July 17, 2018

The 2018 Freedom Fest in Las Vegas started on a positive note as Patrick Byrne, CEO of Overstock.com, came on stage with one of those omni-present red caps; but it seemed a little “off” to me, since the third word looked a bit too long. Sure enough, he took it off and asked the camera to zoom in on the words:


I checked on line and found out that these hats are very popular (“Out of Stock. More on the Way”).

Journalist George Will followed by saying that MSNBC and Fox News have the same business plan: “Talk to your two million core believers and ignore everyone else. That’s four million people between them. Meanwhile, 324 million other Americans are mowing their lawns and working hard every day.”

In the Bull vs. Bear panel, the two bears had a touch of humility, too. Doug Casey said that even though he predicted that Donald Trump would win in 2016, he “didn’t see Trump bull market coming.” Jim Rogers, the other bear, said, “Markets don’t always act rationally…I guess they don’t know what I know.”

As for my panel on “The Decline of Western Civilization,” three of my four panelists didn’t even agree with the premise of the title – that our society was in decline – so I guess there was optimism in the air.

The market was in sync with our conference. The S&P closed Friday above 2,800, its best closing since February 1. The Dow Jones Industrials closed above 25,000 and Nasdaq closed at a record-high 7,825.98.

We’re nearing the six-month anniversary of the first “tariff tantrum” following the minor tariffs imposed on washing machines and solar panels on Monday, January 22 this year. The S&P peaked that Friday, January 26, then careened down over 10% in two weeks to 2581 on February 8. It retested that low a few times, most notably on April 2, but then MEGA-earnings for the first quarter began to flow in. At first, those earnings were called “peak” earnings, so nervous traders forced another test of market lows in May.

But now, we see that MEGA-earnings should continue for Q2. The latest earnings estimates for the S&P 500 are up over 20% from the same quarter a year ago. The S&P 600 is expected to rise 32%, while Ed Yardeni says, “Growth rates are expected to remain high during the last two quarters of the year as a result of the tax cuts,” averaging over 21% for the S&P 500, 22% for the S&P 400, and 34% for the S&P 600.

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

Meanwhile, S&P 500 revenue estimates are expected to increase by 7.9% this year and 5.1% next year. The latest GDPNow estimate from the Atlanta Fed shows second-quarter GDP coming in at 3.9%. This certainly doesn’t seem to be the expected landscape for a new 1930s-type Smoot-Hawley “trade war.”

Earnings season began last week with some of the major financial stocks posting better-than-expected earnings and sales, despite constant warnings that a shrinking yield curve threatens bank earnings.

Is the Shrinking Yield Curve Signaling a Recession?

Last Friday the spread between the 10-year and 2-year Treasuries shrunk to 25 basis points, down from 98 bps a year ago. This worries investors since a flat or inverted yield curve usually accompanies a recession.

Economist Ed Yardeni examined the evidence in some detail last Wednesday (in “Is the Yield Curve Bearish for Stocks?”) and decided that the jury is still out on this indicator. First of all, the more common historical comparison is the 10-year Treasury vs. the Fed Funds rate, where the spread is closer to 1%:

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

The gap is shrinking, but there is a long way to go to zero. The Federal Open Market Committee (FOMC) raised the Fed funds rate by 25 basis points (bps) on June 13 to a range of 1.75%-2.00%, while the 10-year U.S. Treasury bond yield peaked at 3.11% on May 17 and fell to 2.82% in early July, so the spread is just below 100 bps now. If the Fed delays raising short-term rates for a while and 10-year Treasuries stay within half a point of 3%, this gap is not likely to come close to zero any time soon.

Next, we need to look at all 10 Leading Economic Indicators, of which the yield curve is but one. Even though the yield curve has declined, the LEI have collectively risen 6.1% in the last 12 months to a new high. To find the truth, we have to look at the full weight of evidence, not just this one indicator in 10.

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

As this long-term chart shows, historical recessions began long after the Leading Economic Indicators turned down – which they have not done yet. In fact, the LEI are still rising strongly in 2018.

In addition, we have to look at the global bond market. With negative interest rate policies in Europe and Japan, U.S. rates are comparably attractive, so global wealth is drawn to the U.S. dollar and Treasuries. This means the bond market isn’t just driven by the “bond vigilantes” monitoring the U.S. business cycle and our inflation trends, but by foreign capital seeking the best real return for their trillions in liquid capital.

With GDP and earnings soaring, a recession isn’t likely. The yield curve doesn’t contradict that analysis.

About The Author

Gary Alexander

Gary Alexander has been Senior Writer at Navellier since 2009.  He edits Navellier’s weekly Marketmail and writes a weekly Growth Mail column, in which he uses market history to support the case for growth stocks.  For the previous 20 years before joining Navellier, he was Senior Executive Editor at InvestorPlace Media (formerly Phillips Publishing), where he worked with several leading investment analysts, including Louis Navellier (since 1997), helping launch Louis Navellier’s Blue Chip Growth and Global Growth newsletters.

Prior to that, Gary edited Wealth Magazine and Gold Newsletter and wrote various investment research reports for Jefferson Financial in New Orleans in the 1980s.  He began his financial newsletter career with KCI Communications in 1980, where he served as consulting editor for Personal Finance newsletter while serving as general manager of KCI’s Alexandria House book division.  Before that, he covered the economics beat for news magazines. *All content of “Growth Mail” represents the opinion of Gary Alexander*


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