Entering an “Earnings Recession”?

Are We About to Enter an “Earnings Recession”?

by Louis Navellier

March 12, 2019

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The bulk of fourth-quarter earnings have been announced and the average stock has posted a 5.7% sales increase and a 14.3% earnings increase – the fifth straight quarter of double-digit earnings growth.

Despite that great news, the S&P fell 2.16% last week as CNBC kept warning about a coming “earnings recession.” They are referring to the analyst community’s forecast that first-quarter 2019 S&P 500 earnings could decline 2.9%, due largely to more difficult year-over-year comparisons. Specifically, FactSet is expecting that only four of the 11 S&P sectors will post positive earnings growth in the first quarter, namely Healthcare (up 5.4%), Utilities (+3.9%), Industrials (+3.1%), and Real Estate (+1.9%).

However, 2018 was a year of 24% earnings growth and a 6% decline in the S&P 500, so a year of flat earnings may not impact the market that much. Maybe the late 2018 correction reflected the anticipated drop in 2019 earnings growth, so the market may now look forward to 2020 earnings more than 2019.

In This Issue

We finally had a down week in 2019, so the doomsday stories have dominated the media. First, there’s the very real threat of Brexit and a European recession, but Bryan Perry doesn’t think this will impact the U.S. market much. Then there’s the political nonsense of the Green New Deal and the latest “end of the world” rhetoric in America, which Gary Alexander debunks. Ivan Martchev revisits the China “miracle” of a levitating market with deteriorating fundamentals, which can’t go on forever. Jason Bodner has been warning of a correction in this “overbought” market and is glad it has arrived, but history tells him to look for higher prices ahead. Then I’ll close with a look at the U.S. vs. Europe. Bottom line, there are problems in Europe and China, but the U.S. remains the oasis – with a strong currency, stock market, and economy.

Income Mail:
Recession Inertia is Building in Europe
by Bryan Perry
European Growth Forecast – “Look Out Below!”

Growth Mail:
The Sky is Falling…Again
by Gary Alexander
Is Today Really “The Most Divided” America Has Ever Been?

Global Mail:
The Trade Deal is a Trigger to Sell China
by Ivan Martchev
The Economic Cycle Cannot Be Eliminated

Sector Spotlight:
This “Overbought” Market Finally Corrected
by Jason Bodner
The First Week of Lower Prices in Most Sectors in 2019

A Look Ahead:
Can We Sustain 3% GDP Growth in 2019?
by Louis Navellier
In Contrast, Europe is Struggling

Income Mail:

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

Recession Inertia is Building in Europe

by Bryan Perry

As recently as December 14, 2018, European Central Bank President Mario Draghi stated that the ECB would stop the almost $3 trillion quantitative easing (QE) bond-buying program in January 2019. At that time, Draghi lowered his prediction of Europe’s growth for 2019 to around 1.7%, citing the persistence of uncertainties related to trade issues, the threat of protectionism via Brexit, vulnerabilities in emerging markets, and a steep decline in asset valuations within financial markets that would impact spending.

Fast forward just three months to March 7, 2019 and Draghi has put out a revised forecast for only 1.1% growth in 2019 – cutting in half the ECB’s outlook from just a year ago. At its policy meeting, the ECB announced that they will postpone their first post-crisis rate hike until 2020 and went on to state that the central bank will now offer “ultra-cheap” loans, saying again that the global trade war and the threat of Brexit are causing lasting damage to the euro-zone economy. Brexit hasn’t even happened yet, but their pointing the finger at the U.K. seems like a good way to lay blame somewhere other than where it lies.

What’s interesting is that Draghi forgot to mention the biggest threat to Europe’s GDP growth – namely, the irreversible, structural long-term damage from embracing socialist economic policies that fueled a flood of non-assimilating immigrants and massive public spending on top of sky-high income tax rates.

High marginal tax rates can make additional work prohibitive and lead individuals to decide to stay in less productive positions or choose not to work at all, depending on how favorable the social safety net is in their country. When high tax rates increase the cost of labor, this has the effect of decreasing total hours worked, which decreases the amount of production in the economy.

The intensely liberal European Union is headquartered in Brussels, Belgium, a nation with one of the three highest marginal tax rates in Europe at 60.2%. The higher two are Slovenia (61.1%) and Portugal (61.0%). Here’s the scary part: Those 60%+ marginal tax rates kick in at household incomes of just $56,000 in Belgium and $107,000 in Slovenia. Really? Tax rates reach 60% at such modest incomes?

The youth unemployment rate in Belgium has averaged 20% from 1983 until 2018 (source: Trading Economics), and this is the “democratic socialist” model which those elitists that run the EU in Brussels want to apply to greater Europe. No wonder the U.K. wants out. In terms of share of eurozone GDP, Germany is #1, as it contributes 21.1% of euro-GDP with the U.K. coming in second at 16.0%. No wonder Brexit is such a big deal. Brexit takes a huge chunk of revenue away from the socialist elites.

If you want to take into account the countries that matter most to the Eurozone, Germany has a top marginal tax rate of 47.5% for incomes above $299,000, France has a top marginal tax rate of 55.1% for incomes over $583,000, Spain has a top marginal tax rate of 43.5% for incomes over $73,000, Italy has a marginal tax rate of 52.8% for incomes over $93,000, and the U.K. has a marginal tax rate of 47.0% for incomes over $192,000. That’s quite a wide range of top rates and peak income thresholds in one region.

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

European Growth Forecast – “Look Out Below!”

So, while the benchmark Euro Stoxx 50 index has rallied in tandem with the U.S. market since late December, the downside risk to European equities now seems elevated. Germany closed 2018 with GDP growth of only 1.5% compared with 2.2% in 2017. This is the weakest growth rate in five years, with downward momentum implying economic contraction for Europe’s most important economic engine.

It’s no surprise, then, that Draghi is raising a red flag before the first quarter is even in the history books. Germany’s factory orders were down -2.6% for February and poor import and export data out of a key market in China shaved -4.4% off the Shanghai Index. Not knowing what is in store for Brexit, there is little to get excited about in the way of owning European equities.

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

The hard data is telling us that the recent gains enjoyed by the Euro Stoxx 50 index will be at risk of being wiped out as the year progresses. Those expected losses could be led by the European banks, now that the ECB will reintroduce the long-term financing operation for banks, known as TLTRO.

With no rate hikes in the current forecast, loan demand in decline, and trade/tariff talks hitting a stalemate, European financials could suffer worsening business conditions over the intermediate term. Additionally, it’s hard to imagine how much lower interest rates can go in Europe. As of March 7, the ECB held its benchmark refinancing rate at 0 percent, and as of last Friday the average eurozone 3-month interest rate was -0.31%. Most 10-year bond rates in the EU nations have gone down 15 or more basis points in the last month, and 30-60 bps in the last year:

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This table represents the most widely-held and widely-traded 10-year government bonds from around the globe. If $3 trillion in QE, zero interest on short-term money, and 1.0% 10-yr money can’t get Europe’s economy out of first gear, then I’m not sure what will. While this situation – combined with a weakening economy in China – may not wash up on U.S. shores anytime soon in the form of weak domestic data, it could well have a dampening effect on investor sentiment.

Despite the rising chorus of socialist nostrums in the U.S., our citizens, voters, and investors need look no further than Europe to see how decades of experiments in social democracy are working out. Capital will continue to leave places where it is not welcome and move to where it is not perfectly welcome but is treated with more respect than on a continent with 60%+ tax rates.

Growth Mail:

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

The Sky is Falling…Again

by Gary Alexander

“The world is going to end in 12 years if we don't address climate change, and your biggest issue is how are we gonna pay for it?” – Representative Alexandra Ocasio-Cortez (AOC), January 21, 2019.

In her first full day in Congress, as the youngest woman ever elected to that august body, AOC actually said, “The world is going to end in 12 years,” unless we re-invent our way of living, from scratch.

Instead, maybe she could read some history books or listen to some of us old codgers who have endured worse scares. Instead, she parrots the fears of a generation that has grown up with warnings of worst-case scenarios of global warming (now called “climate change” to cover all possible outcomes). Scary videos have convinced an army of youthful non-scientists that we are about to die, but these fears are not new.

Shortly after I graduated from college in 1967, a slew of books came out warning of similar Apocalypses:

  • In 1967, the brothers William and Paul Paddock wrote a book called “Famine 1975,” in which they said that it was impossible for food production to keep up with population growth. The first chapter was titled “The Population-Food Collision Is Inevitable; It Is Foredoomed.”
  • In 1968, Paul Ehrlich published “The Population Bomb,” in which he opened by saying, “The battle to feed humanity is over. In the 1970s and 1980s, hundreds of millions of people will starve to death,” leaving “only 22.6 million starved Americans alive in 1990.”

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This was only the beginning of our sorrows. By Earth Day 1970, many renowned professors were equally dismal. Washington University biologist Barry Commoner said, “We are in an environmental crisis which threatens the survival of this nation.” Harvard biologist George Wald said that “civilization will end within 15 or 30 years unless immediate action is taken against problems facing mankind.” Peter Gunter, a North Texas State University professor, wrote in 1970, “Demographers agree almost unanimously on the following grim timetable: By 1975 widespread famines will begin in India; these will spread by 1990 to include all of India, Pakistan, China and the Near East, Africa. By the year 2000, or conceivably sooner, South and Central America will exist under famine conditions…. By the year 2000, 30 years from now, the entire world, with the exception of Western Europe, North America, and Australia, will be in famine.”

In January 1970, LIFE magazine reported, “Scientists have solid experimental and theoretical evidence to support…the following predictions: In a decade, urban dwellers will have to wear gas masks to survive air pollution…by 1985 air pollution will have reduced the amount of sunlight reaching earth by one half.” LOOK magazine reported that “Dr. S. Dillon Ripley, secretary of the Smithsonian Institute, believes that in 25 years, somewhere between 75 and 80 percent of all the species of living animals will be extinct.”

Then came the books about how we will soon run out of natural resources. “The Limits to Growth” came out in early 1972 and eventually sold 16 million copies in over 30 languages. In short, the report’s authors projected that, at the exponential growth rates they expected to continue, all the known world supplies of zinc, gold, tin, copper, oil, and natural gas would be completely exhausted by 1992. In the same year, Harrison Brown, a scientist at the National Academy of Sciences, published a chart in Scientific American that estimated that all of our lead, zinc, tin, gold, and silver would be gone before 1990

In that era, the “Coming Ice Age” was considered more of a risk than global warming, since the planet had actually cooled slightly between 1940 and 1975. Cal-Davis professor Kenneth Watt warned about a pending Ice Age: “The world has been chilling sharply for about 20 years,” he declared. “If present trends continue, the world will be about four degrees colder for the global mean temperature in 1990, but 11 degrees colder in the year 2000. This is about twice what it would take to put us into an ice age.

Sadly, I believed all these threats and wrote about them in major magazines in the 1970s and 1980s until I realized it was all nonsense. In the 1990s, I formed a whimsical group called “Apocaholics Anonymous,” a haven for those who once preached the end of the world but who now avoid parroting such pessimism.

Is Today Really “The Most Divided” America Has Ever Been?

You think America is divided today? Just look at 50 years ago, when Vietnam War protests on the UC Berkeley campus turned so violent that National Guard helicopters indiscriminately sprayed tear gas on student demonstrators. Half a million protesters surrounded the White House protesting Vietnam, especially after pictures of the My Lai Massacre were published, showing our brutality in that war.

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Domestic terrorism? In a four-month period in the summer and fall of 1969, eight bombings rocked major institutions in New York City. That’s in addition to the Manson family killings on August 8-9, when they cruelly slayed seven people, including Sharon Tate, hoping to launch a civil war. On August 20, a bomb equal to 24 sticks of dynamite ripped open three sides of the Marine Midland bank on Broadway.

In one 18-month period in 1971-72, there were over 2,500 domestic terrorist bombings, an average of five per day (see Brian Burrough’s book, “Days of Rage,” about “The Forgotten Era of Domestic Violence”).

We obsess over a minor face-off between a Kentucky high school boy and a Native American in Washington DC, but in 1969, Indian demonstrators took over the former federal prison on Alcatraz Island in San Francisco Bay and stayed there for 19 months, declaring it their own sovereign nation.

President Trump mocks the press and its “fake news,” but President Richard Nixon compiled an “enemies list” of his press tormenters and had them audited. He also used VP Spiro Agnew as his attack dog. Agnew called the press “an effete corps of impudent snobs” and “nattering nabobs of negativism.”

All through this, the U.S. economy kept growing, with the GDP reaching $1 trillion for the first time in history. The federal budget was balanced for the last time – until 30 years later, in 1999. The Boeing 747 made its debut, and the U.S. made two round trips to the moon – Apollos 11 and 12 – all in 1969.

We can focus on all the bad news, or we can look at the progress mankind is continuously generating. Likewise, we can plot historic trends into the future using inaccurate static (straight-line) projections of past trends to create computerized models of doom, but they haven’t worked in the past and will not likely come true this time, either, since mankind tends to seek and find solutions we can’t see in advance.

Global Mail:

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

The Trade Deal is a Trigger to Sell China

by Ivan Martchev

With a possible summit of President Xi and President Trump approaching to sign “the trade deal of the century,” the Chinese stock market has zipped higher – rising from under 2500 to over 3100 on the Shanghai Composite in 2019, before the chilling export data hit last week causing a sharp reaction lower.

This rally on rising trade deal hopes is a rally for the wrong reasons. I believe that the recent sharply decelerating economic data in China is not because of trade friction and tariffs, which in this case act only as a catalyst. It’s because the Chinese economy was slowing down due to China’s authorities clamping down on unregulated lending and overall credit growth that had gone out of control in the last five years.

Apple is a good indicator for China, as they cited the mainland as the main reason they missed estimates last quarter. If you watch the interview CEO Tim Cook gave to CNBC’s Jim Cramer, he clearly stated that Apple saw the Chinese economy slowing down on a rational trajectory before the tariffs hit, at which point the pace of deterioration picked up. My point is that the removal of tariffs will be no magic wand that makes the Chinese economy perform much better, despite the fact that they are pressing the accelerator pedal on lending quotas and reserve ratio cuts in order to spur the very credit growth that they were trying to clamp down on – which led to the slowdown in the first place (for more, see Marketwatch, January 14, 2019, “China’s hard landing? Watch prices on these 3 things, not economic data”).

Navellier & Associates does own Apple in managed accounts and in our sub-advised mutual fund.  Ivan Martchev does not own Apple in personal accounts.

When it comes to economic data, February exports fell 20.7% from a year earlier, the largest decline since February 2016. Consensus estimates were looking for a 4.8% drop after January’s unexpected 9.1% jump. What makes matters worse is that imports fell 5.2% from a year earlier, where the consensus was looking for a 1.4% fall accelerating from January’s 1.5% decline. Imports of major commodities fell across the board, raising an interesting question about the direction of the CRB Commodity index and the price of oil, which fell precipitously in 2014-2016, the last time there was a major economic deceleration in China.

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

When the price of oil fell from $77 to $42 in the fourth quarter of 2018, I had a sneaking suspicion that it was not only due to hoarding crude stockpiles because of the coming Iran sanctions, but also a dramatic fall in demand from China, the largest driver of oil prices on global markets. The rapid deceleration of economic data in China of late supports that view (see Marketwatch, November 14, 2018, “China’s coming recession has pushed oil below $60”).

A Nikkei reporter saw the above article and called me, centering her questions on the very important issue of when China’s hard landing may arrive. As you may know, Japan has its own issues of too much financial leverage backfiring in epic deflation and economic stagnation for over two decades now, so a credit bubble like the one we have seen in China today is near and dear to their hearts.

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

You might call this “the trillion-dollar question” since that is the amount of foreign exchange reserves that have been lost since China’s reserves topped out near $4 trillion in 2014. How many trillions more will leave China if the hard landing actually arrives? I think we will find out soon enough.

The challenge with timing a hard landing in the Chinese economy is the fact that we have never had a situation in a major world economy where the majority of lending is done via government-controlled entities. Every time the economy weakens, they accelerate lending via quotas, adjust the reserve ratio requirements for banks, and exert control over the exchange rate in order to prevent such a hard landing.

The Economic Cycle Cannot Be Eliminated

Such draconian interventionist monetary policy has worked for at least 25 years and has created an elongated economic expansion. I do not believe such long economic cycles could have happened in a pure capitalistic economy with an open capital account, where the majority of the financial sector is in private hands and only the central bank acts as a regulator. Capitalistic economies are cyclical because of how savings and investment cycles work. Can a hybrid economy like China, with such government control over the financial sector and a large part of the economy – namely the energy sector – eliminate the economic cycle? I believe the answer is “no.”

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

There has never been a case in the history of capitalism of an economy without economic cycles. I think such extreme interventions end up creating non-productive uses of capital and over-indebtedness that ultimately makes the coming hard landing a lot worse than it would have otherwise been.

The unproductive uses of capital can be seen not only in the numerous empty cities that have been built in China, but also in the performance of the Shanghai Composite, when compared to India’s Sensex Stock Market Index. India is much less developed today but similarly to China had to do numerous reforms to liberalize its economy by reducing government control. But there is no such thing as forced lending in India, and there are numerous large financial institutions that are for-profit enterprises.

As the Indian economy grows, profits in the overall economy grow and so does the Sensex Index. As the overall economy in China grows, profits in the aggregate do not necessarily grow, other than for some well-known Chinese privately held companies many of whom have ADRs listed in New York. This lack of rising aggregate profits can be seen in the erratic performance of the Shanghai Composite.

The cycle of rising GDP with rising indebtedness and lack of rising profitability will be China’s downfall.

Sector Spotlight:

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

This “Overbought” Market Finally Corrected

by Jason Bodner

Think back to when you were a kid. Remember when you used to hear all these warnings: “You’ll shoot somebody’s eyes out!” or “Sitting too close to the TV will ruin your eyes.”  Or “don’t run into traffic.” Looking back now, some of those just seem ridiculous, but some were smart guidelines to keep us safe.

Some warnings have ulterior motives. For instance, the military requested that the FDA do a study on drug effectiveness. They studied 100 prescription and over-the-counter drugs and found that over 90% of them were still effective and safe 15 years after the expiration date. That’s right, the dates don’t actually indicate that a drug is less effective once it had “expired.”

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The obvious undertone is that the manufacturers sell way more drugs if you’re fooled into believing they are no longer safe and effective. It brings to mind the ongoing argument between my wife and me about food expiration dates. Either way, one mantra of expiration dates is: keep ‘em shopping for a fresh supply.

I know I sound like a broken record when I say that the media is fixated on delivering bad news to you. The fact is that unicorns and rainbows don’t get people to click, so the media needs to generate fear and loathing. That brings me to what I am noticing now. We have been talking about how the market has been overbought since the first day our ratio popped above 80% as of the close on February 6th.

The market has now been overbought for 21 trading days with the MAP-IT ratio over 80%. This happens when the number of unusual institutional buy signals divided by sell signals is more than 80% on a 25-day moving average. The ratio hit its peak on March 1st at a level of 92.6%. As the ratio has declined, the buying has been slowing and the selling has been picking up. This table delivers the daily details:

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

The green column is the daily buy signals while the red is the daily sells. The right-most column is the 25-Day Moving Average of this daily measure. As you can see, it’s dropping over the past few days. But when you look to the column left of it – the one-day ratio – you can see how swiftly the deceleration of buying has been in the past five trading days, a time during which the S&P has declined over 2%.

Observing this led me to ask: How does this overbought period compare with prior periods in the last 30 years of our data mining? There were 28 prior times that the market stayed overbought for 19 or more trading days. Given the power of our oversold signal timing market bottoms, we were hopeful to find the overbought signal to be promising in identifying market tops. What we found was very interesting.

Making a long statistical story short, we found the peaks of the 25-DMA ratio in each instance and then looked for when the ratio declined for at least five days afterwards. We took the average returns for one week through eight weeks afterwards. The theory was that when the ratio started falling from the peak reading, we would see lower market prices ahead. Over the 28 instances in the last 30 years that fit these criteria, what we actually found was an average 1.5% increase eight-weeks forward.

This summarizes the average 1-8 week returns from the ratio dropping from its peak (after five days):

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

Those are the average returns of all 28 instances. But what we see now are lower prices.

The First Week of Lower Prices in Most Sectors in 2019

Look at the market and sector performances since the ratio peaked on March 1st

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

Now that’s a pullback – no question. On a sector basis, we have seen a rotation from growth sectors into defensive sectors. Utilities and Real Estate saw a move higher (as of this writing) while the remaining nine sectors were down for the week. Health felt the biggest blow, down nearly 4%. Energy, Financials, Consumer Discretionary, and Info tech were the other worst performers.

This is the first week of lower prices in most sectors since the end of 2018.

As you can see below, buying slowed significantly, while UI sell signals picked up slightly.

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

A giveback is a healthy thing and now the worriers who fretted about going up too far too fast can begin worrying about going down. Such is the curse of the eternally negative thinker. As a result, the China trade news is now back in the headlines. The Friday nonfarm payroll report was pretty dismal, and the political headlines are (as usual) irksome. My point is that the news cycle has shifted negative again, and we can see the algorithmic selling starting to react to it, so I expect some bumps ahead.

But given the lookback we did over all prior overbought periods, our expectation has to be tempered to expect less high prices rather than lower prices. In other words, the bull market is still alive. The sales and earnings cycle is nearly complete with 96% of companies reporting earning: 70% beat their earnings estimates, and 60% beat sales estimates. So, as we exit this earnings cycle and hit a pocket of less market-intense news, I expect a near-term market burp followed by a resumption of bullish action.

The thing about market warnings is they are just that – warnings, not facts. Take heed in the warnings that come from pessimistic thinkers. The data is strong, but there will always be storm clouds on the horizon.

Norman Cousins Quote

As Norman Cousins said, “History is a vast early warning system.”

A Look Ahead

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

Can We Sustain 3% GDP Growth in 2019?

by Louis Navellier

On February 28, the Commerce Department announced that fourth-quarter GDP grew at a 2.6% annual rate, bringing the full-year growth rate up to 2.9%, just shy of President Trump’s stated goal of 3%.

However, that figure could be revised lower in the next iteration, since the Commerce Department announced last Wednesday that the U.S. trade deficit soared 18.8% in December to $59.8 billion, its highest monthly level in a decade. U.S. exports declined 1.9% to $205.1 billion, while imports rose 2.1% to $264.9 billion. I should add that some economists believe that imports soared in December because businesses were trying to build their inventories up, just in case tariffs were increased in early 2019.

On top of that, first-quarter GDP growth is set to take a hit. Severe winter weather has impacted the U.S. so much that it will impact GDP. The Atlanta Fed is now expecting just 0.5% annual GDP growth for the first quarter, which is not too bad, since first-quarter GDP is often negative due to severe winter weather.

However, there is good reason to think the economy will pick up in the middle quarters of the year, as it did last year, especially if we see a favorable resolution to the U.S./China trade spat. After the latest talks, the U.S. is prepared to remove tariffs on $200 billion of Chinese goods in exchange for China lowering its tariffs on U.S. auto, chemical, farm, and other products. Furthermore, China would buy $18 billion in natural gas from Cheniere Energy and would not file a formal complaint with the World Trade Organization (WTO) concerning the recent U.S. tariffs. Since China’s exports plunged 20.7% in February (vs. a year ago), I suspect China wants to boost its exports by ending the U.S. tariffs as soon as possible.

Navellier & Associates does own Cheniere Energy in managed accounts but does not own Cheniere Energy in our sub-advised mutual fund.  Louis Navellier and his family do not own Cheniere Energy in personal accounts.

There was a lot of positive economic news released last week, all pointing to future GDP growth.

  • On Tuesday, the Institute of Supply Management (ISM) announced that its non-manufacturing (service) index surged to 59.7 in February, up from 56.7 in January and well above economists’ consensus estimate of 57.4. The new orders and business activity components were especially robust at 65.2 and 64.7, respectively. Additionally, all 18 ISM components rose in February, a rare event.
  • Also on Tuesday, the Commerce Department reported that new home sales rose 3.7% in December to an annual rate of 621,000. The median sales price was $318,600, 7% lower than a year ago.
  • On Friday, the Commerce Department announced that new housing starts surged 18.6% in January to an annual pace of 1.23 million. Residential building permits rose at a much more modest 1.4% to a 1.345 million annual pace. Both came in at a much higher pace than expected, since economists were expecting new housing starts to rise 9.5% and building permits to decline 2.7%.

The ADP and payroll jobs report also came out last week, but I won’t get into the details here, since the revisions are typically large in future months, and the partial government shutdown skewed the way the statistics were tabulated this time. For instance, the January ADP private payroll report was revised up to an impressive 300,000, from 213,000 previously estimated. However, I will cite the good news that average wages per hour rose 3.4% to $27.66 in the last 12 months. This wage growth has not been inflationary, since the U.S economy continues to boost its productivity. Specifically, U.S. productivity in the fourth quarter rose at an annual rate of 1.9% and in the past 12 months grew at a robust 2.2% pace.

In Contrast, Europe is Struggling

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The big surprise last week was that on Thursday, the European Central Bank (ECB) stunned observers by unveiling plans to stimulate Eurozone economic growth. This was a major policy reversal, since not only did the ECB say that they would hold interest rates steady for the remainder of 2019, but they also announced low-cost loans to banks to help shore up their capital base. The first batch of ECB loans will be offered in September with a two-year maturity. The ECB slashed its 2018 GDP forecast to 1.1%, down from 1.7% in December. ECB President Mario Draghi said, “The persistence of uncertainties related to geopolitical factors, the threat of protectionism and vulnerabilities in emerging markets appears to be leaving marks on economic sentiment.”  Draghi said the probability of a Eurozone recession was “very low,” but uncertainty surrounding Brexit on March 29 is a wild card that must be taken into consideration.

On Friday, it was announced that German factory orders declined 2.6% in January, substantially below economists’ consensus estimate of a 0.5% increase and the biggest monthly decline since last June. Orders outside the Eurozone were especially weak, which is consistent with China’s plunging exports. Domestic orders also fell, so if Germany follows Italy into a recession, the ECB will have to get much more aggressive, especially since Brexit is causing so much uncertainty.

By contrast, the U.S. remains in a “Goldilocks” environment with accommodative central banks and moderating interest rates due to slower global growth and serious Brexit concerns. There is no doubt that there is a global economic slowdown underway due to plunging Chinese exports and German factory orders, so the ECB has decided to provide new stimulus to try to avoid a Eurozone recession.

The key for investors in the upcoming months will be to concentrate on dividend growth stocks as well as conservative growth stocks that are forecasted to post strong earnings momentum in a decelerating earnings environment. My A-rated (Strong Buy) & B-rated (Buy) stocks in both Dividend Grader and Stock Grader are expected to remain an oasis for investors and should continue to benefit from persistent institutional buying pressure in an increasingly narrow stock market environment.


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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