June 26, 2018

Over the last few weeks, I have written about some potential “speed bumps” to the primary bull trend. While I don’t expect all the stars to line up in favor of the bulls, it has been nice to be able to check off some of the potential market hazards on the bear’s short list. Here are three of their most recent concerns:

#1: Rising oil prices: OPEC has agreed to raise production by 600,000 barrels per day. Investors were hoping for a one-million-barrel-per-day increase, and though the price of oil finished higher on Friday at $68.58 per barrel for West Texas Intermediate, it is still 5.5% below where it was trading in late May. With production picking up both domestically and internationally, oil prices should stabilize soon.

Check One.

#2: Rising tariffs. The U.S. imported 1.26 million vehicles from Europe in 2017, according to LMC Automotive. About half came from Germany, according to Evercore ISI. Most are luxury vehicles. BMW, Mercedes, and VW operate U.S. plants, but most of their U.S.-sold vehicles come from Europe.

On Friday, President Trump signaled that, without concessions, he would penalize European-made vehicles sold to Americans “based on the tariffs and trade barriers long placed on the U.S. and its great companies and workers by the European Union. If these tariffs and barriers are not soon broken down and removed, we will be placing a 20% tariff on all of their cars coming into the U.S.”  The Germans blinked. Germany’s leading auto manufacturers are now in favor of eliminating all import tariffs.

Check Two.

#3: Rising Democrats: As to the upcoming mid-term elections, now less than five months away, a new USA Today/Suffolk University Poll finds that the political landscape still favors the Democrats, but not by as much as earlier this year. In the poll, Democrats have an advantage of six percentage points, 45% to 39%. At the end of February, however, Democrats had a 15-point edge. Given the latest economic data – and the especially strong employment and wage data – James Carville’s now famous phrase, “It’s the economy, stupid,” will undoubtedly be widely quoted on Republican placards during the campaign season.

Come November 4th, if the economy is still on pace to grow GDP at an annual rate north of 3.5%, people that aren’t that fond of Donald Trump but are fond of their rising paychecks will vote with their wallets for Republicans. To that point, the Republicans will very likely maintain control over both the House and the Senate with the stock market finishing the year in rally mode that takes the S&P to my target of 3,000.

Check Three.

In addition, the latest consumer confidence reading is at a 17-year high, suggesting that economic growth in the second quarter is likely to have improved from Q1. Overall, confidence levels remain at historically strong levels and should continue to support solid consumer spending in the near-term.

 

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

“FOMO” Will Make Domestic Dividend Growth Investing the Second-Half “Sweet Spot”

Any wave of good news could fuel a “fear of missing out” (FOMO) rally in the stock market.

While headlines of the Dow being down for the year (-0.56%) and the S&P 500 up a scant 3.04% as of last Friday’s close, there has been a sizzling spring-and-summer rally taking place among big-cap technology and small-cap stocks. Shares of most FAANG stocks are surging, taking the Nasdaq to new highs (+11.4% YTD) with Apple the only laggard. It is interesting that the Nasdaq is trading at new highs without the participation of mega-cap Apple, something that many analysts thought could not happen.

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

As for small-cap stocks, the U.S. dollar rally coupled with the expanding U.S. economy and flight from emerging market currency volatility has the small-cap Russell 2000 higher by 9.8% for 2018 YTD.

The big-cap tech and small-cap sectors are viewed quite differently by investors in how they are valued and traded. The strength of the domestic economy is certainly at the forefront of why these two market sectors are outperforming, but one could say that about any sector. Where there is a common denominator is that small-cap technology companies are leading the Russell 2000 higher. The strong fund flows into U.S. stocks with the force of a firehose is finding its way primarily into technology stocks.

Where I see the market broadening out in the second half is into dividend growth stocks. The strong dollar will keep a lid on commodity inflation and the Fed is less apt to raise interest rates if inflation is tame. With many of the best blue-chip companies that double their dividends on average every seven years essentially flat for the year, it’s my view that we’ll see strong rotation from impatient money trapped in value stocks and into premier dividend growth stocks for “fear of missing out,” or FOMO.

If the most recent FactSet data regarding forecasted earnings is even close to accurate, the Q2 reporting season is going to be full of upside earnings fireworks and announcements of hefty dividend increases from literally hundreds of companies. For Q2 2018, the estimated earnings growth rate for the S&P 500 is 19%. If 19% is the actual growth rate for the quarter, it will be the second highest growth rate since 2011.

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

Among the 505 stocks currently in the S&P 500, 415 pay a dividend, and they increased their payments by an average of 13.9% in the first quarter while not a single company in the S&P 500 cut its dividend.

Companies are sitting on a record pile of cash. Their earnings have been boosted by lower corporate tax rates, which has caused many companies to repatriate cash from operations abroad. So far, the largest dividend hikes of 2018 have come from energy companies, as they start to rebound from low energy prices that pressured earnings. But it won’t be just the energy companies gushing cash to shareholders. It will be a widespread payday for investors that I expect will be realized in stock appreciation. Ka-ching!

About The Author

Bryan Perry

Bryan Perry
SENIOR DIRECTOR

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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