, and is now in Beijing, means that another big Chinese region will likely incur draconian lockdowns. Already, China’s energy demand has fallen 20% due to its Shanghai lockdown, so crude oil prices have substantially moderated near-term.
The Institute of Supply of Management (ISM) said that its manufacturing index slipped to 55.4 in April, down from 57.1 in March and is now at its lowest level since July 2020. However, since any reading over 50 signals an expansion, the manufacturing sector is still growing. The new orders component slipped to 53.5 in April (down from 53.8 in March), while the production component declined to 53.6 (from 54.5 in March). On a more positive note, the backlog component declined to 56 in April (from 60 in March), so the ISM manufacturing index is expected to remain healthy due to persistent order backlogs. Also notable is that fully 17 of the 18 manufacturing industries that ISM surveyed expanded in April.
The ISM’s non-manufacturing (service) sector index declined to 57.1 in April, down from 58.3 in March. The main culprit was the new orders component, which declined to 54.6 in April (from 60.1 in March), while the business activity component rose to 59.1 in April (from 55.5 in March). The supplier deliveries component rose to 65.1 in April (from 63.4 in March) and 17 of the 18 industries expanded in April.
On Tuesday, the Commerce Department announced that factory orders rose 2.2% in March, which was well above economists’ consensus estimate of a 1% rise. Especially encouraging was that new orders for durable goods rose 1.1% in March after declining 1.7% in February. This improvement is indicative that companies are increasingly able to procure the raw materials that supply chain bottlenecks disrupted.
The Commerce Department on Wednesday announced that the trade deficit in March soared 22.3% to a record $109.8 billion, as imports soared 10.3% to $351.5 billion, and exports rose 5.6% to $241.7 billion. Both numbers indicate a powerful increase in trade volumes following the two-year pandemic shutdowns.
Although the U.S. exports of crude oil, fuel oil, natural gas and other petroleum products soared, the reason imports soared more was due to a surge in industrial supplies and materials ($11.3 billion) as well as finished metal shapes ($6.8 billion), as order backlogs were fulfilled. Overall, the widening trade deficit better explains why the Commerce Department reported negative GDP growth in the first quarter.
In the meantime, the stock market has a psychological problem as well as some mechanical trading problems, since the Citadel algorithms have been overrun by reckless selling pressure, especially from ETFs that all too often trade at a big discount to their underlying stocks, which in turn fuels panic selling.
One thing that I have learned in the past 40+ years is that I cannot fix “stupid.” Don’t sell into a panic! If you sold ETFs during market hours on April 29th, for instance, you were “fleeced” by Wall Street and received less than the underlying stock values due to wide bid/ask spreads. Many in the financial media are unduly influenced by Wall Street firms, who use them to boost volume, so Wall Street can fleece naïve investors. In general, you will always get a better price and tighter spreads selling into strength.
What I expect in May is a series of relief rallies where major stock market indices find firmer footing. We are fortunate that our dividend growth and growth stocks are still posting record quarterly sales and earnings, so we should continue to get an extra boost from these announcements. I must say, however, that the biggest macro event would be a change in leadership in Russia and/or a ceasefire in Ukraine. In such an event, a 20% relief rally in the NASDAQ Composite and Russell 2000 is certainly very possible!
Positive Job Totals Round Out America’s Non-Recessionary Landscape
Turning to jobs, ADP reported on Wednesday that 247,000 private payroll jobs were created in April. Small businesses (with fewer than 49 employees) shed 120,000 private payroll jobs in April, but medium businesses (50 to 499 employees) added 46,000 jobs and large businesses created 321,000 private payroll jobs. Small businesses appear to be incurring a higher “quit” rate as employees try to find higher paying jobs. The ADP private payroll report has declined for three straight months, so there may be changes underway, but the payroll numbers seem to be distorted by the movement of workers seeking higher pay.
The Labor Department on Thursday announced that weekly unemployment claims rose to 200,000 in the latest week, up from a revised 181,000 in the previous week. Continuing unemployment claims declined to 1.384 million in the latest week compared to a revised 1.403 million in the previous week. Continuing unemployment claims remain at the lowest level since January 1970, clearly not indicating a recession.
On Friday, the Labor Department announced that 428,000 payroll jobs were created in April, better than the economists’ consensus expectation of 400,000 payroll jobs. The unemployment rate remained at 3.6%. The labor force participation rate declined by 0.2% to 62.2% in April, which is indicative that some folks are likely retiring or quietly looking for better jobs. The March payroll report was revised higher by 3,000 to 428,000. Average hourly earnings rose 0.3% ($0.10) to $31.85 per hour and have risen 5.5% in the past year. Overall, the April payroll report was very encouraging for continued steady job growth.