A Flat Market

A Flat Market Reflects a Divided Nation

by Louis Navellier

January 24, 2017

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

Last week, for the second straight week, the S&P 500 slipped by a small amount (-0.13%) but it is still up 1.45% so far this year, which is a much more promising start than last year’s 9% collapse through January 20th. A strong U.S. dollar continues to impede many of the multinational stocks in the Dow Industrials, so 20,000 remains a temporary ceiling. The leadership in the stock market is now coming from NASDAQ, which continues to climb steadily higher due to the strength of some of its leading technology stocks.

Stock Markets Index Performance Table

Over the weekend, the news focus switched to conflicts between President Trump and the press, with protestors telling us there will be no 100-day “honeymoon.” Now is the time when actions speak louder than words. Where the market goes next depends on what policies the President and Congress can get passed.

In This Issue

In Income Mail, Bryan Perry sees inflation coming like an onrushing train, and he offers some solutions income investors can make now. In Growth Mail, Gary Alexander continues to focus on the chances for 4% GDP growth this year or next. In Global Mail, Ivan Martchev focuses on the U.S. dollar and feedback from last week’s column. Jason Bodner uses astronomy to dissect the tricky task of separating truth from fiction, and in my Look Ahead I examine what an “America First” portfolio strategy might look like.

Income Mail:
The Latest Trends in Inflation and Interest Rates
by Bryan Perry
No Time Like the Present for Making Changes

Growth Mail:
Can Trump Deliver 4% GDP Growth? (Part 2)
by Gary Alexander
Can Trump Learn from Reagan’s Example?

Global Mail:
Answering Some Reader Feedback
by Ivan Martchev
Can President Trump Sustainably Pressure the Dollar Lower?

Sector Spotlight:
Separating Fact from Fiction – on Uranus, Earth, and Wall Street
by Jason Bodner
Sector Swings – Fact, Fiction, or Fake-Out?

A Look Ahead:
What Does “America First” Mean for the Markets?
by Louis Navellier
Rising GDP Could Fuel Rising Inflation

Income Mail:

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

The Latest Trends in Inflation and Interest Rates

by Bryan Perry

“I hear the train a comin’
It’s rollin’ round the bend…”

--From “Folsom Prison Blues” by Johnny Cash

I can see and hear this inflation train ‘comin’ round the bend. For the last few weeks, I’ve been describing the green shoots of inflationary pressures that are sprouting in our daily lives. They are now showing up in several economic releases from the Fed and other official bureaus. In its most recent Beige Book, for instance, the Fed said, “Price pressures intensified somewhat” in the latter weeks of 2016, with 8 of 12 districts reporting modest price increases including wages. Although we are less than one month into 2017, investors should be actively seeking out sectors that can realize rising revenues and profits because of the wave of price increases in goods and services that will be passed on to businesses and consumers.

Johnny Cash at Folsom Prison Image

Inflation presents special challenges to investors. Even if your investments are growing in value, inflation is still reducing that value on the back end, which is why investment returns must constantly be “adjusted for inflation” to reflect their real returns. So let’s look at an action plan that incorporates certain asset classes and market sectors that will benefit from what will likely be a forward inflation rate of 3% or so (depending on how fast the economy accelerates from a pro-business, pro-growth, Trump-fueled agenda).

Interest rates are coming off levels that are lower than a speed bump, but the bond market is ALWAYS way out in front of Fed policy and calendar data. It’s my view that any whiff of a strong fourth-quarter earnings season and a fast-track Congressional bill to cut corporate income taxes is going to be met with the 10-year Treasury yield rising to 3.0% by the end of February or quite possibly into the March FOMC meeting. A 3.0% yield represents a level not seen since early January, 2014. It is a major technical resistance level from when the economy appeared to be moving toward escape velocity before suffering another setback in growth, primarily related to the meltdown in the energy and other commodity sectors.

United States Ten Year Treasury Note Yield Chart

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

From the 12-year chart (above) of the 10-year Treasury Note yield, the blue lines represent where I believe the 10-year yield will pause as per the horizontal line, while the sloping (moving average) line shows what I believe is a clean upside technical breakout from a multi-year protracted downtrend that officially brought the bond rally to an abrupt end. If the old Wall Street saying “charts don’t lie” has any bearing, then it should provoke income investors to use this current pause to heed some fundamental advice – like “avoid long-term fixed income investments and emphasize growth in equity investments.”

No Time Like the Present for Making Changes

Repositioning is important if you think inflation is coming. This is especially true since inflation has been low or declining for at least the past three decades and any steps you can take to prepare in advance will pay off handsomely, especially over the long-term. If stocks are not an asset class of choice for risk-intolerant investors, then by all means move into shorter-term alternatives, particularly money funds and Treasury Inflation Protected Securities, or TIPS, issued by the U.S. Treasury. They can be bought online through www.treasurydirect.gov in denominations as small as $100. They’re available in terms of 5, 10, and 30 years and pay interest twice annually. Each year the value is adjusted based on the Consumer Price Index (CPI). This gives you regular interest income, adjusted each year for the erosion from inflation.

Rates on TIPS are currently very low. The 10-year TIPS maturing on January 1, 2027 pays only 0.375% and the 30-year TIPS maturing on February 15, 2046 pays just 1.00%. It’s not much to live on, for sure, but aside from money markets it’s an ultra-safe place for parking capital if you are convinced inflation is a clear threat to interest rates. If waiting for bonds to mature seems like a long ordeal, I’ve written in prior updates about shortening bond maturities to 5-7 years as a sound path to maintaining decent yields.

For the majority of us – who need to grow our capital for maximum total returns – a better alternative is to invest primarily in growth-type stocks and funds. In that regard, I would emphasize dividend-paying stocks in sectors that are likely to benefit from inflation. These can include industrials, financials, energy, commodities, materials, chemicals, building materials, and technology.

Real estate is another excellent investment choice for inflation. I see real estate as the ultimate hard asset and it often sees its greatest price appreciation during periods of rising inflation. This is especially true since the use of real estate investment trusts (REITs) is the most liquid form of making real estate a place in your portfolio if you anticipate rising inflation as rents rise across the spectrum. REIT subsectors of choice include data centers, distribution & logistics, prime office, hotel and leisure, industrial, and manufacturing.

What’s interesting is that I’m not reading much about the topic of inflation in the media, at least not to an extent I find noteworthy. The old notion of super-low rates around the globe keeping U.S. rates lower for longer doesn’t square with ECB President Mario Draghi forwarding the idea of tapering back on QE in the Eurozone as early as April, even as the region braces for a “hard exit” by Britain. Growth rates for China, Japan, Germany, France, and the U.K. are all being revised higher in just the past week, which leads me to ponder what will the bond market look like three months from now? In regards to long-dated bonds, my hunch is that “sell first, ask questions later” might qualify as an early 2017 word to the wise.

Growth Mail:

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

Can Trump Deliver 4% GDP Growth? (Part 2)

by Gary Alexander

The deed is done. The Donald is President. His surprise victory reminded me most of Andrew Jackson’s ascension to the top spot in 1829 after the nation was led for 40 years by four Virginians and John Adams, Sr. and Jr. Jackson represented a rebellion from the eastern aristocracy. His followers reportedly stormed the White House and broke the china while drinking a bit too much, until the porter moved the punch bowl onto the lawn. We didn’t see that this time around, but we did see a weekend full of confrontations.

More recently, in the 32 years from 1981 to 2013, America either had a George Bush (Sr. or Jr.) as President or Vice President, or a Clinton as President or Secretary of State. Even materfamilias Barbara Bush said (in 2013), “We’ve had enough Bushes.” Sure enough, Jeb Bush raised over $100 million but wasn’t able to finish better than fourth in the three primaries he entered before resigning. America was ripe for a radical change, either from socialist Bernie Sanders or unpredictable populist Donald Trump.

Last week, I asked, “Will We Ever See 4% GDP Growth Again?” That’s the standard set by Reagan in the 1980s and Clinton in the 1990s, as well as several other Presidents before them. As The Wall Street Journal reported on Inauguration Day (in “Challenges Lurk in the Economy,” January 20, 2017), the economy grew 32.5% in Reagan’s eight years and 34.8% in Clinton’s eight years, but only 15.0% in George W. Bush’s eight years, and 15.3% in Barack Obama’s eight years – that’s about 1.8% per year.

The Journal’s array of charts also shows that “manufacturing jobs as a share of overall jobs” has declined under all 11 Presidents since Eisenhower. That looks like an unstoppable trend, as cheap overseas labor continues to be available to perform the unsatisfying and repetitive drudgery of slapping new products together. America will need more (and better) education for higher-level jobs in order to compete better.

As for the stock market’s performance under various Presidents of the last century, the Journal also reported on January 20, 2017 (“How Markets Have Reacted to U.S. Presidents’ First 100 Days”) that the six Presidents delivering the most growth (a doubling or better of the Dow Jones Industrials) were evenly divided between Democrats and Republicans. Ignoring for the moment the fact that Congress deserves equal credit (or blame) for tax and spending policies, here are the top six market Presidents since 1900:

Best Presidents for Stock Market Growth Table

The “first 100 days” is somewhat of a mythical measuring rod. Only Franklin Delano Roosevelt tried (and succeeded) in changing the direction of a nation in so short a time. The U.S. economy is now such a huge ocean liner that it takes many months to turn around, and years to turn those trends into measurable growth. Although sentiment can change on a dime, actual results usually take longer than 100 days.

The Journal says the stock market has risen in the first 100 days (January 21st to April 20th) under four of the last five Presidents, averaging +2.34% in that sliver of time. Only George W. Bush suffered a falling market in his first 100 days. Barack Obama’s first 50 days were down, but then the market bottomed on March 9, 2009 and kept rising over nearly eight years since then. Ronald Reagan’s first 100 days saw the Dow rise less than 1%, but it fell sharply until August 1982, when a massive 18-year bull market began.

Can Trump Learn from Reagan’s Example?

My most hopeful analogy for the next four years is to compare Trump’s ascension to Ronald Reagan.  Trump can’t hold a candle to Reagan in terms of sound ideology, integrity, charm, and a positive spirit, in my view, but Reagan was also dismissed as an “amiable dunce” by Clark Clifford, the dean of the Eastern Establishment. Reagan was mostly dismissed as a second-rate B-movie actor by most of the press corps.

But Reagan and Trump got elected by going directly to the people, based on the same campaign slogan…

Let's Make America Great Again Reagan Campaign Button Image

Like Trump, Reagan inherited a sub-par economy struggling in a slow-growth mode, unable to recover after that generation’s Great Recession (1973-74). But the similarities end there. Reagan also had to combat double-digit unemployment and interest rates, plus high inflation amid stagnation (stagflation).

In his morning briefing last Tuesday (“Happy Daze,” January 17th), economist Ed Yardeni compared “Trumponomics” (an inelegant but inevitable new word) to Reaganomics, under three broad headings:

#1: Tax reform: Our corporate tax rate is the highest in the developed world, at 39.6%. Trump wants to cut the top federal corporate rate to 15%. Since U.S. businesses currently hold $2.6 trillion in cash offshore, the President can raise taxes while promoting growth if he taxes that cash at just 10%.

As for personal tax rates, back in Reagan’s day, the Kemp-Roth tax cuts (the Economic Recovery Act of 1981) cut rates across the board by 25% in three years. The top rate was cut from 70% to 50%. In his second term, the Tax Reform Act of 1986 cut rates down to two – 15% for the middle class and 28% for the rich. Today, Trump and House Speaker Paul Ryan favor just three brackets (12%, 25%, and 33%).

Here’s another similarity. Yardeni says, “Reagan’s policies did not significantly reduce the tax burden on higher-income individuals. Nor should Trump’s policies.” In fact, Trump’s Treasury Secretary pick Steve Mnuchin told CNBC on November 30, 2016 that “there will be no absolute tax cut for the upper class.”

#2-Deregulation. The best statistical indicator of the volume of red tape binding businesses in America is the annual number of pages added to The Federal Register, the official record of government regulations. The number of new pages peaked under Jimmy Carter with 73,258 pages in 1980. Reagan’s most lenient year was 1986, with 44,812 pages. By contrast, President Obama added a record 97,110 pages in 2016.

Federal Register Page Counts Bar Chart

In a Town Hall in New Hampshire last year, Trump said, “70% of regulations can go,” (Reuters, October 7, 2016). More realistically, a Trump adviser told Reuters on the same day: “Every agency will be asked to rate the importance of their regulations and we will push to remove 10% of the least important.” In his first hours as President, Trump signed an executive order freezing any new regulations. That’s a start.

#3-Trade. This comparison is more cautionary than the first two. Back in 1988, the last full year under Reagan, The Cato Institute published an analysis of Reagan’s trade policies, saying: “The Reagan administration has failed to promote free trade. Ronald Reagan by his actions has become the most protectionist president since Herbert Hoover, the heavyweight champion of protectionists.”

Trump has promised – pardon the expression – to “trump” Hoover and Reagan as a protectionist. But he might be backing off from his most extreme positions. He has plenty of good people advising if he listens. Let us hope that he is just a good negotiator making threats to bring the other side to the negotiating table.

By learning from history – especially the pros and cons of Reaganomics – Trump’s team could return us to 3% per year GDP growth, on average, and maybe 4% one year. If he doesn’t, he may not be re-elected.

Global Mail:

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

Answering Some Reader Feedback

by Ivan Martchev

As many of you may have noticed, some of my Global Mail articles are also posted in different forms on Marketwatch, a high-traffic site where all kinds of people comment on my columns. I don’t have the time to read all of their comments, but once in a while some of my readers offer some valid counterpoints.

My Global Mail from last week (January 18, 2016) regarding the volatility squeeze in the S&P 500 went to Marketwatch on January 20th under the title, “I’m expecting a stock market rally this year, but 2018 is another matter.” An interesting comment came from a fellow under a rather dark avatar (I am omitting the political parts that do not pertain to the subject of my column).

“A couple problems with the logic in this piece:  Low volatility is what you get during a trading range, and during distribution. When volatility picks back up, that’s when you see price action start moving outside the trading range, and it can move in either direction!  If price moves down from here, we would have what is known as a Tower Top in the S&P 500.

“Secondly, no reason is given why ‘earnings growth for the S&P 500 will resume after six quarters of flat-to-slightly-declining earnings.’  One should expect earnings to continue their decline instead.  After all, the results of any policy changes won’t show up in earnings for a couple years.  We're much more likely to see the results of Fed tightening first, which will show up about a year and a half after the first tightening last December…”

Let me address these two comments, as some other readers may have wondered the same thing. First, I have no idea what a Tower Top is, but it is well-known in the trading community that volatility squeezes tend to resolve in the direction of the prevailing trend, which is clearly up. A longer-term trading range is what we had from late 2014 until late 2016. Last week, I pointed out two short-term consolidations (circled, below) which I identified as volatility squeezes in a popular indicator like Bollinger Bands.

Standard and Poor's 500 Large Cap Index Chart

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

I would agree that to a day trader a one-month consolidation may seem like a long-term trading range, but since I do not write these columns with such a hopelessly-misguided short-term view, to me the circled areas are just short-term consolidations. As they say, everything is in the eye of the beholder.

To me, a trading range is what we saw in the 2-1/2 years represented by the blue rectangle below. It is clear that for more than two years sellers hit the market near 2100 on the S&P 500 (or just slightly above that level). It is also clear that buyers flocked in every time the market approached 1800 on the S&P 500.

Standard and Poor's 500 Large Cap Index Chart

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

The S&P 500 broke out of that trading range after Brexit, and then we retested the top of that range just before the November Presidential election, dipping marginally below 2100 before moving higher. Right now, the market is resting after the sharpest surge after any Presidential election in history.

The second point made is that I offered no reason why earnings growth would resume. But I was referring to consensus estimates, which means hundreds of analysts that follow their companies, taken into an aggregate. I have access to a database that measures those consensus earnings, and they show improvement.

The comment further points to Fed tightening as a reason for earnings to decline and for (Trump) policy changes to show up in earnings a year from now. While I agree about the delay in policy changes, this is a very measly Fed tightening do so far. One rate hike in 2015 and one in 2016. In fact, overall there has been loosening of financial conditions in 2016, where Fed policy is only one part of the equation.

Bank of America Merrill Lynch United States High Yield Option Adjusted Spread Chart

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

Credit spreads have declined dramatically in 2016, which means riskier debt has rallied even though Treasuries have sold off; so overall you could say that as the Fed has tightened marginally, the market has loosened financial conditions more. Even though I believe that there will be a recession before President Trump’s first term runs out, based in the statistical distributions of recession in U.S. history, as well as the fact that Trump policies may increase business uncertainty, I don't think that recession will come in 2017.

The economy seems to be picking up steam and a tax cut and repatriation of corporate cash from abroad may give growth a boost in 2017. In the U.S., GDP growth typically correlates to positive earnings growth, so I have valid reasons to believe the rise in consensus estimates for S&P 500 EPS is kosher.

Even though rising earnings don't have a linear relationship with rising share prices and do not represent a guarantee, they do have a correlation, which for now points to somewhat higher share prices 2017.

Can President Trump Sustainably Pressure the Dollar Lower?

The short answer is “no.”

I am making this point because on January 17, 2017 the new President indicated to the Wall Street Journal[1]  that he favored a weaker dollar and – voila! – we saw an immediate dip in the U.S. Dollar Index.

United States Dollar Index Chart

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

I think there is a rather obvious contradiction in Mr. Trump’s dollar statements. He has previously stated that he favors higher interest rates and his pro-growth promises are in part a reason for the latest surge in the U.S. dollar after the election. Higher interest rates – in fact, highest in the developed world – mean a stronger currency. Pro-growth Trump policies with a desire to shrink the U.S. trade deficit and a weaker U.S. dollar simply contradict each other directly.

It is also true that the currency markets were “extended,” as traders like to say, so the U.S. dollar was taking a breather before Mr. Trump’s comments anyway. So if the Master of Policy Tweets says something that obviously contradicts his other statements, it may be taken as a reason for the dollar sell-off; but it is unlikely that Mr. Trump’s comments actually moved the currency markets.

Markets tend to move in zigs and zags. And if the zigs are bigger than the zags we have an uptrend. I think a second leg higher in the U.S. Dollar Index has started and a likely target in due course is 120.

Mr. Trump also indicated last week that he does not care if the European Union survives. While he was pro-Brexit, he surely understands that a failure of the European Union means a failure of the euro. This means a much higher reading for the U.S. Dollar Index as the euro would go into a nosedive under an EU dissolution scenario and at last count the euro still represents 57% of the U.S. Dollar Index.

I think the U.S. dollar is going much higher in due course.

Sector Spotlight:

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

Separating Fact from Fiction – on Uranus, Earth, and Wall Street

by Jason Bodner

You know that I love a good fact. Here’s one to ponder as we sit smack dab in the middle of winter: The planet Uranus has four seasons, like Earth, but seasons on Uranus last 21 years and each pole has 42 years of sunlight followed by 42 years of darkness. Yes, a year on Uranus year lasts 84 earth years! Its northern hemisphere spring equinox occurred in 2007 when the sun was shining above Uranus’ equator. As sunlight reached some areas for the first time in decades, gigantic springtime storms sprang up. The storm systems were as large as North America. So, if you're already at the point of bemoaning the cold and pining for warmer days, then be thankful you only have a few months to go and not another decade or so.

Uranus Image

Facts, ironically, have been sparking a series of hot debates lately. A fact shouldn’t really be debatable, but last weekend, Trump advisor Kellyanne Conway (love or loathe her) was in the hot seat when talking to Chuck Todd about major issues of national importance – like the attendance size of the inauguration! She was quoted as saying that White House Press Secretary Sean Spicer offered “alternative facts” about the attendance levels, to which Chuck Todd replied that alternative facts are really “falsehoods.”

Todd versus Conway Interview Image

Whether or not the inauguration was anemically attended or the largest in history should not really be up for debate. The fact that the media’s portrayal of factual events is being called into question is in itself a big deal. When facts are no longer called facts but are “alternative facts,” what should we all believe?

Are the photos of attendance misrepresented or manipulated? It may not matter as much as being a clever distraction from the inarguably large national demonstrations that took place Saturday. In the end, what really matters is that Donald J. Trump is now the 45th President of the United States. My sincerest hope is that he rises to the privilege and does such a phenomenal job that a second term is earned. If that seems like a long time from now, consider: One presidential term is only about 20% of one season on Uranus!

Inauguration Attendance Image

Sector Swings – Fact, Fiction, or Fake-Out?

Turning to the markets, is the Trump rally “fact or fiction”? This is one reason why the financial markets are so fascinating to so many. Some are drawn to the fluctuations of value because of the stories and inferences that come from them – i.e., seeing things others don’t see. Others are drawn to cold hard data that can be collected and analyzed. Either way, the market offers everyone the same data to observe.

Closing prices are the most basic of indicators, offering investors the ability to agree or disagree about value. A value investor may think a price is too high, while a momentum investor may think a rise is just getting started. These are just two examples of market participants that currently drive price action and will do so for the foreseeable future, despite the growing reality of “artificial intelligence” trading.

In terms of last Friday’s closing prices, the sectors seem to have liked Trumps’ first hours in office as Friday saw all sectors up, save Healthcare and (barely) Industrials. The S&P 500 Healthcare Sector Index was down -0.29% while the Industrials sector index closed nearly flat, -0.04%. But the irksome thing about this market is that the leadership is thin. A few big names are driving returns and much of the rise in sectors comes on the heels of disappointing sales and earnings. I pointed this out last week by singling out Financials’ disappointing earnings as a glaring counterpoint to its price action. It may just be a “hope” rally. While not ideal, “hope” could be the catalyst for a more fundamentally sound bull market to come.

Last week saw Consumer Staples put in a solid +1.93% performance, which helped its month-to-date performance significantly. Financials took a needed break and sold off (-1.64%) for the week, and month-to-date is down -0.60%. This may seem unsettling until we remember that the three-month performance of the S&P 500 Financials index is +18.86%. For three months, Healthcare and Real Estate remain the only negative sectors. Consumer Staples is clinging to a small +0.16% positive three-month performance.

Standard and Poor's 500 Sector Indices Changes Tables

It still feels (to me) like the market is dislocated and unsure of its course. The “washing machine” cycle of sector rotations has calmed somewhat, but the volatility of the past year will not be easily forgotten. The markets may soon reveal their clear direction as White House policy hits and directives unfold.

Financials will eventually verify whether the rally was warranted or not, and other leading sectors will take hold based on strong fundamentals. The heat surrounding this presidency will eventually cool but it may take a while. Occupy Wall Street lasted longer than people thought it would. Standing Rock did, too.  Was Saturday’s march a “one and done” event? Or is there more unrest to come?

The reality is that this country is indeed divided and the task of uniting it, as Trump has promised to do, will not be easy, especially when opinion on him is so polarized. Hopefully the tough stance of Trump and his cabinet will achieve great things for America in the time to come. The markets will continue to reveal their opinion of him. As for us, whether you love or hate Donald Trump, just remember one thing: your right to an opinion is yours and it is Constitutionally-protected. And also, don’t forget that President Donald J. Trump works for you, me, and every other American taxpayer. President Ronald Reagan said it well when he said, “We the people tell the government what to do; it doesn’t tell us.”

Ronald Reagan 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.*

What Does “America First” Mean for the Markets?

by Louis Navellier

In his brief (16-minute) Inaugural Address, our new U.S. President Trump made clear his priority for “America First.”  This week, he will begin to unveil his proposed changes that will most likely be pushed via Paul Ryan’s agenda in Congress.  Assuming Congress will not agree on everything President Trump wants to see, some executive orders may also be implemented, but I suspect that the White House will initially try to use Congress as much as possible.  One thing is certain; I feel Trump’s economic policies will boost GDP growth.  The International Monetary Fund (IMF) agrees.  Last week, the IMF raised its U.S. GDP forecasts for 2017 to 2.3% and 2018 (2.5%).  The IMF also raised its 2017 GDP forecast for Britain, China, Germany, and Japan, but warned of downside risks if protectionism spreads globally.

Last Tuesday, British Prime Minister Theresa May made it clear that Britain is leaving the European Union and that the exit would not be delayed.  As a result, the British pound weakened over concerns about the speed of a “hard Brexit.”   Complicating matters further, Donald Trump implied that he did not care if the European Union stays united.  He also implied that the EU was unduly influenced by Germany.

Reeling from previous Trump criticism about Germany’s immigration policy, German Chancellor Angela Merkel decided to warn Trump openly against protectionist tendencies.  Additionally, Chinese President Xi Jinping at the World Economic Forum in Davos, Switzerland also warned the U.S. and other countries about changing existing trade deals.  Clearly, big exporters like China and Germany want to protect their current trade surpluses; but on Tuesday, Trump told The Wall Street Journal that the U.S. dollar was “too strong,” in part due to Chinese efforts to devalue the yuan.  All this infighting unsettled financial markets last week, since the U.S. will clearly be operating differently under President Donald J. Trump.

As I said up front, “America First” implies superior performance by domestic stocks until we see the dollar weaken and U.S. exports begin to surge.  For the time being, a strong U.S. dollar will impede the earnings for many multinational stocks, making domestic stocks a safer haven.

Rising GDP Could Fuel Rising Inflation

GDP growth may sow the seeds of inflation.  On Wednesday, the Fed released its Beige Book, which said that “price pressures intensified somewhat” in the last few weeks of 2016.  Overall, it appears the Fed is anticipating more inflation – but that mostly depends on how interest rates unfold in the upcoming weeks.

Speaking of inflation, on Wednesday, the Labor Department reported that the Consumer Price Index (CPI) rose 0.3% in December, in line with economists’ consensus estimate.  Excluding food and energy, the core CPI rose 0.2% in December.  For all of 2016, the CPI rose 2.1% and the core CPI rose 2.2%.

Consumer Price Index Bar Chart

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

In 2016, medical service costs rose 3.9% while drug prices rose 4.7%, so it will be interesting to see if the pending repeal of Obamacare impacts medical and drug prices.  Also, housing/rental costs rose 3.6% in 2016 and the Fed may be able to control housing and rental prices somewhat via its interest rate policy.

Speaking of housing, on Thursday the Commerce Department announced that housing starts rose 11.3% in December to an annual pace of 1.23 million.  In 2016, housing starts rose 5.7%.  Single-family home starts rose 4% in December to an annual pace of 795,000 and rose 3.9% in 2016.  Overall, housing starts are running at their second highest pace since 2008 and should remain strong as long as rates remain low.

Right now, much of the brewing inflation is concentrated in the energy patch, but concerns that Saudi Arabia and other OPEC nations may not stick to their quotas in the second half of 2017 are helping to cap crude oil prices near-term.  Furthermore, in addition to the 400,000 barrels per day of new crude oil production in the Gulf of Mexico, the resurgence of shale oil production in the Permian Basin is helping to exacerbate the glut of crude oil in the U.S.  The Energy Information Administration (EIA) projected last week that shale oil production would rise to 4.75 million barrels per day in February, up from a revised 4.71 million barrels per day in January.  On Thursday, the EIA reported that crude oil inventories rose 2.3 million barrels in the latest week, so the glut of crude oil persists.  Also interesting is that the demand for gasoline has been weaker than anticipated.  The EIA reported that gasoline inventories surged six million barrels in the latest week, which was more than three times higher than analysts estimated.


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.

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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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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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