Despite Temporary Chaos

Despite Temporary Chaos, Good Stocks Should Keep Rising

by Louis Navellier

January 31, 2017

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

Last Wednesday, 20,000 on the Dow Industrials went from being a ceiling to a potential “launching pad” for the overall stock market. At the end of last week, the Dow stood at 20,093.78, while the S&P was closing in on 2,300. All three major indexes reached records last week with NASDAQ closing at a record 5660.78, up 5.16% so far in 2017. After a short pause, the “Trump Bump” seems to have resumed.

Despite some struggling multinational stocks, the current stock market rally is fueled by an improving earnings environment and wave after wave of positive earnings surprises and higher guidance from many domestic companies. For 2017, I expect the earnings environment to recover strongly and deliver up to 20% earnings growth on the S&P 500 for all of 2017, if major corporate tax reforms are implemented.

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Another factor fueling this week’s stock market rally is the speed of which the Trump Administration is implementing executive orders. Trump’s meeting with union leaders on Monday was a pleasant surprise, as was the news on Tuesday of the “go ahead” on the Keystone and Dakota pipelines that will create lots of union jobs, including American steel. These pro-business and pro-labor actions have ignited a second stage of the “animal spirits” rally that commenced after the Presidential election. Due to these pleasant surprises and corporate earnings unfolding, I expect 20,000 to be a new floor for the overall stock market.

In This Issue

First off, Bryan Perry notices the simultaneous recovery in the manufacturing indexes of the five largest economic zones, and what it means for inflation and interest rates looking forward.  Gary Alexander and Ivan Martchev use a popular musical play and movie, respectively, to examine how foolishly we often treat our wealthier citizens and trading partners, while Jason Bodner takes his usual cue from cosmology when it comes to rating the latest sector rotations.  My main subject in A Look Ahead is the advantage of small/mid-cap domestic stocks vs. large-cap multinationals, given the latest currency market dynamics.

Income Mail:
Big Five Economies Singing Off Same Sheet of Music
by Bryan Perry
Modest Inflation – a Nice Problem to Have

Growth Mail:
What’s Wrong with Being Rich?
by Gary Alexander
1917: Russia Killed the Rich while America Taxed Them
1942 – American CEOs Built the Arsenal of Democracy

Global Mail:
A Real-Life Mexican Standoff
by Ivan Martchev
Currency Implications for the Peso, Ruble, and Euro

Sector Spotlight:
Putting Today’s Headlines into Perspective
by Jason Bodner
Financials Lead the Way over the Past 3-6 Months

A Look Ahead:
Keep Focusing on Small/Mid-Cap Domestic Stocks
by Louis Navellier
The Economic News Remains Positive – for Now

Income Mail:

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

Big Five Economies Singing Off Same Sheet of Music

by Bryan Perry

When discussing the global economy, one of the many data points that gets eyebrow-raising notice from economists and investors alike centers on a country’s factory output. Manufacturing is a key indicator of core growth, so when the biggest economies in the world are all experiencing a similar uptick in their manufacturing Purchasing Managers Index (PMI) reports, it’s a big deal.

The Purchasing Managers' Index (PMI) is an indicator of the economic health of a manufacturing sector. The PMI is based on five major indicators: new orders, inventory levels, production, supplier deliveries, and the employment environment. The information that generates the PMI is gathered from monthly surveys sent to purchasing executives at approximately 300 companies. By definition, a PMI of more than 50 represents expansion of the manufacturing sector – when compared to the previous month – while a PMI reading under 50 represents a contraction. A reading of exactly 50 indicates no change.

Few would argue that the U.S. is currently leading the global economy out of a recessionary threat based on the fact that the Fed is the first central bank among the largest global economies to tighten interest rates. The Fed’s view is supported by steady improvement in many economic readings, not the least of which is the monthly PMI report. In the latest reading, the Flash Markit Manufacturing PMI in the United States increased to 55.1 in January of 2017 from 54.3 in the previous month, beating market expectations of 54.5. It is the highest reading since March of 2015 as new work boosted output and purchasing activity (source: Trading Economics U.S. Manufacturing PMI – January 24, 2017)

Purchasing Managers Index Bar Chart

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

Looking at the five largest economies over the past year, there has been an uneven pattern of fits and starts with factory output as it pertains to the U.S, China, Japan, Germany, and the rest of the Eurozone economies. However, in late 2016, all five economic powerhouses experienced similar and encouraging upticks in their respective PMI readings. This, in my view, may have bullish ramifications for global markets and central bank monetary policy going forward. I would venture to say that the “Trump bump,” which the markets have experienced since November 8th, took root back in July 2016, well before the election and not as a result of it. The Trump victory merely watered what was already a healthy, growing garden.

Five Largest Economies Manufacturing Purchasing Managers Index Chart

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

Global bond markets have taken notice of this coordinated move off the economic doormat, as evidenced by the unwinding of safety trades, rotation out of bonds and into equities, dramatic currency swings, and rising forecasts about a pickup in inflation. Sovereign bond yields for each country have risen in tandem even as monetary easing remains in effect with the exception of the U.S.

For the time being, the backup in government bond yields is being looked upon by global stock markets as more of a coincident indicator in the sense that it reflects more optimism about a long-awaited pickup in economic growth than it does about serious concerns related to inflation being too much of a threat.

Modest Inflation – a Nice Problem to Have

The largest global economies recovering in one accord might bring some much-needed redemption for central bankers, as it would provide some validation for policies that have long been criticized for lacking effectiveness. The trade-off, though, could eventually be a synchronized tightening effort if manufacturing activity continues to gather strength, economic growth rates increase, and, of course, if inflation rates accelerate. But that scenario would be “a nice problem to have,” considering the alternative – which I’ll address if and when inflation does present a real long-term threat to the bond market.

The past week showed that expectation for the five-year forward inflation rate rose by three basis points to 2.15% (source: fred.stlouisfed.org, January 27, 2017), holding at a level that should certainly please policymakers at the Fed. Stability of oil prices plays a big role in this forward inflation figure and with WTI crude trading in a $50 to $55 per barrel range, the combination of incrementally higher interest rates with rising GDP and modest inflationary pressure bodes well for the big picture of economic prosperity – save for the rising national debt and ongoing deficit spending that needs to be reined in at some point.

As of last Sunday evening, January 29th, when I sat down to write this column, the Gross Federal Debt was $19,939,908,790,870. At the end of FY 2016, the debt was $19.5 trillion, or 105.6% GDP. The highest federal debt in U.S. history was 119.0% GDP in 1946, just after World War II. At the end of FY 2016 the annual federal deficit was $587 billion, or 3.2% of GDP (http://www.usgovernmentdebt.us).

There is little argument that the real risk of government debt at this point is the burden of interest rates. Experts say that when interest payments reach about 12% of GDP then the government will likely default on its debt. The chart below shows the U.S. is a long way from that danger zone. Federal net interest costs for 2015 were 1.24% of GDP but interest payments should increase sharply once interest rates normalize.

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

Adding deficit spending from infrastructure spending, the military, and job creation, mixed with lower corporate tax rates, could spur GDP growth above 3.0%, spurring future tax receipts from higher across-the-board revenue growth from businesses. Only time will tell if this formula plays out to the benefit of all; but it sure beats the worn-out road of out-of-control entitlement spending, high taxation, strangulation by regulation, and out-of-balance global trade deals that serve special interests.

For now, investors should breathe a sigh of relief and enjoy the place where the market is today compared to the literal gloom-and-doom headlines and bearish deflationary rhetoric that was crossing the tape this time last year when the S&P 500 sank 13% to 1810 in the first month of trading for 2016. To see the S&P touch 2300, or 27% higher than the low 12 months ago, while the Dow simultaneously crosses 20,000 is a testament to just how responsive the stock market is when it senses the domestic economy has turned the corner. And by the closely watched PMI as well as many other indicators, it certainly has turned a corner.

Growth Mail:

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

What’s Wrong with Being Rich?

by Gary Alexander

“Would it spoil some vast eternal plan, if I were a wealthy man?”

– Tevye, in the conclusion to his song, “If I Were a Rich Man,” from “Fiddler on the Roof” (1964)

I have seen some biting criticisms of Trump’s “billionaire cabinet” picks, as if their success reflected some sort of moral flaw. In truth, there are only two billionaire nominees (Wilbur Ross in Commerce and Betsy DeVos in Education) and two more worth $300 million each (Rex Tillerson in State and Steve Mnuchin in Treasury), but some critics can’t seem to separate wealth from greed in their mental calculus.

It was always thus. In the mythical town of Anatevka, a student from Kiev named Perchik came up to Tevye the milkman and offered to teach Tevye’s five daughters in exchange for food. They shook hands on the deal. Then, Tevye offered Perchik a slice of cheese. But Perchik recoiled from accepting the gift.

Perchik: “I am no beggar.”
Tevye: “You know it’s no crime to be poor.”
Perchik: “It is the rich who are the criminals. Someday, their wealth will be ours.”
Tevye: “Oh, that would be nice. If they would agree, I would agree.”

Back in 2008, I had the honor to play Tevye in a week-long community theater production of “Fiddler on the Roof,” with a cast of 50. In a real-world sub-plot, I believed in Tevye’s aspirational capitalistic fantasy (“If I were a Rich Man”), while our actor playing Perchik was an equally dedicated share-the-wealth socialist. Our play ran during the week of the Bear Stearns bailout, so Perchik and I were acting out our own views in public. For instance, Perchik argued over Tevye’s match for daughter Tzeitel:

Perchik: “Congratulations, Tzeitel, for getting a rich man.”
Tevye: “Again with the rich? What’s wrong with being rich?”
Perchik: “Money is the world’s curse.”
Tevye (beating his chest): “May the Lord smite me with that curse! And may I never recover!”

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Later, in Act II, Tevye overheard one of Perchik’s socialist-flavored Bible lessons for his five daughters:

Perchik: “In order to marry Rachel, Jacob was forced to work another seven years. So, you see, children, the Bible clearly teaches us you can never trust an employer.”

These comic exchanges were fun to act, but the actions of the real-life Perchiks aren’t that funny. As the centennial of the 1917 Bolshevik Revolution approaches, maybe it’s time to rehearse the different ways in which the Old and New Worlds handled the challenges of wealth inequality over the last 100 years.

1917: Russia Killed the Rich while America Taxed Them

As quoted above, Perchik prophesied, “Someday their wealth will be ours.” He was talking about seizing their wealth, not politely asking, so after Tevye’s family left for America, Lenin and all his little Perchiks fomented a 1905 uprising and then the 1917 Bolshevik revolution, followed by a bloody civil war.

This transition is recounted in harrowing detail by Douglas Smith in “Former People” (2012). Smith concluded that “the destruction of the nobility was one of the tragedies of Russian history. For nearly a millennium, the nobility… had supplied Russia’s political, military, cultural and artistic leaders” including “writers, artists, and thinkers, of scholars and scientists, of reformers and revolutionaries.”

From my studies as a music historian, I know that nearly all of the great 19th century Russian composers were part of that aristocracy: Alexander Borodin (1833-1887) was a man of science – a leading professor of chemistry who helped found the School of Medicine for Women. Modest Mussorgsky (1839-1881) and Nikolai Rimsky-Korsakov (1844-1908) both served as military and naval officers before turning to music, while Peter Ilyich Tchaikovsky (1840-1893) graduated in law and became a legal clerk before composing.

In short, the Russian aristocracy were not the idle rich. As Douglas Smith wrote: “The end of the nobility in Russia marked the end of a long and deservedly proud tradition that created many of what we still think of today as quintessentially Russian…from the poetry of Pushkin to the novels of Tolstoy and the music of Rachmaninov.” But the Perchiks of the world didn’t care about all that. They wanted the loot. Martin Latsis, head of the Cheka in Ukraine said, “Do not look in the file of incriminating evidence… Ask him instead to which class he belongs, what is his background, his education, his profession. These are the questions that will determine the fate of the accused. That is the meaning and essence of the Red Terror.”

America entered World War I 100 years ago this spring, about the same time the Czar was overthrown in Russia. To fund America’s war effort, Congress raised tax rates astronomically. The federal income tax began in 1913 at 7%, but then the top rate leaped to 67% in 1917 and 78% in 1918, followed by 73% in 1919-1921 to pay off war debts. When World War II broke out, top tax rates leaped to 88% in 1942-43, then 94% in 1944-45. That means that rich Americans could keep only $60 of every extra $1,000 earned!

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1942 – American CEOs Built the Arsenal of Democracy

In World War II, some of our best industrialists volunteered to leave their lucrative jobs and work for the government at a symbolic $1 annual salary. (Apparently, U.S. law forbids government accepting the services of unpaid volunteers, so those executives had to be paid a nominal salary.) Two leaders of this effort were shipbuilder Henry Kaiser and the automotive magnate William “Big Bill” Knudsen, each of whom recruited a huge team of “dollar-a-year” executives from major industrial companies to produce the steel, ships, and tanks to support America’s war effort. There was no question these CEOs would comply.

Knudson was President of GM in 1940, when Roosevelt first called him. Knudson soon turned his auto assembly lines into making tanks, jeeps, and aircraft. Later on, Kaiser turned from making commercial freighters to making Liberty ships, landing craft, and battleships. As Arthur Herman relates in “Freedom’s Forge: How American Business Produced Victory in World War II” (2012), American businesses “produced two-thirds of all Allied military equipment used in World War II. That included 86,000 tanks, 2.5 million trucks and 500,00 jeeps, 286,00 warplanes, 8.800 naval vessels, 5,600 merchant ships, 434 million tons of steel, 2.6 million machine guns and 41 billion rounds of ammunition … and the atomic bomb.” All this happened after 12 years of a Great Depression, with factories closed across the land.

In 1943 in Tehran, Joseph Stalin – who had terrorized the rich in the USSR – raised a glass to Roosevelt and Churchill and toasted to “American production, without which this war would have been lost.”

There is a danger in this sort of federal control over private businesses. Except on a strictly voluntary basis during limited times of war and national crisis, this unholy alliance can turn into “economic fascism,” which Wikipedia defines as “an economic system where the state has the power to direct economic production and allocation of resources.” After all, Nazi Germany enlisted its heavy industry (like Krupp Steel) to its war effort, too. A much healthier way of bringing business talent to government is to hire them. That is what we have seen with some Trump nominees – business people taking a drastic pay cut.

In the next installment, I’ll cover a similar contrast from 50 years ago – China’s Cultural Revolution vs. LBJ’s bizarre tax increases of the late 1960s to fund the Vietnam War. For a decade (1966-76), China replicated the Bolshevik terror by torturing and killing the rich and well-educated elite. Russia’s example of terror was also repeated in Pol Pot’s Khmer Rouge. As Doug Smith wrote, “Russian nobles were one of the first groups subjected to a brand of political violence that became a hallmark of the last century.” *

*Book sources: “Former People: The Final Days of the Russian Aristocracy,” by Douglas Smith (2012) and “Freedom’s Forge: How American Business Produced Victory in World War II” by Arthur Herman (2012).

Global Mail:

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

A Real-Life Mexican Standoff

by Ivan Martchev

Inglourious Basterds is a 2009 film written and directed by Quentin Tarantino. It’s about a fictional band of U.S. soldiers that operated within German-occupied France during WWII. At one point, Lt. Aldo Raine climbs down the stairs of a basement to save a wounded German girl from his party but is faced by the last-standing German soldier with a machine gun.

Aldo: Hey, Willi, what's with the machine gun? I thought we had us a deal?

Willi: We still have a deal. Now, get the girl and go.

Aldo: Not so fast. We only got a deal (if) we trust each other. And a Mexican standoff ain't trust.

Willi: You need guns on me for it to be a Mexican standoff.

Aldo: You got guns on us. You decide to shoot, we're dead. Up top, they got grenades. They drop them down here, you're dead. That's a Mexican standoff, and that was not the deal. No trust, no deal.

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Spoiler alert: Willi does not survive the scene as he gets shot dead by the wounded girl being rescued.

It appears that President Trump has walked into a real-life Mexican standoff with Mexican President Enrique Peña Nieto: Both sides will suffer tremendously if any “shots are fired.” The rhetoric of a 20% border tax to “pay for the wall” over the past week certainly suggests still-rising tensions. And so does the cancelled meeting between the two counterparts announced appropriately by President Peña Nieto via his own Twitter account. As they say in the movie business, here is where the plot thickens.

In my conversations with investors over the past couple of months, there is a recurring theme to most questions: “What do you think President Trump will mean for the economy and stock market in 2017?”

My answer has been very consistent all along. I do not believe that many of the people that voted for President Trump understand the self-contradictory nature of many of his election promises. He could turn out to be a really good President if he expedites the repatriation of corporate cash from abroad, lowers taxes, delivers targeted deregulation, and simplifies the tax code. Well-targeted infrastructure spending and domestic investment will also boost the economy. However, high domestic spending in combination with high tariffs would cancel each other out – this is Economics 101. So if he starts his term in office with a trade war with some of the United States’ most important trading partners, like China and Mexico, then economic conditions could turn sour much faster than the majority of investors anticipate.

TradeBalance.jpg

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

To be fair to President Trump, something needs to be done on the trade front as we have witnessed persistent deterioration in the past 25 years. The U.S. trade deficit, charted above, also tends to shrink most notably during recessions and when the oil price is weak, as oil imports are a major component of it.

Still, there is a misconception about U.S. manufacturing capacity that needs to be clarified: The U.S. manufacturing sector has not shrunk. It is true that some jobs have gone to China and Mexico but it is also true that many jobs have been lost due to automation. U.S. manufacturing capacity has actually been slowly growing as the trade deficit has exploded. It’s just that the service part of the economy has grown much faster. It is also true that corporations have invested in manufacturing capacity in China and Mexico, instead of the United States, which is a trend President Trump wants to understandably change.

Yet, the nature of the trade deficit with Mexico implies that a trade war will hurt both countries at the same time. If one examines the details more closely, one can see that the trade deficit with Mexico is actually not the same as the trade deficit with China. According to Wilson Center’s Mexico Institute:

“Mexico already buys more U.S. products than any other nation except Canada, but more than just an export market, Mexico and the United States are partners in manufacturing. Through a process known as production sharing, the two countries actually work together to build products. Imports from Mexico are therefore unlike imports from any extra-continental partner in the way they support U.S. jobs and exports. A full 40% of the content in U.S. imports from Mexico is actually produced in the United States (See page 17 of the report). This means that forty cents of every dollar spent on imports from Mexico comes back to the U.S., a quantity ten times greater than the four cents returning for each dollar paid on Chinese imports.”

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Yes, there is a trade imbalance with Mexico, but the situation is a fraction of the issue with China, which imported only $116 billion of American exports in 2015, vs. sending us $483 billion of Chinese exports.

Currency Implications for the Peso, Ruble, and Euro

Taking into consideration that U.S. exports to Mexico are about twice those going to China and have grown dramatically because of NAFTA, one can see that the Mexicans have not taken as much advantage of the U.S. as President Trump would like us to believe.

PesoVersusRuble.jpg

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

For the time being, the Mexican peso should serve as a pretty good barometer of where this standoff is going. The peso has been under significant pressure since 2014, as are most emerging market currencies, due to the overall decline in commodity prices. But while many emerging market currencies have surged in 2016 – due to the rebound in oil and other commodities, most notably reflected in the volatile Russian ruble – the Mexican peso has kept on selling off because of pressure from Washington.

How the Mexican peso performs would be a real-time indicator as to how the standoff is resolving itself.

As for the Euro, Brexit is just part of the European Union’s problems. This year promises to be full of rising political risk for the EU and, by definition, for the euro itself. There are elections in France, the Netherlands, Germany, and maybe Italy. Suffice it to say that the EU cannot survive if any of these four countries elects a populist government, with France now posing the riskiest political outcome.

ExchangeRate.jpg

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

All those political worries suggest that the “dead cat” bounce seen since early January in the EURUSD cross rate is unlikely to stick. We are most likely headed for parity, which won’t hold, in my opinion.

The EU (and the euro) cannot afford to lose another member. The EU may have an exit strategy from the union via Article 50 but the architects of the euro forgot to think about an exit mechanism. Should another EU member deliver their own version of Brexit, both the EU and the euro are likely to disintegrate.

I think we will yet see significantly lower levels for the EURUSD cross rate – i.e., below parity (1-for-1).

Sector Spotlight:

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

Putting Today’s Headlines into Perspective

by Jason Bodner

You likely know that the earth is tiny compared to the sun. About 1.3 million earths could fit inside the sun. That may make you feel small, until I tell you about a monster star named “UY Scuti.” This star is the largest star yet observed. It is 1700 times the size of the sun and has five billion solar masses.

To put that into context, if the sun holds 1.3 million earths, UY Scuti would hold 6.6 quadrillion earths. This one giant star is one of a few hundred billion in our galaxy which is only one of a recent NASA estimate of nearly a trillion. This should be enough to make every one of us feel insignificantly small.

UY-Scuti.jpg

I find that when things get confusing down here on earth, which is often, I look to the stars to offer some perspective. From a cosmic perspective, Mr. Trump’s actions over the past week may not mean much; but they are numerous, constant, controversial, shocking, and quite puzzling at times.

With the recent slew of ‘circustastic’ news developments over the past week, it's a great time to look up, because I for one am sick of looking at headlines. The enormity of the universe is something easily overlooked when each passing event seems like the most unprecedented thing that has ever happened.

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The market seems to jerk wildly as it reacts to a steady stream of intraday headlines. Looking over this past week, from the perspective of the market, the onslaught of media squawking seems to have just been so much noise. The market churned higher as the Dow cracked 20,000. The thing is, though, the market looks to be overbought as we grind higher. But then, the market doesn't seem to care about executive orders as much as actual people do. The conflict and controversy of everyday action is certainly not reflected in the broad market indices. It’s been business as usual – at least the usual since November 8th.

Financials Lead the Way over the Past 3-6 Months

Looking at how the sectors performed this week, we see the usual suspects. Materials, Information Technology, and Financials all posted very solid performances. Materials vaulted 3.44% last week, while Infotech popped 2.30%. Financials rounded out the top three with a +2.14% showing. The only visible sign of weakness was the Telecommunications Services Index, which sank -1.74%. Again, whenever Telecom is a focal point, it is necessary to remind you that there are very few stocks in the index (five), so the volatility of the index becomes amplified and distorted by a small data set.

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Financials continue to be the major driver of the post-election rally. For the past three months, the index is up 19.61% and for six months is up +23.06%. Performances like these don’t come about very often.

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Utilities and Consumer Staples are currently the only sectors which are not positive in their past three months. The “Trump Bump” is maturing each day. Currently, the only signs that it may stop come in the form of the absence of institutional selling. All of the metrics that I use to observe institutional activity above and beyond the norm indicate a one-way crowd. Institutions continue to accumulate stocks, but the overall pace is slowing. When the pace of one-directional price action starts to slow, and volumes start to dwindle, a potential reversion may be around the corner. While no one expects the market to go straight up forever, a lot of unexpected things seem to be happening lately. Right now, with only 34% of companies reporting out of the S&P 500, we are still in a wait-and-see mode. People want to see what earnings say.

According to FactSet’s Earnings Insight (January 27, 2017), so far, 65% of companies have beat earnings, while 52% have beat the mean sales estimate. The good news is that six of the eleven sectors have higher growth rates today compared to December 31. In terms of guidance, it’s about 50/50 for companies guiding lower and higher.

As the landscape unfolds, each day seems quite different than the day before. We have to stand back and admit that the current administration’s first days in office are dominating global headlines, overshadowing market performance. In a more “normal” environment, the Dow cracking 20,000 would be on the lips of nearly everyone. This is just not the case this week. With all the media swirl going on right now, it may help to pause and take a moment for some perspective. When the news becomes so intense, it has a habit of becoming all-consuming for the human mind. Instead, try looking up at night. Each point of light is a star potentially harboring many planets. There are literally trillions of them. Down here on Earth, many people have anxiety about what will happen tomorrow. Uncertainty reigns supreme. But what can we do?

Walt Whitman said it well: “The future is no more uncertain than the present.” In markets and life, we need to take each day as it comes. We can prepare, but ultimately we all end up reacting more than acting.

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A Look Ahead:

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

Keep Focusing on Small/Mid-Cap Domestic Stocks

by Louis Navellier

I was on CNBC again early last Thursday after the Dow closed above 20,000 for the first time. On the show, I cautioned against overreacting to big Dow stocks or the cap-weighted S&P 500 and NASDAQ indexes. Due to a strong U.S. dollar, I’m avoiding many U.S. exporters. In general, I told the CNBC audience that I expect the small/mid-cap arena to outperform big caps, and equal-weighted indexes to outperform cap-weighted indexes. As for big-caps, I like selected industrials and energy stocks in advance of next earnings season. I also said that Trump can’t control the U.S. dollar, no matter what the press and Trump think.

If the Fed raises rates further this year – as nearly all pundits expect – the U.S. dollar will gain even more strength, since it offers positive income in a strong currency vs. flat-to-negative yields in the weaker euro and yen. Even if the Fed postpones rate increases, the U.S. dollar still offers higher yields than the euro or yen.

If inflation keeps rising and the economic news continues to improve, I think the Fed will likely raise rates again.

The Economic News Remains Positive – for Now

The economic news last week was mostly positive. On Thursday, the Conference Board announced that its Leading Economic Index (LEI) rose 0.5% in December, the fourth straight monthly rise. The Conference Board’s director, Ataman Ozyildirim, said, “December’s large gain … suggests the business cycle still showed strong momentum in the final months of 2016.” As an example of a strong business cycle, Markit reported that its flash estimate of its service purchasing managers index rose to 55.1 in January, up from 53.9 in December. This is the highest reading that Markit has reported for the service sector in over a year.

On Friday, the Commerce Department announced that its flash estimate for fourth-quarter GDP was an annual rate of 1.9%, which was below economists’ consensus estimate of 2.2%. Rising inventories added 1% to overall fourth-quarter GDP growth, while a bigger trade deficit subtracted 1.7%. In fact, the fourth quarter was one of the worst quarters ever for the trade deficit, dragging down overall GDP growth as imports posted the biggest quarterly gain in two years and soared 8.3%, while exports plunged 4.3%.

The silver lining is that fourth-quarter GDP would have grown at a 3% annual pace had the trade deficit been unchanged from the third quarter (it was boosted by record soybean exports). Clearly, a strong U.S. dollar is now impeding exports, widening the trade deficit, and slowing down overall GDP growth. This means that trade will be a big factor if the U.S. is going to get near President Trump’s goal of 4% growth.

Speaking of trade, it appears that President Trump and Mexican President Enrique Peña Nieto are having a bit of a tiff over the new border wall. On Thursday, President Nieto officially canceled his meeting with President Trump scheduled for today, while reiterating that Mexico would not pay for the new border wall. President Trump then instructed his press secretary Sean Spicer to announce that the U.S. would impose a 20% border tax on Mexican imports to raise $10 billion a year to pay for the border wall.

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In 2015, Mexico exported $296 billion in goods to the U.S., so a 20% border tax could (in theory) be as high as $59 billion! Clearly, the trade wars are now taking shape, although I suspect that the threat of a 20% border tax may be posturing for eventual negotiations when cooler heads will prevail, so that both sides can claim victory. However, in the interim, currently both President Trump and President Nieto are trying to appeal to their respective political bases. Stay tuned, since this escalating fight with Mexico will be fascinating to watch and naturally may spook some companies that import goods from Mexico.

On the downside, the Commerce Department announced on Friday that durable goods orders declined 0.4% in December, substantially below economists’ consensus estimate of a 2.2% increase. A dramatic (-33.4%) plunge in new defense capital goods orders was largely responsible for the drop in overall orders. Some of the bright spots in the report were that orders for new vehicles rose 2% and orders for commercial aircraft soared 42%! Excluding autos, aircraft, and defense orders, durable goods orders rose 0.5% in December, the sixth straight monthly gain when transportation orders are excluded. Another encouraging sign was that shipments of core capital goods rose 0.8% in December. Assuming the Trump administration boosts defense spending this year, durable goods orders will likely improve steadily.


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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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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