by Louis Navellier

May 11, 2021

The big news last week was that the market fell when Treasury Secretary Janet Yellen apparently forgot that she is no longer the Fed Chair and said on Tuesday that, “It may be that interest rates will have to rise somewhat to make sure that our economy doesn’t overheat, even though the additional spending is small relative to the size of the economy.”  These comments are not consistent with Fed Chairman Jerome Powell, who has not signaled any tapering or key interest rate increases. Although technically the Fed is under Secretary Yellen’s supervision, her comments threaten the Fed’s independence… and are baffling.

Yellen later issued a clarification, saying, “I don’t think there’s going to be an inflationary problem, but if there is, the Fed can be counted on to address it.” She also said that she sees some price pressure over the next six months, largely due to supply-chain bottlenecks, higher energy prices, and demand for labor. The bottom line is that Secretary Yellen is sticking to the Fed’s prediction that inflation will be “transitory.”

This is a good time to remind you that when Janet Yellen was the Fed Chair (February 2014 to February 2018), she was called the “fairy godmother” of the stock market by Ed Yardeni and other economists. I, for one, am extremely comfortable with Janet Yellen as Treasury Secretary and believe that she will be sprinkling “fairy dust” on both the stock and bond markets in the upcoming months and years in office.

The latest example of this fairy dust is the 10-year Treasury bond yield, which has been meandering lower in recent days. On Maria Bartiromo’s show on Fox Business on Thursday, I said that someone (most likely the Fed) is clearly intervening to keep 10-year Treasury bond yields low (under 1.6%), but I also admitted that 10-year bond yields could rise to the 2% level as inflationary pressures heat up.

Speaking of the Fed, the Atlanta Fed now estimates that second-quarter GDP is growing at an astonishing annual rate of 11% (revised on Friday, down from its previous estimate of an even more astonishing 13.6%)!  Robust consumer spending, plus the manufacturing backlog, are expected to act as a “one-two punch” to propel second-quarter GDP growth, which will also likely be fueled by inventory rebuilding.

How I Usually Resolve the Mixed Messages in the Jobs Reports

The labor market dominated the news last week. As usually happens in the first week of the month, the ADP report on private payrolls comes out on Wednesday, followed by the Labor Department’s more comprehensive jobs report on Friday. First, on Wednesday, ADP reported that a whopping 742,000 private sector jobs were created in April, which was the largest monthly job increase in seven months.

The bulk (over 85%) of these new jobs were created by the service sector (i.e., 636,000 jobs), led by leisure and hospitality jobs. However, the goods sector also created 106,000 jobs, of which 41,000 were in the construction sector. Also notable was that job creation was robust across the sectors, by size – in small (under 49 employees), medium-sized (50 to 499 employees), and large businesses (over 500 employees). Clearly, job creation is booming, which bodes well for continued strong GDP growth.

On Thursday, the Labor Department announced that weekly unemployment claims declined to 498,000 in the latest week, compared to a revised 590,000 in the previous week. This is the first time that weekly unemployment claims have fallen below 500,000 since March 2020, representing a new post-pandemic low. Interestingly, continuing unemployment claims actually rose slightly to 3.69 million vs. a revised 3.653 million in the previous week. Economists were expecting weekly and continuing unemployment claims to come in at 538,000 and 3.62 million, respectively, so the lower weekly claims were a big surprise, while the higher-than-expected continuing claims raised some lingering concerns.

Wednesday’s ADP report created giddy expectations of one million or more total jobs created in April, counting all sectors, but the shocking news was that the Labor Department reported on Friday that only 266,000 payroll jobs were created in April, which was barely one-fourth the one million payroll jobs that some economists expected. Clearly, some economic forecasters cannot hit the broad side of a barn!

Hospitality created 331,000 jobs in April, while professional & business services lost 111,000 jobs. Courier jobs fell by 77,000 in April, while manufacturing lost 18,000 jobs. Even healthcare shed 4,000 jobs. These numbers make no sense at all to me. Are couriers and manufacturers closing doors? I doubt it.

When it comes to any big conflict between the ADP jobs report and the Labor Department, I tend to side with ADP, since they compute from hard data – payroll checks – while the Labor Department is based on reports which trickle in at various speeds, subject to massive revisions in future months. Besides, some of these April numbers look particularly suspicious, so I expect we will see massive upward revisions in the April payroll report during the first weeks of June and July. For instance, the February payrolls were just revised up to 536,000 (from 468,000 previously estimated), while March payrolls were revised down to 770,000 (from 916,000 previously estimated). Confused?  We all are, especially the Labor Department.

I think we can ignore the April payroll report, since I think it will likely be revised upward next month!

Most Other Economic Statistics Look Strong

The Commerce Department recently announced that household income soared 21.1% in March, due largely to the federal stimulus checks that were sent out. This was the largest monthly surge in household income ever recorded – ever since records commenced in 1959. The personal savings rate surged to 27.6% in March, up from 13.9% in February. These are massive numbers, unprecedented in history.

Consumer spending surged 8.1% in March and is expected to persist in upcoming months. Consumers bought predominantly big-ticket items in March, since spending on services only rose 2.2%.

The Institute of Supply Management (ISM) manufacturing index hit a 37-year high in March, so it was expected to cool off in April, and it did, declining to 60.7 in April from an over-heated 64.7 in March. Any reading over 50 signals an expansion, so manufacturing activity remains healthy. The new orders component declined to 64.3 in April, down from an incredible 68 in March. The production component slipped to 62.5 in April, down from a stunning 68.1 in March. The best news was that the backlog component rose to 68.2 in April, up from 67.5 in March, boosted by supply chain bottlenecks that have plagued the auto industry. I expect manufacturing to stay strong due to strong demand and order backlogs.

The ISM service sector also hit a new all-time high in March, at 63.7, so it was bound to correct in April. On Wednesday, ISM announced that its non-manufacturing (service) sector index decelerated slightly to 62.7 in April. Any reading over 50 signals an expansion, so the service sector remains very healthy. However, economists were expecting the April ISM service index to rise to 64.3, so they were surprised by the decline. The big culprit was the new orders component, which declined to 63.2 in April from an all-time high of 67.2 in March. Inventory depletion appears to be the primary culprit. Since inventories have to be replenished, I expect the ISM services index will continue to grow in the upcoming months.

The Commerce Department announced on Tuesday that U.S. trade surged in March as exports rose 6.6% to $200 billion and imports increased 6.3% to $274.5 billion. Any time both exports and imports are rising is indicative of both worldwide and domestic economic growth. The difference represents a “deficit” of $74.7 billion. Technically, some economists may trim their first-quarter GDP estimate due to the high deficit in March. However, looking forward, second-quarter GDP growth is looking incredibly strong.

How the Automotive Industry Has Changed Due to Supply-Chain Disruptions

The Wall Street Journal reported last week that the automotive industry is moving away from “just in time” delivery, due to acute plastic and semiconductor shortages. The disruptions in the global supply chain are forcing the automotive industry to use suppliers closer to their plants, especially regarding the heavy batteries that are used in hybrid and electric vehicles (EV).

Battery pack production at the new Tesla plant in Berlin hit a “glitch” and caused the opening of this crucial manufacturing plant for Tesla to be postponed several months, until at least January 2022. But frankly, this is just one of many delays associated with battery production that is expected to slow down the transition to EVs due to shortages of cobalt, neodymium, and other rare earth materials. The Financial Times recently reported that cobalt prices have risen 40% so far this year, so do not be surprised if more auto manufacturers follow Tesla’s Shanghai plant and make lower-priced, lower-range EVs without cobalt.

Interestingly, Porsche recently announced that it intends to make its own “high performance batteries” rather than just buy batteries from its parent, VW Group (VWAGY). Porsche wants to be on the forefront of high-performance battery production, just like it is now known for its high-performance engines.

Since VW Group has invested heavily in QuantumScape (QS) to commercialize solid-state batteries, it makes sense that Porsche would be the first VW division to potentially help develop and manufacture solid-state batteries. I should add that VW Group’s “Artemis” project is developing a state-of-the-art electric vehicle (EV) platform that will have Audi, Bentley, and Porsche versions that are expected to be the first mass-production EVs with solid-state batteries.

The most shocking EV news last week was that Stellantis (formerly Chrysler Fiat & France’s PSA before merger) announced it will no longer need to buy Tesla CO2 credits due to PSA’s technology that would allow it to meet all European Union CO2 goals. Since 2019, Chrysler Fiat & PSA (Citroen, Opel, Peugeot, and Vauxhall vehicles) have spent about $2.4 billion buying CO2 credits from Tesla. Tesla reported $2.365 billion in regulatory credits and posted earnings of $1.407 billion since 2019. So now, without Stellantis’ CO2 credits, Tesla’s future earnings are in doubt – unless it boosts its manufacturing efficiency.

The good news is that according to Electrek, Tesla’s second-quarter production capacity is already sold out according to “sources familiar with the matter.” The bad news is that the production of Tesla’s new plaid battery in its refreshed Model S and X models has been postponed again. Specifically, the delivery of the Model S plaid has been delayed another month, while the Model X plaid has been delayed by three months. Tesla enthusiasts are excited about the plaid models, since they are supposed to be very fast and have better cooling for sustainable performance as well as faster charging. It will be interesting to see if the plaid delays are due to glitches with the new 4680 lithium battery or just the ongoing chip shortage.

Navellier & Associates does own Tesla (TSLA), for one client, per client request in managed accounts.  We do not own VW Group (VWAGY), QuantumScape (QS), or Stellantis (STLA). Louis Navellier does not own Tesla (TSLA), QuantumScape (QS), VW Group (VWAGY), or Stellantis (STLA) personally.

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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