GDP Forecasts Sink

GDP Forecasts Sink Uncomfortably Near Zero

by Louis Navellier

April 12, 2016

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

Federal Open Market Committee Symbol ImageFederal Open Market Committee (FOMC) minutes of their March 15-16 meeting were released last Wednesday.  Several Fed members expressed their concerns about the economic outlook by saying, “In light of this expectation and (participants’) assessment of the risks to the economic outlook, several expressed the view that a cautious approach to raising rates would be prudent or noted their concern that raising the target range as soon as April would signal a sense of urgency they did not think appropriate.”

The next FOMC meeting is April 26-27. Last Friday, the Atlanta Fed lowered its estimate for first-quarter GDP growth to an annual pace of 0.1%, mostly due to lackluster retail sales, a growing trade deficit, and lower-than-expected inventories.  Over the past few weeks, first-quarter GDP growth has been consistently revised downward.  As a result of this trend, I do not expect the Fed to raise rates at their next meeting.

The S&P 500 declined 1.2% last week, falling the farthest on Thursday, but with the advent of earnings season, the market often rallies.  April is historically a strong month due to pension funding and the fact that the best earnings tend to come out early.  It also helps that spring arrives in April for much of the U.S., so the weather improves and the trees blossom, which helps to lift consumer and investor sentiment.

In This Issue

In Income Mail, Bryan Perry reviews the harmonic convergence of Fed policy among the latest chorus of fiscal doves, while Gary Alexander’s Growth Mail proposes that the slowdown in GDP growth is no big threat to a market that has traded flat for nearly two years now.  In Global Mail, Ivan Martchev thinks the Japanese yen rally has legs, thereby creating a global wave of currency “yen-vy.”  In his Sector Spotlight, Jason Bodner uses glass frogs, alien observations, and dog-walking to peer inside this inscrutable market, while I close with a look at the market leaders and laggards last quarter and our outlook for performance of high-dividend stocks with strong underlying fundamentals now and for the rest of 2016.

Income Mail:
A Chorus of Fiscal Doves Serenades the Credit Markets
by Bryan Perry
Whistling by the Junk Yard

Growth Mail:
The Folly of Following Flawed GDP Forecasts
by Gary Alexander
Global Growth Estimates (by the IMF) are Notoriously Flawed
Could We Suffer Another Crash – Like April 10-14, 2015?

Global Mail:
Wide-Spread Currency Yen-vy
by Ivan Martchev
The Fed’s Mystery Monday Meeting

Sector Spotlight:
Who’s in Charge of This Madhouse?
by Jason Bodner
VIX Isn’t the Only Measure of Volatility

A Look Ahead:
High-Dividend Stocks Remain Market Leaders
by Louis Navellier
The Best and Worst Deciles in the First Quarter

Income Mail:

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

A Chorus of Fiscal Doves Serenades the Credit Markets

by Bryan Perry

Last Thursday night, Fed Chair Yellen and former Fed Chairs Ben Bernanke, Alan Greenspan, and Paul Volcker took part in a panel entitled, “When the Federal Reserve Speaks...the World Listens.” For her part, Fed Chair Yellen said that some slack remains in the U.S. labor market. She also said that the Federal Open Market Committee (FOMC) is not trying to overshoot its inflation target of 2% but that 2% is a goal and not a ceiling. (As of Friday, Fed fund futures are showing just a 51% chance of another 25-basis point rate hike by the end of the December FOMC meeting, according to the CME website.)

Kansas City Fed President Esther George (an FOMC voter) was the lone dissenter in favor of a rate hike at the March FOMC meeting. She recently said that continued extreme monetary accommodation risks financial instability. She said that “currently, commercial real estate markets, where prices have continued to drift higher, bear watching.” In addition, on Friday, remarks from New York Fed President and FOMC voter William Dudley struck a dovish tone as he cited the need for a gradual path towards interest rate normalization amid risks to inflation and the growth outlook.

These comments bear a striking resemblance to recent commentary from Fed Chair Yellen. Aside from Esther George’s notation about commercial real estate, nothing out of line within the recent remarks of FOMC voters made headlines, making for a chorus of fiscal doves singing in harmony, for a change.

Whistling by the Junk Yard

Bond guru Jeff Gundlach of DoubleLine Capital LP – arguably THE smartest guy in the room – has turned a tad more cautious of late, so the Fed is finally in simpatico with the finest minds in the credit markets (According to the Wall Street Journal (in “Jeffrey Gundlach Calls End of Risk – Market Rally,” March 8). The striking chart below illustrates Gundlach’s current yellow flag position.

In this chart, you can see how the S&P 500, high-yield bonds (HY), and high-yield loans (Lev) traded in tandem from 2007 through 2012. Then the Fed embarked on Operation Twist, or QE3 as it came to be known. From 2013 through late 2014, when the Fed discontinued QE altogether, the S&P rallied 600 points, roughly 42%, while the high yield bond and high yield loan markets traded sideways to lower.

Operation Twist/QE3 Chart

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

This dislocation might just be temporary in that the high-yield markets have been on the mend and may re-converge higher during 2016. But it does bear watching, and may signal that at some point the Fed may have to unleash another round of money printing if the nascent rally in high yield fades.

Gundlach made it clear that crude oil needs to trade back up to $45 to $50 per barrel, and soon, for there not to be a wave of defaults within the junk bond sector: “100 companies in these sectors are bleeding money and every day that goes by with prices where they are is one day closer to the day of reckoning,” he said, calling junk bonds a ‘widow-maker.’ “High leverage and poor bondholder protections would lead to low recoveries when bonds default.” If Mr. Gundlach is half right, the oil meeting in Doha is a serious game changer for world markets, and it is sure to be headline news next Monday morning, April 18.

Ratings agency Standard & Poor's reported that the global corporate default rate has hit a seven-year high as energy and mining companies suffer from very poor trading environments. (According to the Wall Street Journal (in “Corporate Defaults Hit Seven-Year High,” April 8). In another cautious note, Moody’s Analytics issued a consensus forecast last Friday for Q1 GDP growth of just +0.6%, down from the prior consensus estimate of +0.9%. As such, bond yields are trading near their recent lows with U.S. 10-year notes paying out comfortably more than its European counterparts, except Portugal and Greece.

10-Year Yields: U.S. vs. Europe

  • Germany, 10-yr Bund: at 0.10%
  • France, 10-yr OAT: at 0.44%
  • Italy, 10-yr BTP: at 1.32%
  • U.K., 10-yr Gilt: at 1.36%
  • Spain, 10-yr ODE: at 1.53% 
  • U.S. 10-yr Treasury: at 1.72%
  • Portugal, 10-yr PGB: at 3.20%
  • Greece, 10-yr note: at 8.98%

Even with the strong 7% rally in March, the S&P 500 is trading only 0.18% (less than four points) above where it began the year. The ‘washing machine’ market continues to confound income investors that are weighted outside the safety of utilities, telecom providers, and real estate investment trusts (REITs) tied to neighborhood retail properties, data center REITs, self-storage REITs, and consumer staples where gains of between 10% and 25% have been realized. Without question, there has been a strong oversold rally in the junk bond market; but here, too, like the S&P 500, that market is just back to a flat line for the year.

Negative interest rates and falling rates in general are weighing heavily on the financial sector, both here and abroad. In the past week, European banks led a tumble in the heavyweight financial sector as money center banks, investment brokerages, asset management companies,, and life insurance names all traded lower in sympathy. The U.S. financial sector isn’t faring much better, down -4.7% year-to-date, as per the chart of the Financial Select Sector SPDR ETF (XLF), the most widely-traded basket of financials. (Please note: Bryan Perry does not currently hold a position in XLF. Navellier & Associates, Inc. does not currently own a position in XLF for client portfolios, although it did in the past.

Financials Select Sector Exchange Traded Fund Chart

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

The dovish chorus among U.S. central bankers has the U.S. Dollar Index (DXY) testing a key support level at 94. If that support level is violated, the index would slip into what currency traders call “open water.” From the one-year chart below, we see four previous bounces off the 93-94 level in the last year. A break below 93 would not only benefit short-sellers, but U.S. multinationals that derive more than 50% of their revenues outside the United States. I find this to be a bright spot for maintaining a bias for a further advance in equities led by none other than dividend-paying stocks.

U.S. Dollar Index: Last 12 Months

United States Dollar Index - Last Twelve Months Chart

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

There is little disagreement that the dollar is in a long term bull market. Even Mr. Gundlach is singing off the same sheet of music. From the five-year chart of the Dollar Index (DXY), below, one can see support at 94, then 80. A pullback to 90 for the DXY would prove, in my view, very bullish for the domestic economy and equities. Let’s hope this scenario unfolds over the course of the year, as the dollar trend – like the price of oil – will have a huge impact on fiscal policy, interest rates, and market sentiment.

U.S. Dollar Index: Last Five Years

United States Dollar Index - Last Five Years Chart

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

Now is a good time to be careful and not reach. For most non-professional investors, there isn’t enough information to justify being aggressive. One great quote that sums up this herky-jerky market is this:

“When a person with experience meets a person with money, the person with experience will get the money. And the person with the money will get some experience.” – Leonard Lauder

We’re on the doorstep of earnings season and just in front of a host of data measuring the pulse of the global economy for the first quarter. A little patience will go a long way in shaping portfolios for the summer months and further out. It’s a good time to take a break to smell the flowers and let the market absorb all that is coming its way in the next month. Then, we can move with more conviction.

Growth Mail:

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

The Folly of Following Flawed GDP Forecasts

by Gary Alexander

The name of this column is “Growth” Mail, but any headline about Growth these days seems dismal.  Last Friday, the Atlanta Fed released its latest twice-weekly update of their projected first-quarter U.S. GDP at a scant 0.1%. Their forecasts have been all over the map in the last few months – as high as 2.7% in mid-February when the stock market was in the tank but then sinking steadily, even as the market rose.

Atlanta Fed Gross Domestic Product Forecast for 2016 Chart

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

According to the Wall Street Journal (in “Real-Time GDP Tracker Gains a Following – and Some Criticism,” April 8), the Atlanta GDPNow number (published only since 2014) plugs in all of the GDP economic data points into a model that projects the eventual GDP number for the current quarter.

In this age of instant analysis GDPNow is fast becoming the hottest number on Wall Street. We get so impatient for meaningful numbers that we don’t want to wait until April 28 for the first iteration of first-quarter GDP growth. We want our GDP Now! But we can get whiplashed by the frequent changes. In four weeks, GDPNow fell from 2.3% on March 11 to 0.1% on April 8. What’s next: Negative growth?

Since we love to devour bad news more than good news, GDPNow Google searches have skyrocketed:

Google Searches for ‘GDPNow’

Google Searches for GDPNow Chart

Global Growth Estimates (by the IMF) are Notoriously Flawed

Global growth since 2010 has not been bad, but the high projections and low outcomes concern many economists. Ed Yardeni wrote (in “Fed Policy Made in China?” April 5), that “World industrial production has increased 31% over the 83 months since its previous cyclical trough on February 2009 through the first month of this year. That’s not too bad compared to the previous 74-month expansion from December 2001 through February 2008, when this index rose 32%.” But, he adds, overall global GDP growth was not so good: “The length of the actual post-recovery expansion this time has been 62 months so far with a gain of just 14% vs. 59 months during the previous decade with a gain of 26%.”

Louis Navellier has often said that the Fed can’t hit the broad side of the barn (or even find the barn) in its GDP or inflation forecasts. Globally, the same barn-missing exercise comes out each October from the International Monetary Fund (IMF). They have been way too optimistic in their last five annual forecasts.

Jack Ablin wrote in “Outlook for Financial Markets” (April 6) that “Economists were projecting 5% worldwide growth for 2016 as recently as five years ago. Thus far, the figure is clocking in at 3.5%. In 2010, the IMF tried to project five-year cumulative real gross domestic product for 20 of the world’s major economies. 18 fell short of expectations, with Italy, Brazil, and Russia falling substantially behind.”

International Monetary Fund World Real Gross Domestic Product Forecast Chart

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

Slowing global growth has slowed earnings growth (see chart below), pushing earnings into reverse gear. First-quarter corporate earnings reports begin in earnest this week. Investors will be glued to the Internet or CNBC to digest the latest earnings news. According to Fed Chair Janet Yellen, she will also monitor earnings. In her March 29 talk, she cited earnings expectations when she said,economic growth now seems likely to be weaker this year than previously expected, and earnings expectations have declined.”

It appears that Yellen’s new attention to earnings has paid off in a slow-but-steady market recovery. Since March 17, we’ve seen 16 straight S&P closings within 1% (either side) of 2,053, as S&P closings ranged from 2,035.94 to 2,072.78. The S&P 500 went 15 days in a row without closing up or down by more than 1%, the longest such streak in over a year. Ironically, March 17 was the day after the latest meeting of the Federal Open Market Committee (FOMC), so it appears that the Fed’s inactivity has pacified the markets.

Ed Yardeni said last Tuesday that earnings expectations have dropped 11.9% year-over-year for 2016 and -8.1% for 2017. Analysts “now expect earnings will increase only 2.2% this year, but 13.7% next year.”

Deeper in Earnings Recession - Slower Global Growth Chart

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

This is clearly a time to cherry-pick stocks with rising earnings and a potential for positive surprises.

Could We Suffer Another Crash – Like April 10-14, 2015?

Markets were far more volatile 16 years ago this week. I remember watching a sinking stock market late Friday (April 14, 2000) as the skies around Washington, DC turned dark at noon, followed by thunder and hail. The weather reflected the market as the 1990s tech stock bubble was clearly kaput on that day.

On Friday, April 14, 2000, the major stock market indexes suffered huge declines. NASDAQ fell 355.49 points (-9.7%), to 3321.29. The DJIA fell 617.78 (-5.7%) to 10,305.77. The S&P 500 fell 84 (-5.8%). For the full week, the S&P 500 was “only” down 10.5%, but the tech-heavy NASDAQ fell by over 25%:

Nasdaq's Decline in One Week Table

Are we in danger of such a correction these days? I don’t think so, not with so many central banks pursuing easy money policies and investors snapping up more stocks on dips over the last seven years.   As I’ve often stated here, the current bull market may seem long and strong if measured from 2009, if you look back to the start of the millennium in 2000, markets are up at a snail’s pace; we’re still playing catch up.

Microscopic Net Market Gains Table

For a bubble to pop, it must first inflate to the bursting point. In 1928-29, the DJIA gained 99% in 18 months. In 1986-87, the DJIA gained 50% in 10 months. In 1999-2000, NASDAQ more than doubled in nine months. From 1986 to 1989, the Tokyo stock index tripled. To date, we have not seen any such rapid increases in any major stock index during the life of this bull market. A bubble can’t pop unless it is inflated to the breaking point. Today’s slow global growth implies continued moderate market growth.

Global Mail:

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

Wide-Spread Currency Yen-vy

by Ivan Martchev

The monstrous move in the Japanese yen continues. Last week the USDJPY cross rate declined to under 108. Many are puzzled by the performance of the Japanese currency, although such moves had been anticipated in this column based on the realization that there is a gigantic, synthetic short position against the yen that is causing an avalanche of margin calls.

The synthetic shorts result from the popularity of yen “carry trades,” which involves borrowing yen to buy a higher-yielding asset in another currency. Also, too many people were betting on a similar outcome – a USDJPY depreciation based on BOJ policy – which in many cases results in a violent move in the opposite direction, particularly considering the fact that currency trading positions are famous for using massive leverage.

United States Dollar versus Japanese Yen - Daily OHLC Chart

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

When the USDJPY cross rate was trading near 120, I offered the following commentary in this column (see February 1, 2016 Marketmail “The 'Short of the Century” May Last Quite a Bit Longer”):

“It is not surprising that as the aggressive Japanese QE operation commenced in 2013, the yen sold off from under 80 to over 120 (the USDJPY rate is inverse so a rising chart signifies a weaker yen, or more yen per dollar). It is rather telling that over the past year the decline in the Japanese yen has stalled, even as the BOJ has pressed full QE speed ahead with its printing. This is one of the reasons that forced BOJ’s hand in experimenting with negative interest rates last week.”

“In fact, if one were to look purely at the technicals on this inverse USDJPY chart, it looks like the yen is putting in a rounding top, or possibly a head-and-shoulders top, and the chart may decline further should it break major support at 116, which we tested in January. I believe that the yen is acting counter to the BOJ policies simply because the availability of “carry trades” (where one can use the yen as a funding currency) has greatly diminished and the carry trades that have been put on have had to be unwound, pushing the yen higher!”

I followed this counterintuitive move in the yen before it became front-page news (see my March 9, 2016 Marketwatch column “What’s behind the yen’s monster rally?”) and am convinced that it is not over. I would not be surprised if we see yen/dollar rate go sub-100, particularly if the Chinese devalue the yuan and the Saudis devalue the riyal.

It is possible that both the Chinese and the Saudis devalue within a short period of time as both actions are somewhat correlated. The Chinese are likely to devalue the USDCNY cross rate, as they did by 34% in 1994, as I believe they have a busted credit bubble that is currently deflating but has not yet deflated. In such an environment of rising non-performing loans, normal monetary easing does not work well to support the economy. A devaluation stimulates the Chinese economy via a different channel that is not constrained by the impotent credit multiplier effect of monetary stimulation in a financial system that is experiencing the effect of a busted credit bubble.

Saudi Arabia Riyal Devaluation Image

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

The Saudis may devalue the riyal as the falling oil price is wreaking havoc in Saudi finances and if they did not have a hard peg for such a long time, their riyal may very well have looked like the Russian ruble, which is under pressure from the falling oil price. I am not convinced we have hit a bottom in oil as seasonal demand caused a seasonal rebound in the oil price. The Chinese economic unravelling coupled with seasonal weakness in the fall may push the price of a barrel of oil below $20, particularly as global inventories and production are high.

All those coming devaluations, particularly by China, are highly deflationary and are likely to push the yen higher possibly past 100 on the USDJPY cross rate. It dawned on some major financial firms that the yen may also be driven in part by real interest rates, which are not all that low in Japan. While 10-year Japanese government bonds (JGBs) may have negative nominal yields, Japan is in deflation so their real interest rates (adjusted for negative inflation) are actually not all that low. (See Bloomberg, April 9, 2016 article “The Yen's Puzzling Surge, Explained in One Morgan Stanley Theory.”)

Yen Inflation Expectations Image

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

As the differential between real interest rates in the U.S. and Japan has dramatically shrunk, the yen has surged. That is not the only reason for the surge in the USDJPY cross rate, but it is yet another reason why the yen is appreciating and may appreciate even further with the cancellation of the presently-telegraphed but clearly-misguided Fed rate hikes.

The Fed’s Mystery Monday Meeting

We have news of an unscheduled meeting, with the following description on the Federal Reserve website:

Advanced Notice of a Meeting under Expedited Procedures: A closed meeting of the Board of Governors of the Federal Reserve System will be held under expedited procedures at 11:30 AM on April 11, 2016. Matter to be considered: Review and determination by the Board of Governors of the advance and discount rates to be charged by the Federal Reserve Banks.

Our own Gary Alexander noted to me via email: “The conspiracy theories will explode like pollen in springtime….” I replied: “They already have.” This is because some have suggested that there was a similar closed-door meeting on November 23, 2015 which was just before the first rate hike in years. Hiking interest rates in the present environment employs many quantitative tools – like reverse repurchase agreements – so technically speaking it is a more complicated maneuver than hiking rates before the brave new world of quantitative easing was introduced by Ben Bernanke.

Thirty Day Fed Funds - Daily OHLC Chart

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

I am of the opinion that the December Fed rate hike was a big mistake. This is why fed funds futures and Treasury bond prices surged after the rate hike. At present December 2016 fed funds futures (ZQZ16) predict a fed funds rate of 50.5 basis points (0.505%) at the end of December 2016. Since the present Fed funds rate target is 0.25-0.50%, the probabilities that fed funds futures assign more rate hikes in 2016 are negligible and falling! As a reminder, fed funds futures are traded primarily by institutions hedging short-term interest rates just like they do in similarly-used eurodollar futures. So if the Fed is mulling a rate hike with their mystery meeting on Monday they surely are not listening to the markets.

Ten Year Treasury Note - Monthly OHLC Chart

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

Last week, 10-year Treasury Notes got as low as 1.68%, which was 11 basis points away from the 2016 low of 1.57% reached on February 11. It is my professional opinion that if the Fed hikes interest rates one more time, the 10-year Treasury yield will make a fresh 2016 low and it is also likely to make a fresh all-time low below 1.39%, reached in 2012. I think we are headed in this all-time low direction either way – it’s just that more Fed rate hikes will take us there faster.

I do not feel bullish on the longevity of Janet Yellen as Fed Chair, based on her present monetary policy trajectory.

Sector Spotlight:

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

Who’s in Charge of This Madhouse?

by Jason Bodner

It never ceases to amaze me where I can be amazed from. My son told me today that there is a species of frog aptly named the “glass frog” that has a transparent belly. Upon turning over one of these frogs, you can clearly see the organs and internal systems of the animal. Scientists can actually diagnose if the animal is ill simply by looking through “the window.” Aside from being really bizarre and totally cool, such a species naturally got me to thinking about the market.

Transparent Frog Image

With the immediacy of information and constant heavy media coverage out there, it may seem like the markets should be as transparent as looking through a glass frog’s “window.” But as we all know, the market can be as dark as a black hole and as opaque as concrete.

This U.S. equity market has been called heavily “overbought” by many (including us). Therefore, the expectation may have been that price weakness will surely come along any day now. Although this has been clear for weeks, the rally persists. The rally, as we often highlighted, began as one of short covering and low quality stocks. Take the energy sector for instance: Over-supply concerns persist as does the lack of practical storage for all that excess oil. That hardly justified the S&P 500 Energy Sector Index rally of 23.9% since the 376.13 low on January 20, 2016. But the rally happened. On Friday alone, according to Factset, we watched crude oil rally 6.6% after seeing a surprisingly lower inventory number!

Healthcare was the weakest of the weak in February. As the overall market rally gathered steam, healthcare sat idly by, not participating. Only last week did we begin to see signs of life in that sector.

The S&P 500 is up only 0.18% year-to-date. This year’s opening, however, was the grizzliest on record. Who would have thought the snapback would be equally significant? Yet here we are after the market dropped 10.5% and rallied 11.95% all the way back, and the investor anxiety level has dropped significantly as evidenced by the VIX, which closed at 15.36 Friday. I have only one question: Why?

There are almost 10 nations with negative interest rates, with the European continent most recently in the headlines. We have more oil than we know what to do with, even with the usual expected seasonal surge in demand. We have global growth exhibiting a clear slowdown coupled with S&P 500 companies soon to be releasing what I believe to be the fifth consecutive quarter of contracting sales and earnings. So why the recent rally? The reality is that as much as we seek to justify price behavior, it is sometimes-irrational human beings that drive the market.

VIX Isn’t the Only Measure of Volatility

Now let's look at the sectors and see how they jibe with the overall picture of the past few months.

Standard and Poor's 500 Weekly Sector Indices Changes Tables

Energy took charge this week, led by two 2+% rallies on Wednesday and Friday. Healthcare was in second place with Wednesday displaying a big short squeeze as the S&P 500 Healthcare Sector Index vaulted 2.65%. As we can see in the 3-month and 12-month charts, this sector has lagged for so long that this brief rally may actually turn out to be more than just a squeeze. As Healthcare has dragged in the overall market rally, this pop may begin a near term bounce.

We began to see resumed weakness in Financials last week. The S&P 500 Financials Sector Index fell 2.9%, dragging many other sectors down on Thursday with a nearly 2% daily drop.

This market is continually showing us constant rotations, with some of the big winners of the last three months now displaying weakness. Look at the S&P 500 Telecom Services Index; it was weak last week, but the 3-month performance leads the pack, at +13.53%. In context, as you can see in the chart below, this past week’s 2.33% drop hardly seems severe. It may be a well-needed rest but it also highlights the relatively shaky ground that this market rally is built upon. Volatility may not be evidenced by the VIX, but there is still an underlying current of volatility.

Standard and Poor's 500 Yearly Sector Indices Changes Charts

So let’s get back to why the market is rallying and why it may (or may not) resume its previous slide. A friend mentioned to me that he was speaking to a money manager who was trying to justify his “short everything” position in the market. The manager said something along the lines of “if an alien landed on earth and was asked to add up the value of the planet, how would that being price ‘money’?” His answer: “The levels of debt dwarf the actual money supply, so that alien would likely value money at zero or even below zero. The alien would then start pricing the natural resources, assigning value based on intrinsic usability.” I agree but I added that we can also observe humans doing things that make little or no ‘sense.’

And as far as alien observations go, I brought up Jerry Seinfeld’s old observation about dog-walking:

“On my block, a lot of people walk their dogs, and I always see them walking along with their little poop bags, which to me is just the lowest function of human life. If aliens are watching this through telescopes, they're going to think the dogs are the leaders. If you see two life-forms, one of them is making a poop, while the other one’s carrying it for him, who would you assume is in charge?” – Jerry Seinfeld

Dog in Charge Image

“So what do we make of this market?” I was asked. My answer: Prices are not always immediately justifiable. I thought immediately of economist John Maynard Keynes, who said, “The market can stay irrational longer than you can stay solvent.” Irrational behavior is an everyday part of financial markets, and irrationality in its current form may continue for some time. It also may end tomorrow.

A Look Ahead:

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

High-Dividend Stocks Remain Market Leaders

by Louis Navellier

After the low on February 11, the first quarter was characterized by a massive short covering rally, led by energy and financial stocks, some of the biggest casualties of the previous downturn.  So far in April, those stocks have largely done very poorly.  Instead, companies with persistent dividend growth have emerged predominately as an oasis.  There is a lot of bargain hunting in dividend stocks, as the S&P 500’s dividend yield (2.12% last Friday) remains significantly above the 10-year Treasury bond yield (1.72%).

At Navellier & Associates, we continue to try to zero in on stocks with winning fundamentals so that we can thrive even in market downturns, so we need to find the “crème de la crème” in a stock picker’s environment like this.  In the West, where our company is headquartered, it’s called hunting with a deer rifle and not a shotgun.

The Best and Worst Deciles in the First Quarter

Last Friday, Bespoke Investment Group showed in their weekly “Bespoke Report” what worked best and worst in the first quarter.  They showed how the market was led by (1) the top 10% (decile) of the highest dividend yielding stocks, which were up 10.19% and (2) the bottom decile of the worst performing stocks in 2015, which rose 8.20% last quarter.  In addition, the smallest decile in terms of market capitalization rose 6.76% and the top decile in short interest rose 6.62%.  The 250 S&P 500 index stocks with the lowest analyst ratings rose 5.29%, while the 250 stocks with higher analyst ratings came in absolutely flat, at -0.01%.

In other words, outside of high dividend stocks, you had to buy beaten-down, small capitalization stocks with a big short interest and negative analyst ratings that “squeezed the shorts” to be successful in the first quarter.  But so far in April, according to the Bespoke Report (“April Showers,” April 8), the best-performing decile of stocks in the first quarter flamed out in early April, becoming the worst decile in the first six days of trading, down 1.8% on average. In addition, the best performing S&P sector in the first quarter (Telecom, up 15.1%) was the worst performing sector from April 1 to 8 (down 2.17%).

It was also a bad quarter for analysts and hedge funds.  As Bespoke explained:

“Stocks with the best analyst ratings actually averaged declines in the quarter, while the least loved stocks outperformed significantly.  Not a good quarter for analysts!  Stocks with heavy institutional ownership underperformed stocks with low institutional ownership.  (Not a good quarter for hedge funds either!)”

In summary:

Standard and Poor's 500 Stock Performance Table

For reference purposes, according to Bespoke, “the average stock in the S&P 500 rose 2.62% in the first quarter,” so the gains of 10.19% in high-dividend stocks were almost four-times above the average stock.


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.

Marketmail Archives Trade Summary

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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