by Louis Navellier

June 16, 2020

Federal Reserve

On Wednesday, the Federal Open Market Committee (FOMC) issued a statement that was downright depressing. The FOMC is predicting that U.S. GDP will contract between 4% to 10% (average of 6.5%) in 2020 and then improve to +5% in 2021. Since a 5% GDP improvement in 2021 will not fully erase all the GDP damage in 2020, the Fed will keep key interest rates low through 2022. In fact, Fed Chairman Jerome Powell said, “We’re not even thinking about thinking about raising rates.”  The FOMC statement clarified that the Fed will be buying $80 billion in Treasury securities and $40 billion in mortgage-backed securities each month, which helped to suppress Treasury yields last week. Fed Chairman Powell also said that, “It could be some years before we get back to those people finding jobs.” Pretty dismal stuff!

Confirming this deflationary threat, the Labor Department announced on Wednesday that the Consumer Price Index (CPI) declined 0.1% in May, the third straight monthly decline. Food prices rose 0.7% in May, but energy prices declined 1.8% (gasoline prices declined 3.5%). Excluding food and energy, the core CPI declined 0.1% in May, the third straight monthly decline. In the past 12 months, the CPI has risen only 0.1%, while the core CPI has risen 1.2%, so we’re still in positive inflation territory for now.

Wholesale prices were more deflationary, long term. On Thursday, the Labor Department announced that the Producer Price Index (PPI) rose 0.4% in May, but in the past 12 months, the PPI and core PPI fell 0.8% and 0.4%, respectively, so longer-term deflation is alive and well on the wholesale level.

It appears that crude oil prices have peaked near-term, since both the American Petroleum Institute (API) and the Energy Information Administration (EIA) reported that crude oil inventories soared 8.4 and 5.7 million barrels, respectively, in the latest week. This news came as a shock, since energy analysts were expecting a 3.2-million-barrel decline, so this news should put downward pressure on prices at the pump.

Chinese deflation is even deeper. China shocked many observers on Wednesday when its National Statistics Bureau reported that its PPI index plunged 3.7% in May, following April’s 3.1% decline. In other words, deflationary pressure is spreading in China as sluggish demand from Europe and the U.S. continues to negatively impact demand. Energy prices continue to decline in China and are offsetting widespread food inflation. Overall, outside of food, China is in the midst of widespread deflation.

On the jobs front, the Labor Department reported on Thursday that initial jobless claims decelerated to 1.54 million in the latest week, down from a revised 1.9 million in the previous week. More importantly, continuing jobless claims declined to 18.9 million in the latest week, down from 19.1 million the previous week and a peak of 23 million. Since initial jobless claims continue to steadily decline, it raises hope of a V-shaped recovery, not the U-shaped recovery that the FOMC is forecasting.

Further complicating matters is that 10.7 million self-employed workers were also eligible for unemployment benefits and many quickly returned to work. Since ADP does not count independent contractors in its payroll survey, it is very possible that these independent contractors, including many Lyft and Uber drivers, were responsible for the distorted reports from ADP and the Labor Department.

All 11 sectors in the S&P 500 had their 20-day moving averages cross their 200-day moving averages early last week, which is typically a good long-term buy signal. The other big development is that the annual Russell index realignment should help boost stocks. Russell’s final index change will be announced June 26th and new stocks will be added to the Russell indices after the markets close June 29th.

One reason that the stock market has been so resilient is that the Fed allowed the 10-year Treasury bond yield to rise from 0.66% to 0.91% in the first week of June. Although the 10-year Treasury bond fell to as low as 0.652% intraday last week, many fixed income investors were spooked by the fact that the Fed allowed Treasury bond yields to rise in early June, so more fixed income investors are turning to dividend stocks, since they could lose a lot of money in bonds if long-term Treasury bond yields continue to rise.

Interestingly, the Fed and ECB have been very aggressively buying lower-grade corporate bonds to help shore up financial markets and boost investor confidence. However, since this aggressive central bank buying pressure is new, many fixed-income investors remain cautious and have concluded that dividend stocks are a preferred alternative to bonds, especially since after-tax yields are far higher in stocks.

Europe is Struggling to Re-Open its Economy After Coronavirus Shutdowns

Europe is undergoing wave after wave of stimulus plans from individual countries and the European Central Bank (ECB). Britain is lagging the rest of Europe in reopening, since their coronavirus restrictions are still in place. The Office for National Statistics reported on Friday that Britain’s GDP contracted a whopping 20.4% in April. Layoffs in Britain’s luxury auto industry continue to spread and now Bentley (part of VW Group) is planning to furlough 1,000 workers, about 25% of its workforce.

Germany recently unveiled sweeping incentive programs for low-priced electric cars as well as hybrid vehicles. In addition to lowering the value-added tax from 19% to 16%, Germany is providing a 6,000 euro ($6,800) incentive for electric vehicles below 40,000 euros ($45,000), and automakers are including another 3,000 euro ($3,400) incentive for a total incentive of 9,000 euros ($10,200). Since the Tesla Model 3 starts at a price of 39,999 euros in Germany, some models may be eligible for these incentives.

This German incentive is clearly designed to boost sales of the VW e-Golf and e-Up models. Currently, VW Group is outselling Tesla in Germany for electric vehicles, thanks to help from its Audi and Porsche subsidiaries, so it will be interesting to see how the fight for electric vehicle sales in Europe unfolds.

Navellier & Associates does not own Tesla or Volkswagen in managed accounts. Louis Navellier and his family do not own Tesla or Volkswagen in personal.

All content above represents the opinion of Louis Navellier of Navellier & Associates, Inc.

Please see important disclosures below.

Also In This Issue

A Look Ahead by Louis Navellier
The Fed Launches an Epic Battle Against Deflation

Income Mail by Bryan Perry
Risk Assets Are Proving Resilient

Growth Mail by Gary Alexander
Both Gold and Stocks Belong in a Balanced Portfolio

Global Mail by Ivan Martchev
“We Print it Digitally” – Fed Chairman Powell

Sector Spotlight by Jason Bodner
Seeing the Stock Market “A Little Differently”

View Full Archive
Read Past Issues Here

About The Author

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.

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