by Louis Navellier
May 24, 2022
The economic news emanating from Britain and the European Union (EU) is continuing to come in weak, as many European countries are expected to slip into a recession this year. For example, real GDP in Britain has declined by 0.1% in March after being revised to unchanged in February. Additionally, Britain’s industrial production declined 0.2% in March for the second straight monthly contraction.
Industrial production in the eurozone was even worse, contracting 1.8% in March as France, Germany, and Spain all contracted, with only Italy bucking the negative trend. I’ll have more to say about Europe in a minute, but the biggest economic collapse is unquestionably happening in China, where April retail sales declined by a whopping 11.1%, April industrial production dropped 2.9%, and manufacturing declined 4.6%. The biggest surprise was that unemployment in China’s 31 largest cities climbed to a high of 6.7% in April, so there is no doubt that China’s Covid-19 lockdowns have devastated that economy.
Although Shanghai is finally starting to reopen, Beijing and other key provinces still struggle under Covid-19 lockdowns. Reports are also emerging that Chinese President Xi Jinping (self-styled “President for Life”) may not retain power as criticism mounts from pro-business members of the Communist Party.
I should add that China’s National Bureau of Statistics announced on Wednesday that new home prices edged 0.11% lower in April, which seems like a tiny number, but it marks the first price decline in over six years (since November 2015). New home prices rose in only 30 of the 70 cities surveyed. This new home price decline comes in the wake of the Evergrande default and China’s government crackdown on housing speculation. Many middle-class Chinese were buying apartments in high rise buildings as an investment, and they never occupied many apartments, so their real estate bubble is being “pricked.”
The big surprise from China was that the People’s Bank of China on Friday cut its benchmark rate on loans of five years or more by 0.15% to 4.45%, down from 4.6%. This is China’s biggest single rate cut since 2019, since the Chinese central bank normally moves in only 0.1% increments. (The People’s Bank of China’s benchmark rate for one-year loans remains at 3.7%.) Clearly, China is making this move because it needs to contain its growing housing crisis and re-stimulate economic growth.
While inflation may be ebbing in China and the U.S., inflation is still accelerating in Britain and the rest of Europe. Britain’s Office of National Statistics announced that consumer prices rose at a 9% annual pace in April, the highest level in over 40 years, and up from a 7% annual pace in March. Soaring rates for electricity and natural gas accounted for much of the escalating consumer inflation in April.
Complicating matters further, energy costs are priced in U.S. dollars, but the British pound has fallen over 12% to the U.S. dollar in the past year, so the cost of imported energy and other items is rising due to a weak pound. The Bank of England has been raising its key interest rates, but so far, these higher rates have not shored up the pound. Even worse, the euro (with its negative key interest rates) has fallen over 13.5% compared to the U.S. dollar in the past year, so inflation in the eurozone is rising even faster.
Germany’s National Statistics Agency announced on Friday that wholesale prices based on its Producer Price Index (PPI) soared 33.5% in April compared to a year ago as energy prices soared 87.5%, led by a 154.8% increase in natural gas and an 87.7% surge in wholesale electricity. Complicating matters further, wholesale metals prices rose 43.3% in the past 12 months. The European Central Bank (ECB) is supposed to raise its key interest rate in July, but right now the ECB’s benchmark rate remains at a negative -0.5%.
Once again, the weak euro is part of the problem. For instance, while gold is flat so far this year in U.S. dollars, it is near a record high in euro terms. Germany’s Finance Minister, Christian Lindner, warned that a weak euro risked driving inflation higher in the eurozone and encouraged the ECB to raise key interest rates. Specifically, after a G7 meeting of finance ministers, Lindner said, “Inflation risks emerge from the development of the external value of the euro, especially in view of central bank policy in the U.S.”
In the last few years, the ECB has been led by French, Italian, and French presidents – in that order – and it is notorious for ignoring the #1 European power, Germany, and its Bundesbank. German central bank governor, Joachim Nagel, who is on the ECB’s rate setting committee, said, “We need to take decisive action. … Negative interest rates are a thing of the past,” adding that, “When you’re in an inflation environment around 7% … I think the conclusive decision out of that is that interest rates have to go up.”
The U.S. is blessed with a strong U.S. dollar, putting downward pressure on commodity prices (since commodities are priced in U.S. dollars). The Wall Street Journal dollar index has risen an impressive 8% this year. A strong dollar is also expected to put downward pressure on import costs and further reduce inflation. Friday’s Wall Street Journal raised the possibility that the euro may hit parity with the U.S. dollar after hitting a low of $1.035 earlier this month. In light of Germany’s soaring PPI and the ECB’s inaction in the face of rising inflation, the euro could dip to 95 cents per dollar in the upcoming months.
The only “glitch” associated with a strong U.S. dollar is that approximately half the S&P 500’s sales are outside of the U.S., so some multinational companies may post slower sales growth from getting paid in weak currencies and operating in slowing economies around the world. As a result, domestic-centered stocks (like Costco or Lowe’s) are expected to continue to outperform some multinational stocks (like McDonald’s or Procter & Gamble) for the foreseeable future.
U.S. Economic Statistics Continue to Outshine Other Nations
The Commerce Department on Tuesday announced that retail sales rose 0.9% in April, just slightly less than economists’ consensus estimate of a 1% increase. The most bullish news was that March retail sales were revised up to a 1.4% increase, up from the 0.7% previously reported. Vehicle sales surged 2.2% in April, which is a good sign that consumers are buying big ticket items. Interestingly, gas station sales declined 2.7% in April, so excluding gasoline sales, retail sales rose an impressive 1.3%. Miscellaneous store retailers soared 4% in April, while spending at bars & restaurants rose 2%. Also notable is that on-line sales rose 2.1% in April. The bottom line is that in the past couple months, consumers are spending more than the underlying rate of inflation, which bodes well for continued strong GDP growth.
I should add that thanks to healthy consumer spending, both Target and Walmart announced that their first-quarter sales rose, but both companies were impacted by higher transportation costs and supply chain woes. While Walmart continues to capture more on-line market share, Target posted impressive same-store sales growth of 3.3%. Unfortunately, Target’s operating margin declined to 5.3% vs. 8.13% in the same quarter a year ago. As a result, it will be interesting to see if Target decides to raise its prices.
I mentioned in a podcast last week that Wall Street is trying to push a narrative that consumer spending is sputtering as consumers struggle to make ends meet. This is definitely happening on the subprime end, since Equifax reported that the proportion of subprime credit cards and personal loans that are 60 days late are now rising faster than normal. Specifically, these subprime delinquencies have risen for eight consecutive months through March. In February, 8.8% of subprime vehicle loans were at least 60 days delinquent, but those delinquent subprime vehicle loans fell to 8.5% in March. Overall, as food and gasoline prices continue to rise, subprime borrowers will likely continue to struggle to make ends meet.
Turning to GDP, the Atlanta Fed revised its second-quarter GDP estimate to an annual pace of 2.4%, down slightly from its previous estimate of a 2.5% annual pace. The Atlanta Fed remains right in the middle of the economists’ consensus estimates, ranging from 1.3% to 4% growth. Due to the big upward revision for March retail sales, I expect that the Commerce Department will upgrade its first-quarter GDP.
The Commerce Department on Wednesday announced that building permits declined 3.2% to an annual pace of 1.819 million, led by a 4.6% decline in single family home permits. Additionally, the Commerce Department announced that new housing starts declined 0.2% to an annual pace of 1.724 million, due to a 7.3% plunge in single family home starts. In the past 12 months, housing starts have risen 14.6%.
The National Association of Realtors on Thursday announced that existing home sales declined 2.4% in April to an annual pace of 5.61 million. In the past 12 months, existing home sales have declined 5.9%. The inventory of existing homes for sale at the end of April is 1.03 million, a 2.2-month supply. Due to this tight supply, median home prices rose to a record $391,200, up 14.9% in the past 12 months.
The Labor Department on Thursday announced that unemployment claims in the latest week rose to 218,000 vs. a revised 197,000 in the previous week. This represents a steady rise in continuing claims, since they bottomed out at 168,000 on April 2nd. Continuing unemployment claims came in at 1.317 million compared to a revised 1.342 million in the previous week. Overall, the labor market remains relatively healthy, so continuing claims should continue to decline.
In summary, our best defense remains a strong offense of fundamentally superior stocks that benefit from high energy and commodity price inflation, especially companies being paid in U.S. dollars. Our stocks benefit from high prices for copper, crude oil, natural gas, fertilizer, lithium, and other high commodity prices. These higher prices are expected to persist as the European Union (EU) strives to break away from Russian energy sources. Normally, natural gas prices can soften in the summer months, while crude oil can ebb in the fall as seasonal demand drops, but due to all the LNG and crude oil exports to Europe, these seasonal pressures are lower. As a result, our big bet in energy stocks is looking to be safe for now.
The electric vehicle (EV) revolution remains alive and well in Europe, but an acute battery shortage has pushed some popular EVs up to a two-year waiting list if you order an EV. Furthermore, due to soaring prices for cobalt, lithium, and nickel, some EV manufacturers have closed their long-term order books. Many of them will likely need to follow Tesla and raise prices due to soaring lithium-ion battery costs.
Navellier & Associates owns Costco Wholesale Corp. (COST), Walmart (WMT), Lowes Companies (LOW), Procter and Gamble Co (PG), Target Corp. (TGT), and McDonald’s Corp. (MCD), in managed accounts. A few accounts own Tesla (TSLA), per client request in managed accounts. Louis Navellier and his family own Costco Wholesale Corp. (COST), and Target Corp. (TGT), via a Navellier managed account and Costco Wholesale Corp. (COST) in a personal account. He does not own Tesla (TSLA), Lowes Companies (LOW), Procter and Gamble Co (PG), Walmart (WMT), and McDonald’s Corp. (MCD), personally.
All content above represents the opinion of Louis Navellier of Navellier & Associates, Inc.
Also In This Issue
A Look Ahead by Louis Navellier
Global Growth is Grinding to a Halt
Income Mail by Bryan Perry
Mixed Messages Will Keep Market Volatility Elevated
Growth Mail by Gary Alexander
Will This Be Another Memorial Day Market to Remember?
Global Mail by Ivan Martchev
Possible Peak In 10-year Treasury Yields
Sector Spotlight by Jason Bodner
What Happened to Risk Assets in 2022?
View Full Archive
Read Past Issues Here
Louis Navellier
CHIEF INVESTMENT OFFICER
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.
Important Disclosures:
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 a 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.To the extent permitted by law, neither Navellier & Associates, Inc., nor any of its affiliates, agents, or service providers assumes any liability or responsibility nor owes any duty of care for any consequences of any person acting or refraining to act in reliance on the information contained in this communication or for any decision based on it.
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 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 holdings identified do not represent all of the securities purchased, sold, or recommended for advisory clients and 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 every investor. 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. Index is unmanaged and index performance does not reflect deduction of fees, expenses, or taxes. Presentation of Index data does not reflect a belief by Navellier that any stock index constitutes an investment alternative to any Navellier equity strategy or is necessarily comparable to such strategies. Among the most important differences between the Indices and Navellier strategies are that the Navellier equity strategies may (1) incur material management fees, (2) concentrate its investments in relatively few stocks, industries, or sectors, (3) have significantly greater trading activity and related costs, and (4) be significantly more or less volatile than the Indices.
ETF Risk: We may invest in exchange traded funds (“ETFs”) and some of our investment strategies are generally fully invested in ETFs. Like traditional mutual funds, ETFs charge asset-based fees, but they generally do not charge initial sales charges or redemption fees and investors typically pay only customary brokerage fees to buy and sell ETF shares. The fees and costs charged by ETFs held in client accounts will not be deducted from the compensation the client pays Navellier. ETF prices can fluctuate up or down, and a client account could lose money investing in an ETF if the prices of the securities owned by the ETF go down. ETFs are subject to additional risks:
- ETF shares may trade above or below their net asset value;
- An active trading market for an ETF’s shares may not develop or be maintained;
- The value of an ETF may be more volatile than the underlying portfolio of securities the ETF is designed to track;
- The cost of owning shares of the ETF may exceed those a client would incur by directly investing in the underlying securities; and
- Trading of an ETF’s shares may be halted if the listing exchange’s officials deem it appropriate, the shares are delisted from the exchange, or the activation of market-wide “circuit breakers” (which are tied to large decreases in stock prices) halts stock trading generally.
Grader Disclosures: Investment in equity strategies involves substantial risk and has the potential for partial or complete loss of funds invested. The sample portfolio and any accompanying charts are for informational purposes only and are not to be construed as a solicitation to buy or sell any financial instrument and should not be relied upon as the sole factor in an investment making decision. As a matter of normal and important disclosures to you, as a potential investor, please consider the following: The performance presented is not based on any actual securities trading, portfolio, or accounts, and the reported performance of the A, B, C, D, and F portfolios (collectively the “model portfolios”) should be considered mere “paper” or pro forma performance results based on Navellier’s research.
Investors evaluating any of Navellier & Associates, Inc.’s, (or its affiliates’) Investment Products must not use any information presented here, including the performance figures of the model portfolios, in their evaluation of any Navellier Investment Products. Navellier Investment Products include the firm’s mutual funds and managed accounts. The model portfolios, charts, and other information presented do not represent actual funded trades and are not actual funded portfolios. There are material differences between Navellier Investment Products’ portfolios and the model portfolios, research, and performance figures presented here. The model portfolios and the research results (1) may contain stocks or ETFs that are illiquid and difficult to trade; (2) may contain stock or ETF holdings materially different from actual funded Navellier Investment Product portfolios; (3) include the reinvestment of all dividends and other earnings, estimated trading costs, commissions, or management fees; and, (4) may not reflect prices obtained in an actual funded Navellier Investment Product portfolio. For these and other reasons, the reported performances of model portfolios do not reflect the performance results of Navellier’s actually funded and traded Investment Products. In most cases, Navellier’s Investment Products have materially lower performance results than the performances of the model portfolios presented.
This report contains statements that are, or may be considered to be, forward-looking statements. All statements that are not historical facts, including statements about our beliefs or expectations, are “forward-looking statements” within the meaning of The U.S. Private Securities Litigation Reform Act of 1995. These statements may be identified by such forward-looking terminology as “expect,” “estimate,” “plan,” “intend,” “believe,” “anticipate,” “may,” “will,” “should,” “could,” “continue,” “project,” or similar statements or variations of such terms. Our forward-looking statements are based on a series of expectations, assumptions, and projections, are not guarantees of future results or performance, and involve substantial risks and uncertainty as described in Form ADV Part 2A of our filing with the Securities and Exchange Commission (SEC), which is available at www.adviserinfo.sec.gov or by requesting a copy by emailing info@navellier.com. All of our forward-looking statements are as of the date of this report only. We can give no assurance that such expectations or forward-looking statements will prove to be correct. Actual results may differ materially. You are urged to carefully consider all such factors.
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 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.
FactSet Disclosure: Navellier does not independently calculate the statistical information included in the attached report. The calculation and the information are provided by FactSet, a company not related to Navellier. Although information contained in the report has been obtained from FactSet and is based on sources Navellier believes to be reliable, Navellier does not guarantee its accuracy, and it may be incomplete or condensed. The report and the related FactSet sourced information are provided on an “as is” basis. The user assumes the entire risk of any use made of this information. Investors should consider the report as only a single factor in making their investment decision. The report is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security. FactSet sourced information is the exclusive property of FactSet. Without prior written permission of FactSet, this information may not be reproduced, disseminated or used to create any financial products. All indices are unmanaged and performance of the indices include reinvestment of dividends and interest income, unless otherwise noted, are not illustrative of any particular investment and an investment cannot be made in any index. Past performance is no guarantee of future results.