News from Asia

News from Asia Whiplashes the Market…Unnecessarily

by Louis Navellier

May 30, 2018

Trade War Compass Image

The stock market got off to a strong start last week after China and the U.S. agreed not to impose tariffs on each other. Specifically, China’s Vice-Premier Liu He said the two sides “reached a consensus, will not fight a trade war, and will stop increasing tariffs on each other.” A joint statement issued in China and Washington said China would “significantly” increase its purchases of American goods, so in the end, the financial media overreacted to trade war talk, since these tariffs were used merely as negotiating tactics.

Later on, the stock market sold off on Thursday due to news that the North Korean nuclear summit in Singapore in June had been cancelled (temporarily, as it turns out). The stock market usually rallies going into holiday weekends and last week was no exception, with the S&P rising 0.3% and Nasdaq up 1.1%. People are usually happy leading up to holiday weekends and that tends to rub off on investor sentiment.

We have a lot to be thankful for, such as the fact that the 10-year Treasury bond yield has fallen under 3% and the Fed’s FOMC minutes revealed that any inflation fears are just “temporary.” Furthermore, the fact that small-capitalization stocks in the Russell 2000 continue to exhibit tremendous relative strength is a good sign, since the breadth and power of the overall stock market is expanding. Traditionally, when the Russell 2000 leads, it is very bullish for the market, so June and July are shaping up to be very positive!

In This Issue

Bryan Perry will analyze an interesting new word from last week’s Fed minutes, and what it implies for summer market performance. After his usual jaunt down memory lane, Gary Alexander looks at corporate liquidity for clues to the market’s next big move. Ivan Martchev sees danger in the emerging markets and a delayed reaction to the dollar strength in the commodity markets. Jason Bodner advises us to watch the institutional traders more than the silly stories about news events which supposedly “move the market.” In the end, I’ll bring you a few more reasons to expect continued strong market performance in June.

Income Mail:
Two-Percent “Symmetric” Inflation in the New Goldilocks Economy
by Bryan Perry
“Damn the Geopolitics, Full Speed Ahead” (For Global Growth)

Growth Mail:
Honoring our Veterans – and the Sharp Decline in War Deaths!
by Gary Alexander
Corporate Liquidity Implies More Rallies to Come

Global Mail:
There’s a Lot More to Come in the Emerging Markets Carnage
by Ivan Martchev
A False Sense of Commodity Security

Sector Spotlight:
Look to the Institutional Buyers, Not the News Stream
by Jason Bodner
Energy is Taking a Much-Needed Breather

A Look Ahead:
More Reasons Why the Market is Likely to Rise in June
by Louis Navellier
10-Year Treasury Bond Yields Retreat Back Below 3%

Income Mail:

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

Two-Percent “Symmetric” Inflation in the New Goldilocks Economy

by Bryan Perry

There is a new “buzz word” making its way through financial markets from the minutes of the Federal Reserve’s latest meeting. Specifically, the minutes of the Fed’s May meeting said, “A temporary period of inflation modestly above 2 percent would be consistent with the Committee's symmetric inflation objective.” This added word “symmetric” sent Fedspeak gurus scrambling to dictionaries to decipher its meaning. In fact, the word “symmetric” was mentioned no fewer than nine times in the FOMC minutes!

Translated from Fedspeak, the Fed seems to be content to let inflation briefly run above its 2% target as the economy continues to recover. The use of this new “s” word may refer to their corroboration of the inflation rate from among several inflation measures. The Fed's preferred inflation gauge, the core personal consumption expenditures (PCE) index, is currently at 1.9%, while the headline rate, including energy and food prices, is at 2.0%. Fed officials also described wage pressures as “moderate,” although it noted that there has been more pressure in industries where the labor supply is tightening. Fed officials see 2% inflation as a level that sustains economic growth without putting too much pressure on prices.

A view of the 10-year Breakeven Inflation Rate chart (below) gives a glimpse of what Fed officials read from the bond market. (The Breakeven Inflation Rate represents a measure of expected inflation derived from 10-Year Treasury Constant Maturity Securities and 10-Year Treasury Inflation-Indexed Constant. The latest value implies what market participants expect inflation to be in the next 10 years, on average.)

Breakeven Inflation Rate Chart

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

There had been a measure of uncertainty that the Fed might be behind the inflation curve, however this latest fiscal policy statement should reassure equity markets that the Goldilocks economy remains robustly in place. The bond market found immediate solace in what was construed as the Fed’s sure-handedness on inflation, thus taking the 10-year T-Note yield down to 2.93% from 3.10%.

As the month of May comes to a close tomorrow, the stock market gets mixed reviews even though the major averages are set to finish a tad higher. From where I sit, I look at the varying geopolitical variables that are pulling and pushing on the market landscape – including fluid scenarios with de-nuking North Korea, putting some bite into the bark of averting a trade war with China, tightening the economic screws on Iran, the shelving of a NAFTA deal for the next Congress to tackle, and seeing the collapse of the economy of Venezuela, which just so happens to have the largest proven oil reserves in the world.

Yes, Venezuela has the largest proven oil reserves in the world, but many economists contend that years of economic mismanagement set the stage for the current disaster there. The damage was masked when oil prices were high, giving the government large resources. But when oil prices began a steep fall at the end of 2014, scarcities became common and food prices skyrocketed. Inflation could reach 2,300 percent this year, the International Monetary Fund warned in October 2017 (source: Bloomberg, October 10, 2017, “IMF Says Venezuela’s Inflation Rate May Rise Beyond 2,300% in 2018”). Children are dying from starvation in what resembles a sub-Saharan refugee camp. It’s tragic, and this past week’s undemocratic election of Nicolas Maduro, whose socialist government is shrouded in corruption, only perpetuates the crisis. Time will tell if Venezuela will move from banana republic with a lot of oil to first world status.

“Damn the Geopolitics, Full Speed Ahead” (For Global Growth)

The week leading up to the extended Memorial Day holiday weekend is typically upbeat for stocks. More confusion about the deal or no-deal with China and the initial delay of the North Korean summit hit stocks mid-week, but buyers stepped in supporting the market to where much of the losses had been pared. Then on Thursday, the meeting with Kim Jung Un was canceled, a temporary setback (it seems).

While the news of the canceled summit might cause the market to pause, the broader tone as of late has been improving, as evidenced by the market’s resilience to negative headlines. But then again, there has been a rotation of leadership that allowed the tech sector to regroup after getting de-FAANG-ed for much of the February-April timeframe. It was energy, railroads, and materials that took the lead while some past favorites (tech, financials, defense/aerospace, industrials) consolidated in earnings announcement season.

Heading into the last week of May, the FAANG stocks have reasserted themselves with only Alphabet trading off its all-time high. Several specialty retailers also provided some much-needed non-Amazon leadership in that sector, which helped fortify investor sentiment regarding consumer activity. So, despite the disappointing news surrounding North Korea, global economies continue to exhibit steady growth.

The International Monetary Fund’s April World Economic Outlook forecast cited a cyclical upswing fostered by structural change. The report stated, “The global economic upswing that began around mid-2016 has become broader and stronger. This new World Economic Outlook report projects advanced economies as a group will continue to expand above their potential growth rates this year and next before decelerating, while growth in emerging market and developing economies will rise before leveling off.”

World growth strengthened in 2017 to 3.8%, with a notable rebound in global trade driven by an investment recovery in advanced economies, continued strong growth in emerging Asia, a notable upswing in emerging Europe, and signs of recovery in several commodity exporters.

Expected Global Growth Rates in 2018 Table

The IMF expects to see global growth of 3.9% to 4.0% this year and maybe next, supported by strong momentum, favorable market sentiment, accommodative financial conditions, and the domestic and international repercussions of expansionary fiscal policy in the United States. The partial recovery in commodity prices should also allow conditions for commodity exporters to gradually improve.

Contribution to Global Growth Bar Chart

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

Against this bullish macro-economic backdrop, the primary bull trend should remain intact while still being subject to seasonality issues and geopolitical disruptions, such as what occurred recently, and the inevitable toxic brew the mid-term elections are sure to bring. The market is entering somewhat of a quiet period where first-quarter earnings season has concluded with the Fed’s FOMC meeting slated for June 13 that is highly expected to result in a quarter-point hike in the Fed Funds Rate to a range of 1.75%-2.00%.

Aside from M&A news, it is my view that there won’t be a lot of high-profile catalysts to drive the major averages to new highs, with maybe the exception of the Russell 2000, which achieved a new all-time high last week. The rotation to small-cap stocks is a direct result of the strong move up for the dollar and how small caps are finally catching up with the other indexes after lagging for all of 2017 and early 2018.

However, if market participants feel the Fed is willing to give the economic expansion more rope on inflation, we could see growth accelerate. Then there well could be a ‘symmetric’ move by all the major averages to new highs in what would be a classic summer rally into second-quarter earnings season.

Hot stocks and cold beer. Ah yes!

Growth Mail:

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

Honoring our Veterans – and the Sharp Decline in War Deaths!

by Gary Alexander

“And ye shall hear of wars and rumors of wars: See that ye be not troubled: for all these things must come to pass, but the end is not yet.” – Matthew 24:6

Sports heroes dominated the stage on Sunday, as an Australian with the unlikely name of Will Power won the Indianapolis 500, and then Cleveland’s LeBron James used his own brand of Will Power to dominate the younger, home-standing Boston Celtics to advance to the NBA Finals for his 8th consecutive season.

On Monday, however, the real American heroes dominated our memories. For my part, on my weekly radio program, I honored the vets by playing a dozen songs with a form of “Memories” in the title, from “Memories of You” to the classic Four Lads hit, “(We’ll Have These) Moments to Remember.” But the most poignant Memorial Day song was written by immigrants Harry Warren (born Salvatore Guaragna) and Al Dubin, for World War I vets who were denied a promised bonus and marched on Washington. In a 1933 Busby Berkeley movie spectacular, dozens of these forgotten vets marched as Joan Blondell sang:

Remember my Forgotten Man Image

On Memorial Day, we remember our fallen warriors. This year also marks the centennial of the 1918 Armistice that was to mark the “war to end all wars.” It didn’t work out that way, but something almost like that happened at the end of World War II. The frequency of large wars died down dramatically. We have seen far fewer large-scale wars and a blessedly huge drop-off in deaths from global wars since then.

Deaths in War Chart

These charts give the overview of the bell curve of violent death tolls in the 20th Century, but these charts tend to obscure the details since 1945, beginning with the India/Pakistan civil war, the birth of Israel, and the Cold War outbreaks in Korea (1950-53), Vietnam (1964-73), and the regional conflicts in the 1980s.

State-based Battle Related Deaths Chart

There has also been a small bump in battle deaths since 2010, mostly centered in Syria and the Middle East. Outside of that troubled region, the story has been more accurately described in the ancient warning about “rumors of wars” (in North Korea and elsewhere). There have also been elevated rumors of trade wars, which are constantly being averted or postponed through negotiations, so there are several things to be thankful for on this Memorial Day weekend – far fewer wounded warriors in the last quarter century, and far fewer wars worldwide. This is one reason why the Dow is up 12-fold since the Cold War ended.

Tonight, the show “The Americans” concludes on the FX network. The concluding season is set in late 1987, when Soviet leader Mikhail Gorbachev is visiting America for strategic arms talks. This may have been the last gasp of the Cold War. Just six months later, U.S. President Ronald Reagan visited Moscow. The Russians liked Reagan and he liked them as his “evil empire” rhetoric thawed into a veritable love fest. Here are two benchmarks of the end of the Cold War from this time of year in Reagan’s final years:

June 12, 1987 – In Berlin, President Ronald Reagan said, “Mr. Gorbachev, Tear Down This Wall!”

May 31, 1988 – In Moscow, Reagan praised the “Russian spring” of Glasnost and Perestroika, the “marvelous sound of a new openness… leading to a new world of reconciliation, friendship, and peace.”

In the 30 years since Reagan gave that talk at Moscow State University, stocks are up more than 10-fold.

Thirty Year Market Gains Table

Now, on to the outlook for today’s market:

Corporate Liquidity Implies More Rallies to Come

So far, the recent tax cuts have not generated much in the way of a stock market rally. The major tax cuts of the 1920, 1960s, 1980s, and 2003 generated major stock market rallies, since more money in the pockets of consumers and the coffers of corporations tends to feed the Wall Street money machine. There was an initial buying frenzy in January followed by a “tariff tantrum” and volatility storms since then.

Due to the very high corporate tax levels (until 2018), major U.S. corporations had retained their overseas earnings and about 15% of their overall profits overseas. The run rate for this cash savings has been $215 billion per year over the past eight years, or about $1.7 trillion since 2010, and $2.9 trillion since 2000. Corporations can now repatriate this cash at much lower tax rates and use the cash for expansion or hiring, or for dividends or share buy-backs, or mergers and acquisitions – all activities generally bullish.

The 2018 buy-back activity has been running at a $600 billion annual rate, which would be an annual record (the previous four-quarter record was $589 billion for the year ending 1Q-2016). Economist Ed Yardeni said last Tuesday (in “Some Like it Hot”) that “Over the past four quarters through Q1-2018, dividends totaled a record $436 billion. If buybacks are on track to exceed $600 billion this year, then total cash distributed to shareholders will easily exceed $1.0 trillion for the first time on record.” 

We’ve already seen that first-quarter earnings rose 24% over 2017’s first quarter, more than double the pre-tax-cut earnings estimates, and profit margins hit a record high 12%, up from 10.9% the previous quarter. Overall S&P 500 net operating income rose 25.4% year-over-year to a record $1.2 trillion last quarter. These huuuge Trumpian numbers won’t be repeated, but so what?  They have opened the gates for double-digit gains half that size to follow, and you can’t sneeze at 10% to 12% in following quarters.

The U.S. economy only grew at about 1/10th the rate of corporate earnings in the first quarter – +2.3% GDP vs. +24% earnings, but that’s healthy. We don’t want a runaway (inflationary) growth spurt this late in the cycle. Moderate growth means the expansion can last longer in Goldilocks style, until 2020 or later. The further out a recession is delayed, the longer this bull market can last. (They don’t die by the clock.)

Global Mail:

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

There’s a Lot More to Come in the Emerging Markets Carnage

by Ivan Martchev

The term “emerging markets” covers a rather large generalization. They are all different, but they are generally differentiated from developed markets by faster economic growth (from smaller per capita bases), faster demographic growth (in some cases), and in better long-term returns with higher volatility.

iShares MSCI Emerging Markets Exchange Traded Fund Chart

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

The major equity benchmark index for the emerging market space is the MSCI Emerging Market Index which is represented by the iShares MSCI Emerging Markets ETF (EEM). EEM had a good run (nearly doubling) from the January 2016 lows that were the climax of China hard landing fears, to a January 2018 all-time high. For all intents and purposes, I think the MSCI Emerging Markets Index will fall back into its long-standing range and ultimately take out those January 2016 “China hard landing” lows when the hard landing in China actually arrives. I believe that is a matter of “when,” not “if.”

Sovereign Yields Bar Chart

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

The comparison of sovereign yields (above) and emerging-market currency performances (below) show that we are beginning to experience the “higher volatility” part of the emerging markets universe, which started in the currency and bond markets – where Turkey and Argentina are clear standouts since April – which will surely spill into the equity markets. I do think that China is the big unknown here as there are capital controls which are not very good, as it has lost $1 trillion out of its $4 trillion foreign exchange reserves at its peak between mid- 2014 to mid-2016, and those capital outflows have now resumed.

Emerging Markets Currency Performance versus United States Dollar Bar Chart

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

In 1997-1998, it was the Asian Crisis that spilled over into a Russian debt default due to the collapsing oil price, since that was the primary contributor to their federal budget. In 2008, we had the Great Financial Crisis that emanated in New York and was centered on various mortgage structures that were built on the fascinating strategy of manufacturing AAA-rated CDOs from subprime mortgages! A decade later, in 2018, we have the massive expansion of dollar borrowing in emerging economies that will result in a gigantic synthetic dollar short squeeze catalyzed by the Federal reserve policy of quantitative tightening. (For more, see the St. Louis Fed report, “Global Debt Is Rising, Especially in Emerging Economies.”)

The U.S. Dollar Index closed above 94 last week and I think it is only a matter of time before it crosses 100, which may happen well before the end of the year. Currency trends tend to build up pressure and then react violently in the direction of the fundamental trajectory of developments. In many respects, the 2017 decline in the dollar was driven by political events in the eurozone that will not be present in 2018. In fact, we have populist Eurosceptic parties forming a government in Italy, which is the reverse of the pro-EU election victories in 2017 that helped the euro recover. (For more, see my Marketwatch column, “Ivan Martchev’s 2018 predictions: Gold will sink, and the dollar will rally.”)

The issue in any financial crisis is that there are multiple factors reinforcing each other, which is how a crisis often gathers steam. We are at the very early stages of the present emerging markets crisis, which this time is driven by rampant dollar borrowing. Not every emerging market will be affected the same way – with Russia and India being the more fiscally responsible examples – but I do think that China is the biggest unknown. Capital controls help for the time being, but as we saw in the Asian Crisis 20 years ago, capital controls work until they don't. Near the end of the currently brewing emerging markets crisis, China may very well opt to devalue similar to the way it did in 1993 to the tune of 34%.

A False Sense of Commodity Security

At the onset of this dollar surge, we have seen very little spillover into commodity prices as it has been only a month or so since the dollar turned notably upwards. I think that divergence will correct itself with the dollar being up a lot more and the commodity prices reacting negatively, as they historically do, particularly when the selling in the currency and bond market spills over into the local economies as capital flight accelerates in places like Turkey, Argentina, and China.

gsci commodity index versus united states dollar chart

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

I am a little puzzled at the price of oil, where supply is plentiful, yet we saw the price appreciate in the seasonally weak September-March period. We are in the seasonally strong period for oil prices at the moment, but I doubt that oil can keep rallying with the dollar strength likely to accelerate, in my view.

An added factor may be the pull out of the Iranian nuclear deal by the U.S., combined with Israeli saber rattling. It is understandable that oil traders might be worried that any military escalation with Iran will put pressure on oil prices in the seasonally strong period of the year. Still, the Israelis have responded with air strikes and diplomatic shuttles to Moscow, the major power broker in Syria. The Russians have decided that the best course of action is to solidify their position in Syria and demand that only the Syrian Army is present on the Israeli and Jordanian borders, despite some remaining areas under ISIS control.

I think the Iranian factor in the price of oil has peaked for the time being and with a lack of military confrontation with Iran, it’s the dollar and emerging markets pressures that will drive the price of oil. I don’t think the divergence of firm commodity prices and a surging dollar will continue for much longer.

Sector Spotlight:

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

Look to the Institutional Buyers, Not the News Stream

by Jason Bodner

Did you ever notice that sometimes you are presented with an alternative way of thinking that seems so logical, it should have been obvious in the first place? Consider the speed camera lottery in Sweden. The camera tracks your car and automatically enters you into a lottery if you drive under the speed limit. The jackpot is paid out from the fines collected from all the speeders. The average speed dropped 22%.

Sweden Speed Limit Lottery Image

I think an idea like that makes perfect sense. “Incentivize people to do right,” as opposed to punishment. It makes so much sense that I wonder why it’s not more widely adopted. This is how I felt when I began to look at the market through the lens of what big institutions are doing. To me, if there is huge accumulation in a sector, then the logical place to look for winners is in the best performers of that sector. This became my leading school of thought. Now compare this type of analysis to the conventional “follow the news” method of trying to understand markets. To me, it’s a no-brainer – just like a speed lottery.

Looking at leading and lagging sectors is typically where we will find the births of new trends and deaths of old ones. This usually happens well in advance of anyone on CNBC talking about it. For instance, Information Technology began perking up and seeing heavy institutional buying in November 2016. The news was still squarely focused on the 2016 presidential election results and the geopolitical climate, but those who paid attention caught the huge bull trend in Infotech. The leaders of the sector broke out ahead of the whole sector and lead their groups higher. XLE, a proxy for Infotech, shot up over 45% since then. The same types of sector leadership (and leadership within the sectors) have happened across all sectors.

Technology Select Sector SPDR Exchange Traded Fund Chart

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

So, what is leading and lagging now? Energy has been front and center since April. We have seen leading stocks emerge in Oil & Gas Exploration stocks and refiners. These stocks led Energy higher, and we saw an immense push upward, but I said in last week’s issue that the sector was overbought and overheated. I expected a near-term drop, and that’s exactly what we got. Energy this past week was rewarded with the dubious distinction of “worst” sector. The S&P 500 Energy Sector was down -4.54% for the week.

Those that took the lead were the defensive rate-sensitive sectors. Utilities and Real Estate were the two strongest sectors by far with +3.08% and +2.01% performances, respectively. Information Technology and Consumer Discretionary were the next two strongest sectors. These are sectors I personally like to see leading the market higher, as they are strong engines for growth.

Energy is Taking a Much-Needed Breather

Energy is taking a much-needed breath during this wave of profit taking. As the Memorial Day weekend marks the unofficial start of summer, it will be interesting to see how the sector performs in the typically strong summer months. Energy, due to its close tie with physical commodities, is cyclical and the hot summer usually swells energy demands for driving on vacations or cooling homes. Perhaps this small energy reset will just be a burp that the sector needs to continue its trajectory higher. As we can see, despite the violent down-week, the Energy sector still remains positive for the month-to-date, and the sector is still +9.09% for the last three months – the strongest performer by far in that time span.

Standard and Poor's 500 Sector Indices Changes Tables

Recent sector performance helps illustrate the fact that, despite an overall drop in volatility, we are still in a choppy market. The VIX has plunged from the high 30’s in February, through the mid 20’s in March, to just over 13. We have seen buying resume in leading stocks and sectors. This bodes well for the bull case, but we are also seeing some wild week-to-week changes in the sectors. The market is still a choppy place.

Sometimes if we approach the same thing from a different vantage point, the outcome can seem more obvious than the traditional way. Speeding is punitive in the States. In Sweden, it’s a game of seeking a reward for doing the right thing. The media often focuses on creating headlines to explain stock markets. Focusing on what big institutions are buying can offer a unique perspective. This buying can be observed directly though sector rotations. Energy has been hot for months and this past week it was punished.

Is this the beginning of the end for Energy’s run? Or is it just a breather during a long, hot run? Does what the news says jibe with what we are seeing in terms of institutional buying and selling? Does the headline fit the backdrop of sector leaders and laggards? The answer may depend on the perspective and the way we think about it. It’s all about what you do with the information you analyze.

It may be like Jimi Hendrix said, “Now if 6 turned out to be 9, I don't mind.”

What will you see?

Jimi Hendrix Quote 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.*

More Reasons Why the Market is Likely to Rise in June

by Louis Navellier

On Tuesday, Trim Tabs Investment Research reported that the stock buy-back boom continues at a relentless pace with U.S. companies announcing a whopping $6.1 billion per day in buy-backs after their first-quarter earnings announcements. When the fourth-quarter announcements were released in January and February, Trim Tabs pointed out that stock buy-backs hit an amazing $6.6 billion daily pace. Trim Tabs concluded by saying, “The buyback boom early this year confirms our view that the main use of corporate America’s tax savings will be takeovers and stock buybacks rather than capital investment or hiring.” I should add that one of my largest stock holdings, Micron Technology (MU), announced last week that it would expand its buy-back program by another $10 billion, so the stock surged in the wake of this announcement. Another large stock holding, Align Technologies (ALGN), announced that it is increasing its buy-back program by $600 million, so the stock surged in the wake of this announcement.

(Please note: Louis Navellier does currently hold a position in MU and ALGN. Navellier & Associates does currently own a position in MU and ALGN for client portfolios and mutual funds).

Another reason why June should be favorable is the rise in small-cap stocks combined with the annual realignment of the Russell indexes. The Russell 2000 hit another new high last week. The recent small-to-mid capitalization stock melt up is being caused by a strong U.S. dollar that diverts investors from large multinationals to domestic stocks. Even without the strong dollar as a tailwind, the annual Russell realignment in June often propels many small-capitalization stocks significantly higher.

The “melt up” in small-capitalization stocks is the strongest in at least two decades and is expected to accelerate in June as institutional investors (including our company) position their portfolios ahead of the stocks that they expect to be added to the Russell 2000 and 3000 indices. Several years ago, I remember that some of the small stocks that Russell added surged over 19% during the week of the realignment. These oversized surges were possible due to the fact that the liquidity in many small-cap stocks is so thin.

I should also add that the MSCI indices are also expected to add some Chinese blue-chip stocks in June, so I expect a surge in many of those stocks as well. The flow of funds into international and emerging market stocks in 2017 was simply incredible. However, crude oil prices often cause investors to flee emerging markets, so that exodus is clearly underway. Furthermore, considering that there is a growing currency crisis in several emerging markets – including Argentina, Burma, Cambodia, Indonesian, Iran, Paraguay, Turkey, Uzbekistan, Vietnam, and others – is also accelerating the exodus from emerging market investments. When there is an international currency crisis, the oasis currencies are the British pound, the Chinese yuan, the euro, Japanese yen, and the U.S. dollar, simply since these currencies have tremendous liquidity, so this capital flight is also good news for the many blue-chip Chinese ADRs.

10-Year Treasury Bond Yields Retreat Back Below 3%

Another reason for strong markets in June is that Treasury bond yields have suddenly stopped rising. The 10-year Treasury rate fell from 3.06% on Tuesday to 2.93% on Friday, mostly due to the Wednesday release of the minutes from the latest Federal Open Market Committee (FOMC). Rates fell because the FOMC comments about inflation were dovish, as the Fed made it clear that inflation has been subdued and if inflation perks up above its 2% target rate in the upcoming months, it may be temporary.

The FOMC said that only a “few” FOMC members expected inflation to rise above its 2% target. Translated from Fedspeak, this means they expect to see inflation fizzle out in the upcoming months. The bottom line is that the FOMC is not worried about runaway inflation, which means that further interest rate hikes beyond June may not be as certain as many Wall Street analysts fear. That change in expectations caused market rates like the 10-year Treasury bond to decline after the FOMC minutes were released.

The other news that may have helped put downward pressure on Treasury bonds was that the Commerce Department on Wednesday announced that new home sales declined 1.5% in April to an annual pace of 662,000. The average price of new homes rose to $407,300 in April, an all-time high. The supply of new homes for sale declined to a 5.4-month supply in April, down from a 6-month supply in March, so as inventories tighten up, prices tend to rise. Affordability remains a long-term concern, but as long as inventories remain tight, median prices are expected to rise. Zillow also reported on Thursday that median home sale prices rose 8.7% in the past year, which is the fastest pace in 12 years, to $215,600.

On Friday, the Commerce Department announced that durable goods orders declined 1.7% in April, due largely to a 29% decline in commercial aircraft orders (after a 61% surge in March). Excluding volatile transportation orders, durable goods orders rose 0.9% in April. Also notable is that vehicle sales rose a robust 1.8% in April. Overall, U.S. manufacturing remains healthy, which bodes well for GDP growth.


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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 Blue Chip Growth, Louis Navellier’s Emerging Growth, Louis Navellier’s Ultimate Growth, and Louis Navellier’s Family Trust, 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. 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. Navellier & Associates, Inc. does not have any relation to or affiliation with the owner of these newsletters. As noted above, there are material differences between Navellier Investment Products’ portfolios and the InvestorPlace Media, LLC, newsletter portfolios. In most cases, Navellier’s Investment Products have materially lower performance results than the InvestorPlace Media, LLC newsletter portfolios and advertising materials claim to have. The InvestorPlace Media, LLC newsletters and advertising materials typically contain performance claims that can significantly overstate the performance results compared to actual results for similar Navellier Products.

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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