Interest Rate Jitters

Interest Rate Jitters in China and at Home Send Global Markets Down

by Louis Navellier

October 16, 2018

I sincerely hope that everyone in the path of Hurricane Michael is safe and your electricity is back on.

China and Bond Yields Image

October lived up to its ancient reputation last week, even though October has been positive – a #1-rated bullish month – in the last 20 years. The Dow fell about 1300 points last Wednesday and Thursday. The big sell-off early Wednesday was triggered by dramatically rising interest rates in China as well as the fact that Treasury bond yields did not fall significantly in a flight to quality. The real catalyst that spooked financial markets was that overnight lending rates in China on Tuesday soared from 1.745% to 5%, while one-week rates surged from 3% to 7.6%. Private lending had suddenly become incredibly expensive.

On my Wednesday podcast, I explained why we need to see (1) Treasury yields fall significantly to quell interest rate fears, leading to (2) a capitulation selling day, (3) a high-volume reversal, and (4) a “retest” of the lows, so that investors can make sure that the recent low is indeed “the” low. (Here is a link to my Wednesday podcast.) Fortunately, Treasury bond yields started to decline on Thursday, which allowed me to become much more positive and see the “light at the end of the tunnel.” Here’s my Thursday podcast.

I’ll have more background on these interest rate triggers and the market jitters in my closing column.

In This Issue

All of our authors acknowledge the somewhat trivial events which caused last week’s “air pocket” events that caused a quick midweek collapse in the market, but they each assure investors that carefully-selected U.S. stocks and sectors provide the best place to invest in a world of much higher risks. Bryan Perry sees a more flexible Fed under Jerome Powell, which will be bullish for stocks when any new threat becomes clear. Gary Alexander sees the U.S. as far preferable to Europe and Ivan Martchev sees far greater risks in China and emerging markets. Jason Bodner asks, “Where else are you going to invest” in this risky world? All of our authors also join me in anticipating the wave of third-quarter earnings reports coming out soon.

Income Mail:
Equity Market Suffers from Over-Analysis Paralysis
by Bryan Perry
Future Fed Policies Will be Based Entirely on Future “Unknowns”

Growth Mail:
The United States is Still the Best Place to Invest
by Gary Alexander
America Kept Rescuing Europe – Until Trump Was Elected

Global Mail:
When Skynet Meets Xi Jinping
by Ivan Martchev
The Mother of All Dead-Cat Bounces is Over

Sector Spotlight:
No Charts or Science Lesson this Week – Just Plain Talk
by Jason Bodner
The Role of Sectors in the Next Stage Up

A Look Ahead:
Rising Interest Rates Sent a Shock Through Global Markets
by Louis Navellier
The Market Now Turns its Attention to Earnings

Income Mail:

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

Equity Market Suffers from Over-Analysis Paralysis

by Bryan Perry

The stock market shed its Teflon coating this past week in what was a nasty short-term correction, where the S&P 500 shed roughly 7% in seven trading sessions. Taking a rear-view mirror look as to why the sharp breakdown occurred at the time it did deserves examination, not only to understand why, but also to glean from the events whether the correction has run its course, just as earnings season is about to unfold.

From my vantage point, the selling was triggered by a confluence of events, some of which began during the last week of September and then came home to roost in the opening two weeks of October.

Aside from the obvious finger-pointing at the Fed’s decision to raise interest rates and the subsequent pop in Treasury yields that got the selling stone rolling downhill, there was a rising level of anxiety that fueled investor fears. Leading up to the September 25-26 FOMC meeting, there was already evidence of weakness in the real estate, semiconductor, materials, and financial sectors in highly active sector rotation.

And while the Dow, S&P, and Nasdaq traded at new all-time highs October 1-3, on the back of a few mega-cap stocks, there were already some leading stocks beginning to pause. At that point in time, the stock market was technically overbought on a purely short-term basis, and few market participants would argue with that view. Also, the sharp breakdown in Chinese, European, and Emerging Markets from many months prior had finally caught the attention of investors comfortably camped out in U.S. equities.

Here are the 12-month charts of China Shanghai, Euro Stoxx 50, and the MSCI Emerging Markets Index:

China Shanghai, Euro Stoxx 50, and the MSCI Emerging Markets Index Charts

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

Heading into October, investors had to digest a flurry of political headlines and the latest policy statements from the Federal Reserve, which included another rate hike, the third one this year.

The U.S. at last implemented tariffs on $200 billion worth of Chinese goods, which triggered Beijing to impose retaliatory tariffs on $60 billion worth of American products. Chinese officials also canceled mid-level trade talks that had been scheduled for later in the week, dashing hopes for a near-term resolution.

Additionally, OPEC and several non-OPEC nations failed to reach agreements to increase crude oil output in order to counter falling supplies from Iran due to U.S. sanctions. President Trump criticized OPEC in front of the UN General Assembly, saying that the oil cartel is “ripping off the rest of the world” by colluding to limit supply and prop up prices. President Trump also called Iran a “corrupt dictatorship,” telling the United Nation that its leaders “sow chaos, death, and destruction.”

Future Fed Policies Will be Based Entirely on Future “Unknowns”

The policy directive coming out of the late-September FOMC meeting wasn't a big surprise. The fed funds rate was raised 25 basis points to a range of 2.00% to 2.25%, which everyone expected, and the vote was unanimous, which wasn’t a surprise, either. Their projections for PCE inflation and core PCE inflation were steady between 2.0% and 2.1%, which means they see no big rise in inflation.

In the Q&A portion of Fed Chairman Powell's press conference, he acknowledged that an inflation surprise to the upside would be a risk for a more aggressive tightening cycle, yet he quickly added that the Fed does not see that in its forecast. Powell also clarified that it is very possible the Fed would CUT rates in the event of a noticeable downturn in growth. The lack of a clear crystal ball was the major takeaway of Powell's presentation. That was by design, as Powell has an even-keel delivery predicated on a belief that the Fed's monetary policy actions are not to be considered preordained. They are subject to change.

The implication that the fed funds rate may move higher in 2019 and 2020 is based on how the Fed thinks the economy will evolve in the interim, based on Powell’s positive outlook in his prepared remarks, which acknowledged that the current U.S. economy is strong. Despite these clarifications, however, the Treasury market had its own bearish interpretation of matters that spilled over into the stock market.

So, while the recent pullback for the U.S. equity market might cause alarm bells to be going off, from a longer-term perspective it looks as if what has just occurred is a garden-variety correction. The weekly chart of the S&P 500 (below) demonstrates how today’s stock market tends to get overbought more frequently than in years past, much of it the work of algorithms that trigger the further buying of stocks when new highs are established, or the inverse when sell programs hit – like what just happened.

Standard and Poor's 500 Large Cap Index Chart

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

In other words, the computer cuts both ways, and after Friday’s close, the S&P is trading back down to the low end of the long-term primary uptrend line that has defined the bull trend.

Rather than try to dissect any further what all these converging forces will do next, let’s let the upcoming earnings and guidance season provide the evidence as to whether all this “paralysis by analysis” is warranted. The time-honored adage of “sales fixes everything” still holds true, especially for the stock market. If the companies that make up the S&P can show 6% to 7% third-quarter revenue growth, as is currently forecast, and more importantly, guide to similar top-line growth in the fourth quarter, then the past two weeks will have been viewed in the rear-view mirror as one heck of a buying opportunity.

Growth Mail:

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

The United States is Still the Best Place to Invest

by Gary Alexander

“We know that we have too few young people and nevertheless we live at the expense of the future by running up debts. That means that we rob future generations of their room for investment and development – and that is immoral.” – German Chancellor Angela Merkel, at her first talk in the Global Economic Forum in Davos, Switzerland in January 2006

Last week’s market bloodbath may have some investors wondering whether or not it is wise to stay invested in U.S. stocks, but consider the alternatives. Global stocks are faring worse. Last week, I brought you the story of the dismal performance of Euro-stocks, year-to-date. Longer-term, look at the flat-line of the 50 top European stocks in the decade since early 2008. The Euro Stoxx 50 index is still below water.

Standard and Poor's 500 index versus Euro Stoxx 50 Index Chart

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

It wasn’t always this way. Europe began the 21st Century with a bang. Notice how the Euro Stoxx 50 Index outperformed the S&P 500 during the first big bear market of the 21st century, from 2000 to 2002. Europe also slightly outperformed the S&P 500 during the following recovery, from 2003 to 2007.

Standard and Poor's 500 Index versus Euro Stoxx 50 Index Earlier in the Century Chart

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

But then, Europe’s house of cards fell in, far more catastrophically than anything that happened in the U.S., as I showed you in last week’s Growth Mail. European banks were far more invested in the worst tranches of the U.S. mortgage market, as shown in Adam Tooze’s new book, “Crashed: How a Decade of Financial Crisis Changed the World.” In one of the author’s many statistical tables, he showed how Europe overloaded themselves with debt in the first years of the 21st century, far more than the U.S.

Eurozone Indebtedness Increase Table

The fact that Germany acted responsibly could not rescue the rest of the European Union, since the debts of the several irresponsible nations, acting on their own sovereign behalf, became the obligation of the whole Union to repay. That was (and is) the fatal financial flaw of the EU. It’s as if Nebraska could run up debts that New York was obligated to pay. It makes for a rocky union if 28 renters in a dormitory have a checkbook and all 28 have to balance that checkbook at the end of the month from their various salaries.

That’s one reason why Europe went into a long (six-quarter) recession in 2011-13, and the U.S. didn’t.

GrossDomesticProductChange.png

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

This trend is also reflected in the performance of the euro currency, which was born 20 years ago this coming January, at an IPO price of $1.18. It quickly went down under $0.90 in 2001 but it recovered and reached a peak of nearly $1.50 in 2008, but it has been on a downhill slide ever since the 2008 crisis.

ExchangeRate.png

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

America Kept Rescuing Europe – Until Trump Was Elected

A century ago, American troops poured into Europe in mass numbers and turned the tide of a trench-warfare stalemate into a situation in which Germany felt obligated to sue for surrender, leading to an Armistice whose centennial is soon approaching – November 11, 1918. Americans lost over 100,000 lives – more to disease than battle deaths – to win a war that was not of our making and did not threaten our shores, just to help Europe solve some age-old rivalries that cost Europe nearly 20 million lives.

Barely a generation later, America sent even more troops over to Europe and into the Pacific to fight a two-theater war to defeat Germany and Japan, even though they posed no credible threat to America’s shores. Europeans suffered far more, of course, but it was American troops that made the difference in the survival of Europe, under the wartime leadership of Dwight D. Eisenhower and Gen. George Patton, then the postwar Marshall Plan and the launch of the North Atlantic Treaty Organization (NATO) in 1949.

The U.S. still shoulders over 70% of the cost of NATO defense. As a percent of GDP, the U.S. spends 3.5% on defense while Europe’s NATO nations spend 1.5% on defense, relying heavily on U.S. arms.

NatoSpending.png

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

This is changing, as President Trump has repeatedly called on Germany (which spends 1.2% on defense) and others to spend more on arming themselves and quit relying on their sugar daddy across the pond.

America supports Europe’s generous welfare state by taking care of the bulk of their defense. Another way in which America funds Europe’s welfare state is in tariff inequalities. Europe funds a generous cradle-to-grave welfare state and six-week vacations in “greater August” in part by high tariffs charged on U.S. exports to Europe. One example is that vehicles shipped from Europe to the U.S. face a low 2.5% tariff, while cars built in America face a 10% tariff when entering Europe (plus added fees for “gas guzzlers.”) Europe recently said it was willing to lower these tariffs after Trump raised tariffs on steel.

A third way in which America has bailed out Europe is in the banking sector. As I showed last week, European banks loaded up on bad U.S. mortgage debt more than U.S. banks did. The Fed’s QE liquidity helped European banks more than ours. Now that the Fed is reeling in liquidity through QT (quantitative tightening), it is highlighting some bad debts in Italian banks, among many other overextended debtors.

The combination of Europe having to face the music of paying for its own defense, its own welfare state, its debts, and massive unassimilated waves of immigrants – all without U.S. bailouts – will be a daunting challenge. They can holler all they want about Donald Trump, but this is a problem of their own creation.

Looking at the world around us without illusions, the U.S. is still the best place for our investment dollars.

Global Mail:

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

When Skynet Meets Xi Jinping

by Ivan Martchev

Unlike President Trump, I do not believe that the Fed has gone “crazy,” and neither do I believe that the trade war has anything to do with last week’s decline, which felt eerily similar to what we experienced in February; but both the Fed and recent trade frictions PLUS the proliferation of high-frequency trading let the algos trade with other algos and left human traders scratching their heads for any rhyme or reason in the super-fast moves in the major indexes last week. That’s what happens when you let computer programs chase fractions of a cent at the speed of light. (For more see my February 14, 2018 Marketwatch article, “This is what happens when Skynet from ‘Terminator’ takes over the stock market.”)

EmergingMarketsFreeIndex.png

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

To be fair, I am not surprised, since I have seen the MSCI Emerging Market Index dramatically underperform the S&P 500 for quite a while. Ultimately either they both rally or they both join the decline. Recently, we saw a similar dynamic in 2015 as the collapsing price of oil dragged emerging markets lower and we saw it in the past six months when the U.S. dollar rally dragged down the binge-dollar-borrowing emerging market universe. (For more see May 30, 2018 Marketwatch, “The carnage in emerging markets stocks is just beginning.”)

Because of the expected quality of reported earnings for the third quarter, we are likely to see a serious rebound and new high in the S&P 500, especially if initial signs are that President Trump and President XI Jinping are ready to sit down and make a trade deal that could turn out to be productive. That would remove one major uncertainty from the market and let investors worry primarily about the Fed.

If the S&P 500 does not rally on renewed trade talks and good earrings – which should be up over 20% for 3Q – I would take that as a bad omen. For the time being, my thesis is that any signs of trade tensions easing will produce the necessary catalyst for a rebound in U.S. stocks. My hope is that any deterioration in emerging market economies will be postponed to 2019, even though “hope is a bearish indicator,” as traders like to say, and the potential for more bad news from Argentina, Turkey, and China is clearly here.

LiraVersusPeso.png

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

While the Turkish lira and the Argentine peso have stabilized somewhat, capital outflows from emerging markets in general are still here and they may continue with the rampant Federal Reserve quantitative tightening and the unfortunate consequences that most emerging markets – Turkey and Argentina included – have accumulated massive dollar-denominated debts in the past 10 years.

As I have explained previously here, dollar borrowing is equal to dollar shorting, as emerging-market borrowers take loans in dollars and then sell them for their own currencies. When they repay those loans, they have to buy those dollars back. Rising U.S. interest rates accelerate loan repayments and create a synthetic short squeeze in the exchange rate of the dollar, particularly against emerging market currencies. This is why the JP Morgan Emerging Markets Currency Index made an all-time low in September and why it looks a lot weaker than the U.S. Dollar Index, which includes no emerging markets currencies.

TradeWeightedDollarIndex.png

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

The Broad Trade-Weighted U.S. Dollar Index, which includes major emerging markets currencies like the Chinese yuan, is likely to hit an all-time high in this cycle, particularly if President Trump's unorthodox attempts to rebalance the U.S. trade deficit bear fruit. But even if there is a trade deal with China, the Chinese may choose to devalue the yuan anyway, given the precarious situation in the Chinese economy.

The Mother of All Dead-Cat Bounces is Over

I have previously referred to the rally in the Shanghai Composite off the climactic low in January of 2016 as the “mother of all dead-cat bounces,” or MOADCB. This “bounce” is now over, in my view. It began with a January 2016 low at 2650, but that level was taken out last week as the Shanghai Composite could not recover from what it lost in the single month of January 2016, when malfunctioning circuit breakers on mainland exchanges caused the index to re-crash after it initially crashed in the summer of 2015.

ShanghaiIndex.png

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

It is entirely likely that even if there is a trade deal and a trade war is averted, there will be a recession in China. A trade deal only postpones the inevitable, as the Chinese have tried to eliminate the economic cycle, which cannot be done, as shown by hundreds of years of economic history.

Via the policy of forced lending quotas at major banks, which the Chinese government controls, the Chinese economy grew over 10-fold in the past 20 years while total credit in the economy grew over 40-fold. This caused the total debt-to-GDP ratio in the Chinese economy to be over 400%, if one includes the infamous shadow banking system. Despite efforts by Chinese authorities to deleverage the system, it may very well be too late to intervene as forced deleveraging itself may cause China to go into a recession.

ChineseYuan.png

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

Extending the economic cycle for 25 years produced an “economic miracle” in China at a very high cost, as the coming recession is likely to be much worse than a normal recession, if it had not been postponed via the policy of forced lending quotas. The last time there was a recession was 1993 – a recession which the authorities did not officially admit, but which showed up in secondary (un-doctored) loan loss numbers – when the Chinese felt compelled to devalue the yuan by 34%.

The odds are high they do the same this time, only this time the stakes are higher as the Chinese economy is much bigger and the effects of such a devaluation will be highly deflationary for the global economy.

Sector Spotlight:

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

No Charts or Science Lesson this Week – Just Plain Talk

by Jason Bodner

No way-out facts, no closing quote, no sector charts today. Just some common sense about the market.

Thursday, I got a call from a high-up trader at a $2 billion hedge fund. He wanted to know my thoughts on this rough spot in the U.S. stock market. His question was, “What’s causing the sell-off, and when will it end?” Given that everyone else was asking the same question, I’ll just give you the answer I gave him.

When breadth dried up, buying slowed down. I saw big buy signals dwindling at my research firm. That’s the signal for algorithmic traders to test shorting the market. Less buying means aggressive offers. They try to crack the market, because these algorithmic traders (mostly High Frequency Trading firms) make their money for the year on big down days in the market. Bid/offer spreads blow out, liquidity dries up, and they can do whatever they want. This is in part why “it always goes down faster than it goes up.”

They usually need a news catalyst to do this. These HFTs have algorithms that parse the text of news headlines to influence how they trade. They also pay exchanges and brokers for order flows to see if people are better buyers or sellers. Negative news and no bids translate into “party time” for these guys.

Fears from China’s markets and U.S. rate fears were enough bad news to dry up buying and offer a chance for HFTs to sell on Monday. When a wave of selling hits, everyone wonders who is doing it, because we ourselves are not hitting the sell button. Conversations in big trading firms go like this:

“Did you sell anything?”

“No! Did Bob?”

While dogwalkers everywhere in the U.S. are having that conversation, the algo traders are sipping their champagne. We watch the market go down without seeing the “real selling” until eventually the tipping point comes, and technical levels trigger sell programs. Then ETFs get sold by model managers.

Let’s say a manager sells $100 million in ETFs to a broker like Morgan Stanley. Morgan’s ETF trader (or more likely computer) is now long and needs to hedge. So, what does he do? He sells $100 million worth of the individual stocks that make up the ETFs. Where are those stocks going? Not up!

Still, you’re not selling, right? “I mean I’m not selling… right? But should I?”

As selling becomes more and more real – now everyone is thinking something like: “Holy-moly! The market is already down 6%. But who sold?  I didn’t sell! Did you sell?”

When the real sellers come in – like retail managers, who say on TV, “Growth is over, it’s time to buy value – I’m starting to lighten up,” that means he already sold. He just doesn’t want to be the guy who says it first. When he sells, retail investors are selling. Volume picks up. That means the bottom is near.

I’m not convinced. I want to see an exodus from equities and a rush to quality, meaning bonds. The other day, the 10-year yield was RISING while equities were falling! We need people leaving equities rushing into bonds, NOT selling stocks and also selling bonds like we saw last Tuesday and Wednesday.

On Thursday, we finally saw yields fall because people were selling equities and finally buying bonds. That’s what we need to see for a bottom. It’s at that point that selling can exhaust itself. If that becomes the near-term low, with a massive observed sell count, which I saw Thursday, that might be the bottom.

Next up is a “re-test” of the lows and a bounce. This could be a V-shaped recovery like many we’ve seen, or it could be the bounce and “chill-out” period and a slow rebuild. Ultimately, we want to see a big flush-out coupled with a flight to bonds, compressing the yields, followed by a bounce and a retest of the lows.

Then it should be “game back on.” After all, where else is the money going to go? Is a smart manager really swapping out double-digit sales and earnings growth equities for 3.25% on 10-years?  C’mon!!!

China is a mess. Emerging markets are a mess. Energy is rallying, but that’s not the bastion for future growth unless financials also catch a bid and we move into the next phase of the bull market.

The Role of Sectors in the Next Stage Up

It is my belief that Tech and Consumers fuel the bull’s initial explosion. When they exhaust themselves, we should see continued growth through Financials, HealthCare, and Energy. When they peter out, we should see a push into Utilities, REITS, Staples, and Telecom, at which point the equity bull cycle could end, but then it could also perhaps back up and rebuild for another run up.

That makes sense, right?

Technology enables progress and cheaper products for consumers flush with cash. Then rates creep up – and consumers say “OK, I have enough toys for now,” – and they reel-in spending. They worry their credit card balances are high as rates to finance them rise. Their cost of debt creeps up and they stop spending on discretionary stuff. Suddenly, gas is more expensive, too. Banks and Energy company profit margins should expand during this part of the bull cycle. (Meanwhile, equities are still going up, by the way!)

When banks and energy companies get too greedy, the banks lever up to lend at higher and higher rates and pay less attention to default risk. Trump-era deregulation should enable that possibility, too. Banks will bundle up debt just like the mezzanine-junk from the housing bubble days. But next time, I think it will be consumer-credit bundling or something altogether new. Banks lend happily, so they will get out over their skis again. Energy companies will be bloated with profit, but there is still cheese on the table. Fat margins become irresistible and O&E companies start borrowing heavily to get their share of the pie.

Soon cracks start. Energy prices will start flushing out small over-levered O&E companies. They go bust and default. That hurts banks. When the news breaks, the market cracks. People flee to Utilities, Telecom, Health, and Staples. We know those things happen when things get bad, but that’s not the bull’s last gasp.

This is how it will play out, so in my opinion we are closer to the fifth inning than the 9th. I believe the market has not fully realized tax-reform impacts on earnings growth and equity buy-backs. In fact, more equity buy-backs have been announced. We may see over $1 trillion this year!  There is still an inherent bid for U.S. stocks and unparalleled rates of growth and return. The U.S. is a haven in financial markets.

One final thought: Trump is heading into midterms with a nicely-engineered correction, in my opinion. Now is a PERFECT time to come out and say “I, Lord Trump, have fixed the trade dispute and we are meeting to hash it out. China realizes they need to work with us, so all is good! Go vote Republican!”

Earnings are about to pick up with another record season. Some companies will talk about trade-impact on their earnings calls, but if Trump eases their nerves by saying he is fixing it, this forward discounting may not be brought up. I believe Trump needs a humming stock market in the next three weeks. He’s smart enough to know he needs rising markets to get votes and secure Congress. Too much is at stake.

This is a burp, plain and simple, a time when smart algo traders measure the drying up of buying liquidity and pounce on it. The correction will end with a bounce, a retest of the lows, and a calming of volatility.

Then we go up.

Maybe a lot more.

A Look Ahead

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

Rising Interest Rates Sent a Shock Through Global Markets

by Louis Navellier

The People’s Bank of China had been allowing the yuan to steadily depreciate to keep China competitive, despite three separate waves of U.S. tariffs. Naturally, a weaker yuan is inflationary for imported goods, like commodities priced in U.S. dollars, so interest rates in China began rising. However, if credit is cut off in China, its economic slowdown will accelerate, which is a threat to overall global GDP growth.

On Thursday, the Labor Department reported that the Consumer Price Index (CPI) rose 0.1% last month, which was below the economists’ consensus expectation of 0.2%. The core CPI, excluding food and energy, also rose 0.1%. In the past 12 months, the CPI and core CPI rose 2.3% and 2.2%, respectively.

President Trump has become increasingly concerned about rising interest rates, especially since inflation has not accelerated. Last Wednesday, when walking off of Air Force One, President Trump said that the Fed “has gone crazy” by continuing to raise key interest rates. Clearly, the President wants to see a higher stock market heading into the mid-term elections, so the Fed has become the President’s official whipping post for the stock market correction and higher Treasury yields. It will be interesting to see how this battle between the White House and the Fed comes out, but I suspect that Fed Chairman Jerome Powell will soon have some reassuring comments to calm down both the President and the financial markets.

HomeForSale.jpg

Speaking of interest rates, U.S. mortgage rates are now over 5%, the highest level in almost eight years, so home price appreciation will likely stall, despite tight inventories. Existing home sales have been slowing down and higher mortgage rates are expected to further slow home sales, since it raises the cost of home affordability. As the housing market continues to cool, it will eventually impact GDP growth, but right now there is no evidence that GDP growth has been adversely impacted by slowing home sales.

Some regional Fed Presidents remain outspoken about the course of interest rates, with the hawks apparently outnumbering the more outspoken doves. Dallas Fed President Robert Kaplan, who favors three more key interest rate increases, said last week that he is hopeful that the Federal Open Market Committee (FOMC) will not invert the yield curve, since inversions are a “good forward indicator” of a recession. He elaborated by saying that “if you get in a situation where a financial intermediary cannot borrow short and lend long and make a spread because of inversion, it’s logical to me that it’s going to put strains on credit creation.”  Translated from Fedspeak, that would effectively cut off access to credit.

There is a fear that higher interest rates could cause stock buy-backs to dry up, but so far there is no evidence of buy-backs slowing. According to Goldman Sachs, stock buy-backs so far this year are running a whopping 88% above the same period a year ago. Through mid-September, $762 billion in stock buy-backs have been authorized, so $1 trillion in total stock buy-backs remains possible for all of 2018.

The Market Now Turns its Attention to Earnings

The stock market is now turning its focus from recent interest rate gyrations to third-quarter earnings announcements. Fortunately, estimated earnings for the S&P 500/400/600 indices continue to steadily rise. The S&P 500 large-cap index is expected to post 21.5% annual third-quarter earnings growth, while the S&P 400 (mid-cap) index is forecasted to post 23.4% growth and the S&P 600 (small-cap) is expected to post 35.3% annual third-quarter earnings growth. In other words, as you go down the capitalization ladder, the underlying earnings environment gets stronger as the stocks get smaller.

You might find this ironic, since the mid- and small-capitalization stocks have gotten off to a rough start this October, but short sellers love to try to hit the most powerful stocks before earnings announcements begin. The strongest S&P sectors this season are expected to be Energy (+101.5%), Financials (+40.8%), Materials (+28.8%), Technology (+20.5%), Industrials (+16.9%), Communications (+14.8%), Consumer Discretionary (+12.7%) Healthcare (+10.8%), and Consumer Staples (+7.3%). Utilities (+4.8%) and Real Estate (+4.3%) are also expected to post positive results, but they are largely high-dividend value stocks.

Overall, I cannot wait for the third-quarter earnings announcement season to start, since I am expecting wave after wave of positive sales and earnings surprises, as well as positive guidance. I will be assessing how each stock reacts to their news and if some stocks do not react properly and get too volatile, I may look for good exit points. The conundrum that many stocks have is that liquidity is pulsing in and out, causing many stocks to move in a herky-jerky manner, so it is best to strive to sell some selected stocks into near-term strength. The liquidity drought that suddenly materialized in October and was exacerbated by the algorithmic selling pressure in the Russell 2000, as well as other indices, should dissipate as Wall Street refocuses on wave after wave of positive third-quarter announcements in the upcoming weeks.


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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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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