Correction Has Begun

The Correction Has Begun: How Long Will It Last?

by Louis Navellier

February 6, 2018

Stock Market Pit Image

We have been warning you about a coming correction and the “overbought” condition of this market for several weeks now. Last week, we even threw up our hands about timing this correction, saying, “When this market corrects is anyone’s guess,” but it began happening even as we went to press last Tuesday. Tuesday was down over 362 Dow points, but Friday’s big 666-point Dow drop pushed the Dow down 1,096 points (-4.12%) for the week. Then, Monday took the Dow down another 1,175 points, comprising an 8.5% correction in just six trading days.

While all eyes were on the stock market, the bond market made some big news, too. Yields on the 2-year Treasury notes continued to rise (to 2.15%) and the 10-year rate, at 2.9%, is approaching 3%, raising fears of multiple Fed interest rate hikes this year. I find it odd that Treasury bond yields are rising while the stock market corrected so sharply, since typically Treasury yields fall during a stock market sell-off.

Also, those nasty iPhone X rumors refused to go away and were confirmed on Thursday when Apple’s iPhone sales missed analysts’ consensus estimates. That was one of the catalysts that caused the market to “burp” on Friday, digesting its recent gains. The key factor to watch moving forward is trading volume, since as long as trading volume remains low, there is no panic selling. Fortunately, we are in the midst of fourth-quarter earnings announcements, and so far the average stock in the S&P 500 has announced 8.3% annual sales growth and 14.9% annual earnings growth, which should limit any serious market damage. (Please note: Louis Navellier does not currently hold a position in Apple. Navellier & Associates does currently own a position in Apple for client portfolios).

In This Issue

I’ll examine some more indicators about why I expect the market to recover soon in my closing column below, but first our other authors examine why this correction may be short-lived, due to spectacular earnings and even more spectacular guidance for future earnings, due in part to the recent tax law reform. Global growth and trade also fuel corporate profit expansion. Barring stupid political moves (always a possibility), stocks should recover fairly soon and resume their former growth arc, but at a slower pace.

Income Mail:
Assessing the Bull Trend at the Mid-Point of Earnings Season
by Bryan Perry
The Economic Future is So Bright, Ya Gotta Wear Shades

Growth Mail:
Happy 70th Birthday to GATT – Global Free Trade
by Gary Alexander
Global & U.S. GDP Growth Now Approaching 4%

Global Mail:
The “Number of the Beast” Strikes Again
by Ivan Martchev
The Expected Culprit for the Stock Market Sell-off is Bonds

Sector Spotlight:
Black Holes Often “Burp” New Stars
by Jason Bodner
The Overbought Signals Were Overwhelming – Two Weeks Ago

A Look Ahead:
What Will the Market Do Next? (Likely Rise)
by Louis Navellier
Another Round of Positive Economic Indicators

Income Mail:

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

Assessing the Bull Trend at the Mid-Point of Earnings Season

by Bryan Perry

Friday trading sessions can be volatile when certain factors threaten investor confidence and this past week we saw a confluence of events and looming unknown issues that knee-capped the rally in a way that truly wrangled the nerves of investors. Let me put what Mr. Market is concerned about in bullet format:

  • There was no flight to quality as the market sold off, meaning Treasuries typically rally when stocks sell off. Instead, Treasury yields rose with the 10-year closing with a yield of 2.85%, the highest level in 4.5 years. The bond market could be reacting to the strong payroll report, which showed some wage inflation following the parade of job raises and bonuses due to tax rate cuts.
  • In a strong economy, where bond yields are rising, the value of the dollar almost always rises. Not this time. The dollar has been selling off, even before Treasury Secretary Steven Mnuchin talked down the dollar at the Davos, Switzerland conference. The expected spike in short-term government debt levels due to tax reform might have something to do with the dollar weakness.
  • Political headlines involving the release of “that memo” and the unknown of what it might mean to the administration and another looming government shutdown. I personally don’t think this scenario had much impact on the sell-off, but to some extent it contributed to the angst.

Now for the good news. Rates are expected to rise when the economy is getting out of first gear, and there is rising speculation that first-quarter GDP will top 3.0% with the fourth quarter seeing a sharp upward revision, as the initial 2.6% GDP reading for Q4 2017 was unduly weighed down by trade deficits.

United States Gross Domestic Product Growth Rate Bar Chart

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

Consumer spending rose the most in six quarters and residential investment rebounded while inventories weighed down growth and a surge in imports brought the net trade contribution to negative. Exports jumped 6.9% (2.1% in the previous period) and imports surged 13.9%, after falling 0.7% in the previous period. As a result, the impact from trade was -1.13% from +0.36 percent in the previous period. Add back the 1.13% from the trade deficit and the fourth quarter would have registered 3.7% growth.

The Economic Future is So Bright, Ya Gotta Wear Shades

So, let’s look at the really good news. With 50% of S&P 500 companies having reported fourth-quarter results, a record 80% of companies are beating sales estimates. If 80% is the final number for the quarter, it will mark the highest percentage of S&P 500 companies reporting positive sales surprises since FactSet began tracking this metric in Q3 2008. In aggregate, companies are reporting sales 1.4% above estimates, which is also above the 5-year average (source: FactSet S&P 500 Earnings Season Update, February 2).

Standard and Poor's 500 Earnings Above, In-Line, and Below Estimates Bar Chart

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

All 11 S&P sectors are reporting year-over-year earnings growth. Six sectors are reporting double-digit earnings growth. Three sectors are reporting double-digit revenue growth: Materials, Energy, and Information Technology. Analysts currently project earnings to grow at double-digit levels through 2018.

How does 81% beating sales estimates compare to recent averages? During the past year (four quarters), 64% of the companies in the S&P 500 have reported sales above the mean estimate on average. During the past five years (20 quarters), 56% of companies in the S&P 500 have reported sales above the mean estimate on average. Thus, the percentage of companies reporting sales above estimates to date for Q4 2017 is running well above both the trailing one-year average and the trailing five-year average.

Standard and Poor's 500 Positive Sales Surprise Bar Chart

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

It is interesting to note that companies are beating an even higher bar for estimates now relative to expectations at the start of the quarter, as revenue estimates in aggregate actually increased during the fourth quarter. On September 30, the estimated revenue growth rate for Q4 was 5.7%. By December 31, it was 6.7%. Because of the number and magnitude of these upside surprises (and continued upward revisions to revenue estimates after the end of the quarter), the blended revenue growth rate for the quarter has increased to 7.0% today (source: FactSet/Insight – February 2, 2018).

What does this data mean, and why does it matter? I’ll tell you. What we saw last week was a long overdue bull market correction that used an entirely justifiable rise in bond yields and the first evidence of wage inflation as a reason (or excuse) to book what are some very heady profits in equities and ETFs. I don’t believe it was anything more than this mindset that took hold going into Friday.

The data and charts above clearly show that the economy is accelerating and current earnings estimates are too low. This is all great news for the stock market, as it should dispel the fear of the market trading at too lofty a P/E ratio. The market is currently trading at a forward P/E of 18x, but if future revenue growth for the S&P is being adjusted higher to the tune of 7%-8% going forward, then the market is not expensive because earnings growth will also accelerate.

In essence, look for the Fed to raise the Fed Funds Rate in March to 1.75% from 1.50% and then again in May or June if first-quarter growth is gangbusters, meaning north of 4.0%. Currently, there is a 76.1% probability the Fed raises in March and that number is likely to climb into the 90s by the end of February.

Fed Funds Rate Probable Rate Hike in March Bar Chart

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

What the market is now just starting to price in is the possibility of another hike at the May 2nd FOMC meeting, which would be much sooner than most economists had forecast. The jump in probability from the md-50% to what is now a 72.9% chance of a rate hike for May is what I think caught the bond market, and hence, the stock market flat-footed, triggering the sell-off.

Fed Funds Rate Probable Rate Hike in May Bar Chart

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

Good news for the economy can sometimes be hard for the bond market to digest, and great news can be simply very hard to swallow, at least in one week’s time. My view is that this reset of expectations of how the Fed will and must act over the course of the next few months is what accounts for the unsettling atmosphere. The bond market has been dictating to the Fed and not the other way around during the past decade of financial central bank engineering.

What we need to know most as investors is that the present rally is defined by outstanding top and bottom line growth for corporations and that normalizing rates a little more ahead of schedule as an offset to the power of tax reform is a very good thing for sustaining the secular bull trend. What we are being presented with in the days ahead is a buying opportunity that will seem generous in a couple weeks.

Growth Mail:

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

Happy 70th Birthday to GATT – Global Free Trade

by Gary Alexander

The growth in global prosperity over the last 70 years has been phenomenal – despite a 45-year Cold War, several hot wars, terrorism, oil embargoes, political turmoil in nearly every nation, hurricanes, a series of epidemics, famines, global cooling and then warming, nuclear stockpiling in a dozen nations, and now the Presidency of Donald Trump, which short-sighted pundits are calling the worst news ever.

Good news happens quietly, while bad news makes the headlines. It was 70 years ago last month that the General Agreement on Tariffs and Trade (GATT) took effect after 23 nations signed a pact in Geneva to radically lower or eliminate trade tariffs as of January 1, 1948. Nearly 50 years later, 123 nations met in Marrakesh on April 14, 1994, to sign the Uruguay Round Agreements, which established the World Trade Organization (WTO), the successor to GATT as of January 1, 1995. How important was GATT? The average tariff levels for GATT participants were about 22% in 1947, but only 5% as of 1999.

Total world trade in goods was $600 billion (in constant inflation-adjusted 2015 dollars) in 1950, but that total had risen to $18.9 trillion by 2013 – a 31.5-fold increase, even though global population had grown less than three-fold in the same span, so global trade has grown over 10 times faster than population in the first 65 years under GATT (and WTO) trade liberalization policies. This is in stark contrast to the trade restrictions and punitive war reparations which followed World War I, which severely punished Germany and caused a guy named Hitler to foment a new war. After World War II, however, a peaceful Germany and Japan made cars and cameras, not guns and cannons, as nations that trade together seldom make war.

As this chart shows, trade represented only 1% of global GDP in 1950 vs. 4% of global GDP in 2015:

The Long, Steep path to Freer Trade Chart

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

In his Inaugural Address over a year ago, President Trump pledged “America First” and vowed to “protect our borders from the ravages of other countries making our products, stealing our companies, and destroying our jobs.” Within days, he withdrew the U.S. from the Trans-Pacific Partnership (TPP) and said he would renegotiate the North American Free Trade Agreement (NAFTA) to “get a better deal.”

Now, more than a year later, negotiations are still continuing on NAFTA, but it is becoming increasingly clear to the President and his negotiators that the 24-year-old NAFTA agreement has led to a great degree of economic integration between Canada, Mexico, and the U.S., whereby the label “Made in Mexico” or “Made in the USA” has become meaningless, since parts and assemblies are made everywhere at once.

Each of the top three imports from Mexico in 2016 were auto-related (parts, accessories, engines, engine parts, trucks, buses, and passenger cars), reflecting the extensive, intricate, and inter-connected automotive supply chain in North America that makes U.S. automakers globally competitive, supports thousands of U.S. jobs, and bestows great benefits on American consumers. Nearly three quarters (73%) of imports from Mexico are inputs and intermediate goods purchased by U.S. firms for assembly within the U.S.

Trump likes the fact that the stock market has risen over 30% since he was elected. He (or his advisors) will not want to send the market into a tailspin. As Larry Kudlow said on CNBC on January 16, 2018, the President is “not inclined” to pull out of NAFTA. “There’s a potential blow up in the stock market if we leave NAFTA. We’re talking agriculture. We’re talking car parts. We’re talking trucking, transportation, energy. We’re too intertwined.”  Besides, scuttling NAFTA could impact the Mexican elections in July.

Global & U.S. GDP Growth Now Approaching 4%

Another reason not to scuttle free trade is that it could bring global and U.S. GDP down from its winning streak of ever-rising coordinated growth rates – a unique win-win situation that has just recently emerged.

Last week, the Commerce Department reported that the U.S. economy grew at an annual rate of 2.6% in 2017’s final quarter, down from the third quarter’s 3.2% annual rate, but that news is temporary and sure to be revised upward soon. First of all, a surge in imports took 1.13% off the fourth quarter’s growth rate. Add that back in and the fourth-quarter rate would have been 3.73%, well above the president’s goal.

Furthermore, the import surge was driven by a 3.8% rise in consumer spending, the strongest rate in six quarters—led by an 8.2% jump in goods consumption. Within goods consumption, spending on consumer durable goods (+14.2%) was the best since Q3-2009, while nondurable goods outlays (+5.2%) was the highest since Q4-2010. Real nonresidential fixed investment expanded 6.8%, driven by its second consecutive double-digit gain (11.4%) in equipment spending. Meanwhile, trade subtracted from GDP as imports (13.9%) grew at double the pace of exports (6.9%). Inventory investment was also a drag.

Last Thursday, February 1, the Atlanta Fed’s GDPNow forecast for real GDP growth (at a seasonally adjusted annual rate, or saar) for the first quarter of 2018 was 5.4%, up from 4.2% on January 29. This huge leap was based on a dramatic increase in real consumer spending growth, from 3.1% to 4.0% and the Manufacturing ISM Report of real private fixed-investment growth, rising from 5.2% to 9.2%.

If these numbers hold, the first four full quarters under Trump could total about +3.5% GDP growth, with higher rates to come. Companies are also investing in growth. While the government keeps delaying any investment in America’s infrastructure, corporations are spending a lot on capital projects. In the last two Obama years, capital spending was flat, as this component of real GDP rose just 0.4% from Q3-2014 through Q4-2016 (chart, below); but in the last year, through Q4-2017, it is up 6.3%. Capital spending is rising in parallel with business optimism (the CEO Outlook Index compiled by the Business Roundtable).

Chief Executive Officer Outlook Index Chart

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

Likewise, according to Ed Yardeni, “Capital spending on equipment in real GDP stalled during 2015 and 2016, but rose to a new record high during Q4-2017. Leading the way higher through thick and thin has been information processing equipment, which soared 9.7% y/y last year to a new record high.”

The global growth trend is strong and getting stronger. The CPB World Trade Monitor Report for November shows that World Merchandise Trade increased by 4.2% in November 2017 versus a year earlier, reaching a new record high. World Industrial Output increased 3.3% from November 2016 also to a new record high, to a level 20% greater than at the pre-recession peak. The world is on a winning streak.

Trade and GDP growth make average Americans richer. A January 26 USA Today survey (“Did your company pay you a bonus with tax savings?”) found that 500 of the nation’s largest companies said they are dishing out financial rewards to their workers due to the new tax law. Also, according to Ed Yardeni (January 29, 2018, “Don’t Worry, Be Wealthy”), “The S&P 1500’s market capitalization has increased by a whopping $6.6 trillion to $27.2 trillion since Trump was elected. It is up 73.5% since the prior bull market’s peak on July 19, 2007. Yes, the rich have gotten much richer, but so have working stiffs with 401(k) accounts invested in stock.”  Let’s not kill this global growth machine by imposing trade barriers.

Global Mail:

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

The “Number of the Beast” Strikes Again

by Ivan Martchev

The “Number of the Beast” is 666. In our case, it was 665.75, the magnitude of the point decline of the Dow Jones Industrial Average last Friday, after sharp sell-offs in both stocks and bonds. It finally sunk into investors’ minds that the Federal Reserve was likely to up the pace of quantitative tightening as some regional Fed surveys suggested the economy was running “hot” with 1Q GDP on track to be up over 5%. (In an odd coincidence, the S&P 500 bottomed out at 666 at the start of this bull market in March 2009.)

What gives? Earnings are accelerating yet stocks are sliding. This makes no sense, right?

Actually, there is such a thing in the stock market called “prices getting ahead of themselves.” The types of extremes to the upside that I have seen in January 2018 I had not seen since November of 2008, when I saw extremes of similar magnitude to the downside. For example, let’s look at some widely used indicators such as 50- and 200-day moving averages. When that difference is expanding to the downside, we have a strong downtrend. When that difference is expanding to the upside, we have a strong uptrend.

Dow Jones Industrial Average Index Chart

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

The difference between the 50- and 200-day moving averages had been expanding for so long that at last count it stood at 2313.53 (25016.11 minus 22702.58), the widest such difference we have seen since the latest bull market started on March 9, 2009. The only other similar divergence to the upside that I recall was in the Nasdaq in early 2000. Still, I don't recall such momentum buying in the Dow in my lifetime.

These two key averages tend to move away from each other to the downside too. For example, on March 9, 2009 – the last bear market low – the 200-day moving average stood at 9741.38 while the 50-day stood at 7930.60, or a difference of 1810.78. The difference between the 50- and 200-day moving averages in this latest extreme to the upside is bigger by almost 500 points than the last downside extreme. We could get into a discussion of whether the numbers are more meaningful on a linear or logarithmic scale, but in both cases, we witnessed significant extremes in the market, one to the upside and one to the downside.

We would not know if we have made a top in the stock market until after the fact. Tops are much different than stock market bottoms as they tend to form over much longer periods, like 6-12 months, while in many cases bottoms are climactic events. Some climatic bottoms in the stock market were March 9, 2009 as well as lesser-known bottoms in March 2003, October 2001, and October 1998.

I actually think the chances that the stock market makes more new highs in 2018 are good given the accelerating profits picture, but with increased Fed fund rate hikes and quantitative tightening, it is highly unlikely that the year 2018 will be as profitable as 2017. It may look more like 2015 or 2016.

The Expected Culprit for the Stock Market Sell-off is Bonds

The 10-year Treasury yield closed at 2.84% on Friday and given the downside momentum in the stock market it is now a foregone conclusion that it will cross 3%. If it happens this week, I think the Treasury market will cause more pressure on the stock market and it would be a perfect welcome for the new Fed Chairman Jerome Powell who starts on the job this week. As I have suspected all along, the markets were likely to test the new Fed Chairman, but I did not suspect that it would happen in his first day on the job!

United States Ten Year Government Bond Chart

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

How high could the 10-year yield go? My working assumption is that the bond market may calm down in the 3.0% to 3.5% range, even though markets have been known to overshoot both to the upside and the downside. A key question here is not only how far the 10-year yield goes, but how fast it gets there. If we cross 3% to the upside this week, I would expect more sharp selling in the stock market.

This is an overdue correction in the stock market, which would put a target anywhere between 5% and 10%. I remember the time when even 15% corrections were considered normal and, given the speed of rise in Treasury yields, overshooting beyond 10% is clearly a possibility. I seriously doubt we have started a bear market in stocks, though even given the strength in the economy, if the new Fed Chairman Jerome Powell is not too careful with his QT operations he has the power to cause a recession.

I think he knows that. 

Sector Spotlight:

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

Black Holes Often “Burp” New Stars

by Jason Bodner

Black holes are giant stars that have collapsed in on themselves. Their gravity is so powerful that they gobble up everything near them, including light! Black holes have a reputation for being like Hotel California – “You can check out anytime you like, but you can never leave.” Actually, black holes sometimes eject pure energy or x-rays in flares. This cosmic “burp” does two things: It allows a reset, so the black hole can begin more feasting on gas and matter, and it sweeps away the dust and gas in the path of the ejection. This dust and gas clumps together and forms new stars. So, the burp is necessary as it paves the way for new growth. Sound familiar? Maybe that’s what happened to the markets last week.

Black Hole Image

Cycles of growth and restorative rest happen everywhere. It's the way your kids grow, muscles build, and creativity happens. Life rarely happens in a straight line; it's full of fits and starts. The market works the same way. For at least two weeks, the market has been gearing up for a reset. Friday was the culmination with reactive selling and profit taking on a massive scale. The catalyst could have been the FISA memo release, the rising yields signaling a rate cut, a weak dollar, or several other reasons. The fact is corrections are healthy and natural. It sweeps away the clutter and allows a reset for new birth and growth.

The last few times market selling of any magnitude took place it was met with a swift bounce, which paved the way for much higher prices. I believe that Friday's action will prove to be exactly that. I expect a market bounce next week, but also possibly more selling to “retest” the lows beforehand. One thing I am sure of: In a few months this burp will pave the way for new stars to emerge in the stock market.

The Overbought Signals Were Overwhelming – Two Weeks Ago

Were there signals heading into this? Absolutely. Last week I wrote: “We are starting to see profit taking in an updraft of euphoria. One unique metric of institutional buying that I look at religiously labels this market near-term overbought. This, along with standard indicators such as RSI, MACD, and ADX indicators, all have this market significantly overbought.” Several MAP metrics I look at had not only the smaller-cap general market overbought heading into last week but had the energy sector overbought while utilities and real estate were oversold. I have long said that I found the energy bounce to be technical in nature with improving yet still weak fundamentals. Let's have a look at how these played out:

  • January 24thsaw an overbought signal in IWM
    • IWM (iShares Russell 2000 Index ETF) is down -3.23% since then.
  • January 17thsaw an overbought signal in the energy sector (XLE)
    • XLE (Energy Select Sector SPDR ETF) is down -6.03% since then.
  • January 17thsaw an oversold signal in utilities (XLU).
    • XLU (Utilities SPDR ETF) is down -1.15% since then, outperforming the market.
  • January 31stsaw an oversold signal in Real Estate (IYR).
    • IYR (iShares U.S. Real Estate ETF) is down -2.67% underperforming the market yet pushing it further into oversold territory – expect a pop here soon.

No sectors were spared last week, which is a good thing. This is a broad “flush-out” of the system. Profit taking is necessary and helps reset the market into a base-building area which will springboard it higher. It’s worth noting that even though yields went down along with equities (which is unusual), rate-sensitive sectors still outperformed last week. Telecom, Utilities, and Real Estate were the top performing sectors, as they declined the least. On the other hand, energy fell like a rock, having the weakest fundamentals.

Standard and Poor's 500 Daily, Weekly, and Quarterly Sector Indices Change Tables

I don’t expect this recent sector rotation to last for long as defensive action is typical in a sell-off, especially a technical one. We can expect this sell-off to be short lived. Why? The stock market has been like a “white hole,” in the sense that its appetite for higher prices has been fueled by solid fundamentals. Sales and earnings growth are continually exceeding expectations and we are on pace for one of the best earnings quarters ever. But every meteoric rise needs a break – a chance to blow off steam, rest, and reset for the next leg higher. The bottom line here is that we should not lose focus or get frazzled.

The best way to take advantage of market cycles is to own the best stocks – those with growing earnings and sales and solid technicals. These are the stocks that will bounce the highest when a relief rally comes, while the weak ones may continue to get “tested.” In my opinion, this is a buying opportunity, so when looking over your list of stocks that were “too expensive” to own, a flash “sale” just arrived. When you have your eye on a new car and suddenly there’s a manager’s sale, you don't ask, “What's wrong with the car? I don't want the car anymore.” You see value. The same should be applied to stocks. Fundamentals certainly have not changed from one week to another. The environment is great, other than that the market overheated and was getting ahead of its skis. This “reset” is just like a burp within a black hole.

Growth cycles everywhere in the universe follow the same pattern of bursts of progress with intermittent resets and rests. This reset may last a week or longer but either way, this last week will be long forgotten before next summer when we will likely be higher, and by this fall it will seem insignificant.

Confucius said: “Our greatest glory is not in never falling, but in rising every time we fall.”

Confucius Quote 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 Will the Market Do Next? (Likely Rise)

by Louis Navellier

The market will likely drop some more before it recovers, since we’re overdue for a 10% correction, but I believe it will likely rise later this week. The Dow has fallen 500 or more points 17 times in the last 25 years. In the following five trading days, the Dow rose an average 2.83%. The S&P 500 rose an average 2.91% and NASDAQ rose an average 2.91%. Large-cap tech stocks rose the most after these past historical panics.

Bespoke Investment Group (BIG) put together some other interesting studies in their weekend Bespoke Report. I found this one most interesting: Last week’s sell-off put an end to the S&P 500’s longest-ever streak without a 3% decline from a closing high. The latest streak ended at 448 calendar days on January 26, 2018, eclipsing the previous record of 370 days, ending December 13, 1995. There have been only eight times in market history in which the index went over 200 days without a 3%+ pullback. In six of those eight times, the market was significantly higher a month, a quarter, six months, and a year later.

Standard and Poor's 500 Average Gains after 200 Days Without a Pullback Table

And then there’s the matter of strong earnings and sales metrics. The fundamentals argue for a strong recovery from last week’s decline. Bespoke pointed out that corporate earnings guidance is at a record high +7.8 this quarter. This “guidance spread” measures the difference between the percentage of companies raising guidance minus lower guidance, “So while the strong earnings and revenue beat rates for this season are backwards looking, forward-looking guidance is equally (if not more) impressive.”

Another reason why the market should recover is that the economy is gaining strength, not slowing:

Another Round of Positive Economic Indicators

Overall, the economic news last week was very positive. On Tuesday, the Conference Board announced that consumer confidence rose to 125.4 in January, up from a revised 123.1 in December, reaching the highest level in almost 17 years. Economists were expecting consumer confidence to rise to 125 in January, so consumer confidence came in better than expected. The tax reform package seems to be lifting consumer spirits, since the future expectations component rose to 105.5 in January, up from 100.8 in December. One other reason that consumers are in a good mood is that on Tuesday S&P CoreLogic Case-Shiller reported that median home prices rose 6.2% in November vs. the same month a year earlier.

As an example of just how healthy the U.S. manufacturing sector is at the present time, in November, U.S. crude oil production rose above 10 million barrels per day in November (to 10.038 million barrels) for the first time in nearly 50 years. The announcement that Exxon was investing $50 billion in the U.S. (mentioned in the State of the Union speech) is a big deal, since the shale crude oil production expansion in the Permian Basin is showing no signs of slowly down. There is a wide price spread between sweet crude (Brent) and heavier crude (West Texas Intermediate), so the refiners are making a lot of money due to the spreads between crude oil grades. Crude oil prices remain stubbornly high despite rising inventory reports this week due to the dwindling production chaos in Venezuela. (Please note: Louis Navellier does currently hold a position in Exxon in mutual funds. Navellier & Associates does currently own a position in Exxon for client portfolios).

On the first Friday of every month, the Labor Department reports on the job situation. This time, we learned that 200,000 payroll jobs were created in January, which was significantly above economists’ consensus estimate of 177,000. The big news is that average hourly wages rose 0.34% (9 cents) to $26.74 per hour, the strongest monthly wage growth in more than eight years. Unemployment remains at a 17-year low of 4.1%. Under the Yellen-led Fed, she wanted to tie the Fed’s rate hikes to wage growth, so it will be interesting to see if the new Chairman Jerome Powell reiterates Yellen’s comments.

I should also add that on Wednesday, ADP reported that 234,000 private payroll jobs were created in January, so the January payroll report may be revised higher in the upcoming months.

Finally, the most positive news last week was that the Atlanta Fed has upped its forecast of first-quarter 2018 GDP to +5.4%. The Atlanta Fed is notorious for starting out optimistically and then trimming them as the quarter unfolds, but I can never remember when they started with such tremendous optimism. Let’s hope that the Atlanta Fed is correct, since 5.4% would be the strongest GDP quarter since 2009!


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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 Blue Chip Growth, Louis Navellier’s Emerging Growth, Louis Navellier’s Ultimate Growth, and Louis Navellier’s Family Trust, 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. 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. Navellier & Associates, Inc. does not have any relation to or affiliation with the owner of these newsletters. As noted above, there are material differences between Navellier Investment Products’ portfolios and the InvestorPlace Media, LLC, newsletter portfolios. In most cases, Navellier’s Investment Products have materially lower performance results than the InvestorPlace Media, LLC newsletter portfolios and advertising materials claim to have. The InvestorPlace Media, LLC newsletters and advertising materials typically contain performance claims that can significantly overstate the performance results compared to actual results for similar Navellier Products.

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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