Negative Interest Rates

Negative Interest Rates Now Dominate Global Finance

by Louis Navellier

February 2, 2016

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

Japanese Temple Gate ImageThanks to the Bank of Japan – where interest rates are now negative out to eight years – the financial markets now seem to assume that central banks will keep pumping out endless money to help shore up their lackluster economic growth. Specifically, on Friday, the Bank of Japan announced that it would cut its key deposit rate to -0.1% from +0.1% and then said that “we will cut the interest further into negative territory if judged as necessary.” Clearly, deflationary forces are now spreading around the globe.

The European Central Bank (ECB) will meet this week and they may also choose to push their already-low (-0.3%) key interest rate further down to -0.4%, since ECB President Mario Draghi has implied that more accommodation may be necessary to help shore up Italian banks that now have more than 10% non-performing loans and too much emerging market exposure. Meanwhile, in the U.S., fed funds futures are now forecasting virtually no interest rate hike in 2016. So with interest rates collapsing around the globe, stock markets are suddenly more attractive, especially high-dividend stocks with a history of rising yields.

Interestingly, both former Fed Chairman Ben Bernanke and Vice Chairman Alan Blinder have said that the Fed should add negative interest rates to its toolkit. In an interview with Marketwatch last Friday, Bernanke said, “I think negative rates are something the Fed will and probably should consider if the situation arises.” If so, the U.S. would join the Bank of Japan, the European Central Bank, and the central banks of Switzerland, Denmark, and Sweden with negative rates.  Clearly, we live in a strange new world!

In This Issue

In a world in which five central banks offer negative interest rates, Bryan Perry, Jason Bodner, and Ivan Martchev have each trumpeted the value of utilities and other high-income oases. This week, Bryan will take a closer look at the five nations with sub-zero rates, along with others heading toward zero. Ivan examines the surprising strength of bond markets when “shorting bonds” seemed like a steal, and Jason finds several hidden positives in today’s negative press. Gary Alexander’s Growth Mail asks us to look beyond a dismal winter toward a more promising spring, based on history and the political calendar. Then I will return with a look at our weak GDP growth and other deflationary indicators released last week.

Income Mail:
Global Interest Rates Are Going Down for Real
by Bryan Perry
Global Overnight Rates in the Red Zone

Growth Mail:
A Dormant Winter Often Precedes a Spring Rally!
by Gary Alexander
The Market Often Rallies as Spring Approaches
February 2, 3 & 4 in U.S. Financial History

Global Mail:
The “Short of the Century” May Last Quite a Bit Longer
by Ivan Martchev
“Crossover Yen-Vy,” or How the Yen Carry Trade Backfired

Sector Spotlight:
A Negative Times a Negative Equals a Positive!
by Jason Bodner
Some Surprising Positives in January’s Sector Scorecard

Stat of the Week:
U.S. Growth Slips to 0.7% Last Quarter
by Louis Navellier
Commodity Price Deflation is Punishing Russia

Income Mail:

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

Global Interest Rates Are Going Down for Real

by Bryan Perry

Market participants commonly describe the current trend for global interest rates as remaining “lower for longer.” Following the rapid and seemingly coordinated moves to flex fiscal stimulus across the developed world, bold actions by the European Central Bank, the Bank of Japan, and the Peoples Bank of China demonstrate the power and direction of this trend. After last week’s action, I’d say that global interest rates are going down “for real.” The race to zero interest rates is on and there are many entrants.

I posted the table below exactly one month ago and thought it prudent to revisit this set of numbers to gain a snapshot of how the rest of the world compares with the U.S. The collective move lower for global interest rates is fairly well pronounced in just the past four weeks. Alarming adjectives like “desperate” are being used to describe current central bank policy-making as deflation, so prevalent in emerging markets, is threatening to intensify in the rather unimpressive recoveries among developed economies.

Global Interest Rates Table

Even as the Dow rallied almost 400 points on Friday, the yield on the benchmark U.S. 10-yr Treasury Note fell to 1.93% during the same session. Normally, such a spike in equities finds an equal and opposite reaction from the bond market, reflecting a “risk off” sentiment. This was not the case as a large portion of investors weren’t drinking the Kool Aid of the stunning move from the Bank of Japan.

Global Overnight Rates in the Red Zone

Investors woke up to a fresh shot in the arm for equities last Friday after the Bank of Japan launched a surprise attack on its stagnant growth by adopting a negative interest rate policy. Apparently the BOJ liked what it is seeing from other countries that are already collecting interest from depositors. Japan has joined the EU, Denmark, Switzerland, and Sweden in imposing negative interest rates with the dual purpose of devaluing currencies and battling deflationary forces. With this latest central bank trend now fully in play, more than a fifth of the world’s GDP is covered by a central bank with negative rates. (See January 29, 2016 ZeroHedge.com: “Negative Interest Rates Show Desperation of Central Banks.”)

Central Banks with Negative Interest Rates Image

The big question going forward is whether the U.S. consumer can become a sufficient counter-lever to deflationary forces fueled by downward pressure on commodity prices and a rising dollar that will only rally further if the Fed stays the course with its now-fabled “dot plan,” which depicts monetary markers for what interest rates should be going forward. Indeed, the Fed’s dot plan has been reworked three times since last March with the forward dots moving progressively lower on the chart with each revision.

FOMC Member Projections Chart

Against this highly dovish backdrop, the glide path is clear for income-generating assets tied to the domestic economy in defensive sectors. I’ve pointed out in recent weeks that within the blue chip space, consumer property REITS, skilled care REITS, electric utilities, and telecom providers offer yields above 4% where preservation of capital is first and foremost. While the month of January was dismal for many formerly high-flying stocks, a whole host of stocks within my favored sectors closed out the month with solid gains, attracting fund flows right into last Friday’s closing bell, marking the end of a wild month.

There is also renewed vigor in the consumer staples sector among companies that sport dividend yields higher than that of the 10-yr T-note. Better-than-expected Q4 results from Proctor & Gamble (PG), with a current dividend yield of 3.25%, took the lead and just about every company that occupies space in the kitchen and bathroom areas traded firmly higher on the week. (Please note: Bryan Perry does not currently own a position in PG. Navellier & Associates, Inc. does currently own a position in PG for some client portfolios.)

The sky remains blue for companies that produce goods and services that stand to benefit from cheaper commodities and persistently lower interest rates. The correction in the past month left no market sector untested and at the same time left no doubt that high-quality equities with healthy dividend growth rates are where invested capital is being richly rewarded with minimal volatility. What’s not to like?

Growth Mail:

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

A Dormant Winter Often Precedes a Spring Rally!

by Gary Alexander

“When Chekhov saw the long winter, he saw a winter bleak and dark and bereft of hope. Yet we know that winter is just another step in the cycle of life.”

-- Bill Murray as weather reporter Phil Connors in “Groundhog Day” (1993)

The 1993 movie Groundhog Day depicts actor Bill Murray as a weather reporter doomed to relive the same daily routine, over and over again, while everyone else in the movie thinks the day is fresh and new.

It’s the same with economic history: The business cycle is predictable, but it always seems to come as a surprise to some traders. Economic historians are the Bill Murrays of the world; they’ve seen it all before.

This recovery has climbed a wall of worry ever since the market began to recover in March of 2009. We have seen five annual worry-fests over Greek debt, sometimes leavened with crises in the Crimea, China, or Cyprus. We saw market panic over America’s debt ceiling and credit rating in August 2011. October 2014 brought Ebola scares and then China fears pushed stocks lower in August, September, and January.

In January, the S&P 500 fell 11.3% (intra-day, January 20), but it closed January down “only” 5.07%.

The latest worry is that the U.S. GDP only grew 0.7% in the last quarter of 2015. Does that mean we’re entering a recession? Probably not. In an age of deflation, slow growth is certainly better than no growth.  When inflation is near zero, any positive growth is good. To demonstrate that fact, let me take inflation out of the GDP calculation. Ignoring inflation, nominal growth has averaged 4.0% since 2010:

Nominal United States Gross Domestic Product Growth Table

A new (January 12, 2016) 778-page magnum opus by Robert J. Gordon, “The Rise and Fall of American Growth,” foresees the end of growth in America, as in his final chapter: “Long-Run American Economic Growth Slows to a Crawl.” He also argues that today’s youth may be the first generation in American history that fails to exceed their parents’ standard of living. (I’ve heard that dismal argument for every generation since my birth in 1945; but it hasn’t happened yet, and it probably won’t happen this time.)

What Robert Gordon and other pessimists fail to see is (1) that which is invisible – future technological changes – and (2) a statistical fallacy called the Law of Large Numbers. Gordon looks at slower growth rates and says we’re slowing down. The book tags 1970 as the peak of U.S. productivity growth; so let’s look at 1969, when America recorded its first trillion-dollar GDP. The GDP increase in nominal terms in 1969 was $77.6 billion, rising from $942.5 billion in 1968 to $1.1099 trillion in 1969. But even with high inflation, the GDP grew only $77.6 billion in 1969 vs. over 10 times that growth, $799.3 billion in 2011.

The Law of Large Numbers tells us that it is difficult to grow by large percentages as an economy grows to super-sized status. The most dramatic example today is China. In the 1990s and early 2000s, China’s economy enjoyed several years of double-digit GDP gains. But now that China’s economy produces over $10 trillion per year in GDP, any 10% growth rates become highly unlikely. Even 7% represents a stretch.

China's Economy Table

When China’s economy stood at $732 billion in 1995, an 11% gain represented about $80 billion. At $10 trillion in 2014, a slower 7% growth rate represents $725 million, or about nine times the absolute growth in 1995. Instead of lamenting China’s slower growth, we should get used to China’s slower growth rate.

Another cause of celebration is the rise of China’s middle class. China’s per-capita GDP was barely $600 two decades ago, and it grew 12.5-fold to $7,596 in 2014. This is one of the greatest success stories in the history of the world. But to think that China can continue to grow at 10% or even 7% a year is ridiculous.

The Market Often Rallies as Spring Approaches

According to Bespoke Investment Group (in “B.I.G. Tips,” January 29, 2016, “February Seasonality”), February is a lackluster month (+0.25% over the last 20 years, on average), but April is the best month, averaging 2.6% gains, while March adds another 1.36%. As this chart shows, the March-April surge is second only to the October-December increase over the last 20 years, while May through September is generally flat, as are January and February. In a phrase, “if winter comes, can spring be far behind?”

Standard and Poor's 500 Index Seasonality Chart

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

Looking at this chart in seasonal terms, Spring and Fall are strong. This chart shows a lift-off in mid-March, with strength until a pre-summer peak in June. By contrast, the S&P 500 has been virtually flat in the summer and the first 75 days of the year, until some spring flowers (and dormant stocks) blossom.

March 15 is especially significant to the market’s chances for growth this year. As I have indicated in recent columns, one reason why the market is in such a funky mood is the prospect of having one of the current poll leaders of either Party in the White House next year, i.e., Republicans Donald Trump, or leading Democrats Hillary Clinton or Bernie Sanders. I am personally hoping for a more pro-freedom Republican to emerge from the pack by March 15. But that takes patience. With all the brouhaha over Iowa this week, it’s hard to hold your emotional horses in check for the real horse races in early March.

February is only important in four states: Iowa, New Hampshire, Nevada, and South Carolina; but 14 states vote on March 1 (Super Tuesday), then nine more states and Puerto Rico vote March 6-8, then five key swing states vote on March 15: Florida, Illinois, Missouri, North Carolina, and Ohio. We’ll probably know who our major Party candidates will be by March 15 – and the stock market tends to like certainty, so the real meaning of Groundhog Day this year is that we have six weeks until political realities emerge.

February 2, 3 & 4 in U.S. Financial History

On February 2, 1653, New Amsterdam officially became a city, later to be called New York. Wall Street was also born then, after Peter Stuyvesant completed a literal wall across lower Manhattan.

On February 3, 1690, paper money was introduced in America when the Massachusetts colony authorized a paper currency. Until then, the colonies dealt primarily in silver and gold coins, or “decrepit coppers.”

On February 4, 1841, The Bank of the United States, our ill-fated first central bank, closed its doors after a contentious 50-year history. Founded by Alexander Hamilton in the 1790s, it survived many attacks but Andrew Jackson mortally wounded the bank by refusing to renew the bank’s charter in 1836. U.S. Bank president Nicholas Biddle changed it to a state bank and moved it to Pennsylvania, but it folded in 1841.

On February 3, 1895, J.P. Morgan was seen in Washington DC, emerging from the office of U.S. Assistant Secretary of the Treasury William Edmund Curtis, so a broker cabled the floor of the stock exchange, shouting “we are saved.” Alas, he was premature. On February 4, the “gold squeeze” reached its climax. U.S. gold holdings were down to $45 million as of January 31, and were shrinking daily. On February 5, Morgan stormed into President Grover Cleveland’s White House and demanded an audience. The U.S. only had $9 million in gold to meet $12 million in current drafts against that gold, so President Cleveland asked Morgan, “What would you suggest, sir?”  In that instant, the power of the purse passed from the Presidency to Morgan, who became our de facto central banker from 1895 to his death in 1913.

On February 3, 1913, the 16th Amendment authorized income taxes, passing Congress while President William Taft was our lame duck President, awaiting Woodrow Wilson’s Inaugural four weeks later.

On February 2, 1929, the Federal Reserve announced a ban on bank loans for margin trades, but traders barely blinked as they opened up margin accounts with their brokers, leading to the late-1929 crash.

On February 2, 1932, the Reconstruction Finance Corporation (RFC) opened for business, with $500 million in credit, a child of the Hoover Administration, a year before FDR gained office.  Also on this Groundhog Day in 1932, gangster Al Capone was sent to prison, first in Atlanta and then to Alcatraz.

Tech News: On February 4, 1957, Smith-Corona began selling portable electric typewriters, in Syracuse, NY. The first machine weighed 19 pounds!  Soon, the competition offered lighter-weight plastic models. And on February 1, 1972, the first hand-held calculator (Hewlett-Packard HP-35) was introduced at $395.

On Friday, February 4, 1994, Fed chairman Alan Greenspan shocked Wall Street when he began a year-long pre-emptive strike against non-existent inflation by issuing the first of seven interest rate hikes. The DJIA careened down 96.24 points (-2.5%) that day. Then it kept going down. It took well over a year for the DJIA to eclipse its previous record (set January 31 at 3978.36). Mr. Clinton fumed at the Fed’s actions, as the dismal 1994 market may have fueled the Republican Revolution in November 1994.

On February 2, 1998, the DJIA gained 201 points (+2.5%), only the fourth 200-point daily gain to that date, most of them happening in the previous six months. This was the beginning of a 639-point (+8.1%) surge in February. The DJIA gained over 1,000 points (+14%) in six weeks, January 26 to March 11.

Global Mail:

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

The “Short of the Century” May Last Quite a Bit Longer

by Ivan Martchev

Those in the forecasting business know that markets love to humble them on a regular basis. One such humbling event of late has been the precipitous decline in long-term government bond rates around the globe, handing substantial losses to those who were positioned for a round of rising rates.

The latest inspiration of the dive in global government bond yields has been the decision by the Bank of Japan to experiment with negative short-term interest rates in the wholesale funding markets for Japanese financial institutions – the closest equivalent of which is the fed funds rate.

To demonstrate the ability of markets to humble even the greatest of traders, I penned a piece on May 4, 2015 in Market Mail titled “The Short of the Century May Last A Little Longer,” I showed the example of market gurus taking it on the chin with bombastic statements like “the short of the century” for governmental bond markets – like the late and legendary Barton Biggs about Japanese government bonds (JGBs) in 2003, and more recently, in 2015, similar statements about German bunds by dethroned bond king Bill Gross and the newly-appointed bond king Jeffrey Gundlach. While I have the deepest respect for Gundlach, the German deflationary situation was rather precarious and, in my opinion, it was not as big of a lay-up as he was thinking. To refresh your memory, here is what I wrote about that trade last May:

“Gundlach’s point is simple: If you short a bond that is trading at a negative yield – like the German two-year bunds – you can’t really lose: At maturity you are getting paid at par.  So if one leverages the trade at 100X on a bund that at the time was yielding -0.20%, one makes 20% at maturity. Sure, he is using wholesale funding markets for leverage that can carry lower interest rates than what a mortal individual investor can get, so his math works. I don't doubt he can make money in the short-term, or even in a year or two, just like Barton Biggs did with JGBs in 2003, but are bunds really the new ‘short of the century?’

“In institutional markets, as the Gundlach example shows, the leverage can be 100X or higher in some cases so a fraction of a percent yield can be capitalized upon. Such sophisticated trading is not within the reach of the individual investor, nor should it be as 100X leverage is almost an assured road to the poorhouse. One rookie mistake at 100X can wipe out a retail investor.”

So what happened to Gundlach's suggested trade since he suggested it in early 2015?

Germany Two Year Schatz Yield Chart

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

German 2-year notes have sunk further into negative territory. So while in theory he is correct and when they mature at par (100 cents on the euro), if he was short German 2-year notes at maturity he was going to make close to 20% if he was leveraged at a rate of 100X. However, if one put on the Gundlach trade with the German 2-year notes at around -0.20% last spring, one would now be losing 29% (at 100X leverage) as those same bonds now yield -0.49%. (To be fair to Gundlach, his 2-year note trade would no longer be a 2-year note trade as those bonds have a constantly falling maturity and now they would be one year and three months away from maturing if he put that trade on when he suggested it in April 2015.)

Be that as it may, my point is to demonstrate how a “no brainer” short-of-the-century trade can turn out to be rather problematic for quite some time before it works out. JGBs had a record low yield of 10 basis points (0.10%) last Friday. One would have lost quite a bit of money if one was shorting JGBs since 2003 as Barton Biggs suggested, although granted, that trade did work for a year or so after he suggested it.

Japan Ten Year Government Bonds Chart

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

How is it possible that JGB yields are at 10 basis points while the Bank of Japan is running a QE program that on a relative basis is three times more aggressive than the Fed’s, which in the process has unleashed a tsunami of yen aimed at boosting prices in Japan? (See my May 31, 2013 Marketwatch column, “Repercussions from the Yen Surge.”) In 1990, Japan experienced the same type of crash that China is experiencing today: Too much fixed-asset investment driven by ever-rising borrowing hit the wall and domestic consumption never really picked up. To boot, the banking system had issues for years with credit growth and bad loans. Then, the population began to shrink and age. Older people do not usually spend money as younger people do. So no matter how much the BOJ lowers interest rates and depresses the value of the yen, their deflationary malaise continues.

The Japanese realized that even their ambitious QE operation was not helping as much as they had hoped, so in October the chief cabinet secretary, Yoshihide Suga, encouraged women to “contribute” to the nation by bearing lots of children. He was immediately criticized as he brought back memories of wartime Japan when women were encouraged to reproduce in order to boost the nation’s military power. (See October 1, 2015 Telegraph article, “Japan politician tells women to 'contribute' by having more babies.”) Despite his critics, the basis of the cabinet secretary’s argument is demographically correct, as a shrinking population virtually guarantees that what the BOJ is doing at the moment is only a temporary patch for a much bigger demographic problem. After all, central banks cannot print more babies.

The BOJ monetary machinations raise interesting questions about the yen, which has been acting rather peculiarly in this global deflationary environment. There is no doubt in my mind that the much more aggressive nature of Japan’s QE can be called printing, given the different design of the QE program and the outright purchases of stocks by the BOJ as part of it (see my Marketwatch article referenced above).

The U.S. QE program, by comparison, cannot be called printing. I think the U.S. QE is better described as force feeding credit on a financial system that was in the process of deleveraging naturally. The Fed was much more successful compared to the BOJ with a relatively less aggressive QE program (relative to the size of the U.S. economy) due to the lack of demographic problems and a more flexible economic model.

United States Dollar Japanese Yen Exchange Rate - Daily OHLC Chart

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

It is not surprising that as the aggressive Japanese QE operation commenced in 2013, the yen sold off from under 80 to over 120 (the USDJPY rate is inverse so a rising chart signifies a weaker yen, or more yen per dollar). It is rather telling that over the past year the decline in the Japanese yen has stalled, even as the BOJ has pressed full QE speed ahead with its printing. This is one of the reasons that forced BOJ’s hand in experimenting with negative interest rates last week.

In fact, if one were to look purely at the technicals on this inverse USDJPY chart, it looks like the yen is putting in a rounding top, or possibly a head-and-shoulders top, and the chart may decline further should it break major support at 116, which we tested in January. I believe that the yen is acting counter to the BOJ policies simply because the availability of “carry trades” (where one can use the yen as a funding currency) has greatly diminished and the carry trades that have been put on have had to be unwound, pushing the yen higher! Let’s look at an example of a carry trade gone bad.

“Crossover Yen-Vy,” or How the Yen Carry Trade Backfired

In a carry trade, a financial institution borrows yen at a tiny interest rate. Only financial institutions can access wholesale yen funding markets so individuals cannot do carry trades – not the kind described here, anyway. Then, the bank sells the yen for Brazilian real (BRL) and buys any other higher interest yielding asset in Brazil to capture the interest rate differential. This is the essence of a carry trade – to borrow in a low-interest-rate currency like the yen and buy assets in a high-yielding currency like the Brazilian real.

Brazil Ten Year Government Bond versus Brazilian Real Chart

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

The problem is that the Brazilian real had a really bad year in 2015, down nearly 50%. It is not going to be a very good carry trade if one can get 16% interest in Brazilian government bonds but lose three times that on the exchange rate. The USDBRL exchange rate is shown in the chart but since the USDJPY rate has been relatively stable over the past year the JPYBRL exchange rate has also dramatically weakened. In other words, because of the collapse in commodity prices that is hurting the Brazilian currency, yen-funded carry trades in Brazil have not worked. And this is the case for many other commodity currencies as well. This is why we are in the absurd situation of seeing a stable yen when the BOJ is printing in a manner that may make Japan look more like Easter Island. It will be even more absurd if the yen appreciates past 116 per dollar with negative interest rates in Japan and commodity prices falling further courtesy of the Chinese economic unravelling. Regrettably, I believe this is quite possible.

Sector Spotlight:

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

A Negative Times a Negative Equals a Positive!

by Jason Bodner

With all the negativity going around recently, I decided that I was tired of feeling the continuous weight of the bleak headlines. When everything feels overwhelmingly negative, it can breed a new hunger for positivity, so I decided to be positive this week! On that note, here’s some good news for dieters: There are several foods that require more calories to ingest and digest than are present in the foods themselves.

Therefore, foods like celery, lettuce, grapefruit, and several others have negative calories. So if you eat a few celery sticks or a bowl of plain lettuce every meal, you will lose weight. You’ll probably still be hungry, but it’s simple science: If calories burned are greater than calories consumed, weight is lost. It’s when you smother that salad with creamy ranch dressing and throw in toppings like cheese, crispy noodles, and other goodies that you end up with a Big Salad that has more calories than a Big Mac!

Negative Calories Image

Negatives can be positive. Sometimes, negative things are good for us. Japan went positively negative on its surprise interest rate decision, cutting rates from +0.1 to -0.1%. Upon hearing that Friday, the market felt refreshed, like eating a salad after a week-long binge on pizza – hence Friday’s strong finish. As noted elsewhere in this issue, the ECB is finding that the negative rates imposed might actually be having an adverse effect of causing cash accumulation instead of the desired redistribution into the economy. But generally speaking, negative rates are being positively embraced. In this case, negatives can be positive.

Positives can be negative. Today’s negative environment and the general lament that it’s causing optimists to shine like beacons in a storm. We have talked here constantly about how “the best defense is a great offense,” meaning that we should own the best companies with growing sales and earnings. This past week saw some nice earnings surprises and led to some much-needed cheer in the market. But many companies, , despite having upbeat earnings reports, were cautious in lowering their future guidance, citing global growth slowdown. Some of the more successful and more volatile growth stories have met with heavy selling in the market for weeks. We have seen companies with double-digit sales and earnings growth experience 50% corrections in their prices in just a few weeks. Positives can be negative.

Yin Yang Image

A lot of data that I consistently look at, including new highs and new lows, volume and volatility, leave me confident that we have put in the low for a little while. Every time I say that, however, we see a new swath of volatility. But recently, the number of new lows has slowed dramatically, and we are starting to witness significant short covering. As earnings come in, we just find ourselves in a situation where any news that comes out which seems less bad than expected might result in positive reactions.

One last thing before we get into the sectors. I just want to point to an interesting (positive) chart I came across on Yahoo Finance. This is a 100+ year chart with 10-year annualized returns plotted on the y axis and time on the x axis. It actually suggests that the bull market everyone suspects is now over may have another few years to run. It's interesting to note that blips like Ebola and the emerging market scare don't seem very apparent on this scale. To be fair, not everyone has the investing time horizon of Mr. Buffett, but it’s refreshing to have an optimistic view of the market in the midst of seemingly endless gloominess.

Ten Year Annualized Returns Chart

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

Some Surprising Positives in January’s Sector Scorecard

As we continue to ride a highly volatile market, the sectors last week echoed this turbulence. Finding any bright spots after January’s disappointing overall performance has been tough, but the S&P Telecom Services Index was January’s best performer, at +5.48%, with Utilities not far behind at +4.90%.

Standard and Poor's 500 Weekly Sector Index Table

Healthcare sagged last week as it resumed its place in the cross hairs of leading Democratic candidates’ sights. The Materials sector was the second worst performer, but it put in a positive week for the first time in many weeks. In fact, looking at the full-month performance of the sectors, we see Materials in last place with a -10.62% return. Energy was quite strong for the week in the wake of crude oil’s monstrous squeeze higher; but it was also the week’s most volatile performer, down 4.52% on Monday and up 3.78% on Tuesday. Looking at the daily returns of the S&P 500 Energy Index, it’s easy to get queasy.

SP500DailySectorIndex.jpg

When you look around and the crowd begins to seem overly negative, it is very easy to go along with the crowd. In fact, it is human nature to go with the crowd, not against it. We’ve seen this often in human history, such as the Tulip bubble mania in Holland (1637), the Salem witch trials (1692), and in the last 20 years the great tech bubble, the housing bubble, and now the deflated energy bubble.

The interesting thing about crowds running together is that, just like in the markets, when things are good and prices are on the way up, movements tend to be more measured and relaxed. But when things turn negative, they get amplified very quickly and people pile on even faster. As investors have been swept up in the worry and dread of global slowdown and deflation, we almost expect to wake up and find equity markets trading lower. Yet as sentiment becomes unanimously negative, the positive has a way of creeping in. As American writer Elbert Hubbard said; “positive anything is better than negative nothing.”

Stat of the Week:

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

U.S. Growth Slips to 0.7% Last Quarter

by Louis Navellier

Last Friday, the Commerce Department announced that their preliminary estimate for fourth-quarter GDP was an annual pace of 0.7%, which is a sharp deceleration from an annual pace of 2% in the third quarter and 3.9% in the second quarter. For all of 2015, U.S. GDP grew at a 2.4% annual pace, the same as 2014. Overall, consumers are now driving virtually all of U.S. GDP growth, but consumer spending decelerated to a 2.2% annual growth rate in the fourth quarter, down from a 3% rate in the third quarter.

Additionally, exports declined 2.5% in the fourth quarter, while imports rose 1.1%, so a wider trade deficit is also causing a bigger drag on GDP growth. Business investment also remains poor and declined 5.3% in the fourth quarter. Shrinking inventories also put downward pressure on fourth-quarter GDP.

Before this downbeat GDP data came out, the Federal Open Market Committee (FOMC) met on Tuesday and Wednesday. The official FOMC statement released on Wednesday said that the Fed is “closely monitoring global economic and financial developments and is assessing their implications for the labor market and inflation, and for the balance of risks to the outlook.” Although the FOMC acknowledged that “economic growth slowed late last year,” they also said that the U.S. economy is still growing at a “moderate pace.” There was a significant change of language when they said that business investment is now “moderate” vs. the “strong” in the previous (December 16) statement.  In other words, the Fed did its best to imply that it may not be raising key interest rates anytime soon. In fact, the fed funds futures market no longer anticipates that the Fed will raise key interest rates at its mid-March FOMC meeting.

Even though the Fed and many businesses have expressed concern, consumers are not that concerned. The Conference Board announced last Tuesday that consumer confidence rose to 98.1 in January, up from 96.3 in December. Consumer sentiment is tied more to housing prices than the stock market, so it’s fitting that on Wednesday, the Commerce Department announced that new home sales rose 10.8% to an annual pace of 544,000 in December, up from a revised 491,000 in November. For all of 2015, new home sales rose 14.5% to 501,000. During the past 12 months, new home prices rose 4% to $294,575 compared with 2014. Continued home price appreciation remains crucial to boosting overall consumer confidence.

On Thursday, the Commerce Department announced that December durable goods orders declined 5.1%, the biggest monthly decline in 18 months. Defense orders plunged 46% and commercial aircraft orders declined 29%. Excluding transportation orders, durable goods orders still declined 1.2% in December due to weakness in key industries. Business investment in 2015 was the weakest since 2009 and continues to put downward pressure on durable goods. For example, shipments of core goods declined 0.2%.

Commodity Price Deflation is Punishing Russia

Russian Walkway Panorama ImageEven though our leading indicators are mixed, the U.S. is doing well compared to Russia, whose Federal Statistics Office announced last week that its GDP contracted 3.7% in 2015. Retail sales declined 10% and business investment fell 8.4%. This is the second year in a row that Russia’s GDP has contracted. In the past two years, the Russian ruble has fallen a shocking 58%, from 32.5 per U.S. dollar at the start of 2014 to 77 per dollar now, according to Trading Economics. Obviously, such a dramatic plunge can destroy consumer purchasing power. Since many countries in the Middle East, North Africa, as well as Russia and Venezuela are overly dependent on crude oil prices, it is very possible that unrest in these countries will persist and some borders may be redrawn, especially in the current Middle East conflicts.

The real risk in the global stock market is that commodity deflation has devastated commodity-related stocks and commodity-dependent nations. The energy sector malaise has now spread to many financial stocks, due to their growing default risk. I am not yet ready to say that deflation is spreading to tech stocks, since Apple’s operating margins continue to expand and it still has pricing power; but the real risk to the stock market is persistent selling pressure as deflation envelops the globe. For example, there is already a lot of selling pressure emanating from sovereign wealth funds, especially in the Middle East (see: Financial Times, February 1, “Sovereign wealth funds drive turbulent trading.”)

Overall, there are a lot of wildcards that may impact financial markets in 2016. The Bank of Japan’s abrupt switch to a negative interest rate policy was definitely one big surprise. Now it will be the ECB’s turn to possibly surprise us further. One thing is certain: Countries are continuing to systematically devalue their currencies, so the U.S. dollar is destined to remain strong due to higher real interest rates and better growth than many other countries. This means that a stronger dollar will continue to put more downward pressure on commodity prices, so I expect these deflationary forces to continue to spread.

The Presidential election outcome also remains uncertain, but after the Florida “winner take all” primary on March 15, there should be just two or three leading Republican candidates left, so political uncertainty should diminish in the upcoming months. In the meantime, Libya remains a wildcard, as does its crude oil production, since ISIS is now effectively taking over the country. Three ISIS leaders were recently killed via long range snipers, so either special forces from selected countries are in Libya or possibly this is the start of a much more serious conflict that is about to escalate. Ironically, this also means that crude oil prices could surge if there is any kind of prolonged conflict. So, a lot of wild cards are in play in 2016.


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.

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Please note that Navellier & Associates and the Navellier Private Client Group are managed completely independent of the newsletters owned and published by InvestorPlace Media, LLC and written and edited by Louis Navellier, and investment performance of the newsletters should in no way be considered indicative of potential future investment performance for any Navellier & Associates separately managed account portfolio. Potential investors should consult with their financial advisor before investing in any Navellier Investment Product.

Navellier claims compliance with Global Investment Performance Standards (GIPS). To receive a complete list and descriptions of Navellier's composites and/or a presentation that adheres to the GIPS standards, please contact Navellier or click here. It should not be assumed that any securities recommendations made by Navellier & Associates, Inc. in the future will be profitable or equal the performance of securities made in this report. Request here a list of recommendations made by Navellier & Associates, Inc. for the preceding twelve months, please contact Tim Hope at (775) 785-9416.

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It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities in this list. Click here to see the preceding 12 month trade report.

Although information in these reports has been obtained from and is based upon sources that Navellier believes to be reliable, Navellier does not guarantee its accuracy and it may be incomplete or condensed. All opinions and estimates constitute Navellier's judgment as of the date the report was created and are subject to change without notice. These reports are for informational purposes only and are not intended as an offer or solicitation for the purchase or sale of a security. Any decision to purchase securities mentioned in these reports must take into account existing public information on such securities or any registered prospectus.

Past performance is no indication of future results. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. It should not be assumed that any securities recommendations made by Navellier. in the future will be profitable or equal the performance of securities made in this report.

Dividend payments are not guaranteed. The amount of a dividend payment, if any, can vary over time and issuers may reduce dividends paid on securities in the event of a recession or adverse event affecting a specific industry or issuer.

None of the stock information, data, and company information presented herein constitutes a recommendation by Navellier or a solicitation of any offer to buy or sell any securities. Any specific securities identified and described do not represent all of the securities purchased, sold, or recommended for advisory clients. The reader should not assume that investments in the securities identified and discussed were or will be profitable.

Information presented is general information that does not take into account your individual circumstances, financial situation, or needs, nor does it present a personalized recommendation to you. Individual stocks presented may not be suitable for you. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. Investment in fixed income securities has the potential for the investment return and principal value of an investment to fluctuate so that an investor's holdings, when redeemed, may be worth less than their original cost.

One cannot invest directly in an index. Results presented include the reinvestment of all dividends and other earnings.

Past performance is no indication of future results.

FEDERAL TAX ADVICE DISCLAIMER: As required by U.S. Treasury Regulations, you are informed that, to the extent this presentation includes any federal tax advice, the presentation is not intended or written by Navellier to be used, and cannot be used, for the purpose of avoiding federal tax penalties. Navellier does not advise on any income tax requirements or issues. Use of any information presented by Navellier is for general information only and does not represent tax advice either express or implied. You are encouraged to seek professional tax advice for income tax questions and assistance.

IMPORTANT NEWSLETTER DISCLOSURE: The performance results for investment newsletters that are authored or edited by Louis Navellier, including Louis Navellier's Growth Investor, Louis Navellier's Breakthrough Stocks, Louis Navellier's Accelerated Profits, and Louis Navellier's Platinum Club, are not based on any actual securities trading, portfolio, or accounts, and the newsletters' reported performances should be considered mere "paper" or proforma performance results. Navellier & Associates, Inc. does not have any relation to or affiliation with the owner of these newsletters. There are material differences between Navellier & Associates' Investment Products and the InvestorPlace Media, LLC newsletter portfolios authored by Louis Navellier. The InvestorPlace Media, LLC newsletters and advertising materials authored by Louis Navellier typically contain performance claims that do not include transaction costs, advisory fees, or other fees a client may incur. As a result, newsletter performance should not be used to evaluate Navellier Investment Products. The owner of the newsletters is InvestorPlace Media, LLC and any questions concerning the newsletters, including any newsletter advertising or performance claims, should be referred to InvestorPlace Media, LLC at (800) 718-8289.

Please note that Navellier & Associates and the Navellier Private Client Group are managed completely independent of the newsletters owned and published by InvestorPlace Media, LLC and written and edited by Louis Navellier, and investment performance of the newsletters should in no way be considered indicative of potential future investment performance for any Navellier & Associates separately managed account portfolio. Potential investors should consult with their financial advisor before investing in any Navellier Investment Product.

Navellier claims compliance with Global Investment Performance Standards (GIPS). To receive a complete list and descriptions of Navellier's composites and/or a presentation that adheres to the GIPS standards, please contact Navellier or click here. It should not be assumed that any securities recommendations made by Navellier & Associates, Inc. in the future will be profitable or equal the performance of securities made in this report. Request here a list of recommendations made by Navellier & Associates, Inc. for the preceding twelve months, please contact Tim Hope at (775) 785-9416.

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