by Louis Navellier
August 9, 2022
It was a busy week, with a series of positive economic news that telegraphed, “No Recession Here!”
First, the Institute of Supply Management (ISM) announced that its manufacturing index dipped only slightly to 52.8 in July, down from 53 in June, but any reading above 50 signals an expansion, not a contraction, and manufacturing only represents about 30 percent of the U.S. economy. Furthermore, the U.S. is outpacing purchasing manufacturer indices (PMIs) in most other economies, including China.
Then, on Wednesday, ISM announced that its non-manufacturing (services) index shot up to 56.7 in July, up from 55.3 in June, well above the economists’ consensus expectation of 53.5. Even more impressive, the ISM new orders component surged to 59.9 (up from 55.6 in June) and its business activity component rose to the same stratospheric 59.9 level in July (up from 56.1 in June). This is very bullish and indicative of reaccelerating economic growth, since services account for over half of economic output.
Furthermore, the Atlanta Fed now estimates that third-quarter GDP growth is a positive +1.4% annual pace, and I am expecting an upward GDP estimate revision in the wake of the ISM service index report.
On Thursday, the Commerce Department announced that the U.S. trade deficit plunged 6.2% in June due largely to food and petroleum exports. Specifically, exports rose 1.7% to $261 billion, while imports fell 0.3% to $340 billion. The improving trade deficit may result in upward second-quarter GDP revisions.
The biggest news was the jobs report. On Friday, the Labor Department announced that 528,000 new jobs were created in July, more than twice the economists’ consensus estimate of 250,000 jobs. Furthermore, the June payroll report was revised up to 398,000 from the 372,000 jobs previously reported.
The labor force is finally larger that it was before the pandemic struck nearly 30 months ago, even though the labor force participation rate is 62.1%, well below the pre-pandemic level of 63.4% in February 2020.
The unemployment rate tied a 52-year low of 3.5% in July, down from 3.6% in June. Average hourly earnings rose 0.5% (or 15 cents) to $32.27, and wages have now risen 5.2% in the past year.
Overall, this was a stunning payroll report, which bodes well for third-quarter GDP growth.
We’re Also In the Midst of a Truly Stunning Earnings Announcement Season
Add to these great economic numbers the fact that we have not had the expected “earnings recession,” and all this talk of an economic recession is premature, to say the least. As a result, I find myself agreeing with Fed Chairman Jerome Powell, Treasury Secretary Janet Yellen, and President Joe Biden that the U.S. is not in a real recession, unless you are in the homebuilding business, which is now running at only 42% of its near-bubble peak. As a result, institutional investors have concluded that recessionary fears are overblown, and Treasury bond yields may have peaked in mid-June since inflationary pressures are cooling, so it is time to go bargain hunting and snap up quality stocks with historically low P/E ratios.
This has been a truly stunning announcement season, since flagship stocks like Apple and Amazon have attracted a lot of institutional buying pressure. Major energy stocks are doing even better, as crude oil prices have resumed rising due to tight supply/demand imbalances. The U.S. is “the Saudi Arabia of natural gas” and despite record production, natural gas prices remain near their highest level in 14 years, due to the fact that Russia is rationing their natural gas to Europe, creating chaos on that continent.
Energy stocks will continue to post strong sales and earnings due to high prices for both crude oil and natural gas for at least the next six months, even though crude oil prices should moderate by October as seasonal demand ebbs. The semiconductor shortage persists, which bodes well for our semiconductor stocks. Shipping rates remain elevated, which will help our shipping stocks continue to prosper.
According to the Energy Information Administration (EIA), crude oil production in the U.S. was running a bit lower in May, at 11.6 million barrels per day, so crude oil prices have meandered higher. Although production in North Dakota rose 17.1% in May, to one million barrels per day, New Mexico’s output fell 0.7% to 1.5 million barrels per day, and Texas’ output declined 1% to five million barrels per day. The EIA also said that U.S. natural gas production in May was running at a record pace.
The EIA also reported on Wednesday that the inventory of crude oil rose 4.5 million barrels in the latest week, which is 7% below the 5-year average this time of year. Gasoline inventories rose 200,000 barrels in the same week, while the inventory of distillates declined by 2.4 million barrels. Interestingly, gasoline demand in the U.S. is running below pre-pandemic levels and, according to the EIA, consumers are using less than one million barrels of gasoline a day. Even though gasoline prices have declined for 50 straight days – as the Biden Administration loves to tell us – that’s just because most consumers are driving less.
There is growing optimism that the Russia/Ukraine conflict could thaw in the wake of their recent agreement for grain exports to resume from Ukrainian Black Sea ports. Additionally, this deal also allows the unimpeded access of Russian fertilizers to global markets. Russia is a major producer of fertilizers, which are vital to maximizing food production, so the cost of fertilizer has soared due to the conflict. Hopefully, this first agreement will eventually lead to a cease fire between Russia and Ukraine.
The bears on Wall Street have been overpowered recently by persistent institutional buying pressure as corporate earnings remain strong and optimism spreads due to inflation cooling. The fact is that the U.S. is the oasis in a chaotic world, which is why the U.S. dollar is near its highest valuation in over 20 years. A strong dollar puts downward pressure on commodity prices, since commodities are priced in U.S. dollars. Furthermore, Treasury yields continue to decline from foreign buying pressure due to a run on Chinese banks, and no real yields in Europe or Japan and weaker economies around the world.
This summer, I have been urging investors to “wait for quarterly earnings,” and I will undoubtedly say the same thing in September before third-quarter earnings announcement season begins in mid-October. The Fed’s final interest rate hike will likely occur at the FOMC meeting on September 21st, since the next FOMC meeting is only six days before mid-term elections. There is a lot of excitement about November, since the expected Congressional outcome will likely result in more gridlock, which Wall Street prefers.
Additionally, the U.S. is in the midst of a renaissance of new R&D and manufacturing, since China has become a less reliable trading partner, as it had to dispatch tanks in the streets to squelch protesters not being able to withdraw their deposits. China’s threat to House Speaker Nancy Pelosi, when she visited Taiwan last week, could isolate China further after its military said that it will “not sit idly by” after Pelosi’s visit, adding that her visit would “lead to egregious political impact.”
Also complicating world trade is the fact that mighty Germany’s export machine has been neutered by Russia rationing natural gas, which is causing chaos as energy rationing throttles many European countries. The net result is a strong U.S. dollar and the fact that the U.S. is an oasis for investors.
Last Thursday, the Bank of England hiked key interest rates 0.5% to 1.75%, its biggest rate hike since 1995. The Bank of England also said that Britain faces a protracted recession in the worst squeeze in living standard in 60 years. They said that, due to a surge in natural gas prices, the BofE expects inflation to rise above 13% and remain at “very elevated levels” throughout 2023. Yikes! British foreign secretary, Liz Truss, the front runner to become next Prime Minister, said she wants to review the Bank’s inflation mandate. Britain’s electricity prices have risen over 1,000% since April of 2020 due to its dependence on expensive imported natural gas and a lack of wind generation, so British consumers are very upset.
The wildcard in Europe is that Ukraine would like a ceasefire in its conflict with Russian before winter. The recent agreement between Ukraine and Russia for grain and fertilizer exports to resume in the Black Sea is a good start. If and when there is a ceasefire, the stock market could explode 40% higher within a year in a massive relief rally. The bottom line is that the stock market has plenty of upside potential!
Interestingly, Apple announced last week that it is taking advantage of lower bond yields and selling $5.5 billion in bonds to fund stock buy-backs and dividends. This is a big deal, folks, since all chief financial officers (CFOs) are trained that if their company’s return on equity (ROE) is significantly higher than the rate they can earn on corporate bonds, they should take advantage of low bond yields to buy their stock back and further boost their underlying earnings per share. Sadly, this type of “financial engineering” annoys Senator Elizabeth Warren, who has called stock buy-backs “nothing but paper manipulation.”
Other Senators are now lined up to punish buy-backs. Senator Chuck Schumer has been recently critical of energy companies buying back their stock, while Senator Bernie Sanders wants to ban stock buy-backs entirely. I just want to assure everyone that there is no chance of banning stock buy-backs, since it is one of the first things taught in Finance 101 in virtually all business schools. However, in the spending bill that may pass Congress this weekend, a 1% tax on corporate stock buy-backs was added after carried interest for hedge fund managers was eliminated. This tax on stock buy-backs is a horrible policy and will likely force companies just to pay bigger dividends with the money that they allocate for stock buy-backs.
Navellier & Associates owns Amazon (AMZN), and a few accounts own Apple Computer (AAPL), in managed accounts. Louis Navellier and his family own Apple Computer (AAPL) in a personal account. He does not own Amazon (AMZN) personally.
All content above represents the opinion of Louis Navellier of Navellier & Associates, Inc.
Also In This Issue
A Look Ahead by Louis Navellier
Jobs and Other Indicators Scream “No Recession Here!”
Income Mail by Bryan Perry
The Bulls Face an Array of High Hurdles in August
Growth Mail by Gary Alexander
Could Hyperinflation Ever Happen Here?
Global Mail by Ivan Martchev
No More Recession Talk for Now
Sector Spotlight by Jason Bodner
Do We Dare Utter the Words “Bull Market” Yet?
View Full Archive
Read Past Issues Here
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.
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 firstname.lastname@example.org. 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.