May 15, 2018

Last week’s resurgence of the stock market was very reassuring for investors, capping a seven-day rally that saw the market hold a key technical level (see chart below), inviting fresh buying and widespread short covering. All in all, the bullish camp is doing its level best to win back the narrative from the bears that have touted “peak earnings,” the threat of stagflation, geopolitical chaos, and slowing growth in Europe – all of which turn out to be overblown but are the byproduct of a culture that wants to have investors glued to the business media 24/7. After all, crisis mongering is good for business.

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

Investors were able to easily digest President Trump’s Tuesday decision to withdraw the U.S. from the Iran nuclear deal. Then, buying of stocks picked up notably after profit-taking in the oil sector set in.

Nine of eleven S&P sectors closed the week in the green. The energy sector led the charge. A rebound in the crude oil futures market, which returned to a three-and a half year high, saw WTI crude futures trade as high as $71 per barrel. President Trump’s decision to restore the “highest level of economic sanctions” against Iran, OPEC’s third-largest oil exporter, carries the perception that it will likely decrease crude supply on the global market, but in reality that will likely be offset by higher U.S. and other production.

On the downside, the lightly-weighted utilities and telecom services sectors finished at the back of the pack. The consumer staples sector lagged further as Walmart weighed down the group, losing 3.1%, after the company agreed to buy a 77% stake in Indian e-commerce giant Flipkart for $16 billion, which qualifies as Walmart’s largest acquisition deal ever.

(Please note: Bryan Perry does not currently hold a position in Walmart. Navellier & Associates does not currently own a position in Walmart for client portfolios).

The yield on the benchmark 10-year Treasury note ventured briefly above the psychologically important 3.00% mark on Wednesday, but prices for U.S. Treasuries closed the week on a broadly higher note, pushing yields down across the curve. Meanwhile, the Producer Price Index for April increased 0.1% versus 0.2% consensus, while the final demand index, less food and energy, rose 0.2%, as expected.

The key takeaway from the report is that there was a moderation in producer price inflation, yet it wasn’t significant enough to alter the Federal Reserve’s proposed monetary policies. Wholesale inventories increased 0.3% in March versus a consensus of 0.5% on top of a downwardly revised 0.9% increase (from +1.0%) in February. And the weekly MBA Mortgage Applications Index declined by 0.4%. Then, on Thursday, the April Consumer Price Index came in at +0.2% versus consensus expectations of +0.3%.

Since first-quarter earnings season has all but wound down, the focus going forward is on economic data points, which are showing further evidence of benign inflationary pressure. Hence, the market seized on the softer threat of inflation and it was “Tally-Ho!” as the bulls recaptured the narrative and high ground.

As of Friday, all four major averages are in positive territory year-to-date. The Nasdaq and Russell 2000 are clearly where fund flows are most pronounced, and rightly so because they have considerably less exposure to the recent strength in the dollar than do the heavily-weighted multinational Dow and S&P.

Dollar-Oil Trade Out of Kilter

In general, when the dollar is weak, commodities rally and when the dollar is strong commodities sell off. Lately, there has been somewhat of an aberration. For the past four weeks both the dollar and WTI crude oil have rallied in tandem with Treasury yields. While it makes perfect sense for the dollar to rally as yields rise, the rise in oil is in my view primarily the result of a perception of supply disruption from Iran.

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

As talk of $80 per barrel oil started making the rounds on cable business channels, the weekly Baker Hughes rig count data showed another 13 rigs coming online, bringing the total to 1,045, up by 160 rigs from this time last year. U.S. oil production is surging, primarily in the Texas Permian Basin, which has seen a renaissance in production due to advancements in horizontal drilling and fracking techniques.

As the week came to a close, the four-week dollar rally ran into profit taking as did the rally in oil prices and the yield on the 10-year Treasury fell back below 3.0% on what would be considered benign inflation data. All three of these elements of risk are still very much a threat to the primary uptrend, but stocks elevated higher after this trifecta of risk-off factors paused.

Why has the market struggled so hard to advance? Most investors are unaware of the power the financial media has to influence market sentiment at the professional level, where most of the market’s total assets are invested and traded. Mixing politics and finance was once considered irresponsible reporting, but not today. There is an ongoing media effort to undermine the bullish narrative that embraces tax reform, a de-leveraging of the Fed’s balance sheet, a stable dollar, fair trade with China and Europe, a resurgent domestic energy market, and efforts to roll back overzealous government regulations on small businesses.

The financial media has repeatedly warned investors that this market was “overvalued.” These warnings were (and still are) misleading. Somehow, the financial media forgot to report that the stock market has not gone up as much as underlying earnings. As a result, price-to-earnings ratios have been compressed and the stock market remains undervalued relative to both forecasted earnings and interest rates.

The fact that the market has been able to trade through the bearish bias and noise of financial bubbles fomented by cable and print news is in my view a testament to the strength of the underlying economy.

Sometimes numbers matter more than words, and for this market, the numbers are doing the talking now.

About The Author

Bryan Perry

Bryan Perry

Bryan Perry is a Senior Director with Navellier Private Client Group, advising and facilitating high net worth investors in the pursuit of their financial goals.

Bryan’s financial services career spanning the past three decades includes over 20 years of wealth management experience with Wall Street firms that include Bear Stearns, Lehman Brothers and Paine Webber, working with both retail and institutional clients. Bryan earned a B.A. in Political Science from Virginia Polytechnic Institute & State University and currently holds a Series 65 license. *All content of “Income Mail” represents the opinion of Bryan Perry*


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