by Bryan Perry
September 7, 2022
Inflation is still around, so the Fed is promising to raise rates and draw down their balance sheet rather aggressively “until the job is done,” meaning they want to bring inflation down to their target level of 2%.
Their monetary tool kit is powerful, but it’s a big stretch to see how they can accomplish their objective when the commodity markets, supply chain disruptions, war in Ukraine, crumbling global currencies and geopolitical risks contribute mightily to global inflation factors that remain out of their control.
Friday’s jobs report showed an unemployment rate that ticked up to 3.7% from 3.5%, while July factory orders fell by a bigger-than-forecast 1.0%, adding to the market’s selling pressure, so the technicians that called the move off the June lows a “bear market rally” are getting congratulated by the financial media, as all the major averages turned down when meeting their downward-sloping 200-day moving averages.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
The uncomfortable logic of today’s market landscape calls for investors to root for bad economic news to cross the tape, since good news implies more Fed tightening. The Fed is set to raise the Fed funds rate by 75 basis points at the next FOMC meeting on September 21. In order for the market to be convinced they may pause after that, we must see a steady stream of disappointing data, evidence of a slowing economy.
Current odds reflect a 57% probability the Fed will raise short-term rates 0.75%, per the FedWatch Tool.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
When inflation gets embedded in the economy, it doesn’t surrender easily. Back in 1981, when inflation was roaring, Fed Chairman Paul Volker oversaw the task of fighting inflation with the prime rate peaking at 20.5% in August 1981, when annual inflation was running at 13.5%. At that time, 30-year mortgages were pegged at 18.4% and money markets were the greatest investment of the time, paying 18.9%. The cause of inflation then was rising oil prices, government overspending and rising wages. Sound familiar?
A repeat of 1980-82 is what terrifies the current Fed, hence Powell’s tough talk in Jackson Hole a little over a week ago. Far from being “transitory,” inflation is like a force of nature, once released. With the Fed’s balance sheet at nearly $9 trillion and our national debt at nearly $31 trillion, higher rates would put massive stress on the ability to service what would be soaring interest costs on $31 trillion of federal debt.
When investors are in this uncomfortable “bad news is good news” environment, where stocks tend to rally when the economy is slowing, that is not a good long-term situation. Ultimately, sales and earnings growth will slow, and stock valuations will contract. The market dislikes recessionary forces that call for a “hard landing.” A soft landing, also called a “growth recession,” is what the current Fed is aiming for.
This “threading a monetary needle” is delicate work, and only time will tell how it plays out. The value of the U.S. dollar is trading at levels not seen since the dot-com bubble days, which ended in 2002 with the S&P 500 losing nearly 50% of its value. The dollar is currently the most crowded trade in the world – as global macro events and inflation imply very high levels of uncertainty. The Fed had a chance to stave off inflation in early 2021 by stopping QE much earlier, but instead they embraced the “transitory” message that put them squarely behind the curve, and now they’re in a much more challenging position.
With the bad news now out front – all of which the market knows and is probably fully discounting at this point – the good news has yet to make its mark or be fully appreciated. Let’s turn it into a checklist:
- Last Friday, hourly wages and factory orders were tame, coming in below forecast. Check one.
- WTI oil closed at $86.87 per barrel, matching a multi-month low. Check two.
- The 10-year Treasury rallied to close at 3.19% with an inverted yield curve, implying economic slowing. Check three.
- European funds have seen net outflows for the past 29 weeks. The euro, yen and yuan are all taking out their multi-year lows against King Dollar, and the U.S. bond and stock market remain the most trusted place in the world to allocate capital. Check four.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
From the 20-year chart below, the U.S. stock market is consolidating a monster move higher following a firehose of Covid-19 stimulus spending both here and abroad, as capital flows charged into U.S. stocks.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Most of the 2022 correction is likely complete. While there is a lot of wood still to chop, the long-term bull trend is very much intact. The market just got way ahead of itself. That will be resolved, probably by year-end, if not sooner. Why? The inflation data will likely cool faster than the current consensus expects. The CPI and PPI data for August come out next week, right in front of the next FOMC meeting.
If there was ever a time for the market to pivot higher, it would be on the thrust of these two critical reports being softer-than-expected. That would be check five. The bigger question is when the market will regain its primary uptrend. Investors, by nature, are impatient, and it may be past the mid-term elections before the bull market makes its big move. While that is only two months away, it will feel like a lifetime.
All content above represents the opinion of Bryan Perry of Navellier & Associates, Inc.
Also In This Issue
A Look Ahead by Louis Navellier
The Deadly Calculus of War and Energy Prices in Europe
Income Mail by Bryan Perry
The Fed’s New Directive Is for a “Growth Recession”
Growth Mail by Gary Alexander
Where Did the Disappearing American Male Workers Go?
Global Mail by Ivan Martchev
EU Natural Gas Saga Hits Dramatic Escalation
Sector Spotlight by Jason Bodner
It’s Human to Worry, But It’s Not Very Profitable
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.