June 19, 2018

It has been an impressive week for the Nasdaq Composite as the technology-weighted index soared to a new all-time high last Thursday, touching 7,768 before pulling back slightly in Friday’s tariff-related sell-off. Most tech stocks behaved well on Friday, even though it would seem only natural that traders would be inclined to lock in gains going into the weekend. A modest pullback only refreshes the powerful breakout for the Nasdaq as the second quarter ends in two weeks. Fund managers are sure to window-dress their portfolios by adding plenty of winning tech stocks in the days ahead.

On Friday, the White House announced an array of various tariffs on Chinese goods amounting to $50 billion that could escalate to $150 billion by some estimates. As expected, the Chinese government said they would retaliate by the same dollar amount. The market’s reaction for the most part was muted as there is an undertone of bias that is betting that both the U.S. and China will come to terms on fairer trade at some point. Since there has been no negative reaction to the steel and aluminum tariffs placed on the E.U., Canada, and Mexico, the market seems to be supportive of efforts to reduce the U.S. trade deficit.

Oil prices continue to pull back to near-term support at $65 per barrel for West Texas Intermediate crude. Russia and Saudi Arabia, leaders of the deal that curbed crude output and boosted prices to three-year highs, will discuss their next move in Moscow on Thursday. They face growing pressure, not least from President Donald Trump, to increase supply to offset disruptions caused by the economic crisis in Venezuela and renewed American sanctions on Iran.

OPEC and its allies could consider an increase of as much as 1.5 million barrels a day, Russian Energy Minister Alexander Novak told reporters in Moscow last week. That would help offset the supply losses from Venezuela and Iran foreseen by the International Energy Agency. Saudi Arabia has been discussing different scenarios that would raise production by between 500,000 and 1 million barrels a day.

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

With daily oil production now well above 10 million barrels per day, the U.S. will surpass both Russia and Saudi Arabia this year as the biggest producer of oil in the world, which will lower the risk of oil prices spiking too high due to geopolitical events. Domestic energy independence is a welcome long-term trend for the U.S. economy. It’s my take that fund managers want to see WTI crude hold the $65 price level and establish a new support level first before increasing exposure to an equal weighting to that of other sectors that have outperformed, namely technology and consumer discretionary.

If the price of WTI crude does in fact hold at $65, it will behoove income investors to start buying into some of the big integrated oil stocks where they benefit from not just higher oil prices and rising demand for gasoline, diesel, jet fuel, chemicals, and lubricants, but from big refining operations where profits are soaring and the exorbitantly wide spread between Brent and WTI crude prices can pad profits as well.

Dividend yields for the biggest global integrated oil stocks are juicy, ranging from Chevron’s 3.6% to Royal Dutch Shell at 5.6%.)If these stocks witness strong institutional money flows, investors will be able to lock in fantastic inflation-sensitive income in what I believe would be a very attractive entry point. Being that oil prices have come well off their highs, we might see some end-of-the-quarter selling in these stocks as institutional money reduces exposure to their holdings.

Finding higher yielding blue-chip assets that appreciate when inflation and interest rates are on the rise can be a real challenge. Seeing the damage done in the REIT, telecom, MLP, and utility sectors, the tide might still be moving out with the Fed bent on raising short-term rates further. Sure, the dividend yields in these sold-off sectors look very tempting at current levels, but at this time, it feels like one would still be “fighting the Fed” by buying into these sectors aggressively.

Keeping a Sharp Eye Out for Speed Bumps

I noted last week two potential scenarios that could raise market volatility – the future of Deutsche Bank, which incidentally is trading within 50 cents of its all-time low, and the Italian bond market, which has a cold that could turn into the flu, depending on a number of factors. But there are a few other potential speed bumps that could slow the expected second-half rally for the U.S. market. These concerns include:

  • If the Dollar Index spikes to 100-105, it could exact a heavy toll on earnings of America’s biggest multinational companies, most of which make up the S&P 500. This past week saw the Dollar Index trade to a new high for 2018, at 94.79.

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

  • If the Fed executes two more rate hikes in 2018, this risks an inverted yield curve. The current spread between the 10-year and 2-year Treasury Notes shrank to a new 10-year low this past week, 35 basis points, the flattest curve since 2007. It’s interesting to note how the current flat yield curve is not only the product of short-term rates moving up. In fact, the yield on the 10-year and 30-year Treasuries have both declined for the past month off their 2018 highs.

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

And who knows what happens if these events turn south in unexpected ways:

  • If unforeseen events result from the termination of the Iranian nuclear deal…
  • If the current U.S./China mutually-imposed tariffs on $50 billion of goods escalates…
  • If the Republicans lose one or both chambers of Congress at the midterm elections…

(Please note: Bryan Perry does not currently hold a position in DB, CHV or RD. Navellier & Associates does not currently own a position in DB, CHV or RD for client portfolios).

These outlying concerns are currently considered “noise” by the market, and separately they probably are. Collectively, it might be a different story as to how the market prices in these fluid scenarios. Then again, Goldilocks has had her way with defusing any and all threats to the bull market for the past nine years. With second-quarter GDP growth set to possibly surpass 4%, the “noise” level may rise, but the market is looking very constructive from a sales and earnings standpoint as we close the first half of the year.

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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