by Louis Navellier
July 27, 2021
Last Monday, value stocks, like airlines, cruise ships, hotels, and energy stocks were crushed over news that the Covid-19 Delta variant was spreading in unvaccinated countries. In contrast, British Prime Minister Boris Johnson implied that “If we do not reopen now, when will we ever reopen?” and proceeded to open the country on what is being called “Freedom Day.” Although getting vaccinated is important, getting back to normal life is equally as important, especially for the vast majority of vaccinated people who are returning to their pre-Covid lives. Frankly, I think last Monday’s plunge in the Dow Industrials was a gross overreaction, because if anything, Britain, Israel, and the U.S. are an oasis compared to the rest of the world, due to their high vaccination rates.
Interestingly, the plunge in crude oil prices may be somewhat related to the fear of a global economic slowdown as the Covid-19 Delta variant spreads, but United Arab Emirates’ (UAE) recent push to boost its output is expected to be followed by other OPEC members, since they are notorious for cheating on their quotas. Although Saudi Arabia has more OPEC influence than the UAE, other OPEC countries desperately need more money for their domestic purposes. It appears that UAE is “In the race for market share ahead of peak demand,” according to Robin Mills of Dubai-based consulting firm, Qamar Energy. Finally, I should add that seasonal pressures typically weigh on crude oil prices, since, commencing in September, worldwide demand naturally drops, because there are more people in the Northern Hemisphere than the Southern Hemisphere, so I do not expect crude oil prices to resurge anytime soon.
The biggest beneficiary of the Covid-19 Delta variant fear are bond yields, since the 10-year Treasury bond decisively “cracked” the 1.2% level last week and actually hit a low of 1.133% on Tuesday. This means that either inflation fears are ebbing or there is a flight to quality as the Covid-19 Delta fears spread. I believe that although energy prices are moderating, the Covid-19 Delta fear of the global economy slowing is the biggest culprit behind falling Treasury bond yields. The next big test for Treasury bonds will be the “bid to cover ratio” at the upcoming Treasury auctions to ensure that there is sufficient institutional demand at current ultra-low yields.
Speaking of interest rates, the European Central Bank (ECB) on Thursday boosted its bond buying (i.e., quantitative easing) and raised its inflation target to 2%. Interestingly, at the ECB press conference, ECB President Christine Lagarde stressed that its key interest rate of -0.5% will not rise until inflation hits 2%. Previously, the ECB had forecasted that inflation was decelerating, not accelerating, which triggered a lot of questions, since the ECB effectively did an “about face” on its inflation outlook. Government bond yields declined in France, Germany, and Italy after the ECB policy change, plus the euro briefly dropped against major currencies. In my opinion, the ECB just confirmed that interest rates will remain negative for the foreseeable future, since it is highly questionable if inflation will ever hit 2% in the euro-zone.
In the wake of last Monday’s sell-off, I have been getting a lot of questions about the potential next big tipping point that could trigger a market correction. Since positive second-quarter earnings seem to be working and helping to shore up stock prices, the biggest risk that I foresee is merely market mechanics; specifically, ETF spreads. Last Monday, had you sold an ETF, you would likely have been fleeced 1% to 2% by selling your ETF at a discount. Last Tuesday, if you bought an ETF, you could have been fleeced up to another 1% premium. I have been checking the ETF spreads and they started to subside last Tuesday afternoon. However, if we get into any extended, multi-day sell-offs, ETF spreads all too often spin out of control. As a reminder, when trading ETFs, just go to Morningstar.com and check the “Intraday Indicative Value,” which tells you any premium/discount compared to the actual ETF price.
The Commerce Department on Tuesday announced that housing starts rose 6.3% to an annual pace of 1.643 million in June. May’s housing starts were revised down to an annual 1.546 million pace in May, down from a previously reported 1.572 million pace. I should add that building permits declined 5.1% to an annual rate of 1.598 million in June. Lumber prices have also declined 70% since June, after surging 125.3% in the first five months of 2021, so oscillating lumber prices may have adversely impacted building permits.
The National Association of Realtors on Thursday announced that existing home sales rose 1.4% in June to an annual pace of 5.86 million. Median home prices hit an all-time high of $363,300, which is the highest level since the S&P CoreLogic Case-Shiller index commenced back in January 1999. Interestingly, the sale of homes priced between $500,000 to $750,000 rose 81% in the past 12 months, while the sales of home over $1 million surged 119%. As a result of the strong sales activity in high-end homes, median home prices are now increasingly being impacted.
The Labor Department announced on Thursday that weekly unemployment claims in the latest week rose to 419,000, up sharply from 368,000 in the previous week. This was a big surprise, since economists were expecting weekly unemployment claims to decline to 350,000. Continuing unemployment claims in the latest week declined to 3.236 million down from 3.365 million in the previous week, which represents the lowest level for continuing claims since March 2020. The best way to describe the latest weekly unemployment claims is “uneven.”
The Fed now has more “excuses” to remain accommodative due to the uneven progress in the labor market, so next week’s FOMC statement will be closely scrutinized for any significant policy change. Since the ECB was dovish with its statement on Thursday and boosted its quantitative easing, I expect that the Fed will also have a dovish FOMC statement. This means that “Goldilocks” is expected to continue, which is a combination of an accommodative Fed and strong economic growth.