After another Mid-Week Scare

After another Mid-Week Scare, Stocks Close on a High Note

by Louis Navellier

June 20, 2017

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

Last week, the Dow Industrials set a new record high above 21,384, so the 20,000 “barrier” has become a “launching pad” rather than a ceiling, as I had predicted here last January.  Last week, the S&P 500 rose by barely one point (+0.06%) but NASDAQ suffered another panic attack, closing down 0.9% for the week.

On Wednesday, the Fed raised key interest rates another 0.25%, but instead of being “dovish,” their public comments sounded surprisingly “hawkish.”  Specifically, the Federal Open Market Committee (FOMC) announced that they would make one more rate hike this year “if the economy performs as expected.”

This turn of events briefly caught Wall Street by surprise, generating a brief sell-off late Wednesday and early Thursday, including an intraday retest of the lows of the NASDAQ 100 (QQQ), but then trading volume dried up after the selling pressure was largely exhausted when the algorithms that generated short-term trading and high-frequency trading (HFT) order flows exhausted the sell-side volume in tech stocks.

Independence Hall Image

In the next two weeks, I expect the market will rally heading into the long July 4th holiday weekend, since it is downright un-American not to rally going into July 4th, which falls on a Tuesday this year.  (We’ll celebrate along with you by waiting until Thursday, July 6thto publish our post-holiday MarketMail.)

In This Issue

This week, Bryan Perry argues that economic fundamentals are far more important market indicators than political concerns.  Gary Alexander looks at recent market history to put aside fears of a tech stock (or overall market) bubble any time soon.  Ivan Martchev explains why commodities and the dollar are moving in tandem when they usually move in opposite directions.  Then Jason Bodner uses the multiplicity of stars in the universe to focus on the smaller stocks off the media’s radar.  Then I’ll close with a closer look at the Fed’s data dashboard and the likely outcome of their announced plan to reduce their bloated balance sheet.

Income Mail:
Mid-Year Market Gut Check
by Bryan Perry
Politics NOT as Usual

Growth Mail:
Are We in Danger of Another Tech Stock Bubble?
by Gary Alexander
Is the Overall Market Near a Bubble Condition?

Global Mail:
Commodities and the Dollar: Strange Bedfellows
by Ivan Martchev
China’s Role in the Commodity Price Collapse

Sector Spotlight:
Inching Our Way to the Stars
by Jason Bodner
The Financial Press Focuses on a Small Array of Big Stocks

A Look Ahead:
Why the Fed May Delay Further Rate Increases
by Louis Navellier
The Fed’s Balance Sheet Strategy Should Help Stocks

Income Mail:

*All content of "Income Mail" represents the opinion of Bryan Perry*

Mid-Year Market Gut Check

by Bryan Perry

There is a rising tide of sentiment that the fixed-income, commodity, and equity markets are at a major inflection point. Investors are caught up in a whirlwind of cross currents of political good versus evil, right versus wrong, fear versus confidence, and complacency vs. a crisis-focused media.

As Edward Luce of the Financial Times writes: “Washington and Wall Street cannot both be right. On the one hand, the future of the liberal international order hangs in the balance. Donald Trump is a loose cannon with record low approval at this stage for any presidency. Washington and the world are in a state of fear. On the other, Wall Street sees only blue skies ahead. US stock indices keep breaking record highs,” (source: “Wall Street Turns a blind Eye to Trumpian Risks,” June 7, 2017).

Even though the Fed raised short-term interest rates for the second time this year to a new range of 1.00%-1.25%, they did so as the rate of inflation was tapering off from 2.0% to 1.5%, per their favorite indicator, the Personal Consumption Expenditures (PCE) Index, which excludes food and energy prices. (The core PCE price index measures the prices paid by consumers for goods and services without the volatility caused by the movements in food and energy to reveal underlying inflation trends.)

Personal Consumption Expenditures Price Index Chart

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

When the year began, expanding stock valuations were supported by the expectation of rising inflation, prospects for a tax cut stimulus plan, a proposal for healthcare reform, the passage of financial reform in the House of Representatives, and the expectation of a strong infrastructure program. The combination of these goals made intuitive sense for the bullish camp to keep the wagons rolling with new record highs being recorded on an almost daily basis – despite all the political obstacles facing this ambitious agenda.

The political atmosphere is as hostile as any of us can remember and the chance of passing tax reform, healthcare reform, financial reform, infrastructure spending, and just about anything meaningful have receded and continue to deteriorate with several leading Republicans conceding that we shouldn’t expect anything to come to a vote or become law before 2018. And yet the markets continue to shrug off the reality of the dirty business of politics and how campaign promises can go right up in smoke.

Politics NOT as Usual

In the bulls’ defense, it takes more than a political donnybrook, fake news, and hour-by-hour fact checking by news media zealots to override the macro-tide of rising global earnings. Short-term corporate earnings fundamentals for the U.S. are strong, while the growth in the Eurozone and Japan is finally picking up.

In light of Donald Trump’s threat to pull out of the World Trade Organization, the potential conflict with China over North Korea’s nuclear ambitions, the expanded bombing of Russian-supported targets in Syria, the rollback of expanded ties with Cuba, and the fallout with Germany’s Angela Merkel over the slack NATO funding by European members, these international conflicts pale in the shadow of structural economic growth on a global scale that is gravitating from developed economies to emerging markets.

Even during Bill Clinton’s darkest hour in 1998-99 – blue dress drama and all – his personal crisis was no match for the Internet revolution that was changing the world as we know it. Markets are now in a similar cycle where the secular advances in quarterly earnings can’t be denied or derailed by political events.

In the worst U.S. political crisis of the postwar era, the resignation of President Richard Nixon on August 8, 1974 had a definite market impact, but it came on top of the loss of Vietnam and the 1973 OPEC oil embargo imposed against the U.S. in retaliation for the U.S. support of the Israeli military. After peaking in January 1973, the S&P 500 fell 48% over the next 21 months, hitting bottom right after President Nixon’s resignation (see Armstrong Economics, “How Did The US Markets Respond During Watergate?”).

Standard and Poor's 500 Cash Index Chart

The 1974 crisis was compounded by the fact that Gerald Ford did little to restore confidence and then Jimmy Carter essentially destroyed America’s global street credibility. The annual consumer inflation rate spiked to 10% by 1979. And then along came Ronald Regan in 1980 and the Dow gained 131% over his presidency (source: Global Macro Monitor – “Presidential Stock Market Returns,” Dec. 17. 2016).

Presidential Stock Market Performance Bar Chart

Today, the stock market under Trump doesn’t have the support of massive central bank stimulus, as was the case under Barack Obama. In fact, the market is gaining ground even though the Fed is raising rates.

At the risk of overusing the phrase “Goldilocks” scenario, it’s hard not to see the market building on its already solid first-half 2017 gains. Markets are a forward discounting mechanism and look out six to nine months for perceived results. I would contend that market participants have perhaps resigned themselves to the idea that nothing of any significance will happen in the way of Trump legislation in 2017 and to look forward to 2018 as the soonest possible time for bills to become laws. As Barack Obama found out, there are only so many Executive Orders a president can issue. You can’t bypass Congress forever.

With this understanding, imagine where the market would be trading if there were the faintest of political tailwinds and not the daily dose of vitriol that fuels the angst of average hard-working citizens. Beyond the noise of political uncertainty, there is a grand recovery in global growth underway that is gaining traction and attracting capital flows. Charles Biderman of Informa Trimtabs stated on CBNC in a June 15 interview with Rick Santelli that his service is seeing record inflows into bonds and huge inflows into equity ETFs. It’s hard to see a major downturn in either stocks or bonds based on such strong fund flows.

To summarize, it’s my view that the market’s current upbeat and sometimes not-so-easy-to-explain performance isn’t so much about the ‘Trump trade’ and whether his campaign promises will prevail. The global reflation trade for equities and bonds is being fueled more by rising business investment, organic earnings growth, lower inflation from lower oil prices, and the ECB and Bank of Japan printing a combined $2.5 billion per day that will continue to find its way into equities and bonds.

With that said, you can turn off the TV and enjoy the ride. 

Growth Mail:

*All content of "Growth Mail" represents the opinion of Gary Alexander*

Are We in Danger of Another Tech Stock Bubble?

by Gary Alexander

Most investors fear a replay of some past portfolio haircut – specifically the financial crisis of 2008 or the tech stock bubble of the late 1990s, which memorably popped in 2000.  In just 31 months, the tech-heavy NASDAQ index fell by 78%, from a peak of 5048 on March 10, 2000 to just 1114 on October 9, 2002.

So that makes the tech stock crash of 2000-02 the worst sector-specific massacre of our lifetimes, right?

Nope.  According to Professor Jeremy Siegel’s “Stocks for the Long Run” (Fifth Edition, 2014, pages 43-44), the financial sector of the S&P 500 fell 84% from its peak in May 2007 to its trough in March 2009.  That’s slightly worse than the 82% loss in the S&P 500 tech sector from its peak in 2000 to its trough in 2002.  What’s even more devastating, the decline in financial stocks in 2007-09 wiped out the previous 17 years of gains – since 1990 – while the tech crash of 2000-02 only wiped out five years of previous gains.

“Peak to trough, Bank of America lost 94.5 percent of the market value of its equity.  Citibank lost 98.3 percent, and AIG lost an astounding 99.5 percent. The equity holders of Lehman Brothers, Washington Mutual and a large number of smaller financial institutions lost everything….  Barclays fell 93 percent, BNP Paribas 79 percent, HSBC 75 percent and UBS 99 percent. The Royal Bank of Scotland, which needed a loan from the Bank of England to survive, fell 99 percent.”

--Jeremy Siegel, “Stocks for the Long Run” (5th edition, 2014, page 44)

The Royal Bank of Scotland was formed in 1727, the year King George II was crowned.  The historical great-grandfather of Citibank was founded 205 years ago on June 16, 1812.  Union Bank of Switzerland (later UBS) was founded in Zurich in 1862, and Hongkong Shanghai Bank Corp (HSBC) was founded in Hong Kong in 1865.  UBS survived two world wars and HSBC survived several revolutions within China. (Please note: Gary Alexander does not currently hold a position in Bank of America, Citi Bank, Barclays HSBC, UBS or Royal Bank of Scotland. Navellier & Associates does currently own a position in Barclays and HSBC for any client portfolios).

Bank of America was founded by Italian immigrant Amadeo Pietro Giannini in San Francisco on October 17, 1904.  Less than two years later, an earthquake and fire destroyed most of the city, but Giannini saved all deposited funds and opened a makeshift pavement office out of two barrels and a few planks, lending out money to rebuild the city.  In other words, banks can survive multiple disasters but not market panics.

By comparison, many of the “dot.com” stocks of 2000 deserved to be annihilated.  They had no earnings or prospects of future earnings at that time.  The tech bubble was built on fantasies and greed.  However, some of the biggest U.S. financial institutions had been around for several decades, even a century or more in some cases, and they had delivered solid earnings and dividends over most of those decades.

Unlike the dot-bombs of 2000, most of today’s leading tech stocks are older, well-established firms with desirable brand name products and services, with a steady source of income and billions of dollars in cash.  The current tech market is not analogous to the 1999 dot.com fantasies with no earnings and a high cash burn rate.  Furthermore, tech stocks have NOT been the runaway leaders of the current bull market.

During the bull market that began March 9, 2009 (according to economist Ed Yardeni in “Tech Now & Then,” June 13, 2017), Information Technology is up 379.8%, the third best sector, well behind Consumer Discretionary (471.2%) and just behind the previously-butchered Financials (+380.3%).  At the bottom, Telecommunications Services come in at next to last (up 81.5%), ahead of only Energy (56.5%).

Standard and Poor's 500 During Bull Market of 2009 - ? Chart

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

In the latest bull market surge (since the lows of February 11, 2016), Yardeni computes Financials in the top spot (up 51.1%) followed by Information Technology (+50.3%) with Telecom Services last (+1.5%).

By comparison, Yardeni reports, the S&P technology rose 1,697.2% from October 11, 1990 to March 24, 2000, more than quadrupling the 417% gain in the S&P 500 over the same time span.  At the tail-end of the tech stock bubble, “the S&P 500 IT sector’s share of the overall index’s market capitalization rose to a record 32.9% during March 2000. However, its earnings share peaked at only 17.6% during September 2000. This time, during May, the sector’s market-cap share rose to a cyclical high of 22.9%, while its earnings share, at a cyclical high of 22.0%, was much more supportive of the sector’s market-cap share.”

Standard and Poor's 500 Information Technology Earnings and Market-Cap Shares Chart

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

In March 2000, the forward earnings in the tech sector (48.3) more than doubled that of the S&P 500 (22.6).  “During the current bull market,” Yardeni says, “the Tech sector’s forward P/E hasn’t diverged much at all from that of the overall index. Last month, the former was 18.1, while the latter was 17.3.”

But that only begs the question, is the whole market (not just tech stocks) overvalued?

Is the Overall Market Near a Bubble Condition?

This is the second longest bull market in history, at over 3,000 days, or 99 months, exceeded only by the 1987-2000 El Toro Grande, which lasted either 150 months (counting from October 1987), or 114 months (counting from October 1990).  Bull and bear markets used to turn around a lot faster.  Yardeni says the average age of the past 22 bull markets in stocks (since 1928) has been only 33 months, under three years.

Real-life bulls die of old age, but financial bulls are not flesh-and-blood animals subject to decay.  They usually die when the economy falls into a recession.  Sometimes markets crash out of fear (1987), but no recession follows.  As this next chart shows, the vertical lines indicating bull and bear markets have been further separated from each other in recent decades.  Specifically, there have been only three recessions and bear markets since 1982.  Two of those recessions were short and mild, and one (2008-9) was severe.

Standard and Poor's 500 Bull and Bear Markets and the Business Cycle Chart

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

We’ve come a long way in this bull market, and we’re also up in 2017, despite the failure of the Trump administration to pass (or even conceive) corporate tax reform or a revised health care plan.  But we must remember that other new Presidents also stumbled in their first year.  Bill and Hillary Clinton’s health care experiment failed in 1993 and their rookie Attorney General Janet Reno stumbled badly in Waco.  George W. Bush won an election that was far more disputed than the recent one, and Bush seemed rudderless until 9-11.  Reagan was nearly assassinated in March 1981 and he fired air traffic controllers in August.  Obama’s 2009 “shovel-ready” infrastructure plans were mostly spending boondoggles, as was his “Cash for Clunkers.”  Even John Kennedy flubbed the Bay of Pigs and Vienna summit in 1961. While the press seems to be reveling in this dysfunctional White House, they weren’t so critical of other rookies in office.

As summer begins (today), it’s time to take a deep breath, see this market in perspective, and then… have a great Fourth of July and summer at the beach, knowing that the stock market has room left for growth.

Global Mail:

*All content of "Global Mail" represents the opinion of Ivan Martchev*

Commodities and the Dollar: Strange Bedfellows

by Ivan Martchev

One of the more reliable inverse correlations in the markets is that of the dollar vs. commodity prices. We generally get strong dollar inflows when there is a flight to safety in the markets, which typically happens when there is a weak global economy. When the global economy is weak, so are commodity prices and vice versa. This is illustrated by the CRB Commodity Index and the U.S. Dollar Index in the chart below.

United States Dollar versus Commodities Research Bureau Commodity Index Chart

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

Furthermore, many commodities are hard assets. A weak dollar environment simply means that there are more dollars to go around for a finite supply of hard assets. So far, 2017 has been a head scratcher – as if someone had flipped a switch in the dollar/commodity inverse correlation. In 2017 there has been a positive correlation, meaning a weak dollar has accompanied weak commodity prices, so what gives?

In part, the answer is geopolitical. Since the euro comprises 57.6% of the U.S. Dollar Index, the trend of pro-EU election victories in The Netherlands and France, and possibly one coming in September in Germany, has lit a fire under the euro. If Angela Merkel wins in September, the euro could go higher.

In 2016, things looked dire for the EU – due to the 1-2 punch of Brexit and the Trump election victory – making the relief rally in Europe’s common currency in 2017 understandable. Still, Europe has many problems that are difficult to solve, like a common monetary policy but not a common fiscal policy, so the euro’s structural issues are still there. In some respects, the eurozone crisis, starting in 2010, never ended.

United States Dollar and Euro Exchange Rate Chart

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

So, if the U.S. Dollar Index is down because of a strong euro, why are commodity prices weak?

China’s Role in the Commodity Price Collapse

Since China is the largest consumer of most industrial commodities, every time I see weakness in hard assets or energy commodities I think of mainland China’s long overdue hard economic landing that is mysteriously being postponed by some very aggressive Chinese government measures.

Commodities Research Bureau Index versus China Foreign Exchange Reserves Chart

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

The slide in the CRB Commodity Index started when the Chinese economy began to slow down in late 2014 and we began to witness a massive flight of capital, which so far is close to $1 trillion. The peculiar part is that in 2017 the Chinese government has stabilized the yuan’s exchange rate to the U.S. dollar and halted reserve outflows (so as to curry favor with President Trump), yet commodity prices remain weak.

Chinese Yuan Chart

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

For the moment, China has enough money to stabilize the exchange rate, but I don't think they can keep the present exchange rate situation ad infinitum. Ultimately, I still believe they are headed for a hard economic landing courtesy of their epic credit bubble. When that hard landing arrives, I think they will opt for a “hard” (overnight) yuan devaluation to the tune of 20% to 40%, just like they did in December 1993 under similar circumstances when they devalued by 34%.

I’ve said all this before. In fact, my numerous musings on China in this column were described by one of my colleagues a couple of weeks ago as “that China rant.” That it may be, but the deflationary tsunami that will result from a Chinese economic hard landing will become front page news. . .

What strikes me as peculiar about the Chinese situation is how their economic unravelling moves in fits and starts. Typically, when we see explosive economic growth driven by explosive credit growth such fits and starts are not common. Historically, when the economy rolls over after the credit cycle peaks, the debt overhang tends to push the economy into a nasty recession and we get a deleveraging cycle.

In this case, the Chinese economy has grown 12-fold since the turn of the century, while total credit in the economy has grown by 40- to 50-fold. In other words, total debt to GDP in the economy has grown from about 100% in the year 2000 to over 400% at present if one counts the infamous shadow banking system.

China Total Social Financing versus China Gross Domestic Product Growth Rate Chart

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

As China’s economy has slowed, its total social financing has ballooned. Originally, credit growth was pushed into high gear by Chinese authorities in order to stabilize the economy after 2008. However, credit growth in the past five years is acting like a runaway train, with ever-diminishing contribution to GDP and larger amounts being borrowed. I have to point out that shadow banking leverage (unregulated lending), which has exploded in the past five years, is not included in the total social financing indicator. That means total credit in the Chinese economy is much higher than what total social financing indicates.

To use an oversimplified example, the Chinese economy is like a binge-spending consumer living large on credit cards before the bills come due. I don’t know if China will have its own “2008” crisis, but a repeat of the Asian Crisis of 1997-1998 can happen anytime. At the onset of the 1997 crisis, China’s GDP was $961 billion while the 2017 Chinese GDP is estimated to be $12.6 trillion, or 13 times larger.

Sector Spotlight:

*All content of "Sector Spotlight" represents the opinion of Jason Bodner*

Inching Our Way to the Stars

by Jason Bodner

Voyager left earth in 1977, ultimately reaching a cruising speed of 11 miles per second (40,000 mph). After 35 years, 13 billion miles from earth, it became the first and only man-made object to leave our solar system. The nearest star is Alpha Centauri, 4.37 light years away (over 25 trillion miles), so Voyager would need another 70,000 years to reach the nearest star. In our local neighborhood, there are tens of thousands of stars, but they only represent a rounding error among the hundreds of billions of stars in the Milky Way. The next nearest galaxy to ours is Andromeda, about 2.5 million light years away.

Recent NASA estimates suggest that there are a trillion galaxies out there, each with about a hundred billion stars. Yet, our current technological and scientific limitations dictate that we spend nearly all of our time and energy dealing with what immediately concerns us the most – what’s going on here on earth.

Solar System Position in the Galaxy Image

Let's put that into perspective. We made a satellite, launched it, and hurtled it away from us at a speed of 40,000 miles per hour; but after 35 years the farthest any man-made object has travelled has brought it to the cosmic equivalent of twitching your eyelid in the center of Manhattan, relative to our cosmic neighborhood. This great accomplishment for mankind is insignificant compared to everything out there.

The reason I get excited about scientific analogies is because science shows all the things we don’t know.  When we relate science to markets, let’s think about the data that the financial media brings to the fore.  Financial news is like the Voyager. The vast majority of airtime is spent on a handful of stocks that drive headlines, but these household names represent only a tiny sliver of 1% of all of the stocks out there. Yes, five or 10 big stocks have huge market capitalizations that account for a significant weight of benchmark indexes like the S&P 500, and they have products and services that affect our everyday lives, but if we spend most of our media time looking at only a handful of stocks, we’re ignoring the rest of the universe.

The Financial Press Focuses on a Small Array of Big Stocks

There are more than 150,000 stocks in the world today. In the U.S. alone, there are thousands. When we strip out the most thinly-traded names, we are still left with a few thousand stocks, meaning there are literally thousands of investment opportunities every day. Yet if we focus solely on the media blitz, we are exposed to maybe 100 names (at best) per day. That leaves a very large iceberg under the surface.

But how do we find the ones that deserve attention? The answer depends on what kind of investor you are. There are day traders, long-term investors, income investors, activist investors, swing traders, technical traders, fundamental bottoms-up investors, algorithmic traders, and the list goes on.

I look at the world through a lens with a layer of filters. Here are a few of them: I like companies with solid fundamentals that can generate long-term growth based on qualities that can make the company “best in show” for years to come. I also follow the tape – identifying technical behavior in the markets to clue me in to possible future price action. Add in a healthy dose of volatility research (on which I spent 15 years as a professional focus) and then add in an analysis of unusual institutional activity, in which I seek to buy what the big boys and girls buy – or sell what they sell. It’s hard to fight mega-institutional investors. If all of these filters start to line up, then I feel I have the recipe for finding long-run winners.

As the title of this column implies, I pay special attention to sector strength and weakness. I have found that the stocks that lead the market tend to run in a pack, and that pack may occupy the same sector. When a previously-hot sector dips – like Information Technology has done recently – does that mean that the entire environment has changed from one day to the next? Not usually, and most likely not last week, either. The S&P 500 Information Technology Index was heavily extended and was primed for a pullback. But pullbacks are inevitable. They come quickly and the media seizes the moment to gain eyeballs.

Looking at a recent chart, though, the tech decline doesn’t look like anything more than a hiccup.

Standard and Poor's 500 Information Technology Sector Index Chart

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

The same pack behavior can be observed for weakness as well. Energy has been down for six months:

Standard and Poor's 500 Energy Sector Index Chart

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

The 1-week performance table of sectors finds InfoTech at the bottom and Energy near the top. But looking back six months, Information Technology is up over 16% while Energy is down over 13%. This nearly-30% spread differential is more than enough to keep me bullish on tech and bearish on energy.

Standard and Poor's 500 Weekly, Quarterly, and Semi Annual Sector Indices Changes Tables

The leader has remained solid and the laggard has remained weak. I suspect this trend will continue.

After all this analysis, the next trick is to identify the winning stocks in the winning sectors through individual analysis. I can delve more into the particular qualities of individual stocks next week, but for now, it is important to know where to focus your own efforts without succumbing to what the media covers. Josh Billings is one of many who have been credited with saying, “The wheel that squeaks the loudest is the one that gets the grease.” Translation: The loudest little bird usually gets fed first …

Robin Feeding Chick 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.*

Why the Fed May Delay Further Rate Increases

by Louis Navellier

The data-dependent Fed looks at a number of indicators when deciding whether or not to raise rates.  The rate of inflation is one prime indicator.  If inflation is rising, the Fed tends to raise rates, but inflation is not rising lately.  Last Tuesday, the Labor Department announced that the Producer Price Index (PPI) was unchanged in May.  Wholesale energy prices declined 3% and food prices declined 0.2%, so the “core” rate actually fell 0.1% in May.  We also learned the next day that the Consumer Price Index (CPI) declined 0.1% in May.  In the past 12 months, the core CPI is up 1.7%, which is below the Fed’s target rate of 2.0%.

In their post-conference press meeting, Fed Chair Janet Yellen said that Fed officials are “monitoring inflation developments closely,” adding that “it’s important not to overreact to a few readings and data on inflation can be noisy.”  In other words, the Fed is basically ignoring the latest PPI and CPI data, but the market is not ignoring this deflationary trend, which helped to drive the 10-year Treasury bond yield to an intraday low of 2.127% on Wednesday.  The market is not ignoring other deflationary indications, either.

Energy prices should continue to decline since the International Energy Agency (IEA) said on Wednesday that the global crude oil glut rose by 18.6 million barrels in April.  Overall OPEC production rose by 29,000 barrels per day in May to 32.08 million barrels per day, the highest level this year.  As a result, the IEA expects that the oil glut will grow and crude oil prices will remain under pressure through 2018.

Another deflationary statistic came out on Wednesday when the Commerce Department announced that retail sales declined 0.3% in May, the largest decline in 16 months, but a 2.4% decline in gas station sales distorted overall retail sales.  Year-to-date, retail sales are running 3.9% higher than the same period in 2016, so there is no reason to panic, but the May retail sales slowdown should cause the Fed some concern.

Building Construction Image

Finally, on Friday, the Commerce Department announced that May housing starts declined by 5.5% to an annual rate of 1.09 million, the third straight monthly decline and well below economists’ consensus estimate of a 1.23 million rate.  Housing starts are now running at the slowest rate in eight months.  Builders are now cutting back on multi-family homes.  Building permits also declined 4.9% in May.

Put all these numbers together and the Fed may have to rethink their goal of raising rates again in 2017.

The Fed’s Balance Sheet Strategy Should Help Stocks

After announcing their latest rate increase, the Fed announced that they will start selling $6 billion per month in Treasury securities and $4 billion per month in mortgage backed securities “relatively soon.” Yellen also announced that the Fed would eventually unload $50 billion a month in assets – including $30 billion per month in Treasury securities and $20 billion per month in mortgage-backed securities.

At last Wednesday’s news conference, Yellen explained that “the plan is one that is conscientiously intended to avoid creating market strains and to allow the market to adjust to a very gradual and predictable plan.”  After the FOMC statement, the 10-year Treasury bond yield rose to 2.173%.  The Fed can’t control long-term rates, but the Fed is clearly trying to boost long-term rates in order to tilt the yield curve higher, but market forces have been flattening the yield curve throughout the first half of 2017.

The only problem that I foresee is that while the Fed is trying to shrink its balance sheet – caused by multiple rounds of quantitative easing that ended years ago – the Bank of Japan, the Bank of England, and the European Central Bank (ECB) continue with their quantitative easing efforts that have flattened yield curves worldwide.  The Fed is essentially swimming upstream compared to the other central banks.

The world is awash in cash from all the quantitative easing in England, Japan, and Europe.  The country with the strongest currency, highest interest rates, and strongest economy will continue to attract capital from around the world; so the Fed’s move could strengthen the U.S. dollar, attracting more capital.

It will be interesting to see if the Fed is eventually overpowered by market rates.  I am betting that (1) market forces will prevail in continuing to flatten the yield curve; (2) deflationary pressures will continue due to the energy glut; (3) commodity prices will remain low, due to a stronger U.S. dollar; and (4) the U.S. will remain an attractive place to park international capital.  That means Treasury bond yields will remain low, which makes stocks more attractive than bonds.  That is great news for higher stock prices.


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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