by Louis Navellier

June 30, 2020

The Federal Reserve Building Image

The Fed freaked out the financial markets late last week when they ordered banks to preserve their capital by not raising their dividends while suspending stock buy-backs. Specifically, the Fed told banks that they cannot pay out any dividends that exceed their average quarterly profits in the four most recent quarters.

Even though many big banks had already agreed to suspend stock buy-backs in the second quarter, the Fed barred all banks from any stock buy-backs in the third quarter. The Fed said that limiting shareholder payouts would help keep banks healthy during what could be a prolonged recession.

The bottom line that many investors are now asking is: “What does the Fed know that the stock market does not know?” Is there now risk of a prolonged recession?  Clearly, the prolonged coronavirus risk could possibly delay a full economic recovery, which remains on the minds of all investors.

CNBC reported on Friday that 4.68 million homeowners, representing 8.8% of all active mortgage holders, are now in “forbearance” plans, which allow them to delay their mortgage payments for at least three months. The number of active forbearance plans rose by 79,000 in the latest week, so the growing number of delinquent mortgages is making the Fed worry, which may be why the Fed wants banks to preserve capital. All I can tell you is that I am glad I do not recommend any bank stocks!

The Latest Economic Statistics are Still Mostly Improving

The Labor Department reported last Thursday that new unemployment claims declined to 1.48 million in the latest week, down from 1.54 million in the previous week. Although this was the twelfth straight week of declining unemployment claims, economists were forecasting only 1.38 million new claims, so this latest report was disappointing. With active coronavirus cases now hitting a record high, there is tremendous anxiety about more service sector layoffs, especially in hospitality and travel sectors.

Energy prices are now falling, despite what used to be the peak of the “summer driving season” as the 4th of July approaches. Last Wednesday, the Energy Information Administration (EIA) announced that crude oil inventories rose by 1.4 million barrels in the latest week, which is the third consecutive weekly increase. Crude oil inventories typically decline about now due to rising seasonal demand, but clearly, consumers will likely stay closer to home this summer due to increasing coronavirus restrictions.

The other economic news last week was mixed. The National Association of Realtors reported that existing home sales declined 9.7% in May to an annual pace of 3.91 million – the third straight monthly decline for existing home sales, which are now running at their slowest pace since October 2010. Economists were expecting only a 3% decline, since applications for mortgages are running at the highest level in 11 years. In the past 12 months, existing home sales have declined 26.6%. Sales should improve rapidly whenever the coronavirus restrictions are lifted, especially if today’s low mortgage rates continue.

By contrast, the Commerce Department reported on Tuesday that new single-family home sales surged 16.6% in May to an annual rate of 676,000, up from a revised annual rate of 580,000 in April. This was a pleasant surprise, since economists were expecting an annual rate of only 650,000 in May. Single-family home sales surged 45.5% in the Northeast, +29.0% in the West, and +15.2% in the South but they declined 6.4% in the Midwest in May. The supply of new homes for sale is 5.6 months at the current sales pace.

The Commerce Department reported on Thursday that the trade deficit rose 5.1% in May to $74.3 billion, up from a revised $70.7 billion in April. Exports declined 6.1% in May to $90.1 billion, while imports fell by 1.2% to $164.4 billion. A wider trade deficit tends to make economists cut their second-quarter GDP estimate. Currently, the Atlanta Fed is forecasting a gigantic annualized GDP decline of 46.6% for the second quarter, but most private economists are forecasting a somewhat softer 35% annual decline.

The best news last week was that the Commerce Department reported that durable goods orders surged 15.8% in May, well above the analysts’ consensus estimate of a 10.3% increase. Automotive orders surged 28% in May and Boeing had no order cancellations, so transportation equipment orders soared 80.7%!  Excluding transportation, durable goods orders still rose by a healthy 4% in May. Even if you exclude defense orders, new durable goods orders rose by an impressive 15.5% in May. Overall, there is new hope for a continued strong rebound in durable goods orders in the upcoming months!

Another bit of good news was that the Commerce Department reported on Friday that consumer spending rose a record 8.2% in May, which was more than double the previous monthly record surge in consumer spending since records began in 1959. There is no doubt that the federal stimulus checks helped to boost consumer spending in May, so it will be interesting to see whether consumer spending will continue to grow in June. Household incomes in May were 3.8% higher than they were back in February before the coronavirus outbreak, so most households are holding up better than many economists had expected!

Navellier & Associates does not own Boeing in managed accounts.  Louis Navellier and his family do not own Boeing in a personal account.

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

Please see important disclosures below.

Also In This Issue

Global Mail by Ivan Martchev
My Real-Time COVID Indicator is Flashing Red

Sector Spotlight by Jason Bodner
Go with the Flow (Newton’s 3rd Law of Motion)

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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