The Fed versus the ECB

The Fed vs. the ECB Means a Stronger Dollar, Lower Euro

by Louis Navellier

December 13, 2016

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

Last week, the stock market started out strong after the decisive “no” vote on Italy’s referendum, followed by the resignation of Prime Minister Matteo Renzi.  The next big vote comes from the French Presidential election in April.  Since current President Francois Hollande is not running for re-election, the only major European leader that is expected to stay in power is German Chancellor Angela Merkel, who is preparing to run for her fourth term.  Although Merkel is considered to be very accommodating to immigrants and refugees from the Middle East, last Tuesday she called for a ban on full-veil burkas and said that “the full veil is not appropriate here.”  Clearly, Europe is struggling with its identity and nationalism is on the rise.

While the Fed is expected to raise rates this week, the European Central Bank confirmed last week that its 80 billion euro ($84 billion) per month in quantitative easing would continue through March 2017 and then be cut back to 60 billion euro ($63 billion) per month in April and for the rest of the year.  With all of the banking problems in Europe, I’d say the ECB will likely continue to remain accommodative.  With rising rates in America and near-zero rates in most of Europe, the dollar should continue to rise in 2017.

Currency Symbols Mix Image

Since the British pound and the euro have been weak relative to the U.S. dollar, their exports have become more competitive, so their respective economies are finally starting to recover.  Expectations for global growth in 2017 have also become very optimistic, despite the political chaos dominating Europe.

Here in the U.S., there is a growing realization that a strong U.S. dollar may impede sales and earnings of large-cap multinationals, while small-capitalization domestic-oriented stocks are performing better.  I expect that the New Year will be dominated by stocks that can report much better earnings and future guidance during the upcoming fourth-quarter earnings reporting season.  In the meantime, we remain in a value-driven rally where some stocks with seemingly lackluster earnings prospects continue to prosper.

In This Issue

In Income Mail, Bryan Perry examines the implications of the Fed’s expected rate increase this week in the U.S. bond and stock markets.  In Growth Mail, Gary Alexander examines the implications of tech breakthroughs on the changing nature of the U.S. job market.  In Global Mail, Ivan Martchev reviews his last three annual predictions, while making a new prediction about gold.  In his Sector Spotlight, Jason Bodner comments on the explosion of green (vs. red) in most sectors and indexes recently.  In the end, I will return with a cautionary review of the most popular sectors, along with my latest economic outlook.

Income Mail:
The Fed’s Rate Increase Should (Eventually) Help Equities
by Bryan Perry
The Impact of Rising Rates on Corporate Bonds

Growth Mail:
Technology Creates More Jobs Than Manufacturing
by Gary Alexander
The Technological Tide Turned Ten Years Ago
Take This Job…and Love It

Global Mail:
Review of My Past Annual Predictions
by Ivan Martchev
2014: The Year of the Dollar
2015: A Rough Year for China
2016: A New Treasury Yield Low
2017: The Year Gold Declined Below $1000

Sector Spotlight:
Where Has all the “Red” Gone?
by Jason Bodner
Small Stocks Have Outperformed Large Stocks Recently

A Look Ahead:
Sector Swings are (Mostly) Based on Infrastructure Plans
by Louis Navellier
The U.S. Economic News Keeps Improving

Income Mail:

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

The Fed’s Rate Increase Should (Eventually) Help Equities

by Bryan Perry

This week the Fed will likely embark on a new rate-raising cycle that the market has fully prepared for in terms of both expectations and forward discounting of bond prices. There is a key difference between this and previous rate increase cycles – the starting point is much lower. For the first time in history, the Fed will be raising rates from near zero. Bond yields are also much lower than in other rate increase cycles.

I see a couple of implications of this unique environment. The fed funds rate has room to move higher before it drags economic growth down. For example, if the Fed enacts four or five 0.25% rate increases over the coming year – as is a reasonable expectation, embraced by a growing number of economists – the fed funds rate would increase to just 1.25% to 1.50%. This would hardly be punitive by any measure.

(During the previous six rate hike cycles, the fed funds rate started at an average of about 5%.)

While equities have generally performed well before and after Fed rate hikes, rate increases are associated with increased volatility. The table (below) shows the average daily returns of the last six rate-increase time periods. In the 250 days before the rate increases and the 500 days after, stock prices trended about 14% higher; but the first 250 days were fairly flat, on average. The numbers are different for each of the six time periods, but on average, equities experienced a peak-to-trough decline of roughly 10%.

Equities Survived Previous Fed Rate Hikes Table

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

Presently, the 10-year Treasury yield is around 2.45%. In the previous six time periods, noted above, Treasury yields were much higher when rates started to rise. During those times, the 10-year yield ranged from 4.6% to as high as 10.3%, with an average starting point of 7.0% (source: Barron’s – June 4, 2015).

This supports the argument that rising rates and yields won’t be enough to derail the current bull market. Plus, the Fed can ill afford to let rates rise to where interest on the $19+ trillion of national debt becomes one of the largest line items on the Federal budget. Currently, interest accounts for about 6% of the federal budget ($3.8 trillion for 2015). Interest on the debt is now projected to continue being the fastest growing area of federal spending in the coming years, outpacing even Medicare or Social Security.

Interest and Certain Government Programs Bar Chart

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

In 2015, the U.S. spent $223 billion of the federal budget for interest on the debt – more than jobless benefits, higher education, food assistance, and pollution control – combined (at $217 billion).

Significantly higher interest rates would mean the federal government would have to pay more interest to Treasury security holders, with those higher interest costs added to the deficit and accumulated debt.

The Congressional Budget Office (CBO) assumes that the average interest rate the government pays on debt held by the public will increase from 1.7% in 2015 to 3.5% by 2026. It also projects a sharp rise in interest rates, with the average rate on three-month Treasury bills rising from 0.5% in 2016 to 3.2% in 2026. It sees the average rate on 10-year Treasuries rising from 2.6% to 4.1%. (My take on this forecast is that it could be woefully underestimating the steepness of the future yield curve.)

But that’s not the only cost. When the Fed makes a profit on its Treasury holdings, it sends much of that profit back to the Treasury. Such profits have totaled hundreds of billions of dollars over the past decade. However, rising interest rates could push down the value of the Fed’s holdings, as bond prices fall when rates rise. That could mean Fed remittances to the Treasury will shrink. According to the CBO, rising interest rates and declining remittances from the Fed could help push interest costs from $223 billion in 2015 to $839 billion in 2026. Here’s the impact in billions of dollars and as a percent of federal outlays:

Net Interest on the Debt Bar Chart

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

The Impact of Rising Rates on Corporate Bonds

Federal budgets and ballooning interest payments aside, maybe the biggest story is in the corporate bond market. Issuance has boomed as large corporations rushed to take advantage of borrowing costs near record lows. Investors have flocked to positive-yielding debt to escape the $11.7 trillion of bonds in Europe and Japan that have been trading at negative yields, thanks to unprecedented stimulus there.

There has been a tremendous amount of influx of capital from around the world into our U.S. markets, enhancing the ability of companies to raise large sums of money in investment-grade capital markets.

Investment-grade bond sales passed the $1 trillion mark as of the first week of September, 2016.

United States Corporate Bond Rush Bar Chart

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

Prior to November 8, borrowing costs remained near year-to-date lows for companies seeking to float their offerings. As long as U.S. investment-grade bonds offer an average of 1.37 percentage points of extra yield over safer Treasuries, according to Bloomberg Barclays Index data, the spread will continue to attract foreign capital at a record pace for maturities inside seven years.

Clearly, Fortune 500 CFOs have pounced on this once-in-a-generation opportunity to build war chests of cash at next-to-nothing carry costs to fuel expanding lines of businesses, spur acquisitions, finance stock buy-backs, and help to insulate dividends. There have been many critics calling this a corporate bond bubble, but I would argue that, given the parameters of ultra-low interest rates the past eight years, I believe history will show that the last few years of record bond issuance will go down as one of the smartest and greatest catalysts to extending the current bull market for several more years to come.

Growth Mail:

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

Technology Creates More Jobs Than Manufacturing

by Gary Alexander

On the eve of Y2K, I wrote about the concentration of great inventions in the first five years of the 20th century.  These innovations – radio, airplanes, undersea cables, automobile assembly lines, diesel engines, and scientific theories like quantum physics and relativity – ultimately defined the 20th century.  At the time, I wondered what inventions in the early 21st century might help define this century.  Thanks to a new book by Thomas Friedman, I have a tentative answer to that question, but first a historical review:

Mid-December dates in the first few years of the 1900s brought memorable moments in new technology:

On December 12, 1901, Guglielmo Marconi sent a radio signal from an antenna in Cornwall, England, to Newfoundland, Canada, 2,232 miles away.  It was the first trans-Atlantic radio signal.  This news literally electrified the world.  Previously, the scientific community had argued that the curvature of the earth would limit the transmission of any radio waves to just a 100-to-200-mile radius, not 2,232 miles.

On December 14, 1902, the ship Silverton set sail from San Francisco to Hawaii to lay the first undersea telephone/telegraph cable between the U.S. and Honolulu.  The 2,620 miles of telegraph wire was successfully laid by January 1, 1903.  The first message was sent on January 3, 1903.

On December 17, 1903, Orville Wright took a short flight for a man but a giant leap for mankind – he flew about 40 yards in 12 seconds at Kitty Hawk, NC, with his brother Wilbur Wright watching.  Wilbur and Orville made four flights that day, the longest one going 852 feet and lasting for a full minute.  It was mankind’s first heavier-than-air powered flight, something previously deemed scientifically impossible.

Back in 1999 on this date, I wrote (for another publisher), “Amidst all the fear of Y2K, have we ignored the potential for unknown breakthroughs coming soon?”  Then I cited the paragraphs above, plus a few more:

  • 1902: Enrico Caruso made his first recordings for Victor
  • 1903: Henry Ford’s automobile assembly line debuted.
  • 1904: The Diesel Engine was first shown in St. Louis – and the New York subway was opened.
  • 1905: Albert Einstein published several scientific breakthroughs, including the theory of relativity.

After that came the Panic of 1907, but these earlier scientific discoveries made a quick recovery inevitable.

A century later, the world suffered another giant financial collapse in 2008, but not before a similar series of inventions recreated the world as we know it, making today’s world far different than the world of 1999.

The Technological Tide Turned Ten Years Ago

In “Thank You for Being Late: An Optimists’ Guide to Thriving in the Age of Acceleration” (published November 22, 2016), New York Times columnist Thomas Friedman highlighted a stunning series of technological breakthroughs in late 2006 and early 2007.  Here are just a few of the citations he listed:

  •  “Steve Jobs took the stage at the Moscone Center in San Francisco on January 9, 2007, to announce [his company had reinvented the mobile phone,” which he dubbed the iPhone.
  •  “In 2007, storage capacity for computing exploded thanks to the emergence that year of a company called Hadoop, making ‘big data’ possible for all.
  • “On September 26, Facebook, a social networking site that had been confined to users on college campuses and high schools, was opened to everyone at least 13 years old.”
  • “In 2007, a micro-blogging company called Twitter…was spun off and started to scale globally.”
  • Change.org, the most popular social mobilization website, emerged in 2007.”
  • “In late 2006, Google bought YouTube and in 2007 it launched Android.”
  • “Also in 2007, Amazon released something called the Kindle…launching the ebook revolution.”
  • “In 2007, Airbnb was conceived in an apartment in San Francisco.”

--from Chapter 2 (“What the Hell Happened in 2007?”) from “Thank You For Being Late,” by Thomas Friedman

Andy Karsner, U.S. Assistant Secretary of Energy from 2006 to 2008, cited these and other examples as “the beginning of the clean power revolution,” calling 2007 “the beginning of an exponential rise in solar energy, wind, biofuels, LED lighting, energy efficient buildings and the electrification of vehicles.”

These technologies took off rapidly.  Today’s news is defined by Twitter and Facebook.  Atrocities (as well as cute puppy videos) are filmed on iPhones and loaded onto YouTube.  You can delete an offensive Tweet in 10 seconds but chances are that several others have already “re-tweeted” your offensive words. Our Presidents now “tweet.”  On March 5, 2007, “@BarackObama” debuted.  He became our first “wired” President.  Now, we have a President-elect interrupting his slumber (and ours) with controversial Tweets.

More profoundly, new technologies like “fracking” have made America energy-independent over the last decade.  New technologies have also replaced check-out clerks in many stores and may soon replace truck drivers with driver-free vehicles.  The Luddites worry this will put people out of work but, as usual, this will merely replace jobs of great drudgery with jobs of greater creativity.  All of this, of course, requires far better education of far more of our citizens to be able to fit into these new workplace realities.

Tech innovations did not stop in 2007.  Following the Great Recession of 2008-09, high-tech patents grew by 12-fold in five years.  As this chart explains, “4.0” tech patents include Cloud Computing, Augmented Reality, 3D Printing, Big Data, System Security, Humanoid Robot, and Cyber Physical Systems:

Patent Registrations Increased by Twelve Times Bar Chart

Last week’s headlines tell us that our President-elect is working hard to save a few hundred manufacturing jobs in America.  The stock market responded favorably with the Industrials and Materials sectors leading the way, in expectation of massive infrastructure spending.  Technology has fallen a bit, but I would say this is an opportunity to buy into the tech sector and lighten up on heavy industry plays.  The future is still centered on technological advances more than where our air conditioners are made.

Take This Job…and Love It

I don’t want you to think less of me if I admit I played saxophone and sang in a country-rock band in the 1970s.  We played Saturday night honky-tonks.  It was a lot of fun and brought in a little extra cash during a tough decade.  Back in 1977, we sang a #1 hit by Johnny Paycheck called, “Take This Job and Shove it.”  It was about a dead-end, long-term factory job (“I been workin’ in this factory for nigh on 15 years”).

As you might imagine, whenever we sang that song, the whole dance floor joined in on the chorus: “Take this job and shove it!  I ain’t workin’ here no more!”  At the time, manufacturing jobs were dull, dead-end affairs.  Workers back then yearned for cushier jobs in offices or in services.  In fact, 20/20 hindsight shows that this song came out in the exact year when manufacturing jobs peaked in the postwar economy:

United States Employment in Manufacturing Chart

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

When “Take This Job and Shove it” was #1 in the hit parade, technology and world events were starting to put an end to America’s factory jobs.  First came Japan and the four Asian Tigers.  Then, China turned quasi-capitalist and took those dirty jobs from Japan (and us).  Back home, technological innovations improved our productivity so that a factory job is now more technical and less repetitive than it once was.

Real Trade Weighted United States Dollar Index Chart

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

Also, in 1977-78, the U.S. dollar reached its postwar cyclical low, making U.S. manufactured products more competitive on global markets.  But then the U.S. dollar shot up strongly from 1978 to 1985, killing our export markets.  It’s no coincidence that U.S. manufacturing jobs peaked when the dollar hit bottom.

The dollar is rallying again, and it will likely rally further in 2017, creating a headwind for U.S. exporters.  To face these new realities requires education in technology.  Without it, we won’t have jobs to “shove.”

Global Mail:

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

Review of My Past Annual Predictions

by Ivan Martchev

December is when I write my favorite column of the year – my prediction for the coming year. Before giving you my 2017 prediction, I think it will be illuminating to review my last three annual predictions.

2014: The Year of the Dollar

In December 2013 I said “ 2014: The year of the Dollar and what a year it was for the U.S. Dollar.

United States Dollar Chart

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

The U.S. Dollar Index (DXY) began to “run” in mid-year, rising from under 80 all the way to 100 in nine months, by March 2015, when its largest component (the euro, at 57% of the index) traded a hair under $1.05. After the necessary consolidation phase we “broke out” above 100 after the U.S. presidential election and we now look to have started another leg in this multi-year dollar rally.

The euro is near $1.05 again and looks destined to test parity (1-to-1) in 2017. I don't think parity will hold there as Brexit weakened Europe to the core, even though Britain is not a part of the Eurozone.

It is ironic that an EU proponent like George Soros made sure in 1992 that Britons wouldn’t use euros by forcing them out of Europe’s Exchange Rate Mechanism (ERM) with one of his most spectacular trades, earning him the nickname “the man who broke the Bank of England.” It would not be far-fetched to say that Soros sowed the seeds of Brexit as it would have been less likely for Britons to vote for Brexit if they were more integrated with Europe by using euros instead of British pounds.

Looking forward, there is the added possibility that the EU may break up with Le Pen in France and all sorts of euro-skeptics gaining the upper hand in a populist backlash against establishment structures. In addition to the clearly defined political risks for the euro, the Fed is trying to tighten while the ECB and particularly the Bank of Japan (BOJ) are running aggressive QE programs, making it is easy to see how the dollar is not done rallying. I would not be surprised if the Dollar Index ultimately reaches the 120 level. (Right now, we are near 102.)

2015: A Rough Year for China

In January 2015, I wrote “Why 2015 Could Be Rough for China” and China surely did not disappoint. By the time I wrote the column, the Shanghai Composite was already exhibiting signs of a classic bubble market similar to what we saw with the same index in 2007. With the Chinese being notorious gamblers, their stock market bubbles tend to be shorter but sharper in nature than the rest of the world. (Interested parties are urged to study similar moves in the Hong Kong Hang Seng Index, which has had a much longer history than the Shanghai Composite. The big difference is that in Hong Kong GDP growth correlates to profit growth resulting in an upside bias of the Hang Seng Index, which is not necessarily the case in China where the command-style economy does not often produce the same profit growth as GDP rises.)

China Shanghai Composite Stock Market Index Chart

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

My concern about China, often mentioned in this column, is not necessarily a prediction of serial stock market bubbles, but the fact that China is in the middle of a much larger and much more dangerous (for China) credit bubble. As China’s GDP grew 11-fold since the year 2000, total credit in the economy grew over 40-fold, resulting in a total debt to GDP ratio rising from 100% to 400% (if one counts the infamous shadow banking system). This credit bubble has now burst as is evidenced by the crash in the stock market, the rolling crashes in local real estate markets, as well as the massive capital flight out of China.

Chinese Yuan versus China Foreign Exchange Reserves Chart

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

For all intents and purposes, nearly a trillion dollars has left China, with foreign exchange reserves falling from $3.993 trillion in June of 2014 to $3.052 trillion at the end of November 2016, marking the fifth straight month of decline and the lowest forex reserve level since March 2011. Capital flight out of China is now re-accelerating after flattening out in mid-2016, declining by $70 billion in the latest reported month. In 2015 it was not uncommon to have a monthly run rate of $100 billion leaving China. This has put pressure on the PBOC and the Chinese yuan, which is being devalued in slow motion at the moment.

I think the Chinese are headed for a hard landing and I am looking for a similar economic outcome to what happened in the Asian Crisis in 1997-1998. If capital flight continues to accelerate, we could see similar headlines out of China again as those we saw in 2015. The worst news from China is yet to come.

United States Ten Year Government Bond Chart

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

2016: A New Treasury Yield Low

In December 2015, I wrote Will 2016 Bring New Treasury-yield Lows?” We hit a low of 1.36% on 10-year Treasury yield in July, right after Brexit – a new all-time low on a closing  basis. Since the election, a lot of damage has been done in the Treasury market with the 10-year closing at a two-year high at 2.47%.

Was 1.36% the ultimate low yield for Treasuries?

I remain unconvinced as we have a Brexit process that has not happened yet. Brexit has all the hallmarks of a bitter divorce that is now headed for the courts. The EU is so weak it might break apart, which would be a highly deflationary phenomenon that suggests a higher exchange rate for the U.S. dollar and capital flight into U.S. Treasuries possibly causing a fresh all-time low in yields.

The Chinese may have to resort to a hard overnight devaluation of the yuan (like they did in December 1993) in order to deal with the effects of their deflating credit bubble. A sudden, hard yuan devaluation is also highly deflationary in the global context. I think the 10-year Treasury will ultimately see 1% yields, although it may not be in 2017, as I previously thought, courtesy of the Trump policy agenda.

2017: The Year Gold Declined Below $1000

I have to admit this is the least contrarian of my last few annual predictions. I am not even sure that this bull run in gold bullion is over. In the 1970s, we saw a near-50% decline from $195 in 1974 to $103 in 1976 before gold bullion headed for the $800s in early 1980. If gold bullion were to decline 50% from its all-time closing high near $1900 in 2011, it will have to go to $950, which is a pretty good target for the 2017 lows, although losing the four-digit price level may cause gold bullion to overshoot to the downside.

Gold - Continuous Contract Chart

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

I think gold bullion will decline below $1000 in 2017 because I don’t think the U.S. Dollar Index is done rallying; the euro is not done falling; and the Chinese are not done devaluing. It is interesting to note that due to the open-ended nature of QE in Japan, holders of gold bullion denominated in Japanese yen may not experience a decline in the yen price of their gold holdings. The same would be true for holders of gold bullion in the Eurozone if the EU disintegrates due to the present populist backlash on the continent.

United States Consumer Price Index Chart

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

The reason why gold bullion always keeps its purchasing power over longer periods – like 50 years – is the U.S. (and global) fractional reserve banking system, where the credit multiplier effect causes constant monetary growth and the corresponding loss of the purchasing power of the dollar. In terms of inflation, the Consumer Price Index in the United States increased to 241.86 in October 2016 from 23.51 index points in January of 1950, meaning that the dollar has lost 90% of its purchasing power since 1950.

That said, gold often moves in fits and starts and can remain in a trading range for 20-year periods, even as the CPI index keeps on ticking higher. It is true that central banks target a positive inflation rate of about 2% as they believe deflation slows down economic growth. There is a school of thought, led by the Austrian school of economics, that believes that targeting a positive inflation rate and meddling in the interest rate markets only creates distortions in the financial system, which causes bigger and bigger crises until the last crisis is so big that it literally breaks the system.

We are not at such a point yet, even though such a dire outcome cannot ultimately be ruled out. Without necessarily disagreeing with the merits of gold bullion as a hedge against financial system mayhem over the long term, I think next year will be a down year for gold bullion for holders denominated in U.S. dollars.

Sector Spotlight:

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

Where Has all the “Red” Gone?

by Jason Bodner

Did you know that colorblindness is much more common in men than women? It affects about one in 12 men (8%) but only 1 in 200 women (0.5%). This is because the genetic problem is carried via the x chromosome. Nearly all (99%) colorblind people suffer from red-green color blindness, but some suffer from a more profound colorblindness. Actor Eddie Redmayne, who played Stephen Hawking in The Theory of Everything, can only see blue. In fact, many famous people suffer from color blindness. Bill Clinton, Bing Crosby, Bob Dole, Mr. Rogers, Hugh Downs, Jack Nicklaus, Mark Twain, Paul Newman, and Prince William are just some of the many famous colorblind people. Keanu Reeves of the Matrix fame is also colorblind. Mark Zuckerberg made Facebook tones blue because he is colorblind.

Color Blind Example Image

Lately, the market seems to have eschewed all remnants of red ink. Last week, stocks experienced yet another solid week in the “Trump Bump.” Wednesday was a clear highlight with big gains across the board, save Health Care. The S&P, NASDAQ, and Dow all gained north of +3% for the week.

Standard and Poor's 500 Daily Sector Indices Changes Table

Standard and Poor's 500 Weekly Sector Indices Changes Table

Small Stocks Have Outperformed Large Stocks Recently

The real story however, is the Russell 2000 small-cap index, which had already been outperforming big-cap indexes but vaulted another +5.62% last week. As we began 2016, not many would have believed the Russell 2000 would be up 22.2% at this point in December, but here we are. Drilling down even further, the Russell 2000 Value Index is + 31.6% year-to-date with a three-month +performance of 18.6%.

This sends a clear message. The headline talk has centered on “Trump stocks.” Financials and Industrials have dominated the headlines. But looking at the small-cap indexes, one must conclude that the market really favors the growth story for the near future. The future looked bleak for small caps at the start of the year. In fact, according to FactSet, the Russell 2000 Index closed at 2126.64 on 7/7/2015. Almost exactly seven months later on 2/5/2016, the index closed at 1880.05, representing a -11.6% drop.

From that February low, as of Friday’s close of 2259.53, the Russell 2000 is up 20.2%. In the past three months, the surge was 13.9%. The reason I am reciting all of this is that I use my own method to track institutional accumulation and distribution of shares. The data that I see suggests that the buying here has been outsized institutional buying for the past month. What this means to me is that the growth story is not being bought only by smaller retail investors, but more importantly by the big boys.

Time will tell, but I see the current situation like this: Technology recently led us out of some tremendous volatility. Several months ago, I was saying each week how there was nothing to talk about other than tech and a financial short-covering rally which may possibly be a catalyst to spring higher. Now, we see that Information Technology has taken a breather, but it is still quite strong with a respectable year-to-date change of +12.8%. This past week the S&P 500 Information Technology index spiked +4.24%.

Financials have certainly gathered momentum beyond what looked to be a short-covering rally initially. The sector is the clear winner for 1, 3, 6, 9, and 12 months. The S&P 500 Financials Index has surged 17.8% in three months with a +4.82% pop just this past week alone. Energy has also recovered in terms of no longer being the most-hated sector as it was in 2014 and 2015. Year-to-date, the S&P 500 Energy Sector Index is +24.6%. The fact is, all sectors are performing significantly well – except Health Care.

Standard and Poor's 500 Monthly Sector Indices Changes Table

This all boils down to a market recovering in spite of the fundamentals. Earnings have neither “shocked” nor “awed,” and forecasts remain ho-hum. The “value vault” we are seeing, however, is picking up some institutional steam. This is significant because the momentum of a market can and often is created and fueled by institutional activity directing supply and demand. This is not a thin-volume, weak rally. We’ve seen real buying across the board but most notably in small caps, as noted above.

For those 8% of you who may be red-green colorblind, the tables I include here were red for a long time before the election. Now it’s mostly green across the board.

Standard and Poor's 500 Quarterly Sector Indices Changes Table

Standard and Poor's 500 Semi Annual Sector Indices Changes Table

As we settle into the new rhythm of the market, it pays to keep perspective and to keep tabs on what is driving the music. Right now, we see institutional buying and a lot of cash going to work in small cap stocks. Sectors are all seeing a lift and this theme may continue for a while. At any rate, it is certainly something to behold. It’s best to continue to monitor the factors causing the change in the markets.

One person who gained a perspective that few of us on earth will ever know was Astronaut John Glenn, the first American to orbit the earth and the oldest man to go into space at age 77. It seems fitting as we sadly lost this great American hero last week to listen to some of his words:

Astronaut John Glenn Image

“When the new becomes commonplace, people become accustomed to it. That's a tribute to our sense of adventure.” – John Glenn

Or this: “I don't know what you could say about a day in which you have seen four beautiful sunsets.”

Godspeed, John Glenn…

A Look Ahead:

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

Sector Swings are (Mostly) Based on Infrastructure Plans

by Louis Navellier

Sector leadership since the election has favored Financials, Industrials, Materials, and now Energy (after OPEC’s announcement of production cuts), but all these sectors are characterized by lackluster sales and earnings.  Energy is expected to improve dramatically in 2017, due to easier year-over-year comparisons as well as more stable crude oil prices in 2017.  Financial stocks are expected to be more profitable if the Fed raises rates.  They will benefit from a stronger yield curve and an improving economic environment.

By comparison, the Industrials & Materials sectors rallied on widespread anticipation of more infrastructure spending, but much of those benefits may not materialize until 2018 – or even later.  It’s my feeling that this rally in Industrials and Materials is based primarily on plans for infrastructure projects that are yet to be drafted, much less passed, by Congress.  In other words, these sector swings are premature, at best.

Also, since technology stocks have not rallied significantly after the recent election, I feel that they will reassert themselves if they post strong fourth-quarter sales and earnings.  Due to the fact that the Financials, Industrials, Materials, and Energy sectors rallied on the anticipation of earnings that may be slow to materialize, these sectors are now “backing and filling” a bit after getting ahead of themselves.

The U.S. Economic News Keeps Improving

The economy hasn’t “turned on a dime” since the election, but confidence in business spending has taken a giant step with the business-oriented President and his business-centered cabinet now taking shape.

Last Monday, the Institute of Supply Management (ISM) reported that its nonmanufacturing (service) index surged to 57.2 in November, up from 54.8 in October.  Any reading over 50 signals an expansion and 57.2 marks the strongest reading in the past 12 months.  Only the energy and healthcare sectors reported any significant contraction, while construction and retail sectors were the strongest last month. Fully 14 of the 18 service industries surveyed expanded in November, so GDP growth looks very robust.

However, a strong U.S. dollar is curtailing U.S. exports, so the trade deficit may become a drag on GDP growth.  On Tuesday, the Commerce Department reported that the trade deficit surged 17.8% in October. Imports surged 1.3% to $229 billion and exports declined 1.8% to $186.4 billion.  As a result, the trade deficit hit a four-month high of $42.6 billion in October, up from a revised $36.2 billion in September.

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The better news on Tuesday was that the Commerce Department reported that factory orders surged 2.7% in October, the largest monthly gain since January 2015 and the fourth straight monthly increase. Much of the surge was due to commercial aircraft orders.  Excluding commercial aircraft and defense, factory orders still rose by a respectable 0.2%.  Also encouraging, shipments of factory goods rose 0.4%.

In summary, the strong dollar will depress large multinational corporate profits, but many smaller and tech-oriented companies should have a better path toward rising profits and earnings in the year to come.


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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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