by Bryan Perry
August 23, 2022
Friday’s downbeat close took every sector lower, with the exception of healthcare. Friday was also the first session where there were no genuine attempts to buy the intra-day dip, but it was also a day where $2.3 trillion in equity-linked options expired. Some argue this removes a layer of support for the market, so the S&P hit up against its downward-sloping 200-day moving average, prompting technical selling.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Scores of analysts are waving red flags, saying this bear market rally has run its course, so “look out below.” But a broad look under the hood of the previous decisive move up for stocks off the June low reveals some strong underpinnings that suggest any forthcoming pullback should be well-contained.
Several leading semiconductor and semiconductor equipment manufacturers reported better-than-forecast sales and earnings plus bullish guidance for the third quarter and into 2023. It was thought by some high-profile Wall Street analysts that the chip sector was topping out as companies double ordered, and so demand from automakers, industrial producers, and consumer device makers would hit the wall soon.
Predictions of retail sales crashing due to inflationary pressures have not materialized. The latest retail sales report, released last Wednesday, showed that consumer spending persisted in July across most categories, aided presumably by some relief in falling gas prices. Excluding autos, retail sales were up +0.4% for July with online shopping and building materials for remodeling leading the way.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Second-quarter earnings season did not collapse in the face of a multi-year high for the dollar, rising labor costs, and soaring energy prices. According to FactSet Earnings Insight, 75% of S&P 500 companies reported a positive EPS surprise and 70% reported a positive revenue surprise. For Q3, 42 S&P 500 companies have issued negative guidance and 30 S&P companies have issued positive EPS guidance.
Looking ahead, analysts expect earnings growth of 5.8% for Q3’22 and 6.1% for Q4’22. For the full year, analysts see earnings growth of 8.9%. That’s not quite the stuff of recessions, but more a case of moving capital into the strongest sectors, as any resumption of the recent rally will likely be a very welcome event by cash-rich investors that missed the first rally because of gloom and doom voices in the financial media.
July’s Industrial Production was up 0.6%, well above the 0.3% estimate, with capacity utilization surging back up to 80.3%, fueled by strength in automotive assemblies. And weekly jobless claims fell to 250K from the 266K consensus estimate, underscoring the resilient labor market and demand for skilled labor that is more than offsetting layoffs from businesses that benefitted greatly from the first post-Covid surge.
What has frustrated investors most is that the market never provided the textbook capitulation “whoosh” lower that is supposed to define a true bottom. In fact, fear of such an event is dissipating with each week as the market firms up and investor sentiment moves from real fear to a more neutral stance.
There’s no question that this newfound confidence could be derailed just as easily as it surfaced six weeks ago, but investors already expect another rate hike in September; they expect the housing market to cool further, as it should following a torrid rally; and they expect the Fed to talk tough in Jackson Hole this week, so it’s hard to identify any major bearish catalyst that could throw the market a phantom left hook.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Upward pressure on wages, coupled with relatively stable economic data, undergirds the notion that the Fed will have to keep raising short-term rates to counter rising core inflation in professional services, including rent, transportation, medical services, cars, recreation, clothing, and education. While there has been some relief in gasoline and food prices, professional services that make up core inflation remain hot.
The Fed Funds Rate is currently 2.25%-2.50% with median bank transactions taking place at 2.33% as of last week. Based on the hawkish statements by various Fed officials in just the past few days, there is now a 59% probability for a 50-basis point hike and a 41% probability of a 75-basis point hike September 21.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
The Fed concluded QE in March, but that has a six-to-nine month lag effect before it is fully absorbed in the economy, and the same can be said about Quantitative tightening (QT) to the tune of $95 billion per month, which will be somewhat offset by Congress approving more stimulus to “help” the economy.
The big question is how well the market will manage this transition from easy to tight money. So far, it has responded better than most anyone expected. Fed policy far supercedes other factors that are thought to be serious market risks. And frankly, the market has shown, at least for now, little attenion to the Ukraine war, the energy crisis in Europe, a possible Lehman-style credit event in China’s property market, or the 20% crash in the value of the Japanese yen. While these and other external volatile situations may get a lot of airtime, no one on the floor of the New York Stock Exchange seems to care about such events.
Friday’s price action was very sloppy. Up until then, it hadn’t paid to fight the tape, but with the Fed on deck and the technicals presenting some fresh headwinds, the debate about whether July was a bear market rally or just a “pause that refreshes” will likely be answered by Labor Day. Stay tuned.
All content above represents the opinion of Bryan Perry of Navellier & Associates, Inc.
Also In This Issue
A Look Ahead by Louis Navellier
Winter is Coming, and Europe May Freeze
Income Mail by Bryan Perry
With Crosscurrents Galore, the Market Takes a Step Back
Growth Mail by Gary Alexander
Good News! The Future Will Be Full of Surprises
Global Mail by Ivan Martchev
All-Time High Close in EU Natural Gas
Sector Spotlight by Jason Bodner
Is This the End of a Bull Market – or a Normal Pause?
View Full Archive
Read Past Issues Here
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
Important Disclosures:
Although information in these reports has been obtained from and is based upon sources that Navellier believes to be reliable, Navellier does not guarantee its accuracy and it may be incomplete or condensed. All opinions and estimates constitute Navellier’s judgment as of the date the report was created and are subject to change without notice. These reports are for informational purposes only and are not a solicitation for the purchase or sale of a security. Any decision to purchase securities mentioned in these reports must take into account existing public information on such securities or any registered prospectus.To the extent permitted by law, neither Navellier & Associates, Inc., nor any of its affiliates, agents, or service providers assumes any liability or responsibility nor owes any duty of care for any consequences of any person acting or refraining to act in reliance on the information contained in this communication or for any decision based on it.
Past performance is no indication of future results. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. It should not be assumed that any securities recommendations made by Navellier. in the future will be profitable or equal the performance of securities made in this report. Dividend payments are not guaranteed. The amount of a dividend payment, if any, can vary over time and issuers may reduce dividends paid on securities in the event of a recession or adverse event affecting a specific industry or issuer.
None of the stock information, data, and company information presented herein constitutes a recommendation by Navellier or a solicitation to buy or sell any securities. Any specific securities identified and described do not represent all of the securities purchased, sold, or recommended for advisory clients. The holdings identified do not represent all of the securities purchased, sold, or recommended for advisory clients and the reader should not assume that investments in the securities identified and discussed were or will be profitable.
Information presented is general information that does not take into account your individual circumstances, financial situation, or needs, nor does it present a personalized recommendation to you. Individual stocks presented may not be suitable for every investor. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. Investment in fixed income securities has the potential for the investment return and principal value of an investment to fluctuate so that an investor’s holdings, when redeemed, may be worth less than their original cost.
One cannot invest directly in an index. Index is unmanaged and index performance does not reflect deduction of fees, expenses, or taxes. Presentation of Index data does not reflect a belief by Navellier that any stock index constitutes an investment alternative to any Navellier equity strategy or is necessarily comparable to such strategies. Among the most important differences between the Indices and Navellier strategies are that the Navellier equity strategies may (1) incur material management fees, (2) concentrate its investments in relatively few stocks, industries, or sectors, (3) have significantly greater trading activity and related costs, and (4) be significantly more or less volatile than the Indices.
ETF Risk: We may invest in exchange traded funds (“ETFs”) and some of our investment strategies are generally fully invested in ETFs. Like traditional mutual funds, ETFs charge asset-based fees, but they generally do not charge initial sales charges or redemption fees and investors typically pay only customary brokerage fees to buy and sell ETF shares. The fees and costs charged by ETFs held in client accounts will not be deducted from the compensation the client pays Navellier. ETF prices can fluctuate up or down, and a client account could lose money investing in an ETF if the prices of the securities owned by the ETF go down. ETFs are subject to additional risks:
- ETF shares may trade above or below their net asset value;
- An active trading market for an ETF’s shares may not develop or be maintained;
- The value of an ETF may be more volatile than the underlying portfolio of securities the ETF is designed to track;
- The cost of owning shares of the ETF may exceed those a client would incur by directly investing in the underlying securities; and
- Trading of an ETF’s shares may be halted if the listing exchange’s officials deem it appropriate, the shares are delisted from the exchange, or the activation of market-wide “circuit breakers” (which are tied to large decreases in stock prices) halts stock trading generally.
Grader Disclosures: Investment in equity strategies involves substantial risk and has the potential for partial or complete loss of funds invested. The sample portfolio and any accompanying charts are for informational purposes only and are not to be construed as a solicitation to buy or sell any financial instrument and should not be relied upon as the sole factor in an investment making decision. As a matter of normal and important disclosures to you, as a potential investor, please consider the following: The performance presented is not based on any actual securities trading, portfolio, or accounts, and the reported performance of the A, B, C, D, and F portfolios (collectively the “model portfolios”) should be considered mere “paper” or pro forma performance results based on Navellier’s research.
Investors evaluating any of Navellier & Associates, Inc.’s, (or its affiliates’) Investment Products must not use any information presented here, including the performance figures of the model portfolios, in their evaluation of any Navellier Investment Products. Navellier Investment Products include the firm’s mutual funds and managed accounts. The model portfolios, charts, and other information presented do not represent actual funded trades and are not actual funded portfolios. There are material differences between Navellier Investment Products’ portfolios and the model portfolios, research, and performance figures presented here. The model portfolios and the research results (1) may contain stocks or ETFs that are illiquid and difficult to trade; (2) may contain stock or ETF holdings materially different from actual funded Navellier Investment Product portfolios; (3) include the reinvestment of all dividends and other earnings, estimated trading costs, commissions, or management fees; and, (4) may not reflect prices obtained in an actual funded Navellier Investment Product portfolio. For these and other reasons, the reported performances of model portfolios do not reflect the performance results of Navellier’s actually funded and traded Investment Products. In most cases, Navellier’s Investment Products have materially lower performance results than the performances of the model portfolios presented.
This report contains statements that are, or may be considered to be, forward-looking statements. All statements that are not historical facts, including statements about our beliefs or expectations, are “forward-looking statements” within the meaning of The U.S. Private Securities Litigation Reform Act of 1995. These statements may be identified by such forward-looking terminology as “expect,” “estimate,” “plan,” “intend,” “believe,” “anticipate,” “may,” “will,” “should,” “could,” “continue,” “project,” or similar statements or variations of such terms. Our forward-looking statements are based on a series of expectations, assumptions, and projections, are not guarantees of future results or performance, and involve substantial risks and uncertainty as described in Form ADV Part 2A of our filing with the Securities and Exchange Commission (SEC), which is available at www.adviserinfo.sec.gov or by requesting a copy by emailing info@navellier.com. All of our forward-looking statements are as of the date of this report only. We can give no assurance that such expectations or forward-looking statements will prove to be correct. Actual results may differ materially. You are urged to carefully consider all such factors.
FEDERAL TAX ADVICE DISCLAIMER: As required by U.S. Treasury Regulations, you are informed that, to the extent this presentation includes any federal tax advice, the presentation is not written by Navellier to be used, and cannot be used, for the purpose of avoiding federal tax penalties. Navellier does not advise on any income tax requirements or issues. Use of any information presented by Navellier is for general information only and does not represent tax advice either express or implied. You are encouraged to seek professional tax advice for income tax questions and assistance.
IMPORTANT NEWSLETTER DISCLOSURE:The hypothetical performance results for investment newsletters that are authored or edited by Louis Navellier, including Louis Navellier’s Growth Investor, Louis Navellier’s Breakthrough Stocks, Louis Navellier’s Accelerated Profits, and Louis Navellier’s Platinum Club, are not based on any actual securities trading, portfolio, or accounts, and the newsletters’ reported hypothetical performances should be considered mere “paper” or proforma hypothetical performance results and are not actual performance of real world trades. Navellier & Associates, Inc. does not have any relation to or affiliation with the owner of these newsletters. There are material differences between Navellier Investment Products’ portfolios and the InvestorPlace Media, LLC newsletter portfolios authored by Louis Navellier. The InvestorPlace Media, LLC newsletters contain hypothetical performance that do not include transaction costs, advisory fees, or other fees a client might incur if actual investments and trades were being made by an investor. As a result, newsletter performance should not be used to evaluate Navellier Investment services which are separate and different from the newsletters. The owner of the newsletters is InvestorPlace Media, LLC and any questions concerning the newsletters, including any newsletter advertising or hypothetical Newsletter performance claims, (which are calculated solely by Investor Place Media and not Navellier) should be referred to InvestorPlace Media, LLC at (800) 718-8289.
Please note that Navellier & Associates and the Navellier Private Client Group are managed completely independent of the newsletters owned and published by InvestorPlace Media, LLC and written and edited by Louis Navellier, and investment performance of the newsletters should in no way be considered indicative of potential future investment performance for any Navellier & Associates separately managed account portfolio. Potential investors should consult with their financial advisor before investing in any Navellier Investment Product.
Navellier claims compliance with Global Investment Performance Standards (GIPS). To receive a complete list and descriptions of Navellier’s composites and/or a presentation that adheres to the GIPS standards, please contact Navellier or click here. It should not be assumed that any securities recommendations made by Navellier & Associates, Inc. in the future will be profitable or equal the performance of securities made in this report.
FactSet Disclosure: Navellier does not independently calculate the statistical information included in the attached report. The calculation and the information are provided by FactSet, a company not related to Navellier. Although information contained in the report has been obtained from FactSet and is based on sources Navellier believes to be reliable, Navellier does not guarantee its accuracy, and it may be incomplete or condensed. The report and the related FactSet sourced information are provided on an “as is” basis. The user assumes the entire risk of any use made of this information. Investors should consider the report as only a single factor in making their investment decision. The report is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security. FactSet sourced information is the exclusive property of FactSet. Without prior written permission of FactSet, this information may not be reproduced, disseminated or used to create any financial products. All indices are unmanaged and performance of the indices include reinvestment of dividends and interest income, unless otherwise noted, are not illustrative of any particular investment and an investment cannot be made in any index. Past performance is no guarantee of future results.