Fed Comments Roil the Market

Fed Comments Roil the Market Once Again

by Louis Navellier

May 24, 2016

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

First-quarter earnings announcement season is now effectively over and some consolidation is likely in the weeks ahead, especially now that various Fed governors are talking up a potential rate hike in June.

On Tuesday, Atlanta and San Francisco Fed Presidents, Dennis Lockhart and John Williams, appeared together at a lunch sponsored by Politico and both reiterated that the Fed could have two or three more rate hikes this year.  Lockhart said that June “certainly could be a meeting at which action could be taken,” but added that “it is a little early… to draw a conclusion, so I am at this stage inconclusive…”

Fed officials always like to leave themselves “wiggle room” by saying they are “data dependent.”  This week, we will hear from Fed Chair Janet Yellen, who is scheduled to speak at Harvard on Friday, May 27th and again on June 6th, just before the next Federal Open Market Committee (FOMC) meeting on June 14-15.  That speech in Philadelphia at the World Affairs Council should help clarify the Fed’s guidance.

Last Wednesday, the FOMC minutes for their April 26-27 meeting highlighted the fact that the Fed may be willing to raise rates at its June meeting if economic growth and inflation pick up further.  Specifically, the FOMC minutes said that “most participants judged that if incoming data were consistent with economic growth picking up in the second quarter, labor market conditions continuing to strengthen, and inflation making progress toward the Committee’s 2% objective, then it likely would be appropriate for the Committee to increase the target range for the federal-funds rate in June.”  That’s three very big “ifs.”

Brexit Referendum Image

In my opinion, the economic, inflation, and wage data is not yet strong enough for the Fed to act in June.  Furthermore, since the June FOMC meeting is just a week before Britain’s June 23rd “Brexit” vote (to leave or stay in the European Union), I expect the Fed will postpone action.  Since evidence of economic growth remains shaky, new claims for unemployment are steadily rising, and global growth is flagging, I would be shocked if the Fed raises key interest rates at their June meeting.  Furthermore, since the state of the economy will be endlessly debated during the Presidential election season, the Fed would likely want to stay out of the political crosshairs by not raising rates until after the November Presidential election.

In This Issue

In Income Mail, Bryan Perry dissects the impact of the latest inflation figures and Fed mutterings.  In Growth Mail, Gary Alexander comments on the 120th anniversary of the Dow Jones industrial index.  In Global Mail, Ivan Martchev says the Fed is in danger of striking out if it raises rates twice this year.  In Sector Spotlight, Jason Bodner examines whether we know as much as we think we know in making trading decisions, and my closing comments cover some misguided forecasts regarding the oil market.

Income Mail:
Inflation “Blip” Spooks Market
by Bryan Perry
Mixed Messages from a Flatter Yield Curve

Growth Mail:
Where Now, Mr. Dow?
by Gary Alexander
The Dow’s Major Secular Cycles Since 1896

Global Mail:
Three Strikes and the Fed is Out
by Ivan Martchev
The Great Pound Mystery

Sector Spotlight:
We Only See a Small Slice of Reality
by Jason Bodner
Daily, Weekly (Hourly?) Action Shows no Rational Pattern

A Look Ahead:
Don’t be Seduced by Bullish Oil Forecasts
by Louis Navellier
Inflation Reports Whipsawed by Oil Prices

Income Mail:

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

Inflation “Blip” Spooks Market

by Bryan Perry

Just as most of the investing world was becoming resigned to factoring in a slim chance of any rate hikes for mid-2016, an eyebrow-raising headline crossed the tape last Tuesday when the Labor Department announced a 0.4% pop in the Consumer Price Index (CPI) for April – the highest one-month reading in four years – juiced primarily by the rebound in gasoline prices. All of a sudden, trigger-happy traders jettisoned utilities and consumer staples under the impression that this one data point would give the Fed a hall pass to hike short-term rates in June or July.

Let’s take a step back and examine the divergent forces at work here. If you factor out volatile food and energy, the Core CPI reading in April was 0.2%, right in line with expectations. In addition, S&P sales and earnings were negative for the fifth straight quarter and new jobs came in well below expectations.

We are clearly in a stock picker’s market where sentiment can change on a dime. Some markets afford the luxury of riding a broad wave of stock appreciation. This is not one of those markets. On the contrary, any whiff of change in investor perception sparks the high-frequency trading community to action, darting from one sector to the next like a pack of neon fish in a large aquarium when someone taps on the glass.

It appears that inflation might be in a trough to where any upward pressure on wages, medical expenses, housing, and other services might start to show up more consistently in the forward inflation data. This is what owners of bonds need to be concerned with. The yield on the 10-year Treasury moved from 1.75% to 1.85% in reaction to the April CPI report. Further rotation out of defensive sectors is likely in the very short term. I would caution, though, not to overreact. One monthly report does not make for a trend, at least not yet. But it does warrant close monitoring and some consideration toward portfolio rebalancing.

There is a sense of relief that the U.S. market has hung in reasonably well this past week, given the wake-up call it received from the CPI and Fed mutterings that the target range for the fed funds rate could be raised at the mid-June FOMC meeting. Rest assured that if the market had fallen more sharply, the media spin would be that it was due to anxiety about the Fed’s wake-up call about a possible June rate hike.

More notably, the U.S. Dollar Index is little changed since the initial spike following the release of the Fed minutes last Wednesday, so no one at the moment is getting too worked up about the potential negative feedback loop that might originate with a stronger dollar. However, if the recent rebound in the greenback picks up speed on the back of a heightened expectation of a rate hike in June or July, the forex headwinds that negatively impacted first-quarter earnings for many of the S&P 500 multinational companies will re-emerge following a brief two-month reprieve. (See chart of U.S. Dollar Index, below.)

United States Dollar Index Chart

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

Mixed Messages from a Flatter Yield Curve

It’s interesting to see how the bond market reacted to the new-found perception of a possible June Fed rate hike. Yields on the short end of the curve (including T-bills, 1yr, 2yr, and 5yr T-Notes) all popped higher while the longer maturities (10yr T-Note and 30yr T-Bond) saw their yields decline.

Treasury Rate Changes Table

From May 2 to 20, the spread between the 10-yr Treasury note and the 2-yr Treasury note decreased by 12 basis points to 96 basis points. This move was noteworthy because it dropped the spread to levels not seen since early March and it implies increasing growth concerns among bond traders. Prior to this year, the 2/10-spread had not traded below 98 basis points since the end of 2007. This spread remains well below last year's level of 168 (Source: Briefing.com’s Rate Brief, May 16, 2016).  A flattening yield curve can indicate that expectations for future inflation are falling. Since inflation reduces the future value of an investment, investors demand higher long-term rates to make up for the lost value. When inflation is less of a concern, this premium shrinks. A flattening curve also tends to anticipate slower economic growth and sometimes, like now, the curve flattens when short-term rates rise on the expectation of an imminent rate increase by the Federal Reserve.

Ten Year Treasury Constant Maturity Rates Chart

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

The flattening yield curve also reflects the decline in oil and other commodities that has been driving down inflation more than concerns about a recession. Ward McCarthy, chief economist at Jeffries, said (in Business Insider Feb. 22, 2016, “The Most Reliable Indicator of Recession Says the US Economy is Doing Just Fine”): “In this environment, the flatter curve is a reflection of deflationary pressures that have been driven by weaker global energy and commodity prices. It does not presage an economic slowdown.”

It would seem that McCarthy’s view coincides with the views of Fed Presidents Lockhart, Williams, and Kaplan, all of which spoke last week, saying that a June rate hike was not out of the realm of possibility. Additionally, it was not lost on market participants that the hard economic data for the second quarter, as opposed to the soft survey data, supports the view that economic growth is picking up in this quarter.

Specifically, the Atlanta Fed's GDPNow model points to a pickup in second-quarter GDP, showing a current projection for real GDP growth of 2.5% on an annualized basis. Retail sales for April logged the strongest monthly increase since March 2015. Housing starts, industrial production, and hourly earnings were up a robust 0.8% in April, which is a good portent for consumer spending (Source: Briefing.com’s Fed Brief, May 18, 2016).

So, will the Fed raise rates in June? A bevy of Fed presidents are scheduled to deliver speeches this week, with the expectation of a new hawkish tone. In addition, Janet Yellen is slated to speak at Harvard on Friday, May 27th in the company of former Fed Chairman Ben Bernanke, so we’ll know more in early June.

Some will caution that the Fed needs to “get out of the way” by not appearing to influence the political process. That in itself may tip the scales at the June FOMC meeting. There will be plenty of fresh data between now and June 15th for investors to chew on and if the Fed does intend to move up the overnight lending rate by a quarter-point, they will very likely provide Wall Street and the rest of us ample notice.

That said, a June hike seems less likely because Britain’s national referendum on whether to leave the European Union (the “Brexit” vote) comes on June 23rd, about a week after the Fed’s next scheduled policy meeting (June 14-15). And with earnings season ending in rather disappointing fashion, a rate hike in July would seem to be a more compelling way to examine some confirming data points crossing the tape.

Growth Mail:

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

Where Now, Mr. Dow?

by Gary Alexander

The Dow Jones Industrial Average (DJIA) was launched 120 years ago this week, on May 26, 1896.  It was not the first Dow index.  That honor goes to the Dow Jones Transportation Average (DJTA), born on July 3, 1884.  By the time Charles Henry Dow began publishing the first Dow index in early 1885 in “The Customer’s Afternoon Letter,” it contained 12 stocks, 10 of which were railroads.  Since railroad traffic dominated the economy then, the transportation average served as a proxy for the industrial economy, too.

In 1896, Dow split the two averages into 12 industrials and 20 railroads (which later became the new Transportation Index).  The DJIA has been refined and expanded several times since then.  The first 30-stock industrial average debuted on October 1, 1928.  The composition of the index has changed over the years.  The original arbiters were Dow Jones & Co.  The index is now maintained by McGraw Hill Financial.

Even though the S&P 500, Russell 2000, and Wilshire 5000 are – by definition – far more inclusive, the Dow (shorthand for the DJIA) is the most quoted index by the layman, the media, and some professionals.  The DJIA is slightly less volatile than the S&P 500, and it has missed out on the biggest gains in many of America’s biggest stocks: Microsoft and Intel did not enter the DJIA until 1999, during the tech bubble, and mighty Apple didn’t enter the DJIA until 2015, right before its recent correction.  Only one blue-chip industrial stock – General Electric – has been a part of the Dow industrials continually since 1907.

The Dow industrials opened with a big crash.  On May 26, 1896, its value was set at 40, but it fell to an all-time low of 28.48 in August of 1896, in reaction to a contentious presidential race between Republican William McKinley’s “gold bug” (gold standard) advocates and the bi-metallic Democrats, led by William Jennings Bryant who delivered his stirring “cross of gold” speech at the Democratic convention in July. (Source for this section: “Secrets of the Dow Jones Industrials” by John Prestbo, Wall St Journal, May 9.)

The Dow’s Major Secular Cycles Since 1896

Market cycles are not carved in stone for any demographic or mystical reason, but the Dow’s ups and downs of the past 120 years fall into some fairly clear patterns, partly due to politics and Fed policies of the day.  Roughly speaking, there have been four flat or bear markets and four mega-bulls since 1896. Picking tops and bottoms can be arbitrary, but any look at the last century shows clear bull/bear cycles:

Dow Jones Historical Trends Chart

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

In this election year, it’s important to look at what may have caused some of the worst bear markets of the last century, particularly the reversals after 1929, 1966, and 2000 – and what caused the bleeding to stop.

The 1929 stock crash gets all the headlines and most of the blame for the Great Depression, but the Dow was recovering nicely six months later, until politics destroyed that recovery.  On April 17, 1930, the Dow climbed all the way back to 294, retracing 50% of its September/November 1929 losses.  But then came a chilling 86% drop in the next 27 months.  The main cause of the collapse was a trade bill working its way through Congress that spring.  In desperation, on May 4, 1930, 1,028 leading economists signed a petition that protested the tariff.  Their plea didn’t work.  The Smoot-Hawley bill was signed into law on June 17th.

That day, the Dow Jones index fell by a massive 19.64 points (–8%), from nearly 250 to 230.  The 1,028 economists were right.  Their warnings proved prophetic, as foreign nations retaliated against Smoot-Hawley by passing their own tariffs, which deepened into a global depression and then World War II.  In addition to that mistake, the Fed cut money supply by one-third from 1929 to 1932, causing deflation.

The postwar recovery began with a mirror image of the protectionist Smoot-Hawley trade bill of 1930: the advent of the General Agreement on Tariffs and Trade (GATT).  On October 30, 1947, 23 nations signed on to GATT in Geneva, lowering 45,000 tariffs in the first of several GATT rounds of tariff reductions.

The 1966-82 bear market also had roots in politics.  On February 9, 1966, the Dow hit 1001 intra-day, its first foray into four digits.  The primary cause of the long bear market was a huge increase in government deficits.  President Johnson’s “guns and butter” (war and welfare) policies increased spending across the board.  In addition, Johnson took the silver out of our coins in 1965, and President Nixon closed the gold window in 1971, causing inflation and a weak dollar amid economic slowdowns, dubbed “stagflation.”

Another cause of the 1966–1982 bear market was the repeal of the Kennedy-Johnson tax cuts, which had fueled great economic growth in the early 1960s.  After a booming 1964–1965, due in part to tax cuts, on the day after Christmas, 1965, H. Gardner Ackley, chairman of the President’s Council of Economic Advisors, issued a report calling for massive tax increases “to prevent the economy from overheating.”

The 1982 recovery began after the Kemp-Roth tax cuts and Fed Chair Paul Volcker’s interest rate cuts. Volcker lowered the Discount Rate six times in late 1982, from 12% down to 8.5%.  Short-term (90-day) T-bills declined from 13.3 to 7.8% in the third quarter of 1982.  The Dow turned up dramatically on Friday, August 13, 1982 after hitting a lucky 3-digit-stream of 777, gaining 150% within five years.

There was also a repeat of the winning 1947 bull market formula—an increase in free trade worldwide. On November 28, 1982, representatives from 88 nations gathered in Geneva to find ways for eradicating protectionist trade barriers.  Once again, they did the right thing, removing many barriers to global trade.  The market was then supercharged in 1994 with the passage of NAFTA (despite a populist businessman Presidential candidate – H. Ross Perot – calling NAFTA a “giant sucking sound” of disappearing jobs).

Since 2000, we’ve seen three serious market crashes: The tech stock bubble of 2000, the market massacre of 2002, and the Greater Recession of 2008, which delivered the fastest 50% decline in market history.

Market Crashes Table

The market decline of 2007–2009 was caused by some familiar mistakes from the past, repeated: There was a massive government spending increase under President George W. Bush for multiple wars abroad plus increased domestic benefits (Guns & Butter II).  Trying to fight two wars while also trying to solve a variety of domestic ills—and never vetoing a bill until 2008—Bush inadvertently exhibited the same kind of hubris that sent LBJ into early retirement.  Guns & Butter III basically continued under Barack Obama.

The biggest cause, however, was easy money for housing speculation, courtesy of the Fed and Congress. First, Congress and Presidents Clinton and Bush tried to make home-owning near-universal, regardless of credit risk.  Then, the Federal Reserve pushed interest rates too low after 9/11—down to 1% or below for two years, encouraging too many Americans to buy too many homes and other major big-ticket items on easy credit.  By 2006, when the Fed belatedly raised rates back to 5% and housing prices stopped soaring, the inevitable “morning after” made the 2008 market and credit crash worse than it should have been.

According to Ibbotson Associates, the worst decade in stock market history was from February 1999 to February 2009.  In many ways, the current bull market is a belated attempt to mend the 2000-09 malaise.

Where do we go next?  (“Where now, Mr. Dow?”)  To a great extent, that depends on how much our next President and Congress will learn from history and promote free trade, pro-business policies.  Both major Presidential candidates are currently saying some scary things, but maybe they will wise up once elected.

Global Mail:

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

Three Strikes and the Fed is Out

by Ivan Martchev

“The definition of insanity is doing the same thing over and over again, but expecting different results”

--A comment attributed to Albert Einstein

There is little evidence that Albert Einstein actually said this, but it is still a beautiful quote. It has the same ring of truth as Mark Twain’s memorable blurbs: “All generalizations are false, including this one,” or “Truth is stranger than fiction,” or “All you need in this life is ignorance and confidence; then success is sure.” What matters more is that recent statements by the Federal Reserve hint that they are about to find out by repetition of more rate hikes the futility of their present monetary policy course.

The chatter over the past week from multiple Fed officials indicating a coming June rate hike if the economy does not deteriorate in the meantime(there are always such conditional statements with the Fed) feels rather well-coordinated. It is my experience that when the Fed wants to introduce some uncertainty into the markets they have multiple Fed officials make contradicting statements at the same time. But when they want to steer the market in a desired direction, their statements magically begin to sound alike.

iShares Twenty Year Treasury Bond Exchange Traded Fund Chart

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

This Fed chatter hit the Treasury market as well as fed fund futures, which again began to show a rising probability of a June rate hike. Before last week, the odds were negligible. Above, you can see a popular bond ETF, the iShares 20+year Treasury Bond ETF (TLT) and the “June hike sell-off” over the past week. Still, I find it fascinating that Treasury bonds have rallied significantly since the December hike. (Please note: Ivan Martchev does not currently hold a position in TLT. Navellier & Associates, Inc. does currently own a position in TLT for some client portfolios).

Last December, the 10-year Treasury note yield was above 2.30% while on Friday it closed at 1.85% and it has been as low as 1.57% in February. I have never seen the Treasury market rally after a Fed rate hiking cycle was announced and had already started. I take this rally in the Treasury market to be a sign of market disagreement with the Federal Reserve’s policy. Let’s call the first fed funds rate hike Strike 1.

I actually think that if the Fed hikes rates in June, the Treasury market will rally further and the 10-year Treasury yield will make an all-time low below the 1.39% registered in 2012. I give that process 6 to 12 months to play out. I thought that an all-time low in Treasury yields was coming anyway but a Fed rate hike at a time of global deflationary pressures could accelerate the decline in U.S. long-term interest rates. Fed rate hikes can worsen the deflationary outlook as they boost the dollar exchange rate and make it harder for massive foreign dollar borrowings to be repaid. A June rate hike, if it comes, would be Strike 2.

United States Dollar Index - Weekly OHLC Chart

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

A third rate hike by the end in 2016, if it comes, would be Strike 3, as by that time I expect the headline U.S. Dollar Index to be trading above 100 and the present commodity market rebound to be in the process of unwinding completely. The Fed oversees the world’s reserve currency and as such conducts monetary policy that carries far beyond U.S. borders. I think it is hopelessly misguided to be talking about more Fed rate hikes in the present environment, as a composite index on global government bond yields put together by Bank of America just hit an all-time low earlier in May, which is a sign of global deflation.

Chinese Yuan versus United States Dollar - Daily OHLC Chart

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

An interesting development of late has been the correlation of U.S. stock prices to the Chinese yuan. Even though the Chinese do not officially disclose the composition of the yuan’s “dirty” (or semi-floating) peg, the U.S. dollar is widely known to be the largest component of that basket. You can see that from the fact that as the CNYUSD exchange rate (green line) has declined so has the U.S. stock market as represented by the S&P 500 SPDR (SPY). Typically, the yuan-dollar exchange rate is quoted in yuan per dollar, or USDCNY, but by putting it on an inverted scale the correlation is more evident. (Please note: Ivan Martchev does not currently own a position in SPY. Navellier & Associates, Inc. does currently own a position in SPY for some client portfolios).

A depreciating yuan is highly deflationary as it puts China’s competitors at a major disadvantage at a time when the global economy is weak. I believe the Chinese will devalue dramatically, since their financial system is experiencing a deflating credit bubble with rising non-performing loans, which means that their banks are burning through capital. Monetary easing by the People’s Bank of China (PBOC) is not working at the moment. The Chinese devalued by 34% in 1994 after what appeared to have been a bad recession that was not officially acknowledged. I think they will devalue again.

A devaluation stimulates the Chinese economy via a different mechanism than PBOC monetary easing. The 1994 devaluation probably was the trigger that eventually caused the 1997 Asian Crisis, which started in the currency markets and quickly spilled over to local stock and bond markets. It is difficult to estimate what a Chinese devaluation will do this time around, but the bigger the Chinese devaluation, the larger the negative effect on the global economy, in my opinion.

My main point is that the coming Chinese devaluation will be highly deflationary for the global economy, which would make the present Fed rate hiking cycle look even more absurd than it already is. I believe that if the Fed hikes in June and later in 2016, those rate hikes will have to be reversed in 2017.

And that would mean those rate hikes were a big mistake.

The Great Pound Mystery

If the market does not do what you think it should do, there is a message in that, too.

I often like to say that when my theories do not work out, I will start looking to see why that is the case, so that I can figure out how to proceed in the new environment. I previously thought that with a month to go before the Brexit referendum, the British pound would have come under more pressure, somewhere in the $1.30s when looking at the GBPUSD exchange rate. Instead, it closed on Friday at $1.45 per dollar.

United Kingdom European Union Referendum Chart

One reason has been that the vote to remain in the EU has gained a bit of a traction, registering 47% on The Economist’s continuously updated poll, vs. 40% wanting to leave. The traction for the No vote has come from the undecideds, which have dropped to 10% from 20% at one point in the first part of April.

British Pound versus United States Dollar - Monthly OHLC Chart

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

It could be that the currency markets are a real-time voting system, where the smart money was betting on Britain staying in the EU, which is why the British pound “held support,” as the traders like to say, and never meaningfully declined below $1.40.

That said, Britons are the most anti-EU of Europeans. The fact that they are having a Brexit referendum says that. So far, the undecideds seem to have chosen the path of reason and if there are no major disruptions in Britain – like terrorist events – this could turn out to be a tempest in a teapot.

The Brexit referendum is still a bit too close for comfort, though.

Sector Spotlight:

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

We Only See a Small Slice of Reality

by Jason Bodner

The more we experience, the more we think we know. The more we think we know, the more confident we become. Human beings have a remarkable tendency to think we know it all. We see all, hear all, feel all, and sense all. The reality is, however, that we don’t know, see, smell, feel, or sense reality nearly as much as we think we do. In fact, we top-of-the-food-chain humans see only a tiny sliver of the electromagnetic spectrum. Visible light occupies less than 1% of the total light spectrum.

Visual Spectrum Image

We also hear only a small slice of the available sound spectrum, an estimated 20%. As far as the other senses go, many animal species blow us away with their extra-sensory abilities. From pigeons flying hundreds of miles home to the same precise location, to migratory patterns of sea turtles and whales, we observe animals capable of superhuman feats. Bats use echo-location while dolphins use sonar. We think we are in tune with our environment, but cows tend to orient themselves north/south when grazing and dogs even have been shown to align themselves with the poles when, well, when relieving themselves.

The truth is, we see, hear, feel, and sense what we want to. We think it’s everything, even though it’s just a morsel of the total pie. The problem is we sometimes feel superhuman while using a limited data set.

Superhuman Strength Image

The financial markets swim in a seemingly bottomless sea of data, information, thoughts, and opinions. As voluminous as it may seem, only a tiny sliver of information makes it to the mainstream headlines, and those headlines tend to dictate near-term price action. This is another example of how human beings allow themselves to find comfort in a narrow band of available information. We form a bias based on our limited experience. This comes from genetic hard-wiring. As a species, we evolved and survived based on adaptability. But in today’s immediate world, the investor can easily get lost in the volatility caused by short-term trading. The moment a story hits the tape, we have the ability to act, impacting a security’s price (not to be confused with value). For an individual with a long-term investment horizon, immediate trading on headlines causes the expression “Just enough rope to hang yourself with” to come to mind.

The speculation on the future action of the Fed continues to act like the tail wagging the dog. Upgrades and downgrades drive near-term volatility in stock prices. Short-term trends are choppy and volatile. All one needs to do is to look at the past few sessions of the broad equity indexes. According to FactSet, Monday’s performance of the S&P 500 was +0.98%. Tuesday was -0.94%. Wednesday saw a sharp mid-day rally fade to finish the day flat, +0.02%. Thursday was -0.37% while Friday was +0.60%. If I had begun by saying the S&P 500 finished last week +0.28%, it may have felt better than tracing the circuitous route it took to get there. Sector rotations continue: What goes up one day goes down the next.

Daily, Weekly (Hourly?) Action Shows no Rational Pattern

The daily volatility of the market does not reflect a pattern of rational action. With daily fluctuations of oftentimes more than 100 basis points on the broad indices, price action indicates a lack of direction and certainty. It is interesting to note that the Latest Flow Show report from BofA Merrill Lynch discussed a continuation of a “risk-off” theme in recent weeks. About that, FactSet said, “Equities saw $5.8B of outflows, with money leaving for a sixth straight week. At the same time, $2.8B went into bonds, which have attracted capital in 11 of the last 12 weeks. In addition, precious metals saw $1.8B of inflows, the largest in 11 weeks. Getting back to equities, defensive posturing evidenced by 13 straight weeks of REIT inflows, five straight weeks of tech outflows and largest outflows from healthcare in seven weeks.”

Standard and Poor's 500 Daily Sector Indices Chart

Looking at the sectors last week, we see a lot of short-term decision-making. REITS found significant strength since the mid-February lows. This past week, however, we saw notable pressure on REITs. Retail and Consumer stocks have been punished for a few weeks now. Last week didn’t spare them, either. Consumer Staples, Telecom, and Utilities were the week’s laggards, and Energy was the winner.

Standard and Poor's 500 Sector Indices Changes Chart

The recent Energy rally has been impressive. Over the last three months, we see a +13.35% return. Yet when extending our horizon to 12 months, we still see that the sector is heavily (-19%) underwater. The same story goes for Materials. Over three months, the sector is up almost 12% while the 12-month trend is down 10.55%. Telecom, Utilities, and Staples were the 12-month winners and last week’s big losers.

The short-term price action we are seeing is indicative of algorithmic traders looking for near-term arbitrage. The information in the mainstream media outlets is driving prices. Looking at the action, it feels almost mechanical, which one can attribute to high-frequency and algorithm trading. (It seems highly unlikely that retail investors with their 401ks and IRAs are moving the markets in such choppy action.)

There is a lot of information out there, but the reality we see is only a sliver of reality. Just as humans have constructed a comfort zone which leads to confidence based on our limited sensory experience, the market nowadays is moving based on a small subset of what is really going on. Algorithmic programs literally look at news stories and assign a negative or positive bias on them and direct trading accordingly, often in split seconds. In a world where everyone strives to be up to the moment on information, it helps to remember the words of Lao Tsu, who said, “The wise man is one who knows what he does not know.”

A Look Ahead:

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

Don’t be Seduced by Bullish Oil Forecasts

by Louis Navellier

On May 15, a new report by Goldman Sachs declared that the crude oil surplus has come to a “sudden halt” and forecasted $50 per barrel crude oil later this year, up from its previous forecast of $45 per barrel.

Specifically, Goldman Sachs said that the oil market has been helped by strong demand and sharp declines in production, so we have shifted from “nearing storage saturation to being in deficit much earlier than we expected.”  However, Goldman also said that increased Iraq and Iran production could more than offset disruptions from Nigeria.  Furthermore, Goldman Sachs cut its 2017 forecast for crude oil production to only $45 per barrel in the first quarter of 2017, down from its previous forecast of $55.

So essentially, Goldman Sachs is only predicting a slight rise in crude oil prices this year, and a slight decline from current prices by next winter.  Ironically, crude oil prices have moderated since Wednesday, because the Energy Information Administration reported that U.S. crude oil inventory rose by 1.3 million barrels to 541.3 million barrels in the latest week, so the recovery in crude oil prices moderated a bit.

Regarding production disruptions, the United Nations disrupted Libyan crude oil shipments from the port of Marsa al-Hariga due to fighting by ISIS in eastern Libya.  Under Libyan law, which is enforced by the UN, all Libyan crude oil must be shipped by the country’s National Oil Company, but ISIS forces in the east have formed their own oil company and are trying to export.  Due to fighting and blockade, Libya’s crude oil production has collapsed to less than 25% of its production capacity of 1.5 million barrels a day. (Source: MarketWatch.com, May 17, 2016, “Why Libya could be the biggest threat to recovering oil prices”).

Libya County Outline Flag Image

To be candid, the infighting in Libya, Nigeria, and other hot spots has been going on for a long time and these conflicts are routinely cited by traders who are trying to manipulate crude oil prices.  The fact of the matter is that increasing production by Iraq, Iran, Kuwait, and Saudi Arabia can more than offset any supply disruptions from Libya and Nigeria.  Furthermore, as crude oil prices climb, there is a lot of production that can come on line from fracking in the U.S.  Finally, the surge in crude oil prices is really due to seasonal demand; so the real test will be in September, when worldwide demand for crude oil ebbs.

Inflation Reports Whipsawed by Oil Prices

In the meantime, higher crude oil prices have ignited headline inflation on the consumer level.  Last Tuesday, the Labor Department announced that the Consumer Price Index (CPI) rose 0.4% in April, the biggest monthly gain in over three years; but energy prices surged 8.1% and food prices rose 0.2%, so the core CPI, excluding food and energy, rose just 0.2% in April, pretty much in line with expectations.

Medical care and rents rose 0.3% in April and also contributed to higher consumer prices.  In the past 12 months, the CPI has risen 0.9% and the core CPI has risen 2.1%.  Despite evidence that inflation may be brewing, inflation-adjusted hourly wages declined 0.1% in April and have only risen 1.3% in the past 12 months, so I do not believe that the Fed will be raising key interest rates in June, due to this lackluster wage growth.  Fed Chairman Janet Yellen is a labor economist and wants to see wages rise before hiking key interest rates further, so I do not think an interest rate hike is likely until real wage growth improves.

In the euro zone, deflation still persists.  On Wednesday, the EU’s statistics agency announced that its preliminary estimate for consumer prices dipped -0.2% in April, the second month in 2016 in which deflation has reared its ugly head.  Deflation has been a persistent problem for the European Central Bank (ECB), so it will be interesting to see how the ECB tries to break the threat of a deflationary spiral.


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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Please note that Navellier & Associates and the Navellier Private Client Group are managed completely independent of the newsletters owned and published by InvestorPlace Media, LLC and written and edited by Louis Navellier, and investment performance of the newsletters should in no way be considered indicative of potential future investment performance for any Navellier & Associates separately managed account portfolio. Potential investors should consult with their financial advisor before investing in any Navellier Investment Product.

Navellier claims compliance with Global Investment Performance Standards (GIPS). To receive a complete list and descriptions of Navellier's composites and/or a presentation that adheres to the GIPS standards, please contact Navellier or click here. It should not be assumed that any securities recommendations made by Navellier & Associates, Inc. in the future will be profitable or equal the performance of securities made in this report. Request here a list of recommendations made by Navellier & Associates, Inc. for the preceding twelve months, please contact Tim Hope at (775) 785-9416.

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It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities in this list. Click here to see the preceding 12 month trade report.

Although information in these reports has been obtained from and is based upon sources that Navellier believes to be reliable, Navellier does not guarantee its accuracy and it may be incomplete or condensed. All opinions and estimates constitute Navellier's judgment as of the date the report was created and are subject to change without notice. These reports are for informational purposes only and are not intended as an offer or solicitation for the purchase or sale of a security. Any decision to purchase securities mentioned in these reports must take into account existing public information on such securities or any registered prospectus.

Past performance is no indication of future results. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. It should not be assumed that any securities recommendations made by Navellier. in the future will be profitable or equal the performance of securities made in this report.

Dividend payments are not guaranteed. The amount of a dividend payment, if any, can vary over time and issuers may reduce dividends paid on securities in the event of a recession or adverse event affecting a specific industry or issuer.

None of the stock information, data, and company information presented herein constitutes a recommendation by Navellier or a solicitation of any offer to buy or sell any securities. Any specific securities identified and described do not represent all of the securities purchased, sold, or recommended for advisory clients. The reader should not assume that investments in the securities identified and discussed were or will be profitable.

Information presented is general information that does not take into account your individual circumstances, financial situation, or needs, nor does it present a personalized recommendation to you. Individual stocks presented may not be suitable for you. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. Investment in fixed income securities has the potential for the investment return and principal value of an investment to fluctuate so that an investor's holdings, when redeemed, may be worth less than their original cost.

One cannot invest directly in an index. Results presented include the reinvestment of all dividends and other earnings.

Past performance is no indication of future results.

FEDERAL TAX ADVICE DISCLAIMER: As required by U.S. Treasury Regulations, you are informed that, to the extent this presentation includes any federal tax advice, the presentation is not intended or written by Navellier to be used, and cannot be used, for the purpose of avoiding federal tax penalties. Navellier does not advise on any income tax requirements or issues. Use of any information presented by Navellier is for general information only and does not represent tax advice either express or implied. You are encouraged to seek professional tax advice for income tax questions and assistance.

IMPORTANT NEWSLETTER DISCLOSURE: The performance results for investment newsletters that are authored or edited by Louis Navellier, including Louis Navellier's Growth Investor, Louis Navellier's Breakthrough Stocks, Louis Navellier's Accelerated Profits, and Louis Navellier's Platinum Club, are not based on any actual securities trading, portfolio, or accounts, and the newsletters' reported performances should be considered mere "paper" or proforma performance results. Navellier & Associates, Inc. does not have any relation to or affiliation with the owner of these newsletters. There are material differences between Navellier & Associates' Investment Products and the InvestorPlace Media, LLC newsletter portfolios authored by Louis Navellier. The InvestorPlace Media, LLC newsletters and advertising materials authored by Louis Navellier typically contain performance claims that do not include transaction costs, advisory fees, or other fees a client may incur. As a result, newsletter performance should not be used to evaluate Navellier Investment Products. The owner of the newsletters is InvestorPlace Media, LLC and any questions concerning the newsletters, including any newsletter advertising or performance claims, should be referred to InvestorPlace Media, LLC at (800) 718-8289.

Please note that Navellier & Associates and the Navellier Private Client Group are managed completely independent of the newsletters owned and published by InvestorPlace Media, LLC and written and edited by Louis Navellier, and investment performance of the newsletters should in no way be considered indicative of potential future investment performance for any Navellier & Associates separately managed account portfolio. Potential investors should consult with their financial advisor before investing in any Navellier Investment Product.

Navellier claims compliance with Global Investment Performance Standards (GIPS). To receive a complete list and descriptions of Navellier's composites and/or a presentation that adheres to the GIPS standards, please contact Navellier or click here. It should not be assumed that any securities recommendations made by Navellier & Associates, Inc. in the future will be profitable or equal the performance of securities made in this report. Request here a list of recommendations made by Navellier & Associates, Inc. for the preceding twelve months, please contact Tim Hope at (775) 785-9416.

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