2017 Starts on Positive Note

2017 Starts on a Positive Note – Much Better than 2016!

by Louis Navellier

January 10, 2017

*All content in the Marketmail Introduction is the opinion of Louis Navellier of Navellier & Associates, Inc.*

Last year at this time, the S&P 500 fell 6% in the opening week of 2016, the worst opening week ever.  This year, the S&P rose 1.7% in the opening week.  Last week, the Dow Industrial index rose 1.02%, but 20,000 remains a temporary ceiling. As soon as we break through 20,000, I expect 20,000 will become more of a launching pad for the overall market.  Last week, once again, we saw low-quality stocks leading the way, but I believe that earnings season will reward stocks that post strong sales and earnings growth.

Applause Image

Every New Year begins with optimism and 2017 is no exception. A week from Friday, we will have a new President who wants to be a cheerleader for America.  This has sparked a new outbreak of “animal spirits,” including a stock market rally and an incredible surge in the U.S. dollar.  The bad news is that a super-strong dollar could cause analysts to revise their earnings estimates lower for multinational stocks.

I expect 2017 will be a spectacular year! Typically, Americans give every new President 100 days or so to implement his agenda before becoming more critical.  This time around, it will be interesting to see how long it takes the Trump administration to implement their agenda before criticism mounts.  With control of Congress, it is possible that the Trump administration may have an even longer honeymoon, despite a largely cynical news media.  Right now, I expect the stock market will be relatively strong through April, but if Wall Street anticipates accelerating earnings growth from corporate tax reform, the rally could last even longer.

In This Issue

I’ll explain more about why I think 2017 will be a “spectacular” year in my Look Ahead, but first Bryan Perry shares some warnings about the bond market, Gary Alexander looks at two great challenges (and opportunities) in foreign and domestic policy, Ivan Martchev takes a closer like at China and copper, and Jason Bodner examines the possibly-misleading opening week of the New Year in the 11 S&P sectors.

Income Mail:
A Warning Shot Over the Port Bow of the Bond Market
by Bryan Perry
Will History Repeat Itself?

Growth Mail:
Foreign and Domestic Challenges (and Solutions) for 2017
by Gary Alexander
A Creative Way to Finance New Infrastructure Spending

Global Mail:
Another “Vinny Gambini Moment” in the HIBOR Market
by Ivan Martchev
Mind Dr. Copper

Sector Spotlight:
New Year’s Day is a Moving Target
by Jason Bodner
In Week #1, Healthcare Leads, Telecom Lags

A Look Ahead:
Earnings Seasons Should Start Strong and then Get Better
by Louis Navellier
The Dollar, at a 15-Year High, Limits the Fed’s Options

Income Mail:

*All content in "Income Mail" is the opinion of Navellier & Associates and Bryan Perry*

A Warning Shot Over the Port Bow of the Bond Market

by Bryan Perry

Of the many news feeds and funnels of research I scan every day, once in a while one will send off a warning flare that gets my attention. Last week, Bloomberg reported that in a television interview, Larry Summers, President Emeritus of Harvard, warned about market dangers, which is nothing out of the ordinary for the outspoken Mr. Summers. More surprisingly, Paul Schmelzing, a Harvard PhD candidate and visiting researcher from the Bank of England, has said that the bond market is set for a crisis worse than 1994, when global government bonds suffered their biggest losses ever.

In studying historic bond crises, Schmelzing has created a model that says the bond market looks set for a worse reversal than in 1994, when 10-year Treasury yields rose from 5.6% in January to 8% in November while the Fed doubled its benchmark rate. Summarizing this researcher’s views, a Barron’s review said, “The current bond market is facing the ‘perfect storm’ of potential steepening of the bond yield curve, monetary policy tightening, and a multi-year period of sustained losses due to a “structural” return of inflation resembling that of 1967.” (Source: Barron’s – “Market Warnings Out of Harvard,” Jan. 4, 2017)

The obvious questions that come to mind are: What was the inflation rate in 1967? Is there a historical correlation that has genuine application today? And why is 1967 significant to today’s bond market?

Inflation was low but rising in 1966. From the historical table below, we can see that the inflation trend accelerated in 1967. The previous two years look eerily similar to the past two years. Like 1965, the inflation rate in 2015 was running around 1% and, like 1966, inflation in 2016 ended at just under 2%.

Annual Inflation Rate Table

Assuming the historical model has any correlation – if inflation ticks up to around 3.5% in 2017 – then bond yields will move decidedly higher, causing severe carnage in the fixed-income asset classes.

Will History Repeat Itself?

The final inflation reading for 2016 – the December Consumer Price Index (CPI) – will be released on January 18th. As such, it will generate a huge buzz as to whether the Fed will be on schedule to hike the Fed Funds rate another quarter point at their March or May FOMC meeting. If the Fed Fund futures market starts to reflect the likelihood of such a possibility, it’s my view that the yield on the 10-year Treasury Note will trade quickly up to 3.0% and spark another round of sharp selling in all classes of bonds with maturities over seven years. The Fed will be quick to react if inflation rises, since the Fed Chairman in 1994, Alan Greenspan, was late to react to inflation and this exacerbated the bond crisis.

Steven Englander, global head of Group-of-10 currency strategy at Citigroup, estimates the greenback could jump over 10% vs. the euro and yen if the president-elect and Congress carry out most of their stimulus programs while the labor market strengthens. “Financial markets may be witness to a massive rally led by the dollar if Donald Trump pulls off the biggest fiscal stimulus push since the 1980s.” (Bloomberg – January 6, 2017 ‘Huuuge’ Dollar Rally Predicted by Citigroup if Trump’s Plan Triumphs”)

This is great news for Navellier & Associates' leading investment equity strategies and yet at some point, a too-strong U.S. dollar could be a drag on earnings – a headwind that is common knowledge in today’s trading landscape. Still, the Dow forges ahead, looking to slice through the 20,000 level like a hot knife through butter.

So far, investors are giving more weight to the strong manufacturing, services, and wage data than to the U.S. dollar. How this all plays out is pretty much anyone’s guess, but the market is liking what it sees so far.

Under this higher-risk scenario for interest rates, investors that haven’t repositioned their bond portfolios and shortened up their maturities would be wise to consider taking action while bond yields have backed down in the past two weeks. The yield on the 10-year T-Note touched 2.62% on December 15th and is now trading with a 2.42% handle. The pullback in yield has provided a nice oversold bounce in utilities, telecoms, REITs, bond mutual funds, and closed-end bond funds – the kind of bounce that I would regard as a post-Christmas gift card that should be cashed in during the run of this current relief rally.

Clearly the economic data is improving with the Atlanta Fed raising its fourth-quarter 2016 GDP estimate to 2.9% from 2.5% (source: Atlanta Federal Reserve, January 3, 2017). This news comes well before any of President-elect Trump’s economic stimulus plans are even put to committee on Capitol Hill. When tax cuts are put in place, along with varying degrees of deregulation, infrastructure spending, and repatriation of capital factored in, it’s not out of the realm of possibility to see GDP growth approach or exceed 4.0%.

If so, it’s my view the Fed would take the Fed Funds rate up from its current 0.50%-0.75% level to 1.25%-1.50% by year’s end. There is really no getting around the fact that inflation and higher interest rates are a byproduct of a strong economy. Some would say “it’s a nice problem to have,” at least for a while; but if the Fed is proactive, they should be able to temper the rate of inflation so that a repeat of 1969 and 1970-style inflation is avoided. Back then, inflation topped out at 6.18% in that cycle.

I remember well the bond market correction in 1994, when the 10-year T-Note yield rose by 2.4% and it was not a pretty sight. High-quality bonds with 10-year maturities lost about 15% in value; 20-year bonds lost over 23% in value,and bonds with maturities of 30 years or more were hammered by almost 28%. Junk bonds saw losses exceed these figures by another 10% to 20%, depending on the underlying issuer.

Percentage Change in Bond Prices When Interest Rates Change Table

I think most retail investors are unaware of what kind of damage can be done to bond portfolios when rates move up only a little. The popularity of leveraged closed-end bond funds is truly a red flag as retirees have reached for yield in this ultra-low rate environment. For tens of thousands of investors the bond correction/crash is already under way.

The good news is that if one takes proactive measures to shorten up maturities to the 5-7-year timeframe, the potential losses of 4% to 9% over the short term are manageable, mainly because a bond maturing in 5-7 years doesn’t feel that far out in the future. That is why bond traders consider this the “sweet spot” on the yield curve when there is risk that future interest rates will rise. Make it a New Year’s resolution to give your bond portfolio some serious attention and not get caught up in one of those “if I had only known, I would have...” scenarios. It’s definitely worth your time because no one wants to be caught in a game of musical chairs when it involves what is supposed to be the safest asset class in one’s portfolio.

Growth Mail:

*All content in "Growth Mail" is the opinion of Navellier & Associates and Gary Alexander*

Foreign and Domestic Challenges (and Solutions) for 2017

by Gary Alexander

“My foreign policy will always put the interests of the American people and American security above all else…. America First will be the major and overriding theme of my administration.”

– Candidate Donald Trump at the Mayflower Hotel, Washington, DC, April 27, 2016

Bryan Perry wrote (above) about bonds and inflation in 1967.  Here’s another parallel from 50 years ago:

On January 10, 1967, President Lyndon B. Johnson began his State of the Union speech like this:

At home, the question is whether we will continue working for better opportunities for all Americans, when most Americans are already living better than any people in history.

Abroad, the question is whether we have the staying power to fight a very costly war, when the objective is limited and the danger to us is seemingly remote.

“So our test is not whether we shrink from our country's cause when the dangers to us are obvious and close at hand, but, rather, whether we carry on when they seem obscure and distant.”

He was referring, of course, to the Vietnam War – the conflict that would lead him to resign from seeking a second full term in 1968.  Imperial overreach has seduced quite a few Presidents before and after LBJ.

It was a century ago, 1917, that the newly re-elected President Woodrow Wilson, barely a month after his second Inauguration, brought America into World War I and forever changed America’s role in the world.  Wilson had campaigned on keeping America out of Europe’s war, but some surprise attacks by German U-boats and some German subterfuge in Mexico pushed America into Europe’s bloody conflict.

On January 19, 1917, the German high command decided to inaugurate a total U-boat war against all seaborne commerce by neutrals or belligerents. Following this declaration, German Foreign Minister Arthur Zimmerman sent a coded telegram to Mexico, urging them to make war with the U.S.  Germany promised Mexico to help them “reconquer the lost territory in New Mexico, Texas, Arizona” if they co-operated.  (Mexico had already fought America three times in Wilson’s first term.) On February 3, a German sub sank the American liner, Housatonic, off the coast of Sicily. More assaults followed.  By the end of February, half a million tons of Allied shipping were on the bottom of the sea. March was worse.

Zimmerman Telegram Image

In the December 29 (2016) Wall Street Journal, David Shribman wrote that “What 1917 Set in Motion, We’re Still Playing Out Today.” The U.S. entry into World War I was one of three major international decisions in 1917 that are still being fought today.  By entering Europe’s conflict – even though caused by Germany’s foolish taunting – America broke a 130-year tradition of “peace, commerce, and honest friendship with all nations, entangling alliances with none” (Jefferson).  World War I was America’s first foray into “obscure and distant” lands.  Later came Korea, Vietnam, Afghanistan, Iraq, and many others.

Other world-changing international events of 1917 included two Russian Revolutions – first, the more peaceful and liberal Kerensky revolution in February, then the more destructive Bolshevik revolution in November. At the same time, the Balfour Declaration of November 2, 1917 said that Britain would “view with favour the establishment in Palestine of a national home for the Jewish people.”  That battle is still being fought between the outgoing and incoming Presidents, the United Nations, and on a global stage.

In a similar triumph of Euro-chutzpah, the British and French designed the post-World War I borders of Iraq, Syria and other nations by using a ruler. The “Sykes-Picot” borders, first drafted in 1916 (below), bore no resemblance to traditional tribal lines. Many future wars grew directly out of this simple map:

Sykes-Picot Agreement Map Image

One of President Trump’s first challenges will be how much he chooses to respond to faraway conflicts. But, like most politicians, he campaigned more enthusiastically about various domestic challenges…

A Creative Way to Finance New Infrastructure Spending

“The conservative rebels have brought down the Progressive Empire without firing a shot, thanks to our remarkable constitutional system. On Election Day, Trump buried the Bush and Clinton dynasties. He also is about to bury the Obama legacy.”

-- Ed Yardeni, January 3, 2017, “Rogue One”

One arena of Trump’s revolution may be how public projects are financed. When I lived in Reston, VA (1989-2004), there were two toll roads linking me to the beltway (east) or Leesburg (west). The Dulles toll road cost $1.50 (round trip) and it was always crowded. The center lanes, for airport access, were free and wide open.  I never did understand why we paid to go slow but got to ride to the airport fast and free.

By contrast, the Dulles Greenway – from the Dulles Airport to Leesburg – was a privately-financed road that was a delight to drive – always fast and open, with great scenery – but it cost over $2 to go 13 miles.

With modern technology, commuters and other drivers can buy electronic EZ-Pass stickers to be scanned at toll booths to pay for their use of any toll road. When I ran for the Virginia State House of Delegates in 1997, I wanted to champion more roads modeled after the successful Dulles Greenway and fewer special-interest boondoggles like the Dulles Toll Road, run by the Metropolitan Washington Airport Authority.

America’s infrastructure crisis is not properly a federal project.  Getting the U.S. Congress involved invites boondoggles for various districts – like “I’ll vote for your Bridge to Nowhere if you vote for a paved road to my Hunting Lodge.”  We should encourage entrepreneurs to build or repair bridges and roads to be paid for by future fees and fares, automatically collected from drivers who use those roads.

Fortunately, there is a precedent in U.S. history. It began 200 years ago at the New York Stock Exchange.

Two centuries ago, on February 25, 1817, the New York Stock Exchange was first organized under its current name.  Earlier that month, several leading Wall Street brokers sent William Lamb to Philadelphia   to find out why the Philadelphia Stock Exchange worked so well.  On his return, the New York brokers drew up a constitution to emulate the Philadelphia Stock Exchange. It was signed by 28 brokers from seven firms. They became the original Board of Brokers for the New York Stock & Exchange Board.

This reorganization came just in time for the birth of one of the first great NYSE success stories, the Erie Canal.  The newly-elected New York Governor DeWitt Clinton turned over the first shovelful of dirt on July 4, 1817.  The Canal eventually ran 363 miles, dropping 555 feet through 83 locks.  It was 40 feet wide and four feet deep and was dug entirely by hand. The building of the Erie Canal created a mania in canal securities, aided greatly by capital inflow from Europe. Everyone thought the Canal would take decades, but Clinton sounded like JFK in 1961, when he said “The day will come in less than 10 years when we will see Erie water flowing into the Hudson.”  And he was right.  It was completed in 1825.

Even though the State of New York and Governor Clinton championed the Canal, it could not have been done without Wall Street financing. By the same token, the Canal put NYSE on the map. “By the time the Erie Canal opened in 1825 (financed by the New York Stock and Exchange Board bonds), the Exchange had already hit an annual trading volume of more than 380,000 shares.  With the western territories open to New Yorkers via the Erie Canal, Manhattan became ever more important in national finance.” (Source: “The Rise of an American Institution: The Stock Market,” by Brian Murphy, from History Now, 2013).

Erie Canal Map Image

The original Erie Canal cost $7 million to build.  The bonds carried a maximum interest rate of 6%. The tolls collected from 1824 to 1882 amounted to $121 million, peaking at $4.5 million a year in 1862.  By whatever calculation, the return-on-investment benefited investors, entrepreneurs and our young nation.

Donald Trump is a builder. His cabinet is dominated by deal makers. By thinking beyond the special interests in Congress and K Street, they can motivate local entrepreneurs to take the risk of investing in toll-financed roads and bridge construction and repair, paid for by privately-funded bonds, then by tolls.

If we can fund infrastructure improvements in the private sector, and somehow manage to stay out of entangling overseas wars, that sounds like a good first step toward prosperity and balanced budgets.

Global Mail:

*All content in "Global Mail" is the opinion of Navellier & Associates and Ivan Martchev*

Another “Vinny Gambini Moment” in the HIBOR Market

by Ivan Martchev

In the timeless comedy, My Cousin Vinny, the last scene takes us to the courtroom in fictitious Beechum County, Alabama, where Vincent LaGuardia Gambini has just won his first case. He is in a hurry to get out of town, terribly worried that the judge may have gotten word from a court clerk in New York City that he had misrepresented himself as to his credentials.

My Cousin Vinny Image

As he hurries out of the court building, Vinny is interrupted by his grateful defendants and the District Attorney, who shakes his hand.

D.A.: “Vinny, you did a terrific job.”
Vinny: “Thanks.”
D.A.: “You got an open invitation any time you come here. We can get us a deer next time.”
Vinny: “OK. Thanks a lot. I feel like if I don't get outta here now, I might never be able to leave.”

Terrified, Vinny sees Judge Chamberlain Haller approaching…

The judge: “Mr Gambini. I have a fax here from the clerk of New York….”

At this point, Vinny is convinced he is about to go to jail (yet again). He lowers his head and lifts his hands so that he can be handcuffed. Then, the towering judge grabs his right hand and begins to shake it.

The judge: “I owe you an apology, Sir. I'm honored to shake your hand. Win some, lose some. Your courtroom manner may be rather unconventional, but I gotta tell you,...you're one helluva trial lawyer.”

Vinny (looking surprised at his fiancé, Ms. Mona Lisa Vito, played by Marisa Tomei) responds:

“Thank you. And you're one helluva judge.”

Overnight CNH Deposit Rate Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

The bears on the Chinese yuan – myself included – must feel like Vinny, in that we are just about to get handcuffed and taken away by the People’s Bank of China (PBOC), which for all intents and purposes acts as the judge in the courtroom of yuan currency trading. The massive borrowing cost spike in offshore yuan funding markets in Hong Kong suggests the PBOC is doing virtually the same type of bear-hunting operation they performed just about a year ago in January 2016. The only difference is that the yield spike in overnight offshore yuan funding markets – referred to as HIBOR rates – was a little smaller a year ago.

The goal with this HIBOR spike, of course, is that it forces bearish positions that are carried on a large amount of leverage to be covered, which in turn causes a sharp appreciation for the  yuan exchange rate (a spike lower in the blue line, below). Since the USDCNY (onshore yuan) and USDCNH (offshore yuan) rates are inverted (yuan per dollar), a spike lower in the chart actually means sharp appreciation. 

Chinese Yuan versus China Foreign Exchange Reserves Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

I think the bears could ultimately be victorious and get a further yuan depreciation in 2017, just like they got further weakness in the yuan after the previous PBOC bear hunt in the HIBOR market in January 2016, which shows a similar yield spike (see first chart). The question begs to be asked: Why is the PBOC engaging in this bear hunt right now? The reason could be the upcoming Trump inauguration on January 20th or simply a need to rein in short-selling of the yuan. I do not believe that an engineered short squeeze in the USDCNH exchange rate will stop the yuan devaluation, but it sure looked sharp last week.

The other big news that came over the weekend came out of the Chinese foreign exchange reserve data, which showed outflows of $41 billion in December, far less than the consensus estimate of $51 billion. For the year as a whole, China's reserves fell nearly $320 billion to $3.011 trillion, on top of a record drop of $513 billion in 2015. The $3 trillion mark looks destined to be taken out next month. But as I have mentioned before in this column, the forex reserve level looks rather suspicious if you net out the foreign borrowings of mainland entities. In that calculation, the level of forex reserves drops to $1.7 trillion.

Also, we don't know what the composition of their forex reserves is and how liquid the forex reserve assets are. The Chinese may have less money on hand to defend the yuan, which may be one explanation as to why they are engineering short squeezes in the HIBOR market. The yuan depreciated by 6.6% against the dollar in 2016, its biggest one-year loss since 1994, which is ironic, since December 1993 marked the previous huge overnight devaluation of the yuan to the tune of 34%. Many China watchers believe this large overnight devaluation was the original trigger of the Asian Currency Crisis of 1997-1998, which originally started as a domino effect in Asian currencies, but quickly spilled over into local economies.

I think the chances for an overnight devaluation are growing by the day, regardless of the PBOC bear hunt in the HIBOR market last week. I do not believe that an orderly slowdown is possible in the Chinese economy. I am very surprised that 2016 was as orderly as it was when it comes to the deteriorating news flow from China – the term “orderly economic slowdown” is an absolute oxymoron when it comes to deflating credit bubbles. Sooner or later, such deflating credit bubbles end up being disorderly and I am watching with great interest if 2017 will be the year when China’s economic unravelling accelerates.

Mind Dr. Copper

The surprising Republican victory created a “Trumpnado” in more than one market, from bonds to stocks to currencies to commodities. But one market where the Trumpnado is just a short squeeze is in copper.

High Grade Copper - Monthly OHLC Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

The reason is that the Trumpnado was supposed to be driven by expected Trump policies that would affect the demand for commodities, driving up demand for capital and maybe creating higher inflation. I have not heard a thing along these lines coming out of the upcoming Trump administration, or the President-elect’s infamous Twitter account, that is anything but bearish for copper, which is why I think the short squeeze in copper may fizzle out and we will make new lows in the commodity market.

Copper Demand by Region Bar Chart

The reason is, you guessed it, China. As the #1 consumer of copper, China is mired in a deflating credit bubble exacerbated by a verbal war with the President-elect over a possible trade war. If there is no trade war with China, which I hope will be the case, I think the price of copper will decline based just on the deflating credit bubble in the Chinese economy. If there is a trade war, the price of copper will decline faster.

Sector Spotlight:

*All content in "Sector Spotlight" is the opinion of Navellier & Associates and Jason Bodner*

New Year’s Day is a Moving Target

by Jason Bodner

New Year's Day seems like it may have been a year ago, already. The pace at which time seems to be moving, coupled with the steady stream of news events in this young year, makes New Year's Day seem like a distant memory. As I said last week, the truth is that January 1st is just another winter day. The significance is obviously what's important – a clean slate, a fresh start; out with the old, in with the new.

The media got carried away labeling 2016 as “the Worst Year ever.” What?! Some tragic celebrity deaths and unfortunate events marred the year, but certainly there are way worse years in the history books.

If it makes you feel better, there are quite a few cultures that celebrate the turning of a year on completely different days. For instance, here's a partial list of New Year’s celebrations in 2016, if you are interested:

  • Chinese New Year was February 8th
  • Korean New Year (Seollal) was also February 8
  • Balinese New Year (Nyeppi) was March 9
  • Iranian New Year (Norwuz) was March 20
  • Ugadi New Year (Telegu and Kanaada) was April 8
  • Sinhalese (Sri Lanka) New Year (Aluth Avurudda) was April 14
  • Tamil New Year (Puthandu) was April 14
  • Jewish New Year (Rosh Hashana) was October 2-4
  • Islamic New Year (Raʼs as-Sanah al-Hijrīyah) was October 3 (note the similarity to Rosh Hashana)
  • Marwari and Gujrati New Year (Diwali) was October 30
  • Aboriginal Murador New Year October 30

New Year's Celebrations Images

If you're anything like me, this past week was one of resetting, cleaning, and preparation – like taking the boxes from the kids’ toys out to the trash, finding a place to store the new toys, and wrapping up family visits and celebration time I couldn't fit into the schedule earlier. Likewise, many market professionals were still on vacation as most schools were closed and parents spent time with their children.

What this all means, logically, is that there was just not much going on last week. Despite the buildup and rhetoric, "All’s Quiet on the Market Front" in the first week of the year. Despite looking very strong, last week was really a ghost week. While buying volume did indeed pick up from the week prior, this was obviously not a difficult hurdle as volumes plummeted going into the Christmas and New Year’s Holidays.

Last week, we saw increasing volumes and much of the trading pointed to buying pressure. Much of it, I suspect, was buying from institutional funds mandated to put money to work in the first trading days of the year. So many funds are indexed, and several have hard-set rebalance times (like early January). So, buying may have been programmatic last week. But make no mistake, many hedge fund managers and institutional investors remained “checked out” last week, so take the positive action with a grain of salt.

In Week #1, Healthcare Leads, Telecom Lags

That said, Healthcare, last year’s black sheep, surged 2.93% in the four-day trading week. Nearly half of this move (+1.4%) came on the first trading day of the year. This may indeed be short covering or capital going to work in anticipation of a new administration being perhaps more favorable for Healthcare.

The Information Technology, Consumer Discretionary, and Real Estate indices all popped above 2% gains for the week. The recent favorites, Financials and Industrials, also saw strong performances but more muted than the year’s leaders thus far. Materials, Industrials, and Financials rose 1% to 2%. The only negative sector was Telecom Services with a 1.16% loss. Again, this index only has 16 member stocks, so while it is concentrated, it is less reliable than indices with higher numbers of member stocks.

Last week was positive, but I will place more stock in the next few weeks, as managers return from their skiing or sunning breaks, kids head back to school, and markets see full participation again. While nothing unusual is expected, the inauguration on January 20th looms as a psychological milestone. Yet, expecting the unexpected is wise with the new administration, if the campaign was any early indication.

Standard and Poor's 500 Weekly Sector Indices Changes Table

Standard and Poor's 500 Quarterly Sector Indices Changes Table

Standard and Poor's 500 Nine Month Sector Indices Changes Table

So, if this coming year brings unexpected bumps in the road, which is nearly inevitable, take comfort that I have outlined at least seven different times of the year when you can hit the reset button for 2017. The first potential reset button is the coming Chinese New Year (Year of the Rooster), falling on January 28th.

Each day is a gift. The other day, I asked a stranger on the beach how his day was and he said, "Each day I open my eyes is a beautiful day!" It's all in the mind. As hard as it can be to master that truth, we all know it. Jean Paul Sartre said, "There is only one day left, always starting over: it is given to us at dawn and taken away from us at dusk." We should all be saying "Happy New Day" to each other, so…

Happy New Day!

Keep Calm and Happy New Day Image

A Look Ahead:

*All content in this "A Look Ahead" section of Market Mail represents the opinion of Louis Navellier of Navellier & Associates, Inc.*

Earnings Seasons Should Start Strong and then Get Better

by Louis Navellier

In the upcoming weeks, the S&P 500 is forecasted to post a 3.2% annual earnings growth for the fourth quarter, but the S&P is also expected to post a 1.25% annual sales decline.  Later on, however, the overall earnings environment is expected to improve immensely as 2017 unfolds.  In April, when the first-quarter sales and earnings are announced, the annual pace of earnings growth is expected to pick up to an 8% annual pace due in part to easier year-over-year comparisons for energy stocks as well as higher natural gas and crude oil prices.  If the Trump administration can get Congress to implement corporate tax reform, then the S&P 500’s earnings could explode to a 20% annual rate.  Mass repatriation of overseas cash is likely to boost corporate stock buy-backs.  In other words, the upcoming months could be quite exciting.

One of the reasons I like the chances for the overall stock market in 2017 is the slow disappearance of shares available to investors.  Last Thursday, The Wall Street Journal featured an excellent article about how the stock market continues to shrink dramatically due to (1) private capital investment, (2) a slump in initial public offerings, and (3) a merger boom.  Essentially, the U.S. is becoming “de-equitized.” (Source: The Wall Street Journal, “Investor’s Lament: Fewer Public Listings”, January 5, 2017).

Public Companies in Disfavor Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Essentially, U.S. stock markets have shed 3,379 listings since peaking at 9,113 in 1997.  As of last June, there were only 5,734 public companies, down 37% in less than 20 years.  That doesn’t even count the reduction of shares in existing listings through aggressive stock buy-back activity.  The fact of the matter is that the overall U.S. stock market is slowly dying and will continue to “melt up” on order imbalances due to persistent inflows from the ETF, mutual fund, and pension industries into a shrinking share base.

The Dollar, at a 15-Year High, Limits the Fed’s Options

The U.S. dollar hit a 15-year high on Tuesday.  However, the dollar abruptly sold off on Wednesday after the Fed released dovish Federal Open Market Committee (FOMC) minutes of their December 13-14 meeting, which cited “considerable uncertainty” about the impact of the incoming Trump administration.  The good news is that the FOMC acknowledged that the prospects for fiscal stimulus, such as infrastructure spending and tax cuts, should boost economic growth in the upcoming years.  The bad news is that the FOMC seems to have no idea how market interest rates would react to all the fiscal stimulus, even though market rates have risen considerably since the election on the anticipation of more government spending.

The FOMC also “expressed the need for caution” about the “substantial changes” in financial conditions.  This essentially means that the FOMC may not be raising key interest rates further until it gets a better handle on the impact of the Trump Administration’s fiscal stimulus.  In fact, Fed Chairman Janet Yellen said, “We’re operating under a cloud of uncertainty at the moment.”  The FOMC cited three primary risks: (1) the impact of a strengthening U.S. dollar, (2) financial instability overseas, and (3) the fact that interest rates are close to zero overseas.  In other words, the Fed may be taking its cues from global market rates moving forward.  Due to low interest rates overseas, I think the Fed should be increasingly cautious, especially since a strong U.S. dollar could hinder exports and possibly begin to impact overall economic growth.

In the meantime, the Fed will surely see that U.S. job growth remains subpar.  The Labor Department reported last Friday that 156,000 payroll jobs were created in December, substantially below economists’ consensus estimate of 183,000.  Also, the October payroll report was revised down to 135,000 (from 142,000), while the November payroll report was revised up to 204,000 (from 178,000).  Average hourly earnings rose a healthy 10 cents an hour to $26 (following a 3-cent decline in November).  Earnings per hour are up 2.9% in the past year, so the wage inflation the Fed has been anticipating has finally arrived.

On Tuesday, the Institute of Supply Management (ISM) reported that its purchasing manufacturing index rose to 54.7 in December, up from 53.2 in November.  The ISM manufacturing index is now at its highest level in three years despite a strong dollar, but the Fed reported that industrial production rose only 0.1% in November and declined 0.6% in the past year, so there is definitely room for improvement here.  Since the Fed is “data dependent,” I will be watching the economic statistics very closely in upcoming weeks.


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It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities in this list. Click here to see the preceding 12 month trade report.

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 intended as an offer or 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.

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 of any offer 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 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 you. 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. Results presented include the reinvestment of all dividends and other earnings.

Past performance is no indication of future results.

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 intended or 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 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 performances should be considered mere "paper" or proforma performance results. Navellier & Associates, Inc. does not have any relation to or affiliation with the owner of these newsletters. There are material differences between Navellier & Associates' Investment Products and the InvestorPlace Media, LLC newsletter portfolios authored by Louis Navellier. The InvestorPlace Media, LLC newsletters and advertising materials authored by Louis Navellier typically contain performance claims that do not include transaction costs, advisory fees, or other fees a client may incur. As a result, newsletter performance should not be used to evaluate Navellier Investment Products. The owner of the newsletters is InvestorPlace Media, LLC and any questions concerning the newsletters, including any newsletter advertising or performance claims, 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. Request here a list of recommendations made by Navellier & Associates, Inc. for the preceding twelve months, please contact Tim Hope at (775) 785-9416.

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