Massive Sector Swings

Massive Sector Swings Follow Trump’s Upset Victory

by Louis Navellier

November 15, 2016

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

Naturally, the big news last week was the Presidential election on Tuesday, when Donald Trump surprised all the political experts and pollsters.  Ironically, the stock market tanked overnight but rallied dramatically Wednesday in reaction to the Republican sweep.  The DJIA ended the week at record highs.

Presidential Podium Image

We saw incredible volatility in a massive stock market rotation that rewarded financial and industrial stocks, while punishing many leading technology, dividend, and defensive stocks.  As a result, investors are questioning whether they should abandon companies with strong sales and earnings and rotate into financial and industrial stocks, even if they have lackluster earnings.  I would argue against that strategy.

If you are questioning the power of strong sales and earnings, I would like to share some positive news about Nvidia (NVDA), which surged 29.8% on Friday after posting stunning third-quarter results and raising its sales guidance.  The fact of the matter is that good stocks tend to “bounce” after correcting, while some of the battered financial and industrial stocks that surged after the Presidential election were propelled by a short squeeze, which can be misleading and temporary.  Short covering in the past few days should never be confused with strength.  As we approach Thanksgiving, I expect the stock market will settle down and “get smart.”  Specifically, I expect that fundamentally strong stocks will start to exhibit relative strength and re-emerge as stock market leaders. (Please note: Louis Navellier currently owns a position in NVDA. Navellier & Associates, Inc. also currently owns a position in NVDA for some client portfolios. Please see important disclosures at the end of this letter.)

In This Issue

In Income Mail, Bryan Perry focuses entirely on the Trump tax plan, which promises to put a lot more money in the pockets of most American families.  In Growth Mail, Gary Alexander gives an example of federal overreach in our lives and the implications of last week’s Republican sweep.  In Global Mail, Ivan Martchev focuses on the bond market ‘tornado’ and threats to emerging markets and the energy sector.  In his sector spotlight, Jason Bodner examines the details of the sector switches along with some cosmology, for perspective.  Then I’ll close with some of my contrarian calls and what sectors to watch closely now.

Income Mail:
Expected Benefits of Trump’s Tax Plan
by Bryan Perry
Let’s “Get Down to Business” on Tax Reform

Growth Mail:
Why is the Department of LABOR Telling Me How to Invest?
by Gary Alexander
This is the First Republican Sweep Since 1928… or is it 1952, or 2004

Global Mail:
A “Trumpnado” Hits the Bond Market
by Ivan Martchev
Major Worries in Emerging Markets and Crude Oil

Sector Spotlight:
Putting Last Week’s News in Perspective
by Jason Bodner
Massive Sector Rotation into Financials, Industrials, and Healthcare; out of Utilities & Real Estate

A Look Ahead:
My Contrarian Reactions to the Trump Victory
by Louis Navellier
What to Watch Now – Bond Rates & Oil Prices

Income Mail:

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

Expected Benefits of Trump’s Tax Plan

by Bryan Perry

The world of taxation at the personal and corporate level is about to go through a radical overhaul. For the most part, in my view, the forthcoming changes will be positive. With a Republican House and Senate, Mr. Trump has a good shot at having a good number of his tax reforms enacted.

Under Trump’s proposed new tax structure for individuals, there will be fewer tax brackets and lower top rates, namely, 12%, 25% and 33%, versus current rates of 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%. The tax rates on long-term capital gains would be kept at the current 0%, 15%, and 20%. A quick view of how America’s wage earners break down in percentiles and how the new income tax brackets will affect each projects tax savings at every level, assuming that the head-of-household deduction is maintained.

Calculated Tax Increase or Decrease Under Trump Plan Table

As it stands, Trump’s proposed plan would eliminate head-of-household filing status, which has more favorable rate brackets than single filing status, so eliminating it will likely run into stiff resistance from both Republicans and Democrats. About half of single parents with one child would see a bump in their tax rate. Thus, I expect a fire fight on this issue. In the end, I expect Trump to bend on parts of his plan.

The new plan would also abolish the alternative minimum tax (AMT) on individual taxpayers. This is a major positive if AMT is eliminated. In addition to radical changes, Trump wants to relinquish estate taxes altogether. Trump’s plan would also subject accrued capital gains that are outstanding at death to capital gains tax, but there would be a $10 million exemption. In addition, the plan would cap itemized deductions at $200,000 for married joint-filing couples and $100,000 for unmarried folks. The standard deduction for joint filers would be increased to $30,000 (up from $12,700 for 2017 under current law). For unmarried folks, the standard deduction would be increased to $15,000 (up from $6,350). The personal and dependent exemption deductions would be eliminated.

Here's what the progressive income tax brackets look like today:

Progressive Income Tax Brackets Table

If passed in its entirety, Trump’s plan saves a married couple making over $130,000 roughly $10,000 per year. As one can see from the following chart, major tax savings begin at a very low income bracket. Compared to the current income tax brackets, at least on a static basis, everyone's ordinary tax rate falls.

The Trump Plan is a Large Tax Cut for the Middle Class Chart

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

Let’s “Get Down to Business” on Tax Reform

Another mammoth change involves corporate income tax rates. Under Trump’s plan, corporate tax rates would be cut from the current 35% to 15%, but he would eliminate tax deferral on overseas profits. A one-time 10% tax rate for repatriation of corporate cash held overseas would be on the table. There’s a tremendous amount of support for this change, but it will surely run into opposition from Democrats.

In what I think would spark rapid hiring by small businesses, the new tax proposal would apply the same 15% tax rate to business income from sole proprietorship and business income passed through to individuals from “S” corporations, LLCs, and partnerships. The chance of radically lowering this rate would unleash a wave of criticism by economists that federal tax revenues would suffer severely. In the short-term, that might be true, adding to the budget deficit; but with two-thirds of new hires attributed to small business, the longer-term structural gains might be worth it.

One area that gets approval from both sides of the aisle is the elimination of most corporate tax breaks, such as unlimited deductions for interest expense, and many of the write-offs and credits that have been loudly criticized as being corporate welfare. Rest assured, the special interest lobbyists up and down K Street in downtown Washington, D.C., are already working overtime to protect these corporate goodies.

As to healthcare, expect some degree of overhaul and some other aspects of the existing program to remain in place. I believe the 3.8% Medicare surtax on net investment income will be the first line item to be cut out of Obamacare. I think the recent spike in premium rates announced just before the election had a lot of undecided voters pulling the lever for Donald Trump and Mike Pence. House Speaker Paul Ryan and his team have a modified bill drawn up that could become law, if they can outlast a Democratic filibuster.

The degree that these grand changes take effect will depend largely on how fast the Republicans can assemble legislation to go to a vote. In the first 100 days, presidents that have had wide opposition from within their own party, such as we’ve seen in this case, can repair lots of ill will and mend many fences with unified thinking. Simplifying and lowering taxes on individuals, families, and businesses, while reducing the size of federal government by sending more power back to the states and slashing pet projects that fleece American taxpayers, is an absolute must to offset the lower level of future federal tax receipts.

The exploding costs of healthcare, welfare, and entitlements like Social Security, Medicare, and Medicaid will have to undergo severe modification as well as rolling back the burden of over-regulation if Trump has any shot at proposing a balanced budget over the next decade; but households in America have moved toward fiscal sanity since 2009, so why shouldn’t we expect the same from our elected officials?

More money in the hands of more people and businesses, and less in the hands of the long arm of federal government may sound radical to some, but it is one of the hallmark principles on the founding of our nation, when the Continental Congress told King George where to stick it. Back in the Nixon days, a movement was promoted called “New Federalism,” which is the political philosophy of devolution, or the transfer of certain powers from the U.S. federal government back to the states. President-elect Trump and his budget team might want to pull that plan off the shelf and put it to work as it would continue to keep the trend of less government and taxes more on course for America’s new-found future.

Growth Mail:

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

Why is the Department of LABOR Telling Me How to Invest?

by Gary Alexander

Right before travelling to New Orleans for the investment conference there, I dropped in at my local broker’s office to deposit a check and make an investment.  That business done, he nervously reached for a piece of paper put out by his firm, announcing an imminent change of plans in retirement accounts.

I asked what that had to do with me.  I’m on a commission basis, I make all my own investment decisions, and, although I’m 71, I’m clearly not retired yet.  He said it was easier to make a top-down decision about all accounts rather than weigh each situation equally, pending this new Department of Labor regulation.

“Department of LABOR?” I asked, incredulously.  “What do the Labor police have to with my account?”

He cited the new law that requires financial advisors to meet a higher fiduciary requirement by next April.  (It comes from the Labor Department since it apparently updates ERISA rules about retirement plans.)

When I got to New Orleans, I heard Jim Grant talk on this subject while circulating an essay he wrote on this new regulation (“You Get What You Pay For,” Grant’s Interest Rate Observer, October 14, 2016): He forecasted that the unintended consequences of the Labor Department’s edict will be a rush to ETFs and index funds to avoid “risk,” while charging clients more for the privilege of gaining average (or less) returns due to the price inefficiencies of ETFs and index funds.  His penultimate paragraph was chilling:

“The combination of robotic disruption and federal coercion is a power to reckon with. A price war is breaking out among ETF vendors, while brokers are preemptively rejiggering their incentive structures. InvestmentNews reports that more than a quarter of financial advisers plan to leave the business or to look for a merger, so burdensome have regulatory costs become. By next April, Merrill Lynch and its parent, Bank of America, have announced, retirement savers may no longer pay by the transaction; they will rather be dunned a flat fee according to the size of their assets. Savers whose assets fall short of the economic minimum will likely be shown the door.”

As a result of this new law, my annual costs of investing will rise from a few hundred dollars (for actual trades) to thousands in fees.  If so, I may choose to change my account to a more favorable broker in 2017.

This micro-managing of my private investment account is one reason why voters just staged a revolution.  Trump may be a disgusting vehicle of change, but somebody needs to “drain the swamp” in DC.

In his October 16th newsletter, cited above, Jim Grant quoted a speaker at his Fall 2016 Grant’s Conference, Steven Bregman, president and co-founder of Horizon Kinetics, who gave attendees a “valuation sobriety test” about some specific high-yield bond ETF holdings.  Then he cited a widely-held energy stock that is 25% of one ETF and 22% of another.  It is also “simultaneously a Dividend Growth stock and a Deep Value stock…. Get this: It’s both a Momentum Tilt stock and a Low Volatility stock.  It sounds like a vaudeville act.”  One wonders if anyone but the giant ETFs is buying this “versatile” stock.

This is the First Republican Sweep Since 1928… or is it 1952, or 2004?

“1928 was last time Republicans had the White House, the House and the Senate”

– Ann Coulter’s ‘tweet’ on November 9, 2016 at 12:19 a.m.

I’m amazed by the historical ignorance of even the most widely-respected conservatives in America.  In my many political panels in New Orleans, I have informed two pundits (Karl Rove and Ann Coulter) that the Republican power monopoly in 2003 to 2007 “broke our hearts” with too many new spending bills.  Yet this week Coulter mistakenly said, “1928 was last time Republicans had the White House, the House and the Senate,” and Karl Rove said essentially the same thing on national television.  They’re both wrong.

In New Orleans on October 29th this year, Trump’s tax policy advisor Stephen Moore repeated this phantom fact: “The last time Republicans held all three branches of power was in 1928.”  I corrected him in public, right there on the panel.  That was very impolite of me, I suppose, but somebody had to say it!

Here’s the data from the elections of 2002 and 2004, along with a chart laying out the last 160 years:

  • In the election of November 5, 2002, the Senate went from being balanced (50-50) to a narrow (51-48) Republican majority.  The Republicans also gained 15 House seats for a 229-205 lead.
  • In the election of November 2, 2004, Republican George W. Bush was re-elected, while the Republican’s Senate advantage rose to 55-44 and their House edge expanded to 232 to 202.

Control of the United States Senate and House of Representatives Chart

The Republicans also controlled both Houses of Congress and the White House from 1953 to 1955, so why are Rove, Coulter, Moore, and others falsely proclaiming that this hasn’t happened since 1928?

As readers of this column know, I have written often in the last year that the best possible outcome of this election would be a victory by Hillary Clinton offset by a Republican Congress for the kind of “gridlock” we enjoyed under Bill Clinton and the Republican Congress in the glorious growth years of 1995 to 1999.

However, the second-best outcome is a Republican sweep, despite the fact that Trump is not a real Republican or even a conservative.  He is a populist opportunist who has joined both parties – and neither, as an Independent.  The major key to the future will be how President Trump handles his success.  If he can work with the Republican Congress, while inviting the minority Democrats to participate in policy development, he may be able to revive American business earnings and our slow-rising economic GDP.

According to last Friday’s “Bespoke Report,” the last three times the Republicans controlled both Houses of Congress and the White House, the DJIA rose by an average 27% in the next two years:

Dow Jones Industrial Average Performance during Republican Control of all Three Branches Table

In all, the DJIA gained 95% from October 9, 2002 to October 9, 2007.  That’s largely because when the Republicans gained control of the Senate in 2003, they immediately went about cutting top tax rates.

President Bush’s “Jobs & Growth Tax Relief Reconciliation Act of 2003,” which became law on May 28, 2003, reduced the top tax rate to 35%, while sharply cutting long-term capital gains and dividend taxes. The resulting prosperity engendered rising tax collections, causing the federal deficit to shrink rapidly:

Federal Deficit Table

The 2003 tax cut was called a “tax cut for the rich” and a “budget-busting” move that would blow the budget deficit out of all proportion.  But the opposite happened.  Millions of poor were taken off the tax rolls altogether while the rich paid a greater percentage of taxes collected, and the budget deficit declined.

There is hope that a cut in the top personal and corporate tax rates in 2017 can bring trillions of dollars of corporate wealth back home to rebuild the economy.  It may even get the Labor Department off my back!

Global Mail:

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

A “Trumpnado” Hits the Bond Market

by Ivan Martchev

In conversations with investors over the past month, I sensed an unusual worry coming from the anticipation that a Trump victory would mean a large sell-off in the stock market, as he was clearly the less predictable choice. My response then – that the market usually rallies after an election when there is no recession – was repeatedly met with skepticism. I think the market would have rallied if Clinton had won, too. The only difference is that different type of stocks and sectors would have been the leaders.

Nevertheless, we saw a large sell-off in the Treasury market. The 10-year Treasury yield closed last week at 2.15%. Keep in mind that we registered all-time Treasury yield lows at 1.31% just after the Brexit vote.

United States Ten Year Government Bond Chart

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

The idea behind the sell-off in Treasuries is that pro-growth policies of the new Trump administration will create inflation and growth, so risk assets will benefit. That is what the political victors would like you to think. The junk bond market is not getting that memo, as it declined three days in a row after the election. If accelerating growth prospects were the cause of the Treasury sell-off, junk bonds should have been up.

Clearly, it is not only economic growth prospects that are driving the Treasury sell-off. It could be that Trump’s policies may expand the federal deficit, as he has stated the need for tax cuts and more spending at the same time. This is somewhat reminiscent of Ronald Reagan, but the difference is that the former President cut taxes from much higher levels in the 1980s and the overall indebtedness of the federal government – and the U.S. economy for that matter – was a lot lower.

Dow Industrials SPDR - Sixty Minute Line Chart

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

Besides the sell-off in Treasuries, another “Trumpnado” repercussion in the stock market was the vicious rotation into industrials and financials. That rotation can be seen in the action of the Dow Jones Industrial Index relative to the Nasdaq 100, using their popular ETFs. Last Thursday, the Dow Jones industrials reached an all-time high, while the S&P 500 Index was flat and the NASDAQ 100 was down notably.

The vicious rotation last week reminded me of the year 2000, when the same sort of action lasted for weeks at a time. Leading up to the Nasdaq top in March, we had many days when the Dow was down, the S&P 500 was flat, and the technology sector was up a lot. That was a vicious rotation into technology. After the tech bubble burst in March 2000, we had many days where the Dow was up a lot, the S&P 500 was again flattish while the Nasdaq was down notably – similar to what we saw last Thursday.

That said, I think the overall stock market is headed higher, probably in a less chaotic manner than we saw last week. The monstrous heavy volume moves in the financial sector suggest so. Financials are going up because of speculation that the new Trump administration will repeal Dodd-Frank, and deregulate the industry. While a lot of regulation is not good, not enough regulation as was seen in the decade leading up to 2008 can be detrimental, too, as the boom in collateralized debt obligations and leverage nearly wiped out the financial system. Let’s hope the new administration remembers this recent experience.

Goldman Sachs Group - Weekly OHLC Chart

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

If the financial sector was one of the biggest winners last week, large investment banks had even bigger moves.  Bank holding companies are more leveraged to the performance of financial markets than more diversified money center banks, which incidentally registered an all-time high last week. Given this action in the financial sector, I would think that the overall stock market will have a strong finish to the year.

Stock market investors can have quite a ball when they imagine the profits that a Trump administration could bring, particularly when no cabinet posts have been announced and no real initiatives have been officially put forward. If such positive changes don’t materialize, share prices are unlikely to remain at present levels. This is particularly true for the industrial sector, which is battling a weak global economy.

Major Worries in Emerging Markets and Crude Oil

One part of the investment world that clearly does not believe it will benefit from Trump’s pro-growth policies is emerging markets in general and the energy sector in particular. Both sectors, as well as the price of crude oil, were down notably after the election results were announced.

MSCI Emerging Markets Index Chart

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

The decline in the price of oil is understandable as there is too much supply globally and not enough demand. Oil is very weak seasonally in the September-March period as most of Earth’s population lives in the Northern Hemisphere, but the current oversupply makes the seasonal factors much worse. Troop movement in the Middle East was the sole factor that kept the price higher, in my view, so the notable weakening to $43 per barrel is not surprising as news from the war zone disappeared from the headlines. I would not be surprised if we revisit the 2016 oil price lows in 2017 as the oil market is out of balance.

More interesting is the emerging markets sector, which sold off for three days in a row after the news of the Trump victory. The emerging market sector had been diverging from the price of oil this summer (see August 11, 2016 Marketwatch, “One of these two risk assets is sending the wrong signal — but which one is it?”), but the Trump victory quickly established that correlation (see chart above).

The trouble is that the President-elect’s statements sound rather protectionist and anti-free trade. Tariffs do not increase economic growth but rather lower it notably, both domestically and in the country subject to the tariffs. Since China is the largest emerging economy that the new Trump administration threatens to name as a “currency manipulator,” 2017 could be a volatile year in the emerging markets.

Chinese Yuan Chart

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

I think a trade war with China and/or Mexico (courtesy of the big investment in manufacturing capacity south of the border) is unlikely to be productive for economic growth. The Chinese have much bigger problems domestically – like dealing with the effects of a busted credit bubble – so any threats from the Trump administration are only going to make those matters worse.

China Foreign Exchange Reserves Chart

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

With or without being named “currency manipulator,” I believe China will opt for a hard devaluation of the Chinese yuan as capital flight out of China is accelerating again. The Chinese will feel they have no choice but to devalue the yuan as part of the normal credit intermediation process if the Chinese economy is not working well. As the Chinese economy grew 11-fold in the past 16 years, the total debt to GDP ratio grew from 100% to 400%, if one counts shadow banking leverage. Now that the economy is slowing down, that mountain of debt is suffocating it and momentary stimulation from the PBOC is not working.

Because a hard devaluation (similar to the 34% devaluation they engineered in December, 1993) acts like an adrenalin shot to the heart of the Chinese economy, bypassing the financial system, the Chinese are likely to devalue the yuan as they may feel they have no other choice. A hard yuan devaluation is highly deflationary for the global economy given the size of China’s GDP, which is why I maintain my 1% target for the 10-year Treasury note yield, despite the bond market’s “Trumpnado” last week.

Sector Spotlight:

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

Putting Last Week’s News in Perspective

by Jason Bodner

Down here on the ground, while many were debating the merits of the personalities of the major presidential candidates, believe it or not, there was other news happening. It could even be considered much bigger news, depending on your perspective. In mid-October NASA released findings of an updated study on the number of galaxies in the Universe. Most of us know, of course, that we reside in the Milky Way galaxy; our Sun is just one of the galaxy’s four hundred billion stars. The odds of inhabited planets are significant in just our galaxy alone. In the early 20th century, scientists debated how many galaxies there were in the Universe outside of our own. Some thought thousands while others thought millions.

Carl Sagan is well known for his use of the term “billions and billions” – especially regarding galaxies. In 1995, the Hubble Space Telescope was pointed toward a region of black space, recording the blackness at varying depths for 10 days. The resultant “Hubble Deep Field” image revealed 3,000 galaxies in this one seemingly black portion of sky. In 2003-2004 the study was repeated in a pinhole sized black void of space for one million seconds. The results yielded more than 10,000 galaxies. In NASA’s “Hubble Ultra Deep Field” image below, each point of light is actually a full galaxy, each with hundreds of billions of stars. This puts the estimate of galaxies in the Universe at 100 billion to 200 billion. A few weeks ago, NASA released updated findings and said that there are likely far more galaxies than previously thought. 

Hubble Ultra Deep Field Image

In fact, there are possibly two trillion galaxies, each with hundreds of billions of stars. So our sun is perhaps just one of one septillion (1 followed by 24 zeros) stars, or 1,000,000,000,000,000,000,000,000. For perspective, it is estimated there are 7.5 quintillion grains of sand on Earth, or 7.5x1018. That means there are an estimated 135,000 times as many stars in the universe as there are grains of sand on Earth.

Think of that the next time you’re at the beach!

In local news – life here on Earth – all of our daily triumphs and failures are dwarfed by the odds against us ever being here in the first place. But the odds of life somewhere out there in the far-off universe are suddenly higher, now that the pool of candidate stars just grew by trillions upon trillions.

Similarly, it turns out that almost all of America’s major pollsters, pundits, media outlets, and global commentators were dead wrong when it came to predicting the winner of the 2016 Presidential election.  Many awoke to delight or disgust (depending on the camp) to the headlines, “Donald Trump Elected 45th President of the United States.” That shocked many people. The markets also got it wrong, but even that didn’t play out as expected. A Trump win was supposed to rock the markets and send equities into free fall. Wrong again! It just goes to show, no one really knows what tomorrow will bring. As the poll results came in, equity futures were plummeting. This was short lived as the markets actually rallied afterwards.

Massive Sector Rotation into Financials, Industrials, and Healthcare; out of Utilities & Real Estate

Last week’s volatility was wicked within sectors. Reactions were swift and sharp. Monday saw broad market rallies ahead of what was widely believed to be an assured Clinton victory, but Wednesday and Thursday saw huge moves in specific sectors. Financials rallied 4.07% and 3.70% respectively on those two days. The rally of financials illustrates market expectations that Dodd-Frank is in Trump’s crosshairs. Financials finished a yuuuge week, up 11.33%. The other big benefactors of the Trump victory last week were Industrials and Healthcare. Industrials saw a massive +7.95% rally while Healthcare rose 5.82%.

Standard and Poor's 500 Daily Sector Indices Changes Table

Dividend and yield-intensive stocks got pounded. Utilities sank -4.08% for the week. Real Estate, which started the week off well, lost -3.80% on Wednesday and Thursday combined. We witnessed a big sector rotation which likely has significant future implications. One thing is entirely clear: The environment has changed. The perceived stasis of a Clinton win was swiftly replaced with positioning for an unknown future in Donald Trump. Considering that the expectation was for a market meltdown, I think that even if the markets had finished flat last week, it would have been a sign that the market likes the change. What will actually happen next is difficult to tell, as there is still a storm of question marks and widespread anxiety.

Standard and Poor's 500 Weekly Sector Indices Changes Table

For the last three months, financials leapt out ahead as the winning sector. Information Technology has suddenly gone from the market leader to “wait just a minute” as the future growth environment for tech is now uncertain. Looking at the three-month losers, we see clearly that yield stocks are heavily out of favor. Utilities, Real Estate, and Telecom have been fighting a “worst in class” contest over the last three months.

Standard and Poor's 500 Quarterly and Semi-Annual Sector Indices Changes Tables

The odds of life in the universe were originally thought to be much lower than has now suddenly become apparent. We have gone from a pool of a few hundred billion stars to what is now thought as trillions of trillions of trillions. Donald Trump’s odds were as low as 10% by several major polls. Clearly, they were wrong. We laughed at the world for getting Brexit wrong. Who’s laughing now? As the world struggles to adjust to an unthought-of and unexpected outcome, the markets often deliver some unexpected surprises.

One thing is for certain right now – that no one is now certain of anything. As we digest the latest shock the world has given us, it pays to be flexible in mind and action.

We can’t invest in the same exact market twice. Along those lines, Heraclitus said, “No man ever steps in the same river twice, for it's not the same river and he's not the same man.”

Gene Wilder as Willy Wonka 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.*

My Contrarian Reactions to the Trump Victory

by Louis Navellier

Under the surface, Wednesday was a wild trading day.  For example, a leading Mexican brewery stock sold off sharply on the fear that the U.S. would stop drinking Mexican beer.  Naturally, since Mexico makes great beer, I bought more shares.  A leading gun maker also sold off sharply on Wednesday on the assumption that under Donald Trump folks would stop buying guns.  As a contrarian, I could not help myself and bought more shares of that gun maker.

Outside of these seemingly illogical reactions to Trump’s victory last week, some interesting events unfolded that may have more of a long-lasting impact.  Drug stocks rallied on the celebration that Hillary Clinton would not attack them anymore.  But healthcare stocks sold off on the fear that Trump and the Republican Congress would eliminate Obamacare, even though Trump had repeatedly said that he wants to replace it with a better national system, one with more competition beyond state lines.  Most banking stocks also surged on the hope that Dodd-Frank would be repealed, which might be a gross overreaction, since the new Department of Labor (DOL) rules are still being implemented in the financial community.

Financials and industrials accounted for nearly all the post-Trump rallies and are now grossly overbought. Financials are expected to benefit from a steeper yield curve, while industrials are expected to benefit from a dramatic increase in infrastructure and defense spending.  Many technology stocks have done poorly.  Due to the technology sell-off in the wake of the Trump victory, our friends at Bespoke pointed out how poorly the economy of California and other technology-heavy states have performed.  In the three days after Trump’s election, stocks domiciled in California – home to the largest number of companies in the S&P 500 – fell by an average 0.2% vs. a 1.7% gain in the S&P in the same three days.  Connecticut – which has the second-highest number of companies in the S&P – is also a very blue state.  By contrast, its stocks performed very well (second best among states, at +4.0%) since Connecticut is home to a lot of insurers and financial companies.  In addition, companies based in North Carolina (a “purple” state) did best (+4.1%) while companies based in Colorado, another blue state, did worst, falling an average -2.0%.

We have seen that the ETF industry reflects the assumption that Donald Trump’s victory is good for drug companies (since Hillary Clinton will stop attacking them), financials (on speculation of a Dodd-Frank repeal), industrials and materials (based on massive infrastructure spending), but bad for technology and healthcare.  These massive sector rotations and speculation are encouraged by Wall Street, since ETFs all too often trade at premiums and discounts relative to net asset value; so the trading groups that assist ETF specialists with liquidity can make a tremendous amount of money by taking advantage of naïve investors, most of whom have no clue that ETFs trade at substantial premiums and discounts during fast-changing market conditions.  I think this irrational speculation will likely subside in the next several days.

What to Watch Now – Bond Rates & Oil Prices

Frankly, amidst all the impulsive reactions and gross overreactions, there is one major event that has me a bit concerned, namely the fact that the 10-year Treasury bond yield surged after the Presidential election and now yields 2.15%.  The 10-year Treasury and the S&P 500’s dividend yield are now essentially the same.  This has me concerned, since a dramatic increase in long-term Treasury bonds tends to cause high dividend and interest rate-sensitive stocks to temporarily stall.  Our friends at Bespoke prepared another excellent report that shows that when Treasury yields surge this sharply, the stock market tends to stall.

Bespoke said that last Wednesday’s jump in 10-year rates “ranks as the second largest one day percentage increase in the current bull market for equities.”  In looking at the 10 largest daily percentage rises in bond yields during this bull market, Bespoke calculated a median stock market decline of 0.4% a week later.

As a result, I will keep a close eye on my recommended dividend growth stocks, since they are suddenly more volatile in the wake of last week’s surprise presidential election outcome.

Donkey Head Pump Image

I am also keeping a close eye on crude oil prices, since under a Trump Administration, the domestic energy industry will likely blossom.  This will tend to put a lid on crude oil prices.  The current crude oil glut is still growing, since the American Petroleum Institute (API) and the Energy Information Administration (EIA) reported the crude oil inventories rose 4.4 million barrels and 2.4 million barrels, respectively, in the latest week.  Interestingly, the EIA on Wednesday also raised its forecast for crude oil production for 2016 and 2017 by 1.3% and 1.7%, respectively, compared to its previous forecast.

Furthermore, the International Energy Agency (IEA) reported that OPEC output in October rose to a record 33.83 million barrels per day, making it highly unlikely that OPEC will be able to agree on a production cap at its upcoming meeting on November 30.  The IEA stressed that OPEC's task of curtailing the global glut of crude oil is difficult, since major crude oil producers outside the cartel, such as Brazil, Canada, Kazakhstan, and Russia, are all ramping up their production.  As a result, the IEA said, “This means that 2017 could be another year of relentless global supply growth similar to that seen in 2016.”

In summary, the crude oil glut is expected to persist (and possibly grow worse) due to higher worldwide crude oil production, new discoveries, and a more energy-friendly Trump Administration.


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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