by Louis Navellier

July 21, 2020

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Last week, our friends at Bespoke issued a great report, which showed that through Monday July 13th, the seven largest companies in the S&P 500 – namely, Alphabet (GOOG), Apple (AAPL), Amazon.com (AMZN), Facebook (FB), Microsoft (MSFT), Netflix (NFLX), and NVIDIA (NVDA) as a group – were up 45% year-to-date, while the rest of the S&P 500 had declined 11%. The capitalization weighting of the S&P 500 is notorious for “blowing bubbles” under technology stocks, since back in March of 2000, approximately 54% of the S&P 500 was concentrated in seven technology stocks that eventually burst.

This time around, the S&P 500 is blowing another bubble underneath more technology stocks (Microsoft is the only technology stock that was also in the March 2000 bubble), but I do not expect the current bubble to burst, since most of these stocks will post better-than-expected second-quarter results as well as positive third-quarter guidance. However, as I have mentioned in my podcasts, I am expecting that other bubble stocks – such as Nikola (NKLA) – will likely be “pricked” in the upcoming weeks and months.

Navellier & Associates owns Apple, Amazon, Facebook, Google, Microsoft, Netflix, and Nvidia, in managed accounts but does not own Nikola. Louis Navellier & his family own Apple, Amazon, Microsoft, Netflix but do not own Nikola, Nvidia, Google or Facebook.

China announced on Thursday that its economy grew at a +3.2% annual pace in the second quarter after contracting -6.8% in the first quarter. Since China is one of the first economies to rebound from the coronavirus, the world is watching to see how fast they recover as a possible model for the rest of the world. Even though China’s second-quarter GDP growth exceeded economists’ expectations, many investors were apparently expecting stronger growth, so many Chinese stocks corrected after their parabolic surge in recent weeks. This caused the U.S. financial markets to open weaker on Thursday.

Interestingly, much of the big up and down moves in the U.S. stock market this year happened before the stock market opened, as it took its cue from markets in Asia and Europe. Due to this correlation, it is imperative that Chinese stocks continue to exhibit strength, otherwise U.S. stocks may falter. Let’s hope that China and other countries that have largely recovered from the virus continue to exhibit GDP growth.

U.S. Economic Statistics Continue to Dazzle

The Fed announced on Wednesday that industrial production rose 5.4% in June, significantly higher than the economists’ consensus expectation of a 4% increase. Industrial production for May was also revised to a 1.4% increase, while April was revised to a 12.7% decline. In other words, the increase in industrial production in May and June has not yet erased all the damage in April. The notable industrial production components in June that fared the best were manufacturing (up 7.2%) and utilities (up 4.2%).

I should add that the mining component, which includes crude oil and natural gas production, remained weak and declined 2.9% in June. There is also no doubt that the hot weather in much of the U.S. will likely continue to boost utility output, so I expect industrial production to continue to rise in July.

The Fed released its Beige Book survey on Wednesday in preparation for its upcoming (July 28-29) Federal Open Market Committee (FOMC) meeting. It showed that economic activity improved in all 12 Fed districts. However, the survey also noted that although leisure and hospitality improved, it remained well below levels of a year ago. The Beige Book also discussed weakness in commercial real estate, while financial conditions in the agriculture sector were poor and there was “limited demand and oversupply” in the energy sector. Overall, the Beige Book will likely convince the FOMC to maintain its ultralow interest rate policy and bond buying programs.

The Commerce Department reported on Thursday that retail sales rose 7.5% in June, which was substantially higher than the economists’ consensus estimate of a 5% increase. Also notable is that May’s retail sales gain was revised up to a whopping 18.2% surge!  Fully 10 of the 13 industries surveyed improved in June, led by a 105.1% surge in apparel shops, as well as a 37.4% gain for electronics and appliance stores. Also notable is vehicle sales surged 8.2%, so consumers are buying big ticket items, which is a sign of high consumer confidence. In the past 12 months, overall retail sales have risen 1.1%.

The other big news on Thursday was that new unemployment claims declined by 10,000 to 1.3 million in the latest week – marking the 15th straight weekly decline. Continuing unemployment claims declined to 17.33 million in the latest week, down from 18.06 million in the previous week, which was good news. Due to new coronavirus restrictions being re-imposed, it will be interesting to see if new unemployment and continuing unemployment claims will plateau in the upcoming weeks.

More exciting news came on Friday, when the Commerce Department reported that housing starts were running at a 1.19 million annual pace in June, a whopping 17% higher than May’s annual pace!  Furthermore, now that mortgage rates have fallen below 3%, even stronger housing starts are possible in the upcoming months. As evidence that even higher housing starts may be forthcoming, building permits for new homes rose 2.1% to a 1.24 million annual pace in June. The fact that many suburbs are steadily growing as some people flee the city centers, also bodes well for housing starts in the upcoming months.

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

Please see important disclosures below.

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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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