Making Sense of a Tense Market

Making Sense of a Tense and Directionless Pre-Election Market

by Louis Navellier

October 25, 2016

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

Last week, the Dow fell a slight 0.04%, with the S&P 500 down 0.38%, taking the S&P down a moderate 1.25% so far in October. We are now in the midst of third-quarter earnings announcement season, with just two weeks until this sad election cycle is over, so we have a lot to look forward to in early November!

Now that the Presidential debates are over, it will be interesting to watch the candidates in the end-game of their campaigns. The most accurate poll back in 2012, namely the Investor’s Business Daily/TIPP poll, has Donald Trump at 41.1%, Hillary Clinton at 40.2%, Gary Johnson at 7.7%, and Jill Stein at 4.4%. The widely respected Rasmussen poll also has the Presidential election running very close now. The outcome depends mostly on voter turnout. If there is a low Democratic turnout combined with a high turnout from Republican and Independent voters, the election will likely be a lot closer than everyone seems to think.

Lady Liberty and American Flag Image

The expected Electoral College count still favors Hillary Clinton overwhelmingly, but Donald Trump could win the popular vote if there is a big turnout from his enthusiastic base. During Wednesday’s Presidential debate, when asked if he would accept the election results, Trump said, “I’ll keep you in suspense.” He then went on to vent about a “dishonest” media and “millions” of questionable registered voters, setting up the possibility of challenges in selected states if the vote is extremely close. In other words, the uncertainty that is plaguing this year’s Presidential election may persist well beyond November 8th.

In This Issue

As Jason writes below, it was a rather uneventful market week, but we’ve found some gems beneath the surface. Leading off, Bryan Perry shows how we use two basic strategies for analyzing stocks – top-down and bottom-up analysis. While quantitative analysis is essential to our bottom-up analysis of specific stocks, I also insist on a sound top-down analysis of the global economy and the various S&P 500 sectors, as reflected in Jason’s weekly sector analysis, Ivan Martchev’s currency and commodity analysis, Gary Alexander’s overview of market history and growth prospects, and Bryan Perry’s income options. Enjoy!

Income Mail:
Signs of Sector Rotation Reflect Sentiment Change
by Bryan Perry
The Wide World of Derivatives - What We Might Not Want To Know

Growth Mail:
Deficits are Quietly Rising Again – Threatening Growth
by Gary Alexander
The Bright Side of Late October

Global Mail:
“May You Live in Interesting Times”
by Ivan Martchev
Oil Price Rally Tied to Arms Buildup in Syria and Iraq

Sector Spotlight:
“Coincidence? I Think Not!”
by Jason Bodner
Market in a Tight, Range-Bound Pattern

A Look Ahead:
Earnings Season is “Payoff” Time in the Markets
by Louis Navellier
Housing & Healthcare Inflation Impact Retail Sales

Income Mail:

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

Signs of Sector Rotation Reflect Sentiment Change

by Bryan Perry

Many professional asset managers are self-described students of sector rotation, myself included. Both top-down and bottom-up investment analysis have proven to be effective approaches to investing from a historical basis, and therefore should be utilized both separately and collectively. Both approaches have the same goal – to find great stocks. Though there are clear distinctions as to the different strategies used by top-down and bottom-up investors to select companies in which to invest, what you will hear from most boutique research shops in today’s marketplace is that they lean more toward bottom-up stock picking.

As a reminder, top-down investing involves analyzing the “big picture” of the overall economy as a means of forecasting which industry will generate the best returns. Top-down analysts would then look for individual companies within the most-favored industry for adding a new stock to their portfolios. For example, suppose you believe interest rates will rise soon. You might determine that the banking industry would benefit the most from such changes, so you limit your search to the top companies in that industry.

Conversely, a bottom-up investor overlooks broad sector and economic conditions and instead focuses on selecting a stock based on the attributes of the company. Advocates of bottom-up investing seek strong companies with good prospects, regardless of industry or macroeconomic factors. What constitutes “good prospects,” however, is a matter of wide-ranging opinion. Some investors look for earnings growth while others find companies with low P/E ratios attractive. A bottom-up investor will compare companies based on these and other fundamentals. As long as the companies are strong, the business cycle is of no concern.

Since my focus here is on income generation, a top-down analysis tends to weigh heavier in my asset selection. The direction of interest rates has great influence on most classes of income assets. Investors have recently lightened up on assets that are more sensitive to deflation and increased weightings towards interest-rate sensitive assets. The direction of commodity prices also has a great impact on how yield asset selection is determined. Even though energy pipeline stocks do not prospect for oil and gas, for instance, their share price movements are highly correlated with the cost of the fossil fuels that move through their pipeline network. It stands to reason, then, that there is a correlation between the “big picture” and stock picking that investors need to respect in most investment scenarios that involve income-generating assets.

Looking at the bond market, using the 10-year Treasury Note as benchmark, the yield has declined from 7.0% 20 years ago to 1.34% in early July of this year. From a panel discussion I attended last week at the Dallas Money Show (with Louis Navellier as one of the panelists), the general consensus was that the great bull market in bonds is over. Rates might not move much higher from current levels, due to low inflation and slow growth, but it was broadly agreed upon that the easy money has been made in bonds.

Here’s a chart of the 10-year Treasury rate over the last 20 years, measured in tenths of a percent (e.g., 20 = 2.0%). The 2016 low was 1.34% (13.4 on the chart) in July, with the latest reading coming in at 1.74%.

Twenty Years of the Ten Year Treasury Rate Chart

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

Under this assumption, it should come as no surprise that there is already a seismic shift underway within income-producing asset classes that takes into account both top-down and bottom-up analysis, plus sector rotation. For conventional fixed-income assets, the tide has been going out on long-dated Treasuries and investment-grade corporate and municipal bonds with levered closed-end bond funds crumbling recently.

Within the equity markets, there has been elevated distribution of what are termed “bond equivalents,” or stocks of companies that pay lofty dividend yields within sectors that are either considered beneficiaries of lower interest rates or are defensive and non-cyclical in nature – stocks that fall into the categories like electric utilities, telecom service providers, real estate investment trusts, and consumer staples.

Even though the yield on the 10-year T-Note has risen by less than 40 basis points, currently standing at 1.74%, many stocks within these ‘bond equivalent’ sectors have retreated aggressively off their highs. The selling has been fairly dramatic, on high volume, during the September-October time frame. Although the selling has subsided this past week, it could resume its intensity as the December FOMC meeting approaches, with the current consensus expecting a Fed Funds rate hike of 25 basis points (0.25%).

For income investors, there are two old sayings at work here: “Don’t fight the Fed” and “Don’t fight the tape.” Those that have been proactive and reduced exposure to fixed income and bond equivalent equities well before the recent slide in these assets have been saved from some rather sudden erosion of principal.

That said, one shouldn’t generalize that all companies within these sectors should be sold. There are special situations in the utility, telecom, REIT, and consumer spaces that may incur some initial knee-jerk selling, but will continue to work in favor of shareholders even if rates gradually rise, primarily because they are demonstrating strong growth characteristics that closely fit the bottom-up investing profile.

For instance, utilites that are ramping up revenue from high-margin renewables; or telecom companies that are adding cable, video, and digital content; or REITS that target cloud computing and consumer companies engaged in healthy living, organic nutrition, and online ecommerce. Safe to say, there is always a bull market somewhere. Whether it is safe to say the bond market and all its conventional sub-sectors have entered a bear market will become  better known after the December FOMC meeting following evidence of how much of an impact there is on business and consumer spending. In the meantime, it is safe to say that having a highly adaptive, dividend investing strategy is nothing short of “golden” at the present.

The Wide World of Derivatives - What We Might Not Want To Know

Ever wonder how much money there is in the world? Of course, the answer depends on how you define “money.” There are several well-written articles on the subject, but I thought about throwing some numbers around in light of all the recent attention given to Deutsche Bank and its derivative investments. (Please note: Bryan Perry does not currently own a position in DB. Navellier & Associates, Inc. does not currently own a position in DB for any client portfolios. Please see additional disclosures at the end of this letter.)

Jeff Desjardins, an editor of Visual Capitalist, wrote earlier this year that the money we define as currency – like bank notes, coins, and money deposited in savings or checking accounts – is somewhere around $81 trillion. If you include all the various financial products, including derivatives, he calculates the total is $1.2 quadrillion. This is what $1.2 quadrillion looks like when written out: $1,200,000,000,000,000.00.

In fact, there is 17 times more money in derivatives than in all stock markets combined, which is a paltry $70 trillion. The U.S. accounts for roughly half of the global market cap, thanks mostly to the valuation of the largest tech companies domiciled here. Investment in commercial real estate, often the most visible symbol of wealth, pales in comparison to stocks, at $7.6 trillion. As for money owed by every person and country in the world, the grand total is $199 trillion, with some 29% of it borrowed since the 2008 crisis.

The U.S. is responsible for nearly one-third of that global debt, while Europe follows at 26% and Japan at 20%. China, for all the criticism about its debt-fueled economic growth, owes 6% of the total. And despite the attention bitcoin has received in recent years as an alternative currency, it clearly has a long way to go. The value of all bitcoins in circulation is estimated at just $5 billion, a proverbial drop in the bucket. (Source: MarketWatch – “Here’s All the Money in The World,” by Sue Chang, January 29, 2016)

The common man does not completely understand how derivatives work and that is precisely why there is no outrage over the immense risks associated with them. The bottom line is that, unlike stocks and bonds, these derivatives represent no tangible investment. They are wagers – primarily on interest rates, bonds, or currencies – due sometime in the future. A derivative has no intrinsic value and no regulatory control.

Banks dominate the derivatives market and they are doing as they please – with permission from the government – but with the recent headlines surrounding Deutsche Bank and its massive derivative exposure, it might be a good time for the rest of the investing world to grasp what the heck is really going on in the world of derivatives before something “too big to fail” turns out to be just another failed slogan.

Growth Mail:

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

Deficits are Quietly Rising Again – Threatening Growth

by Gary Alexander

It’s time to follow-up on two of my recent promises before we turn the calendar to the market’s historical sweet spot – namely, the advent of blessed November next Tuesday morning.  First, in my Growth Mail of September 27, I examined the Big 3 economic indicators (jobs, inflation, and GDP growth), promising to cover “another important statistic to be released soon – the Fiscal 2016 U.S. Budget Deficit.”

Well, that day of reckoning is here.  The U.S. Treasury reported on October 14th that the federal deficit rose by 34% in fiscal-year 2016 (which ended September 30, 2016), rising from $438 billion in fiscal-2015 to $587 billion in the fiscal year just ended.  In President Obama’s eight years in office, he increased the red ink in Washington by more than $7 trillion, including four straight trillion-dollar deficits in his first term:

The Obama Years Deficits Table

When President Obama took office, the public debt as a share of U.S. GDP was 48%.  Now, it’s 77%.

One big reason for this year’s rising deficit is a 12% decline in corporate tax receipts.  This is partly due to the earnings recession over the last five or six quarters, but it’s also due to America’s world-leading 39% corporate tax rate, which drives many corporations into tax “inversions.”  High tax rates motivate multinational firms to retain their foreign earnings in foreign lands.  Meanwhile, small businesses are dying faster than new ones are being born due to a slow-growing economy and heavy regulations on business.

A quick and easy solution to this particular tax shortfall would be to cut the top corporate tax rate in half.

Politicians, of course, disagree, believing that their pie-in-the-sky rhetoric will deliver more services at less cost.  In last week’s third and final presidential debate, moderator Chris Wallace finally raised the all-important subject of deficits and runaway spending, which both candidates proceeded to avoid creatively.

Wallace said, “Our national debt, as a share of the economy, our GDP, is now 77%, the highest since just after World War II. The Nonpartisan Committee for a Responsible Federal Budget says Secretary Clinton, under your plan, debt would rise to 86% of GDP over the next 10 years. Mr. Trump, under your plan, they say it would rise to 105% of GDP over the next 10 years. Why are both of you ignoring this problem?”

Donald Trump responded first, saying, “You don’t have to bother asking your question,” since his policies would generate annual economic growth of “5% or 6%.”  (Not likely: In the last 40 years, according to Gene Epstein in the weekend Barron’s, “There has not been a single 10-year period in which growth even ran as high as 4% annually.”)  Hillary Clinton’s answer was equally fallacious.  She said: “I pay for everything I'm proposing. I do not add a penny to the national debt.”  She plans to accomplish this magic trick by “raising taxes on the wealthy,” which most rich folks can legally avoid through creating non-productive shelters.  Higher taxes tend to slow overall growth, resulting in fewer overall tax collections.

At this point, Chris Wallace moved onto his final question: “One last area I want to get in with you on this debate is the fact that the biggest driver of our debt is entitlements, which is 60% of all federal spending. Neither of you have a serious plan that is going to solve the fact that Medicare is going to run out of money in the 2020s, and Social Security is going to run out of money in the 2030s…Would you make a deal to save Medicare and Social Security that included both tax increases and benefit cuts?”

At that point, we got this testy dialogue:

Clinton: “That’s part of my commitment to raise taxes on the wealthy. My social security payroll contribution will go up, as will Donald’s, assuming he can't figure out how to get out of it.”

Trump: “What a nasty woman!”  (Trump then immediately pivoted to “repealing Obamacare.”)

Neither Presidential candidate seriously addressed the rise in federal spending or has a plan to halt the rise in entitlement spending.  Both candidates have offered a large array of new spending plans to widen the deficit.  The following CBO projection shows rising deficits in the next decade, no matter who is elected.

Total Deficits and Surpluses as a Percentage of Gross Domestic Product Bar Chart

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

The Bright Side of Late October

My second October promise was contained in the October 3 Growth Mail, titled “October – the Birth Month of Bull Markets,” in which I listed half a dozen bull markets which began in the first week of October. I closed by promising, “I’ll bring you an equal number of examples from late October later on.”

Well, “later on” has arrived. Here are six more major 20th Century bull markets which began in October:

Six Major Bear Market Bottoms in October Table

We’ve also seen some other major market bottoms near this date.  The Panic of 1907 was resolved on this date, even though the Dow didn’t reach its absolute low of 38.17 until November 15. But on Friday, October 25th, J.P. Morgan bailed out Wall Street after meeting with bankers the night before. Within five minutes, he raised $27 million (eventually $84 million) and then said that any bears would be “dealt with” later on. Even President Theodore Roosevelt, who railed against “the malefactors of great wealth” in the previous months now said, “Those substantial businessmen acted with wisdom and public spirit.”

We also suffered the scariest week of the 20th century in late October, 1962, when America narrowly avoided a nuclear exchange with the Soviet Union. On Friday,October 26, 1962, President Kennedy planned an invasion of Cuba, but then the Soviets suggested that their missile bases in Cuba could be dismantled in exchange for a NATO dismantling in Turkey. The Dow leaped 6.2% over the next week.

By comparison, this October seems relatively placid. Last week, the Dow gained a listless 0.04%. In September, the S&P 500 was basically flat (-0.1%) and it is down a moderate 1.25% so far in October (through last Friday). Still, that’s not bad for history’s two scariest market months. As I’ll show you next week, the market tends to flourish in the last two months of the year – the stock market’s “sweetest spot.”

Still, Ed Yardeni reminded us last Wednesday that “October isn’t over, and there are lots of clowns scaring people around the country as Halloween approaches. However, odds are that the stock market will remain listless until we see which of the two clowns running for president wins. Both HRC and DJT have the highest unpopularity ratings of any candidates for the White House before. So the winner will be the one who scares the fewest voters. Investors seem to prefer HRC. But her economic program includes higher taxes and more regulations. DJT’s program includes significant tax cuts and fewer regulations, but his anti-trade measures could be troublesome. Both are extremely flawed characters, to say the least.”

Good news: November is coming soon – the end of earnings season, elections, and eerie October markets.

Global Mail:

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

“May You Live in Interesting Times”
– a famous Chinese Curse

by Ivan Martchev

With all the noise around the unprecedented hostility of the U.S. elections and the increasing tensions in Iraq and Syria, where ground assaults on Aleppo and Mosul are imminent, the Chinese appear to have decided that now is the time to move on the currency front. The well-known Chinese curse – “May you live in interesting times” – is playing before our very eyes with the Chinese yuan cents away from the 6.82 mark, where it got “pegged” to help Chinese companies during the Great Financial Crisis in 2008.

Eight Years of the Chinese Yuan Chart

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

The Chinese started a revaluation cycle back in 2005 to appease the U.S. for their trade surplus as well as a massive U.S. dollar reserve accumulation. The U.S. position was that if the Chinese were to let the yuan float and appreciate, the trade balance would correct itself. The Chinese initially revalued the yuan from 8.28 all the way to 6.82, but were forced to stop at that level as they realized in mid-2008 that Wall Street’s problems were likely to result in a much bigger problem for the world economy.

In some respects, the Great Financial Crisis of 2008 contributed to the present problems in the Chinese economy due to the practice of “forced lending” that was deployed as a response. Since the Chinese government controls the banking sector to a large degree, they simply mandated that banks raise their lending quotas as it became clear that demand for China’s exports was falling in late 2008 and early 2009.

Economics 101 teaches that forced lending does not work. It does help economic growth, but it usually results in more losses down the road. When the Chinese authorities tried to rein in lending, it was already too late – the now infamous shadow banking system had taken over. If the Chinese regulators tried to tighten, Chinese corporate borrowers would go to unregulated lenders, where such curbs were non-existent. By some estimates, unregulated shadow banking lending in just five years has grown to be at least as large as the Chinese economy, which is on track to reach $11.6 trillion at the end of 2016.

China Cash Reserves at Big Banks Chart

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

While the Chinese have used reserve requirements at major banks a lot more aggressively than other central banks – tripling the reserve requirements at banks between 2004 and 2012 – they have been lowering them since 2015, affecting the credit multiplier in the Chinese financial system. However, I think the system itself may have gotten away from the Chinese central bank to the point where such monetarist maneuvers like reserve ratio cuts (that were used previously) may no longer work as well.

The reason why reserve ratio cuts may not work well this time is that the unregulated shadow banking system may be responsible for at least 25% of all loans in the economy. Tightening lending standards does not work with unregulated lending and neither does loosening them. The shadow bankers loosen and tighten credit standards on their own, thus overheating the economy when it’s least desirable or pushing it harder down the slippery slope. In effect, unregulated lending loosens the grip of the Peoples Bank of China (PBOC) over the Chinese financial system, which is something the Chinese are wary of.

China Foreign Exchange Reserves Versus the Yuan Chart

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

This is why I think they are devaluing the yuan in slow motion. When they realize that the shadow banking system will tighten credit at the worst possible time – when the PBOC is actively fighting such tighter credit conditions – they are likely to devalue the yuan by a much larger and less orderly amount.

The last time Beijing resorted to such a hard devaluation was on Christmas Day in 1993. For all practical purposes, the devaluation took effect at the start of 1994. I think the PBOC wanted to use the holidays to give people time to think things over and ponder what a 34% cheaper yuan meant for their businesses.

While I do not know if a 34% devaluation is coming this time, I do think a “hard” devaluation to the tune of 20% to 40% is coming in the next one or two years. The magnitude of such a hard devaluation will depend on how much the Chinese economy will deteriorate because of its epic credit bubble and at what point in this deterioration process the PBOC decides to act.

The Chinese situation today can easily be compared to the Roaring Twenties, the decade before the Great Depression in the U.S. There was rapid growth in unregulated credit similar to the rapid growth in shadow banking in China today. The Great Depression was exacerbated by the raising of tariffs and the tightening of monetary policy, as well as bank failures in the U.S. and in Europe, so in that regard China does not have to go into a depression if there are no policy errors. It may just be a hard landing or nasty recession.

A hard yuan devaluation acts as an adrenaline shot into the heart of the Chinese economy as it bypasses the shadow banking system. This is why I think it is coming sooner or later. An acceleration in capital outflows – which had calmed down in 2016 – is a good sign that things in China are deteriorating again. Such accelerating capital outflows would mean the chances for a hard devaluation are increasing.

Oil Price Rally Tied to Arms Buildup in Syria and Iraq

As pressures on the Chinese economy are increasing, so is the pressure on commodities as China is the #1 consumer of oil, but now we see the oil price rallying during its seasonally weak period. Oil tends to be weak in the September-March period as there are more people that live in the Northern hemisphere each winter than in the Southern hemisphere during their summer months. It is late October and yet we closed on Friday above $50/bbl on the December 2016 WTI futures. So what is causing the lofty price of oil?

West Texas Intermediate Crude Oil - Weekly Nearest OHLC Chart

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

I think the answer is tied to large troop movements in Syria and Iraq, where the hostilities are likely to increase in the next two weeks. The Russians sent a large armada of warships, doubling and tripling their airpower, while 30,000 Iraqi troops and Kurdish Peshmerga are presently advancing towards Mosul.

Mosul has a population of 1.5 million so the potential for a humanitarian crisis is much bigger than Aleppo, which has been nearly demolished in five years of fighting and may or may not have 250,000 inhabitants left, less than 50,000 of whom are in the crossfire now in the part of the city under rebel control.

While most military activity is not concentrated in the oil-producing regions of Syria and Iraq, the oil price is responding to the increased military activity. World and regional powers are on opposing sides of the conflict in some cases, even though they share a common enemy in the face of ISIS. I think the oil price is responding to the possibility for an escalation of the conflict past the present hot spots.

As long as this military activity continues, the oil price may remain elevated. But barring the sound of war drums in the Middle East, there is no fundamental reason for oil prices staying above $50/bbl. The increasing rig counts in the U.S. and weakening Chinese economic data will eventually undercut rising oil prices.

Sector Spotlight:

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

“Coincidence? I Think Not!”
--from “The Incredibles” (2004)

by Jason Bodner

I’m going to make life easy for you this week: You don’t have to read the rest of this piece. Sectors were unexciting this past week and there is just not much to talk about. Done! Shortest column ever! Nothing to see here, folks! Move on. Or is there something to talk about? Is the cloudy air of uncertainty so thick that it is precisely what we need to talk about? Maybe, but first I’d like to talk a bit about Honest Abe.

Abraham Lincoln, the 16th president of the United States, is widely regarded as one of America’s greatest heroes. He is also central to some pretty astounding coincidences. Lincoln and John F. Kennedy were elected 100 years apart (Lincoln in 1860, Kennedy in 1960). They both were succeeded by Southerners named Johnson who were also born 100 years apart (Andrew in 1808, Lyndon in 1908). Each of their assassins was born 100 years apart (Booth in 1839 and Oswald in 1939) and each killer died before trial.

Lincoln was shot in Ford’s theater, while Kennedy was shot while riding in a Lincoln made by Ford.  While Lincoln was shot in a theater and his killer was captured in a warehouse, Kennedy was shot from a warehouse and his killer was captured in a theater. Kennedy had a secretary named Lincoln while Lincoln had a secretary named Kennedy. In an even stranger twist of fate, just months before Booth shot Lincoln, the President’s son, Robert Todd Lincoln, fell from a train platform in Jersey City. He was pulled from under a slow-moving train before any harm ensued. His rescuer was the well-known actor Edwin Booth, the brother of John Wilkes Booth; so the son of a president was rescued by the brother of his assassin.

Lincoln and Kennedy Image

Even though this is a mind-twisting overlap of history, I would imagine that many of you who read it may feel somewhat blasé about it, not because it’s uninteresting, but because you’ve either heard it before or you already know the world is filled with bizarre twists. Once, when I was feeling particularly bearish on the market, a friend pointed out that: “If you are feeling that way, everyone else is feeling that way.” The statement was a blow to my ego, but through years of observation I came to understand there was much truth in what he was saying.  I began to observe that as my emotions came closer to exuberance or fear, so did everyone else’s and thus the market came closer to its highs or lows. While this sounds unscientific, studies are now being done to test the possibilities of a human collective consciousness or a “hive mind.”

The reason I bring this up is because I can tell you how I felt when I discovered Lincoln’s coincidences, and how I currently feel. I was interested by what I saw but it was darkly overshadowed by other thoughts and feelings. I felt (and still feel) tired of this election cycle and want it over with. I am tired of emails and tax-returns, gropings and Wiki leaks. There is a negativity, divisiveness, and a moral low unprecedented in any prior presidential election of our collective lifetimes. This is a fact. I am frustrated with the fear-mongering in the media in regards to Russia and the geopolitical environment. I am worn out with Julian Assange’s saga in the Ecuadorian embassy. Mosul, Yemen, Aleppo, Putin, Trump, Hillary, classified secret thefts, accusers, and on and on. The news media is a bona fide three-ring circus and it’s the biggest show in town. I believe that this all translates to what can be witnessed in today’s market, and I suspect the way I feel is the way a lot of other people feel. I am tired with the market’s indecisiveness and want some clear direction. The uncertainty hanging over this market reflects a directionless nation.

Market in a Tight, Range-Bound Pattern

The S&P 500 has been in a fairly tight, range-bound pattern. Since July 8th, when the index vaulted and stayed above 2100, we have been in a 2.96% trading range. The 50-day moving average on the VIX is a low 13.83. The market is essentially flat. Earnings are positive, but some argue that with a low bar of expectations, it’s easier to delight. What we have seen is a sideways grinding of the market and of nerves.

Standard and Poor's 500 Index and VIX Fifty Day Moving Average Charts

Sector activity is still bumping around but in a less decisive way. Last week saw Telecommunications Services take significant legs down on both Thursday and Friday. With a one-week drop of nearly 4%, the sector is down almost 7% month-to-date. Telecommunications is the clear loser for the last week, October (month-to-date), and three-month performances. It is worth noting again, however, that the Telecom sector has the smallest number of constituents out of the 11 sectors: it has only 5 stocks! So, if we discount that sector for a moment, we see an uninteresting week in terms of sector movement. The other 10 sectors were fairly uneventful, with Materials on top of a slow-rising field, finishing up just over 1.50%.

Standard and Poor's 500 Daily, Weekly, Monthly, Quarterly, and Yearly Sector Indices Changes Tables

We are in the home stretch of the election resolving itself. But the picture abroad is not necessarily rosy, with military offensives in Mosul, military action in Yemen, Aleppo still under siege, and Russia/U.S. tensions bubbling – not to mention Brexit’s repercussions and Europe’s and Asia’s central bank policies.

Sure, several U.S. companies are beating earnings expectations, but the big picture is clear: Uncertainty looms and it looks as though we’re a house divided under the surface of the S&P 500. In an appropriate quote to both the election and the market, the great Abraham Lincoln said, “A house divided against itself cannot stand.” I bet many other people feel the same as I do: if only he were running for President…

Vote Lincoln Election Poster Image

A Look Ahead:

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

Earnings Season is “Payoff” Time in the Markets

by Louis Navellier

When I formed Navellier & Associates in 1987, my business model was based on two fundamental principles: (1) Using proprietary quantitative methods to identify stocks with a greater likelihood of beating the market indexes, and (2) using proven portfolio management techniques to limit risk without sacrificing returns.  We currently manage just under $2 billion in client assets, ranging from regular private investors to large institutional clients.  Over the last 29 years, we have constantly revised our methods to adapt to current market conditions.  In addition to offering a complete selection of growth portfolios, we have also developed alternative income-based strategies, including covered call and dividend strategies.

We also provide defensive and tactical portfolios to protect and grow portfolios.  In recent years, we have also developed three mutual funds that are available through most brokerage firms.  The bottom line is that earnings season is here and we are “locked and loaded” with fundamentally strong stocks that are asserting their leadership.  That is the reason I founded this business – to help investors beat the market.

That’s also why I tend to look closely at each week’s economic statistics, to give us a top-down look at where the economy might go next, and how the Federal Reserve and other forces impact our portfolios.

Housing & Healthcare Inflation Impact Retail Sales

Here’s an example of how we look at the latest economic news to guide our investment selections.

Last Tuesday, the Labor Department announced that the Consumer Price Index (CPI) rose 0.3% in September.  In the past 12 months, the CPI has risen 1.5%, while the core CPI has risen 2.2%.  This may be close enough to the Fed’s 2% target that they may feel free to raise key interest rates in December; but what sticks out to me in the relatively high 2.2% “core” rate is the burden of higher rents, healthcare, and drug prices, which are clearly impacting consumer spending via sluggish retail sales.  If the Fed raises rates, this could fuel even higher housing and rental costs, putting greater pressure on future retail sales.

Speaking of housing, the Commerce Department announced last Wednesday that housing starts declined 9% in August to a 1.047 million pace, the slowest annual pace since March 2015.  In the past 12 months, annual housing starts have fallen 11.9%, which is not good for GDP growth estimates, since construction activity has a major impact on economists’ GDP estimates.  The silver lining in the August housing start details is that single-family housing starts surged 8.1% to an annual pace of 783,000, the highest level in the past seven months.  However, housing starts for multi-family homes plunged 39% in August.  Overall, it is hard to see how rental costs can moderate if the inventory of new multi-family units remains tight.

The other big news on Wednesday was that the Fed released the Beige Book survey of its 12 districts in preparation for its early November Federal Open Market Committee (FOMC) meeting.  The Beige Book survey essentially said that the U.S. economy for most of the country is growing at a modest to moderate pace.  The word “election” was mentioned eight times in the Beige Book survey as a reason that business spending and other economic activity has been postponed.  “Election” could be a code word to reveal that the Fed will not raise rates in early November, due to the continued uncertainty surrounding the election.


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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