GDP Gains are Higher

GDP Gains are +2.9% but That Number is Suspect

by Louis Navellier

November 1, 2016

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

The S&P fell 0.7% last week and -2% for October (through Friday).  It was a spooky week on Wall Street, including the bizarre revelations about Hillary Clinton’s emails (discovered during a separate investigation into former Congressman Anthony Weiner, husband of Clinton aide, Huma Abedin).  Hollywood could not write a more scandalous script.  In fact, I was in Los Angeles last week and kept asking where much of Hollywood would move if Donald Trump is elected President.  Clearly, we live in a bizarre new world.

The biggest economic news last week was that the Commerce Department announced on Friday that its flash estimate for third-quarter GDP came in at a stunning annual pace of 2.9% vs. the economists’ consensus estimate of 2.5%.  The bad news is that this resurgence was largely due to a 10% surge in exports and a 9% surge in durable goods orders, creating an inventory glut.  The export surge was due to a record soybean crop.  A narrowing trade deficit added 0.83% to third-quarter GDP.  Meanwhile, the buildup in inventories added another 0.6% to third-quarter GDP, so exports and inventory comprised half of the gain.

Vehicle Imports Image

Getting further into the GDP details, durable goods orders for appliances, vehicles, and other big ticket items surged 9% in the third quarter, adding to the inventory buildup.  Unfortunately, consumers remained moody last quarter, since personal expenditure declined to a 2.1% annual pace, down from a more robust 4.3% in the second quarter.  Overall, these extraordinary factors – such as rising inventories, a record soybean crop, and the fact that overall government spending rose 0.5% in the third quarter to shore up a broken healthcare system – largely accounted for the resurging third-quarter GDP growth rate.

Speaking of healthcare, rising health insurance costs made the employment cost index rise 0.6% in the third quarter.  Meanwhile, the Fed’s favorite inflation indicator, the personal consumption index (PCI), rose at only a 1.4% annual pace in the third quarter.  Excluding food and energy, the core PCI rose at a 1.7% annual pace last quarter.  Since the PCI is showing less inflation than the Consumer Price Index, this essentially means that the Fed should be in no hurry to raise key interest rates now or in December.

In This Issue

In Income Mail, Bryan Perry takes a closer look at the GDP numbers, along with a review of the flat retail sales numbers.  In Growth Mail, Gary Alexander reports from the recently-concluded New Orleans investment conference.  Ivan Martchev profiles another offbeat holiday (and movie), Groundhog Day, as it applies to the Fed’s pronouncements.  Jason Bodner’s Sector Spotlight also riffs off a Halloween theme, including the market’s many masks.  I’ll close with a review of mutual fund and ETF trends along with a longer-term earnings outlook for the S&P 500 and some recently volatile sectors, Energy and Financials.

Income Mail:
Sparks Fly but Market Maintains a Narrow Range
by Bryan Perry
Checking Under the Hood of the GDP Report

Growth Mail:
Halloween Spooks Surface in New Orleans
by Gary Alexander
Welcome, Blessed November!

Global Mail:
The Fed’s Groundhog Day
by Ivan Martchev
What Says Dr. Copper?

Sector Spotlight:
Halloween’s Origins in Ancient Ireland
by Jason Bodner
The Market Also Wears a Mask

A Look Ahead:
Fear is Fueling Fund Redemptions…at Just the Wrong Time
by Louis Navellier
Earnings Outlook for Troubled Energy & Financial Sectors

Income Mail:

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

Sparks Fly but Market Maintains a Narrow Range

by Bryan Perry

Just as earnings season was getting into a bullish rhythm, with the majority of companies reporting above-estimate results, some erratic late-week events sent fireworks throughout trading desks around the globe. Specifically, momentum was building for most of last week on the assumption that a post-election rally was likely to rescue this sideways market, as long as the outlier risks were of the garden variety; but then came some surprise revelations on Friday, which sent the market down. The S&P 500 index surrendered 0.7% for the week while the Dow Jones Industrial Index (DJIA) added 0.1% and the tech-heavy NASDAQ underperformed, falling 1.3% after a couple of mega-techs on the ‘A-List’ failed to impress.

The underperformance in NASDAQ was mostly due to relative weakness in biotechnology. NASDAQ’s Biotech Index (NBI) lost 2.7% last week. Friday’s weakness in biotechnology was exacerbated by a poor quarterly showing from drug distributors; and soft forward guidance reminded us that the pharmaceutical industry continues wrestling with pricing concerns that may become a regulatory issue, especially if Hillary Clinton wins the presidency (source: Briefiing.com Market Summary, October 28, 2016).

NASDAQ Biotechnology Index Chart 

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

There’s also the current (November 1-2) FOMC meeting, and the one scheduled for December 14th. Rate hike expectations for December firmed up after New Home Sales and Pending Home Sales for September beat expectations. Third-quarter advance GDP also surprised to the upside (2.9% versus consensus 2.5%). The growth rate was the fastest recorded in two years after expanding an anemic 1.4% in the second quarter.

Since the recession ended in 2009 the economy has grown at roughly a 2% annual rate, the weakest expansion on record, but exports increased at a 10% rate in the third quarter, the best rate in nearly three years. Export gains had slumped over the prior year and a half, in part because a stronger dollar made U.S. goods more expensive overseas. But shipments of agricultural products, especially soybeans, supported the latest gain (source: Wall Street Journal, “U.S. Economy Roars Back, Grew 2.9% in Third Quarter”).

United States Gross Domestic Product Growth Rate Bar Chart

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

This latest GDP news definitely moved the needle on forward Fed monetary policy. Accelerating growth in the third quarter, as well as continued improvement in the labor market and indications of higher inflation, will likely lead the Fed to raise rates. The implied probability of a December hike increased to 74.2% from the prior week's 69.9% (source: Briefiing.com Market Summary, October 28, 2016).

Checking Under the Hood of the GDP Report

It is a widely accepted view from economists that consumer spending accounts for about two-thirds of total output, but the third-quarter acceleration in GDP largely reflected increased exports and a buildup of inventories, while consumer spending increased at a decidedly slower rate. The third-quarter GDP report showed consumer-spending gains slowed after a strong advance in the spring. Personal consumption expenditures rose at a 2.1% pace in the third quarter vs. a 4.3% gain during the prior period.

The latest data releases “do not point towards a new growth path but rather a strong rebound following one year of soggy growth,” according to Joseph Brusuelas, chief economist at the consulting firm RSM US.

A quick glance at the one-year chart of the U.S. Retail Index (below) suggests that investors should be wary of headline numbers that aren’t supported by the data tied to consumer spending. From a purely technical point of view, this chart shows a sharp breakdown.

United States Retail Index - Daily OHLC Chart

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

U.S. Retail Sales reflect a gradual advance of sales in real month-to-month dollar terms, and yet the graph above clearly shows the prices of retail stocks coming under severe near-term selling pressure.

Here’s a table reflecting the rather flat level of retail sales over the past four months:

Monthly Retail Sales Table

On the surface, this is a disturbing set of circumstances in that if stock prices are understood to be a forward discounting mechanism, it would stand to reason that the consumer is going to curtail spending just as the economy is looking to reach escape velocity from the umbilical cord of easy monetary policy.

Stocks of many leading homebuilders, building supplies, footwear, clothing, and restaurants traded sharply lower in the past month, creating a cautious tone and raising a yellow flag right in front of the holiday shopping season. My view is that a good dose of election-related nervousness has some negative influence on investor perception about slower future spending, and once we’re past November 8th, American consumers will loosen their purse strings heading into Black Friday and beyond.

Apparently, I’m not alone in this assumption. Yields on Treasury Notes and Bonds rose this past week to their highest levels in five months, with the benchmark 10-yr T-Note closing out last week with a current yield of 1.845% as per the chart below. Bond investors aren’t concerned about an apparent pause in consumer spending or we would see the yield heading decidedly lower.

Ten Year Treasury Note Chart

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

Looking forward, there might be some wait-and-see posturing on small ticket item purchases, but sales of RVs, boats, and travel as reported by several companies in these sectors were nothing short of robust. I see a pattern of more selective shopping for higher-quality goods and one-time purchases while spending on experiential destination travel is high on the bucket list for a more discerning U.S. consumer.

Growth Mail:

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

Halloween Spooks Surface in New Orleans

by Gary Alexander

Having lived in New Orleans during the 1980s, I know that Halloween is second only to Mardi Gras as a season of wild behavior – masks and all.  For the last 33 years, I have been panel moderator or MC (and lately both) at the New Orleans Investment Conference, which usually falls in the last week of October.  Last year, it ran October 28-31, this year October 26-29; next year, October 25-28.  Befitting that timing, I’m writing this Growth Mail conference review on Halloween – for publication on All Saints Day.

New Orleans’ political panel included comic P.J. O’Rourke, who explained why he is voting for Hillary Clinton as “the devil we know.”  Another panelist, economist Steve Moore, explained why he is advising (and voting for) Donald Trump, based on his superior business-friendly tax plan.  Our third panelist, Fox News contributor and Washington Post columnist Charles Krauthammer, explained why he is voting for “none of the above.”  We even had a surprise appearance by a Dan Wiener look-a-like, “Carlos Danger.”

While most New Orleans speakers covered the resource market – the precious and base metals and the energy complex – those who spoke about the stock market were evenly divided.  The parade of bears was led by two Grizzlies: Peter Schiff, CEO of Euro Pacific Capital, spoke on “The Next Recession is Around the Corner,” while Doug Casey, Founder and Chairman of Casey Research, offered his “Update on the Collapse of Western Civilization.”  However, there was an equal number of long-term bulls this year.

First off (on opening night), Jeffrey Hirsch, CEO of Hirsch Holdings and editor of the Stock Trader’s Almanac, predicted a long-term 500% gain in the S&P 500 from its 2009 low to 2025, despite a severe bear market correction in 2018: “We’re one bear market away from a mega-bull market,” he concluded.

Another stock market bull was Peter Ricchuiti, a Professor at Tulane’s Freeman School of Business.  He is noted for sending his students out to interview CEOs and other top executives of companies throughout the south.  Ricchuiti’s speech title referred to the recent earnings recession with a clever metaphor – “Do These Earnings Make My P/E Look Big?”  In general, he sees this bull market being driven by liquidity:

  • Household net worth is rising consistently to new record highs.
  • Corporate balance sheets are improving, with trillions of dollars in cash on the books.

Countering those who are worried about federal budget deficits, Dennis Gartman, editor of The Gartman Letter, asked us to consider the “balance sheet” of our nation, instead of looking at its annual deficits.  He cited the fact that America has 11 aircraft carriers and the associated fleets and jets that accompany them. None of them are counted as assets on America’s balance sheet.  He said Yellowstone and dozens of other National Parks are valued at zero but are priceless.  The Institute for Energy Research estimates that oil and gas reserves are worth more than eight times the total federal debt.  The federal government also owns 30% of all the land in the U.S. (and massive structures) that dwarf the total accumulation of federal debts.

Gartman also believes the dollar will get stronger and “the euro is doomed.”  He expects the euro to fall to par ($1) to the dollar, and then go even lower.  As a result, Gartman advises owning gold and other commodities in terms of the euro or yen, since he believes the U.S. dollar will continue to be super-strong while the negative rates and the aggressive QE policies of Europe and Japan will depress those currencies.

I also found Robert Prechter’s talk very enlightening, as he used historical headlines to identify major historical tops and bottoms.  Prechter, CEO of Elliott Wave International, covered gold and oil first, but I found his closing comments on bonds most interesting.  First, he cited headlines from the Wall St. Journal in July 1984, when 30-year Treasury bonds yielded 14%, saying “it would take a miracle for rates to fall.”  But rates have fallen ever since, creating a major bull market in bonds.  A smart investor I know bought 30-year bonds in 1984, earning 14% a year.  A guaranteed 14% a year for 30 years is nirvana for investors.

United States Thirty Year Bond Yield Chart

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

By comparison, Prechter quoted a Wall Street Journal article on July 13, 2016, saying “ultra-low interest rates are here to stay.”  That headline came just five days after long bonds reached their all-time lows.  As a result of this confidence in low rates ‘forever,’ Prechter sees U.S. rates rising over the next 5-10 years.

Welcome, Blessed November!

Jeffrey Hirsch’s “Stock Trader’s Almanac” is now in its 50th year.  In his opening-night talk last Wednesday, Jeff mentioned that he just toasted his father, Yale Hirsch, the founder of the firm, for his 93rd birthday.  I have quoted their work often in these pages.  They are pioneers in investment seasonality.  They first isolated the fact that the stock market’s best three-month period is November to January, and the best six months are November through April, giving rise to the “sell in May and go away” mantra.

Specifically, Hirsch writes in his latest “Almanac Trader” that November is the second-best month in the S&P 500 since 1950.  November is also the best month for the Russell 1000 and third best for the DJIA since 1950 and for NASDAQ since its launch in 1971.  He also writes that “fourth quarter inflows from institutions drive November to lead the best consecutive three-month span, November to January.”  He adds that in election years since 1952, November has been the #1 month in the DJIA and #2 for the S&P.

In the last 20 years (as this Bespoke chart shows), November is second only to April in market gains.

Standard and Poor's 500, NASDAQ, Russell 100, and Dow Jones Industrial Average Market Gains Bar Chart

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

Expanding out to the next six months, November marks the beginning of the S&P 500’s best six months.

Here are the last seven years of the current bull market, in which the cold months beat the warm months:

Last Seven Years of the Standard and Poor's 500 Current Bull Market Table

In the first six years of this bull market, the November-April half-year segment outpaced the May-to-October months.  This is not to say I align with the “Sell in May and Go Away” crowd.  After all, that trend reversed over the 12 months, with May-to-October winning.  What these data mean, to me, is that early November provides investors with an especially good time to accumulate quality stocks.

Global Mail:

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

The Fed’s Groundhog Day

by Ivan Martchev

In the 1993 film, “Groundhog Day,” a weatherman (Bill Murray) is covering the annual emergence of the groundhog from its hole in Punxsutawney, PA. He is caught in a snowstorm that he erroneously predicted wouldn’t hit the area and finds himself trapped in a time warp with his news producer (Andie McDowell) and cameraman (Chris Elliott), doomed to relive the same day over and over again until he gets it right.

I could have used this film analogy multiple times in the past couple of years in reference to the relentless Federal Reserve flip-flopping regarding their guidance on monetary policy. Time and again, we found ourselves in an environment where the Federal Reserve prepared the market for a fed funds hike, especially in December 2016. Their indications put the 10-year Treasury note under pressure in the past two months, pushing its yield up to 1.88% last Friday from a post-Brexit summer all-time low of 1.31%.

After December 2015, when the Fed last hiked the fed funds rate, the 10-year Treasury dropped expeditiously from 2.33% all the way down to 1.57%. I commented at the time that I had never seen the bond market rally so strongly after a Fed rate hike and for long term-interest rates to drop so fast. It would be curious to see if the Fed is doomed to relive that experience again like the Groundhog Day Forecast.

If they hike in December by 25 basis points – a move not presently forecasted by the fed funds futures market – I would expect the same reaction from the bond market. Namely, I would be looking to the 10-year Treasury to rally, in effect revolting against the Fed’s monetary policy. In a twisted way, hiking the fed funds rate accelerates the decline in U.S. long-term rates as it worsens the global deflation outlook.

If the Fed hikes the fed funds rate this December, I expect that the 10-year Treasury yield will get to 1% faster than it would have without a rate hike. I expect that to happen sometime in 2017.

Ten Year Treasury Note - Weekly OHLC Chart

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

The 10-year Treasury yield is mired in a downward trend that started in 1981 (see log chart, above).

In a conversation with a veteran bond trader a couple of years ago, he referred to this down-trend as the legendary “ski slope.” He shared with me that the present path of growth of the federal debt is unsustainable and that someday the Treasury market may refuse to “clear,” as traders like to say.

Federal Debt Versus Surplus/Deficit Chart

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

While I agree 100% with the unsustainability argument, this is a very long-term point that I do not believe will be an issue in the next five years. As total federal debt approaches $20 trillion, one has to note that it has doubled in just about 10 years. Can it double in another 10 years? I don’t think so. As a percentage of GDP, we have had a similar debt-to-GDP ratio, during World War II. The trouble with that view is that there is no World War at the moment, although one should not discount the expensive engagements in Afghanistan and Iraq, neither of which has produced the desired results. One can successfully argue that the present Syrian civil war is a direct continuation of the invasion of Iraq in 2003, as ISIS has many radicalized elements from the disbanded Sunni-dominated Iraqi Army from the time of the invasion.

Precarious geopolitics aside, the world at present has a deflationary problem that is not going away soon. This problem is a result of debt-driven growth cycles in the developed world – mainly the U.S., Europe, and Japan – and the same is happening in major emerging markets, like China and Brazil.

When the debt binge stops, the economy enters a deflationary spiral. Not every economy that has experienced a debt-driven growth cycle is presently in deflation, but most are headed towards a deflationary bust. China is at the top of my list for the next major economy to fall into deflation because of the spectacular credit bubble it has experienced since the year 2000 where the total debt-to-GDP ratio in the economy has risen from 100% to 400% when one includes shadow banking leverage.

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.

When the Fed is hiking interest rates in a global deflationary environment, it makes matters worse. It causes the U.S. dollar to rise at a time when there is too much dollar borrowing globally, and many economies mired in deflation have to repay dollar debts with depreciated currencies. Total dollar-denominated debts have risen from $6 trillion in 2008 to over $9 trillion at present. Such a dollar borrowing binge creates a gigantic synthetic short position against the dollar, as foreign dollar borrowers sell dollars when they take on dollar debts to spend them in their own currencies. By definition, when they repay those debts they buy U.S. dollars back with much cheaper local currencies due to a weak global economy. Fed hikes in a global deflationary environment make no sense, and the strong dollar is one factor complicating the situation.

What Says Dr. Copper?

After the Great Recession, it seems that many economic indicators no longer make sense. For instance, how strong is the U.S. economy? It does not feel as strong as some indicators suggest, in my view.

The reason for the mixed picture is the severity of the last recession. It’s no secret that the latest recovery has been very long but very weak. With the renewed talk of rate hikes in December, I decided to consult the only metal with a Ph.D. in Economics – Dr. Copper, as traders like to call the metal.

Since a peak in 2011, the price of Dr. Copper is weak and getting weaker.

High Grade Copper - Monthly Nearest OHLC Chart

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

The previous price spikes in the 1970s, 1980s, and 1990s corresponded well with an accelerating and decelerating U.S. economy, while the move from $0.60/lb to $4.50/lb (2001 to 2011) bears no reference to the U.S. economy. China was the main driver of the copper price then, as China’s economy grew from $1 trillion to $11 trillion. I think the present weak copper price is basically a factor of the weakening of the Chinese economy and not necessarily predicting weakening of the U.S. economy. As China became the #1 consumer of many commodities, their fate was much less correlated to the U.S. economic cycle.

I think the price of copper may get a bit weaker in the next two years without necessarily signifying problems in the U.S. But China’s economic problems will be bigger by then, in my view.

Still, the price of copper says that the global economy is much weaker. It may not be able to handle a U.S. dollar rally caused by multiple Fed rate hikes. I think the dollar is going to rally anyway, but rate hikes would make the rally accelerate. I know the global economy and the exchange value of the dollar are not at the top of the agenda at FOMC meetings, but I do think that if they hike in December 2016 they run the risk of reversing course in late 2017 due to the situation in the global economy, particularly China.

Sector Spotlight:

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

Halloween’s Origins in Ancient Ireland

by Jason Bodner

As another Halloween ticks by, it’s interesting to know that this strange holiday dates back at least 6,000 years. Specifically, Samhain was the sacred festival that marked the end of the Celtic calendar year. In the pre-Halloween celebration of Samhain, great fires were lit to ensure that the sun would return after the long, hard winter to come. Druid priests would often toss cattle bones into the flames. This “bone fire” became shortened to “bonfire.” Dressing up as ghosts and ghouls came from the Celtic tradition of townspeople disguising themselves as demons and spirits. They thought that disguising themselves this way would allow them to escape the real spirits wandering the streets during Samhain. “Trick-or-treating” evolved from the ancient Celtic tradition of putting out treats and food to placate those spirits.

Trick or Treat Ghouls Image

Ancient trick-or-treating (above) has now become a contest in costume cleverness:

Subway Baby Image

From this short history, you can see that Halloween is ironically more Irish than St. Patrick’s Day – which was a holiday basically invented in America by Irish-Americans. According to National Geographic, St. Patrick’s Day was only a “minor religious holiday” in Ireland until the 1970s. “All Hallows Eve” is far more Irish than St. Patrick’s Day. Ironically, St. Patrick probably wasn’t even Irish himself and his preferred color was more blue than green. The fable of him banishing snakes is actually a metaphor for his triumph over Irish paganism – specifically, the type of paganism reflected in rites like Halloween.

This provides us with yet another example of how things are not always what they seem. History has a way of transforming traditions over time, to the point where they have little resemblance to their beginnings. Halloween’s beginnings were more along the lines of people dressing in animal skulls and skins to celebrate life awakening in the underworld as the harvest came to a close, plunging the land into darkness and cold. Perhaps if today’s parents thought of Druid priests tossing bones and cats into fires as offerings, they would be less enthused about dressing up their little ones as ghosts to collect Snickers bars.

The Market Also Wears a Mask

The market these days is not quite what it seems. On the surface, we see companies beating earnings and sales expectations and an S&P 500 in a tight trading range since last July. But when we peel back the layers of the ghost costume, we see something a bit different. At my analytics firm, we use proprietary metrics to monitor market breadth, focusing on what the institutions are doing. In looking for markers of what big institutions do, we look at their footprints. What we have been seeing in the last few weeks is measured but decisive selling. Our daily average of signals is close to 2 to 1 in favor of distribution. This trend is confirmed by Bespoke (October 26, “Largest Equity Mutual Fund Outflow in Over Five Years.”)

To add to the general spookiness of the market, all one has to do is look at Friday’s action. The story of a potential FBI review of Clinton’s email case sent the market straight down for a short while. The tone in the media has been one of negativity and heavy focus on the candidates’ scandals and personality flaws. The global climate is also tense, with Russia, Syria, Yemen, North Korea, and, by all measures, an uninspiring U.S. presidential election. It’s an appropriate backdrop for the horror-oriented Halloween!

Once again, the sector landscape hasn’t been very exciting. This past week saw choppiness with mixed earnings in Tech. My distribution meters have also alerted us to selling in Consumer Discretionary, which was down nearly 2% for the week. Health Care continues to be out of favor with a one-week performance of -2.78%, but Real Estate was the undisputed loser of the week, getting punished by -3.40%.

Standard and Poor's 500 Daily and Weekly Sector Indices Changes Tables

Although Tech has been the unchallenged leader of the market for three months, October found a new winner in Financials. The sector shook off some woes from last month, including those of Wells Fargo, and is leading this month as the top sector +2.27% month-to-date (using data through last Friday).

Standard and Poor's 500 Monthly Sector Indices Changes Table

For three months, Info Tech, Financials, and Energy have been leading – the only three in positive territory. It is worth noting that Information Technology has lost momentum in the past couple of weeks while Financials edged up along with Energy. Unfortunately, the last three months have been a bit of a thorn in the sides of Health Care, Real Estate, and Telecom, which are all down by more than 10%.

Standard and Poor's 500 Quarterly Sector Indices Changes Table

So, what we see here is a three-month period of general stasis for the S&P 500, and nothing much to be inspired about in the various sectors. But let me ask the question: What about those with a very long timeline? Maybe looking day-to-day, week-to-week, or even month-to-month is a seemingly meaningless endeavor for someone who thinks in terms of decades. Well, interestingly enough, I came across this chart seeking to highlight 500 years of stock market history. It stitches together several historic stock market indexes.

History of Share Prices Chart

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

Even without magnification of all the details, the trend is clear: If you think in terms of 100 years, you probably have nothing to worry about. But if you think in terms of days or weeks, the market seems a bit creepy right now. It is eerily calm, with some pretty scary stuff behind the sheets. It may be hard to grow your portfolio basis with market rotations being frequent and swift; but as Chuck Palahniuk said (as the character Tyler Durden), “On a long enough time line, the survival rate for everyone drops to zero.”

Look at the bright side. At least Target banned creepy clown masks…like this one:

Creepy Clown Image

A Look Ahead:

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

Fear is Fueling Fund Redemptions…at Just the Wrong Time

by Louis Navellier

According to our friends at Bespoke Investment Group, using Investment Company Institute data, we have just seen the largest weekly equity mutual fund redemptions in over five years (since August, 2011).  In the week ending October 19th, redemptions reached $16.3 billion, fueled in part by (1) the boom in ETF sales (vs. mutual funds), (2) financial advisors realigning their client portfolios to comply with new Department of Labor regulations, and (3) nervous investors getting out before the Presidential election’s potential disruption.  (Source: Bespoke, October 26, “Largest Equity Mutual Fund Outflow in Over Five Years.”)

Amidst these redemptions, the third-quarter earnings announcement season is heating up and it is now essentially every stock for itself.  Ironically, the stocks that have the strongest sales and earnings are being punished in a very odd sort of rotation, but this is unusual and should be short-lived.  As Friday’s market action demonstrated, good stocks tend to bounce like fresh tennis balls while bad stocks fall like rocks.

Interestingly, last week started with merger mania in several large firms.  Thanks to ultralow interest rates and record issuance of corporate bonds, I expect merger mania to continue for the foreseeable future.  The fact that the Bank of Japan, the Bank of England, and the European Central Bank are all continuing their quantitative easing and allowing member banks to buy corporate debt (since their respective governments offer negative yields) means that ironically, merger mania is also being partially fueled by major central banks.

United States Dollar Bill Image

The U.S. dollar hit an 8-month high last week.  The dollar index (DXY) is now up 7.5% since its low in May.  The British pound, the Canadian dollar, the Chinese yuan, the euro, and the Mexican peso are all examples of currencies that have slipped relative to the U.S. dollar; so foreign capital from all of these countries continues to pour into the U.S. seeking a strong currency and higher interest rates, which in turn should continue to put downward pressure on interest rates.  That is the good news.  The bad news is that a strong dollar will hinder U.S. corporate sales and earnings, since companies are paid in eroding currencies.

Earnings Outlook for Troubled Energy & Financial Sectors

Last week, Goldman Sachs lowered its outlook for S&P 500 earnings for both 2016 and 2017 to $105 per share (down from $110) and $116 per share (down from $123), respectively.  Ironically, Goldman Sachs essentially blamed Silicon Valley and Wall Street for these downward revisions, saying that “financials and information technology, the two largest S&P 500 sectors based on earnings per share contribution, have both registered disappointing operating (earnings-per-share) growth in 2016 year to date.”

Goldman Sachs slashed its 2016 earnings estimates for the financial sector to only 1% growth, down from 9% as the financial industry continues to struggle with ultralow interest rates.  Also notable is that Goldman Sachs’ estimated earnings for the technology sector would grow 4% in 2016 and 8% in 2017.  Excluding energy, technology remains the strongest sector for forecasted earnings in 2017. (Please note: Louis Navellier does not currently hold a position in GS. Navellier & Associates, Inc. does not currently hold a position in GS for any client portfolios. Please see important disclosures at the end of this letter.)

I should add that energy is expected to have a major earnings rebound in 2017, due largely to favorable year-over-year comparisons.  However, I would be much more interested in buying more energy-related companies in February or March, when the seasonal strength in oil should resume.  In the meantime, crude oil prices remain under pressure as doubt emerged last week that Russia, Saudi Arabia, and other OPEC members will be able to reach any agreement on production caps.  Iraq has been boosting its crude oil production more than any other OPEC member and signaled last week that it will not scale back its crude oil output, which is currently 4.77 million barrels per day.  As the second largest OPEC member, Iraq needs to continue to produce more oil so it can continue to rebuild its country, especially since it needs to rebuild major cities like Fallujah and Mosul, where it is ousting ISIS and conducting major military operations.

I should add that both the American Petroleum Institute (API) and the Energy Information Administration (EIA) announced last week that U.S. crude oil inventories rose in the latest week.  In addition, API announced that gasoline inventories rose 1.7 million barrels in the latest week, contributing to the supply glut.  This also indicates that the prices at the pump may decline a bit in the upcoming weeks.


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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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