Incredible Earnings Season

Another Incredible Earnings Season Reduces the Market’s Volatility

by Louis Navellier

August 7, 2018

Increased Volatility Image

The daily oscillations in the stock market have been largely subdued due to stunning second-quarter results. Last week began with a flagship NASDAQ stock, Apple (AAPL), reporting better-than-expected sales and earnings on Tuesday. Many leading NASDAQ tech stocks are enjoying recurring service revenue from their cloud backup services, which continues to boost their sales and earnings. Although not all NASDAQ stocks pay a nice dividend or have predictable earnings, the fact that two NASDAQ companies – namely Amazon.com and Apple – should each become $1 trillion market capitalization companies soon (Apple crossed $1 trillion last Thursday) is helping to boost investor confidence.

(Please note: Louis Navellier does not currently hold a position in Apple & Amazon. Navellier & Associates does not currently own a position in Apple & Amazon for client portfolios).

With the majority of stocks in the S&P 500 having announced second-quarter results, sales have risen at a 10.3% annual pace while earnings have risen at a 26.7% annual pace. Folks, this is stunning, because this means sales and earnings are running at 1.5% and 5.2%, respectively, above already-lofty expectations. Despite a currency headwind for many multinational companies, “peak earnings momentum” has not yet materialized. Although the remaining second-quarter S&P 500 earnings may decelerate a bit, there is no doubt that the second quarter will rival the first quarter as a record-high earnings announcement season.

In This Issue

Bryan Perry takes a closer look at China and sees more than “currency manipulation” going on, perhaps some capital flight, which should drive China’s leaders to the bargaining table. Gary Alexander looks beyond the monthly jobs report to two long-term trends – one positive, one negative – rising real wages and the disappearance of many prime-working-age males. From Bulgaria, Ivan Martchev weighs in on the emerging markets crisis, focusing on China and then Turkey. Jason Bodner signals the end of the Dog Days with a review of the rapidly-changing sector traffic patterns of summer, while I take a closer look at earnings trends and GDP in light of trade war rumors, along with an analysis of the latest ISM statistics.

Income Mail:
Capital Flight Out of China – A Better Market “Tell”
by Bryan Perry
Is the Weak Yuan a Result of Manipulation or Something Structural?

Growth Mail:
Ignore the Monthly Jobs Report: Study the Long-Term Trends Instead
by Gary Alexander
Where Have all the PWAMs (Prime Working Age Males) Gone?

Global Mail:
Welcome to the August Doldrums in Eastern Europe
by Ivan Martchev
The Dollar/Emerging Markets Empirical Test

Sector Spotlight:
The “Dog Days of Summer” are Almost Over
by Jason Bodner
Sector Rotations are Often More Rapid in Summer Months

A Look Ahead:
Will Tariffs Help or Hurt (or Not Impact) Earnings or GDP?
by Louis Navellier
ISM Statistics Move Sharply Down: Temporary or Worrisome?

Income Mail:

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

Capital Flight Out of China – A Better Market “Tell”

by Bryan Perry

During the front end of August – when U.S. earnings season is winding down, foreign markets are trading under pressure, and fewer market participants are trading – investors need to put in overtime in their stock selection. Apple’s move to new highs can’t do all the heavy lifting for the whole market, even if it’s the largest weighting in most indexes and most ETFs. In addition, the news flow on the looming “trade war” looks to only intensify leading up to the next round of tariffs, set to go into effect in early September.

While the trade war rhetoric heats up even further, as President Trump has threatened to raise the tariffs on $200 billion of Chinese imports to 25% (from the previous 10%), the market is doing a good job of digesting the dialogue. In fact, the U.S. stock market trades with an undertone of confidence that a full-blown trade war will not break out as threatened. Conversely, China’s Shanghai Composite Index continues to tank, taking that key market average back down to test its 52-week low of 2,691.

Clearly, investor sentiment in China is considerably more worried than its U.S. counterpart about the implications of tariffs on their economy at a time when leaders in Beijing are challenged to keep GDP on its current 6.5% growth rate. From the way their market is trading, it would not surprise most analysts if China were cuffing their GDP data to where the actual number is well below Beijing’s official GDP data.

China's total debt now exceeds 250% of its GDP vs. U.S. debt at about 100% of GDP. After years of loose banking regulations, China’s leverage is high and its government has taken ambitious steps to deleverage the shadow banking industry, where credible data is hard to get. Many global economists fear that any downturn in growth could precipitate a debt crisis, so there is every incentive to inflate economic data.

One interesting data point is that, according to U.S. Census estimates, China's population is set to begin shrinking as soon as 2026, which will invariably pull economic growth rates down. Perhaps the 21st Century won't be dubbed the “China Century” after all. In any event, “fake news” is nothing new to the Chinese government and it will be telling to global equity markets to see how long China will keep its “poker face” over trade policies at the expense of “saving face” publicly and tanking their economy.

The Shanghai index officially entered bear market territory even as many U.S. indexes are at or near record highs. China may be the first to blink in the trade war, because, as CNBC’s John Rutledge put it, “China’s markets are heavily influenced by foreign capital flows, and capital has been flowing out of China.”

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

Is the Weak Yuan a Result of Manipulation or Something Structural?

There is much talk of China’s “currency manipulation,” but could something more important and ominous (to China’s economy) be happening?  Since Chinese foreign exchange reserves equal only about 10% of money supply, a large-scale capital exodus could quickly deplete its liquid currency reserves. There are many indications that China could suffer deeply from a capital flight similar to that of 2015-16. Interest rates in Western economies are up, and Chinese savers don't have access to favorable interest rates at home. Fears of tax increases or currency devaluation are other factors that might drive wealthy Chinese to try to move their capital abroad and circumvent the government's strict capital controls.

The dollar/yuan exchange rate has ballooned to 6.83 yuan per U.S. dollar as of last Friday, a level not seen since late 2016. Last week the Peoples Bank of China (PBOC) raised the margin requirement by 20% for those trying to short the yuan. This is the first big move that China has made to defend its currency, which is a real shift in policy. In doing so, the PBOC is saying that the magnitude of the latest move is too great.

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

Take this central bank policy move in conjunction with the recent deleveraging campaign, rising domestic defaults, and declining growth rates and party officials have real concerns about where the economy is headed right now. China issued a lot of U.S. dollar-denominated debt in the past five years and allowing the yuan to depreciate too much is going to be that much more of a debt load to have to pay off.

Despite this boa constrictor-like squeeze, China still holds the world’s largest foreign currency reserves, $3.16 trillion. A sizeable war chest of foreign currency reserves is very handy during a currency crisis since it can be used to defend against specific attacks on the national currency. By comparison, the U.S. had foreign currency reserves of $42.8 billion as of March. The PBOC has a lot of firepower to defend the yuan for an extended period and will use its reserve to reassure investors it is committed to a stable yuan.

Boiling down these huge crosscurrents of tariffs, currency moves, regulations, and political will, it’s my view that the U.S.-China standoff can brew for a prolonged period, but both the U.S. and China have enough firepower to wage a long-term trade war and the market may be pricing in this reality.

President Trump is going to push hard to get China to strike a deal well before the mid-term elections. How that plays out is anyone’s guess at this point, but what is crystal clear is that the latest read on the ISM Manufacturing Index (at a 4-month low) and the ISM Services Index (at an 11-month low), on the heels of softer housing and wage data, is seen by the bond market as a sign that the economy will expand, but not at the same torrid clip that has been recently reported. It should also send a strong message to income investors that dividend-growth stocks (in lieu of pure growth stocks) will likely shine in the second half of 2018 as third- and fourth- quarter earnings (versus Q3 and Q4 2017) won’t be as impressive.

Rotation of capital is a beautiful thing, as long as you know where it’s going. Though the Fed may have plans for two more rate hikes this year and three more for 2019, if the economic calendar doesn’t register more robust data over the next quarter, there just might be one (in September) and “done” for the cycle.

Growth Mail:

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

Ignore the Monthly Jobs Report: Study the Long-Term Trends Instead

by Gary Alexander

The July jobs report came out Friday, but I generally don’t pay much attention to the monthly jobs total since it’s subject to such great revision in future months, especially when the data comes out so early in the month (8:30 am on August 3 in this case). How do you expect government bean counters to measure the entirety of the employment picture just two days after the close of the month being examined?

As always, I prefer to look at long-term trends. The steady addition of decent-paying jobs is correlated with national wealth and stock market profits, as this chart of total payrolls vs. the Russell 3000 shows:

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

Digging beneath the numbers, there are two misconceptions I would like to begin with, before tackling the 800-pound gorilla in the labor market pool – the disappearing Prime-Working-Age Male.

Myth #1: “Wages are stagnant.” This one bothers me because it discourages people from seeking work. It burdens young people with the myth that only “dead-end hamburger-flipping jobs at minimum wage” are available, and that there is no escape from a dismal fast-food joint – the traditional entry-level job.

In truth, inflation-adjusted average hourly earnings have been rising steadily for the last 25 years (see the blue line, below), from $15 to nearly $20 per hour. The blue line accounts for about 80% of all workers, and it is up 29% from 1995 to 2018. Wages have risen 10% for all workers since those data started being kept in 2006 (red line, below). This is inflation-adjusted, so it can’t be described as “wage stagnation.”

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

Myth #2: Youth are trapped in dead-end jobs. The Atlanta Fed compiles a “Wage Growth Tracker” by age group (called “age cohorts”). Youth in the 16-24 age bracket (the blue line in the chart below) have always seen their wages grow faster than any other group. From February 2013 to November 2016, wage inflation for the 16-24 group grew from 3.5% to a peak of 8.4% before settling down to a still-high 7.1% in April 2018. By comparison, wages are only growing 3.4% for the prime working-age 25-54 cohorts (and 3.2% overall) and 2.0% for Baby Boomers over age 55 – the most rapidly growing slice of workers. (The percentage of workers over age 55 has increased from 13% in 2000 to an astounding 23.3% today.)

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

Even those without a high school diploma have an excellent chance of being employed. According to Friday’s jobs report, a record 19 of 20 in the Labor Force without a diploma are currently employed.

Entry-level jobs are important, as they teach youth basic job skills of showing up on time, following instructions, and serving customer’s requests in a friendly manner. Those skills can be transferred up the line into management positions at the same company or at a more prestigious corporation later in life.

But when looking at the aggregate data, the giant question is: Where have the able-bodied males gone?

Where Have all the PWAMs (Prime Working Age Males) Gone?

“The progressive detachment of ever-larger numbers of adult men from the reality and routines of regular paid labor poses a self-evident threat to our nation’s future prosperity. It can only result in lower living standards, greater economic disparities, and slower economic growth than we might otherwise expect.”

– Nicholas Eberstadt, “Men Without Work,” The American Enterprise Institute, January 30, 2018

Unfortunately, a lot of Prime Working-Age Males (PWAMs) have dropped out of the job market. They are Not in the Labor Force (NILF) for a variety of reasons, causing the Labor Force Participation Rate (LFPR) to remain at 63% or less for the last four years, down from a peak of 67% in the late 1990s.

Isolating the PWAM population, the percent dropping out of the labor force has doubled from 6% in the supposedly depressed 1970s – the era of “stagflation” and “Take this Job and Shove it!” – to 12% in the booming 2010s. Why would 12% of a generation of virile young males drop out of the labor force?

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

This is the question asked (and answered) by Nicolas Eberstadt’s 2016 book “Men Without Work: America’s Invisible Crisis.” It’s hard to put a statistical button on the cause, but Ed Yardeni put it into a sort of “rap song rhyme” last week. Unfortunately, the answer involves a destructive lifecycle spiral:

Disabled, ill, & popping pills
Lacking incentive, lacking skills
Doing time, catching cheap thrills

Taken in order, disability claims have skyrocketed. Didem Tüzemen, an economist at the Federal Reserve Bank of Kansas City, in a February paper titled “Why Are Prime-Age Men Vanishing from the Labor Force?” analyzed the Current Population Survey (CPS) over the last 20 years (1996 to 2016) and she found that nearly half (48.3%) of the PWAM-NILFs in 2016 said that they were disabled or ill. In a similar 2017 paper (“Where Have All the Workers Gone? An Inquiry into the Decline of the US Labor Force Participation Rate”), Alan Krueger, a Princeton University and NBER economist, cited findings that nearly half of all prime-working-age NILFs “take pain medication on a daily basis, and in nearly two-thirds of these cases they take prescription pain medication,” contributing to the opioid overuse epidemic.

Incentive is drained by support systems. Another 2017 paper titled “Declining Prime-Age Male Labor Force Participation, Why Demand- and Health-Based Explanations Are Inadequate” by Scott Winship of George Mason University, used an after-tax income measure adjusted for inflation to show that 76% of PWAM-NILFs have managed to avoid poverty since the income of the average Social Security Disability Insurance (SSDI) recipient about matches the after-tax income of a full-time worker earning minimum wage. Plus, the SSDI recipient gets Medicare benefits due to their “increase in self-reported disability.” 

Wasting time: There was a 67% rise in the nonparticipation rate of younger PWAMs (aged 25-34) from 1996 to 2016. One third were in training or school, one third had a criminal record, according to Winship. Few were taking care of children, so what were they doing? Studies show they devoted about eight hours a day to “socializing, relaxing, and leisure,” like video games. They also gamble, use drugs, and watch TV a lot. Eberstadt says they “have relinquished what we ordinarily think of as adult responsibilities.”

The Fed’s latest (July) Beige Book says there are plenty of jobs available but there is a nationwide labor shortage “across a wide range of occupations,” due to a lack of qualified workers and, in some cases, a lack of willing workers. Last Wednesday, The Wall Street Journal (in “Youths Shrug at Construction Jobs”) quantified the labor shortage of construction workers, which means “fewer homes are built, pushing prices up for perhaps years to come.” They cited a study by BuildZoom chief economist Issi Rome, which says the U.S. had 11.7 million construction workers in 2005, but in 2016, with 28 million more folks to house, construction workers fell 13% to 10.2 million. Employers are desperately in need of warm bodies. The May Beige Book said employers were willing to “relax drug testing standards and restrictions on hiring felons to alleviate labor shortages.” Importing willing immigrants would also work, but we’ve got to find a way to open America to those willing to work on good jobs – now going begging.

Global Mail:

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

Welcome to the August Doldrums in Eastern Europe

by Ivan Martchev

Being a native-born European, I decided to pack my bags in August, European style, and go visit my friends and family in my homeland of Bulgaria. August is the month when all of Europe (not just me) pack their bags and head for the beaches, so European markets are (at best) illiquid as trading volumes decline and surprising headlines generate bigger moves than they would otherwise be able to cause.

With the Chinese yuan dangerously close to 7:1 against the U.S. dollar – last week, it reached 6.92 – I do not believe that the Chinese will make a trade deal before the majority of Trump’s tariffs go into effect on September 5, as they would feel that their hand has been forced. I think President Trump needs to find an expert on Asian business dealings and get some consulting expertise on a way out of this situation so that the Chinese can “save face,” which is the modus operandi of Asian diplomacy. So far it looks like the current trade friction – filled with acrimonious recrimination – will drag into September and October.

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

In this scenario, there is nowhere for the dollar to go but up, as the Fed has reaffirmed its tightening bias in a U.S. economy that is roaring near full employment. I see the Fed tightening in a real trade war, but since the fate of the trade standoff will be decided in September or October, the dollar has significant room to run to 100 or higher on the U.S. Dollar Index, which made a beeline from 90 to 95 early in 2Q. Now that those gains have been consolidated around 95, the next beeline is to 100 or higher, in my view, particularly if the “acrimonious recrimination” part of the Chinese trade negotiations reaches fever pitch.

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

The 2-10 Treasury spread – one of the more popular measures of the slope of the Treasury yield curve – was as low as 24 basis points in July. What's more interesting, the 10-30 spread closed at 17 basis points last week, which means the long end of the Treasury curve does not see inflation but deflation, which would be the natural outcome of a bad trade war. Any way you slice it, the Fed is one FOMC move away from inverting the Treasury yield curve, which has had an ominous predictive power of future recessions.

It looks like the yield curve will invert in September or October, with or without a trade war. In the event that a worst-case scenario plays out (a 20% chance, in my view), the effect will be profoundly deflationary for the global economy as the Chinese will feel compelled to devalue the yuan to 8-9 per dollar, at which point the Fed will stop hiking and the Treasury market will rally. We are not there yet, but I believe the best modus operandi now would be “Hope for the best and be prepared for the worst.”

The Dollar/Emerging Markets Empirical Test

Travelling through Bulgaria, I noticed the long-standing weak dollar vs. strong emerging markets correlation holding up pretty well. If one looks closely, the euro is positively correlated to Bulgaria’s SOFIX stock market index. The SOFIX is a large-cap index (if that is not an oxymoron in a tiny Eastern European market), but it does not take a genius to figure out that a strong euro means a strong SOFIX and vice versa, save for the 2008 crash, which was far more brutal for the local market.

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

This correlation is in big part because emerging markets borrow in U.S. dollars but repay their debts in local currencies. Every once in a while, as they have done recently, they overborrow and create the next emerging market crisis, as they cannot repay their debts.

Bulgaria is a fiscally conservative country, which is not something you can say about most of the rest of Europe. I don’t really care for the “hard peg” to the euro. That hard peg can “go” in a difficult economic situation. Even though I rate the euro’s chance of survival at no more than 50%, I would rather see them join the euro completely and eliminate the hard peg rather than stay in the present “currency purgatory.”

Right next door, 45 minutes across the border in Turkey, the situation is out of control and feels like it is going to blow. The Turkish lira recently crossed five to the dollar and who knows where it will stop after falling from under 2:1 ($0.50) to over 5:1 ($0.20) in under five years. If the Fed does not stop tightening, which I don't think it will, I think we may end up having currency crises in Argentina, Turkey, and China at the same time, all due to years of rampant U.S. dollar borrowing to juice up economic returns.

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

Such dollar borrowing does nothing more than borrow from the future, creating a day of reckoning that seems to be up for some emerging markets.

Sector Spotlight:

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

The “Dog Days of Summer” are Almost Over

by Jason Bodner

July 3rd to August 11th comprise the “dog days” of summer.  Late sunsets, beers on the beach, and loose and easy bedtimes for kids all come to mind. It’s usually a time when most of us think of relaxing….

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The dog days of summer are named after the rising of Sirius, the Dog Star. Greek and Roman astrologists associated Sirius with heat, drought, and sudden violent thunderstorms. It also connoted lethargy, fever, mad dogs, and bad luck. Now, they are just the hottest days of summer in the Northern Hemisphere.

Summer is also a time of change and flexing. These changes can go unnoticed. For instance, the Eiffel Tower actually grows six inches taller in the summer, due to the expansion in the iron.

The stock market is also bowing and flexing. Sectors are sloshing around. Money is moving in and out of the sectors more quickly. Growth stocks sag on one day and then surge the next. The headline effect on stocks seems amplified. This is all completely normal. Summer brings about heightened volatility with lower trading volumes and more traders focused on their upcoming vacations.

But we are also in the height of earnings season. Some price reactions after earnings reports have been outsized when compared to “normal” earnings reactions. We are witnessing it first hand with stock “re-pricings,” compounded by fears spouted by media outlets. Just remember, fear gets more eyeballs than happy pictures of fuzzy puppies. The more fear, the more eyeballs; the more eyes, the more ad revenue.

That’s why “trade war” stories sell ad space. But instead of asking whether a trade war will decimate economic life as we know it, you should ask: “Are earnings working?” Check these stats…

According to FactSet’s latest report for Q2 2018:

  • 81% of the companies in the S&P 500 have reported actual results.
  • 80% of S&P 500 companies reported a positive EPS surprise (currently the highest since Q3’08).
  • That’s well above the 5-year average of 70% positive surprises.
  • The earnings surprise percentage (+4.9% above expectation) is above the 5-year average.
  • 74% reported a positive sales surprise – well above the 5-year average of 58%.
  • The earnings growth rate for the S&P 500 is 24% (currently second-highest since Q3’10).
  • Ten sectors have higher growth rates (vs. second quarter) due to upward estimate revisions and positive earnings surprises.

In short, earnings are stunning and continue to be very upbeat. One thing is clear: We are not having notable earnings and sales deceleration. Here’s a look at earnings and sales by sector:

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

Sector Rotations are Often More Rapid in Summer Months

We are seeing sector rotations in recent weeks as rate-sensitive sectors like Real Estate and Telecom got a boost. The Fed left key rates unchanged yet signaled a likelihood for future hikes, but the bottom line is that the fears earlier this year of hyper-aggressive rate hikes this year and next were clearly unfounded.

Health Care has been on a quiet tear, rising nearly 11% in the last three months. Strong sales and earnings boosted this sector, which faced headwinds from Trump-talk about unfair pricing.

As we look at our nine-month winners, we see Information Technology and Consumer Discretionary still in the lead, but these sectors have been hit with some profit taking lately. Earnings, as we can see above, have been overwhelmingly positive, which gives a great excuse to take some profits “off the table,” but even negative earnings have been a catalyst to sell positions with gains still left in them. I do believe these sectors will return to favor as liquidity rushes back into the market after the summer ends.

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

I have mentioned before that I believe the trade war rhetoric is overblown and not the major concern it is being made out to be. The EU leadership is working with Trump toward zero tariffs. China is devaluing their currency, which in the face of increased tariffs could offset the tariff by making goods cheaper.

There is also a theory that this is part of a Trump “master plan.”  If Trump inflames the trade war situation now, he could come forward in September or October with a solution. This would of course assuage fears in the market and cause a lift in prices. It would also soothe rattled nerves and show a significant victory.

This would come at an opportune time – just before mid-term elections. Either way, the bottom line is this: Sales and earnings are superb for yet another quarter. Interest rates are smoother and more measured than originally anticipated. Trade war fears are a distraction, but Trump’s agenda is ultimately to help America not harm it. Whether or not this rings true with voters will be determined in November.

For now, the market remains strong, with terrific growth metrics. I believe the next two months will see more volatility and, since earnings season ends soon, we will see the algorithmic traders take advantage of low-liquidity environments soon. They will amplify volatility and move stocks around more rapidly, but stay focused on being positioned with the companies having the best sales, earnings, and institutional support. These are the stocks that will lead the market higher into the end of the year.

There are calm markets, and choppy ones. Willa Cather said it best: “There are some things you learn best in calm, and some in storm.”

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A Look Ahead:

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

Will Tariffs Help or Hurt (or Not Impact) Earnings or GDP?

by Louis Navellier

So far, trade fears aren’t lowering earnings or GDP growth. For example, one reason behind Apple’s better-than-expected sales and earnings was the fact that its China revenue rose 19%. Furthermore, the fact that Chinese and U.S. trade negotiations are expected to re-open seemed to briefly calm investors.

There is no doubt that tariffs tend to force the country with the most to lose to the negotiating table, as the European Union (EU) recently demonstrated, so I expect that China will try to deter any new tariffs by resuming trade negotiations. In the meantime, China has purposely weakened the yuan to maintain its competitive trade advantage, which is why the U.S. continues to run record trade deficits with China.

Even though I am not spooked by trade fears, financial markets seem to want to be stressed about something, so trade fears will likely persist for a while, since it is an easy way for the media to bash President Trump. The truth of the matter is that many traders on Wall Street and in Europe will be on vacation for the next four to six weeks. That is one reason why August and September have been so weak in recent years. According to Bespoke Investment Group’s “August 2018 Seasonality” report, the Dow Industrials have posted an average decline of 1.01% and 1.07% in August and September, respectively, over the last 20 years (1998-2017), so we have now begun the two weakest months of the calendar year.

The talking heads on TV will continue to blame trade tensions for any market weakness, but in my opinion, the root cause is much simpler: Since many professional traders disappear in August through mid-September on extended vacations, there are fewer bids supporting some stocks. If I ever get to run the stock market, my first action will be to close it down in August, since trading volume typically drops dramatically, and unscrupulous short sellers like to try to jerk stocks around during very thin market days.

Turning to GDP estimates, U.S. exports have been steadily expanding, but on Friday the Commerce Department announced that exports declined by 0.6% in June to $213.8 billion, despite another surge in soybean exports. Unfortunately, a decline in the exports of autos, trucks, drugs, and passenger planes all contributed to the export slowdown. Imports rose 0.6% to $260.2 billion in June, so the trade deficit rose to $46.3 billion vs. a revised $43.2 billion in May. Since a shrinking trade deficit was a big contribution to robust second-quarter GDP growth, economists may have to trim their third-quarter GDP estimates.

I should add that the Atlanta Fed is currently estimating that third-quarter GDP is running at a 4.4% pace, so there is plenty of room to downgrade third-quarter GDP estimates and still have a healthy number.

Ironically, the preliminary third-quarter GDP report will be announced just before the November mid-term elections, so after two exceptionally strong quarters of GDP growth, it will be interesting to see how that ultimately impacts election results. Currently, the Republicans are expected to pick up seats in the Senate, due to the fact that there are many Democrats running for re-election in Red states. However, due to redistricting that favors Democrats in key swing states like Pennsylvania, as well as many key House seats vacated by Republicans, the outcome in the House of Representatives remains uncertain.

ISM Statistics Move Sharply Down: Temporary or Worrisome?

The Institute of Supply Management (ISM) reported on Wednesday that its manufacturing index declined to a four-month low of 58.1 in July, down from a robust 60.2 in June. This was a big surprise, as economists expected a reading of 59.5. The culprit was two-fold: ISM’s new orders component declined to 60.2 in July (down from 63.5) and its production component declined to 58.5 (down from 62.3).

Assembly Line Auto Engines Car Production Image

More specifically, the main culprit was auto parts. Auto manufacturers reported that vehicle sales in July were lower than expected as many rebate programs ended, so an abrupt curtailment in auto parts orders apparently impacted the ISM manufacturing report. I should add that any ISM reading over 50 signals an expansion, so the manufacturing sector is still healthy, despite these near-term woes in the auto sector. Furthermore, higher gasoline prices and the 2019 model changeover can temporarily depress auto sales.

On Friday, ISM reported that its service index slipped to 55.7 in July, down from 59.1 in June. Once again, that was a disappointment, since economists were expecting a small drop to 58.6. Although any reading over 50 signals an expansion, the ISM services index is now at an 11-month low, due largely to the business activity component that declined to 56.5 in July, down sharply from a robust 63.9 in June. The new order component also declined to 57 in July, down from 63.2 in June. Due to the abrupt deceleration of both ISM indices, it will be interesting to see if economists start to trim their future GDP estimates.

The big economic news last week was Friday’s payroll report, in which the Labor Department announced that only 157,000 payroll jobs were created in July, substantially below economists’ consensus estimate of 190,000. The best news was that the June payroll report was revised up 35,000 jobs to 248,000. The unemployment rate declined to 3.9%, down from 4% in June. Average hourly earnings increased 0.3% or 7 cents to $27.05 per hour, so wage growth remains moderate. The best news was June’s upward revision.

I should add that on Wednesday, ADP reported that 219,000 private payroll jobs were created in July, the strongest month since February. ADP also revised its June private payroll up to 181,000, from 177,000.

The Conference Board announced last week that its Consumer Confidence Index rose to 127.4 in July, up from 127.1 in June, near an 18-year high. Especially impressive is that the “present situation” component rose to 165.7, up sharply form 161.7 in June. The gap between the “present situation” and “expectation” components is nearing a record, which essentially means that consumers are surprised at how well they are doing! As a result, I expect consumers will likely be spending more money, which is good for growth.

The National Association of Realtors last week announced that pending home sales rose by 0.9% in June, a bit better than economists’ consensus expectations of a 0.8% rise. The National Association of Realtors also reported that international purchases of U.S. homes fell 21% in the 12 months through March 2018. Major international markets, like London and New York City, are in the midst of a slowdown, especially for luxury properties. Eventually, as luxury home prices weaken, it might weigh down other luxury markets, such as Art and Collectibles. As long as the S&P 500 continues to pay a nice dividend yield, though, I do not expect that the stock market will be adversely impacted by the global housing slowdown.

On Wednesday, the Federal Open Market Committee (FOMC) left key interest rates unchanged. On Thursday, the Bank of England raised its key interest rate by 0.25% to 0.75%, the highest since 2009. The FOMC was largely quiet after their meeting, perhaps since President Trump signaled his unhappiness with rising interest rates. Due to the global economic slowdown and ongoing tariff concerns impacting global trade, the Fed has some excuse to postpone rate increases. However, most Fed watchers expect the Fed will likely raise rates at its September 24-25 FOMC meeting, but looking forward, after September, the yield curve will likely determine Fed policy, since the Fed does not like to fight market rates.

Finally, Iran’s currency, the rial, declined 18% early last week and is now down by almost 66% this year. U.S. sanctions are scheduled to be reimposed on August 6th and November 6th, but clearly the economic impact is already devastating Iran. The Trump Administration has offered to meet with Iran, but there are several preconditions that will likely delay any meeting. Iran replaced its central bank chief recently and has blamed currency volatility on the “enemies’ conspiracy” and is vowing fresh countermeasures “in the coming days.”  The bottom line is that there is really no need to go to war when the economic sanctions are so powerful. It will be very interesting to see how Iran’s economic crisis will impact its leadership, but at this time, the country’s domestic crisis will likely force Iran back to the negotiating table.


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.

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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.

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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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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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