Old Worries End

Old Worries End, New Worries Emerge, But Stocks Keep Rising

by Louis Navellier

February 20, 2019

The stock market celebrated last week over a bipartisan budget deal reached on Tuesday, making another federal government shutdown unlikely, despite the fact that the President was not happy with the resulting agreement. Like most such Congressional bipartisan agreements, both sides were somewhat perturbed, especially since the President subsequently declared a “state of emergency” to fully fund his border wall.

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Furthermore, it continues to be widely reported that the Chinese trade negotiations are proceeding well enough that the new tariffs that were to be imposed on March 1st will not be implemented. With the China trade deal fears largely dissipated and a shutdown off the table, the stock market staged a big relief rally.

Speaking of politics, if you are looking for something to worry about, Britain’s March 29th exit from the European Union (EU) is shaping up to be a potential disaster for both the British pound and the euro. Ironically, Brexit uncertainty is good for the U.S., since the U.S. dollar is the beneficiary of international capital flight, which continues to suppress Treasury yields. In my management company’s top-rated ETF portfolios, we are invested in two Treasury ETFs staggered along the yield curve.

Ironically, the last time our top-rated ETF portfolios were parked in Treasuries was 2016, when we sold Treasury ETFs the day after the surprising Brexit vote that caused the 10-year Treasury yield to plunge to 1.36% in a global flight to quality. We hope to profit from Brexit again if Treasury yields move lower.

In This Issue

Bryan Perry says the market is ignoring some pretty huge debt numbers, as well as calls for a market “retest.” Gary Alexander looks at 80 years of Presidential election cycles and sees a good chance for a double-digit market gain this year. Ivan Martchev takes a deeper look at a stock we don’t like much, Tesla, while Jason Bodner reviews the growth-oriented sectors leading this recovery. Then, I will return to analyze some recent positive trends in the political landscape and the Fed’s new inactive policies.

Income Mail:
Calls for a Market Retest are Falling on Deaf Ears
by Bryan Perry
The Market is Ignoring Massive New Debts – For Now

Growth Mail:
Expect Another Double-Digit Pre-Election Year Market Gain
by Gary Alexander
Handicapping 2020 – Waiting for the “Adults” to Arrive

Global Mail:
Is Tesla Ripe for a Fall?
by Ivan Martchev
Model 3 or Die

Sector Spotlight:
It Helps to Be Both Good AND Lucky
by Jason Bodner
Growth Sectors Continue to Lead the Pack

A Look Ahead:
America is Finally Looking Forward, Not Back
by Louis Navellier
The Economic News Continues to Argue Against Rate Increases

Income Mail:

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

Calls for a Market Retest are Falling on Deaf Ears

by Bryan Perry

The stock market is in “giddy-up” mode, posting a truly impressive eight-week winning streak that has restored almost three-fourths of the fourth-quarter losses. Funny how a retooled Fed policy and a more accommodative trade narrative can turn market lemons into lemonade. And while fourth-quarter sales and earnings are also worth crowing about, those numbers will likely take a fairly sizeable haircut in the current quarter and further out, due mostly to tougher year-over-year comparisons.

The S&P 500 is challenging its next overhead level of resistance at 2,800, where cries of an “overbought” market are sure to emerge. In fact, CNBC’s Steve Grasso reported last Friday that Goldman Sachs was reporting large year-to-date outflows, despite the run up for stocks.

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

Apparently, January 25th saw the largest single-day outflow from the aggregated funds of the SPDR S&P 500 ETF (SPY), Vanguard S&P 500 ETF (VOO), and iShares Core S&P 500 Index (IVV) on record. That statistic initially sparked some “canary in the coal mine” chatter, but it was later thought to be just a large institutional rebalancing of portfolio weighting out of equities and into bonds.

What’s interesting is that, despite those outflows, the S&P 500 closed higher on January 25th. Since then, net inflows and outflows have been fairly balanced, and the market has rallied strongly.

Investors that have fought the Fed and fought the tape or have been spooked by all the bearishness put forth by the financial media have truly missed out on a bonanza, and with momentum still very much in favor of the bulls, it would not surprise me to see a jump in inflows over the next couple of weeks as the “FOMO” (fear of missing out) crowd wanders back in and takes their position.

The Market is Ignoring Massive New Debts – For Now

Even though the major averages are trending back towards their previous highs from early October, some of the structural issues that I have talked about in prior columns are starting to get more attention. While the economy is expanding and unemployment is at historical lows, a record seven million Americans are 90 or more days behind on their auto loan payments (source: Fortune.com, February 12, 2019).

Within the various consumer debt categories, student loan debt currently has a hold on the #2 spot (behind mortgage debt), ahead of credit cards and auto loans. As of mid-2018, over 44 million borrowers owed more than $1.5 trillion in student loan debt (source: Forbes: “Student Loan Debt Statistics in 2018 – A $1.5 Trillion Crisis”). Sheila Bair, the former head of the FDIC, described the student debt problem in Barron’s last year by saying that nearly 20% of those loans are already delinquent or in default. That number could balloon to 40% by 2023, according to a report by the Brookings Institution.

The “buy now, pay later” syndrome that Americans have come to embrace is slowly creeping higher as a drain on household budgets. Everything from furniture, electronics, clothing, medical expenses, travel, eating out, and leisure are being paid for by use of credit cards in an ever-increasing trend. While they offer an artificial bump to people’s expectations for the standard of living they aspire to have, in reality debt is a long-term drain on the bank account. More Americans forego what they can afford now, in cash, but instead choose to buy whatever they want, if they think they can afford to make the payments.

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

One area that rarely gets talked about is the underfunded state pension and the looming impact of what 10,000 baby boomers retiring every day has on pension funds. Moody’s Investors Service recently estimated that public pensions are underfunded by $4.4 trillion. As of January 1, 2019, every state in the Union has an underfunded pension, the worst of which is in New Jersey, where only 30.9% of the state’s pension fund is funded, with a total pension shortfall of $168.2 billion being the largest in the nation (source: MSN.com, December 17, 2018).

The Chicago Tribune recently wrote about how the decision to reduce the expected-return assumption from 7.5% to 7.0% for the Illinois Teachers Retirement System resulted in the governor calling for approximately $400 million in additional taxes. If a simple reduction of 0.5% in expected annual returns amounts to a $400 million additional tax bill, then something along the lines of a 3% return in a slow economy would imply the need for $5 billion in additional taxes on the citizens of Illinois. The following chart shows how much in taxes needs to be raised for each half-a-percentage-point in lowered returns.

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

And then there is the problem of the rising cost of healthcare, which now consumes one in five American dollars, or $4.4 trillion of the $22 trillion in U.S. GDP, according to www.healthcommentary.org. High health care bills are also the leading cause of personal bankruptcy in America. An aging population that is living much longer is now colliding with the cost of expensive drugs and high-tech treatments and a society that demands premier healthcare for everyone. This is a hard topic to diagnose, but if America moves toward a single payer, the big health insurance companies will be the next “big short,” for sure.

The 2019 federal budget is forecast to be around $4.4 trillion, with only $3.4 trillion in estimated revenue – creating a $985 billion annual deficit – and that does not take into account what could be a $1 trillion infrastructure bill on the way. In fact, according to a New York Times article, “The federal government’s annual budget deficit is set to widen significantly in the next few years, and is expected to top $1 trillion in 2020 despite healthy economic growth, according to new projections from the nonpartisan Congressional Budget Office. The national debt, which has exceeded $21 trillion, will soar to more than $33 trillion in 2028, according to the budget office.”

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

So, while these topics are obviously not of any great importance to the reinvigorated stock market at this moment, they are certainly growing into trends that will be difficult to reverse in the near future, if left unchecked. America’s economy ended 2018 valued at $20.4 trillion, adding $1 trillion from 2017, which sounds solid on the surface. There is a lot of leverage in growing that year-over-year number.

For now, the U.S. stock market seems to ignore rising levels of consumer, corporate, state, and federal debt. This condition might continue for who knows how long, but it’s my view that extreme debt levels contributed greatly to ending the bull markets for stocks in Japan, Europe, and China, and that’s a template we should all pay attention to.

Growth Mail:

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

Expect Another Double-Digit Pre-Election Year Market Gain

by Gary Alexander

The President’s Day break seems to be a propitious time to point out that the pre-election year has been the best historic year since 1940 in the stock market, a winning year for 18 of the last 19 election cycles, up an average 15%, and we’re up 11% so far this year, so there’s no reason to think 2018 is an exception.

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Since 1940, pre-election years have delivered more than twice the average gains of any other year in the election cycle. Why? Pre-election years tend to rise more than most years since Americans are usually optimistic about the “hope and change” that new candidates bring in the months before an election.

The last pre-election year, 2015, was an anomaly since the presumed winners in 2015 looked like a rather dismal re-run between the third Bush (Jeb) and the second Clinton (Hillary), neither of which aroused much enthusiasm – even in their own Party, much less the population at large. To add to the gloom in 2015, U.S. GDP slowed to a snail’s pace (+0.7%) in the second half of the year, hence a small -2.2% decline in the Dow in 2015. That malaise eventually led to an unexpected victory for Donald Trump.

Handicapping 2020 – Waiting for the “Adults” to Arrive

As I read the Constitution over this President’s Day weekend, Article II painted a fairly easy picture of the President’s job. His tasks are mostly ceremonial: He is an appointer of various offices, pardoner of selected miscreants, communicator in an annual State of the Union talk, commander in chief (not in the field, but as a civilian controller of armed forces), and he can make treaties, with 67% Senate approval.

In the last century, however, we have wanted more of a king, an all-powerful imperial President, doubling as the “leader of the Free World,” operating well outside the Constitutional bounds. This time around, we face the prospect of up to 20 Democratic hopefuls in 2020, with the first announced candidates calling for radical changes far outside the Constitution’s enumerated powers for either Congress or the Presidency:

  • Medicare for All (proposed by Senators Bernie Sanders, Kamala Harris, Elizabeth Warren, and 13 other Senators) would replace all private health insurance with a federally-administered single payer. Some bureaucrat 30 to 3,000 miles from your doctor would decide what drug to pay for, what care to deliver, and how much to pay. Private insurance would be banned. The program would cost at least $3.5 trillion a year – more than doubling all current spending, doubling taxes.
  • The Green New Deal (proposed by Rep. Alexandra Ocasia-Cortes and endorsed by 70 other Representatives and four Presidential candidates) calls for the elimination of fossil fuel energy production by 2030, eliminating 99% of all cars and airplanes, the gutting of virtually every building in America, not to mention free education for life, free housing, free food (but no beef!)
  • A Corporate New Deal (proposed by Elizabeth Warren) calls for businesses with over $1 billion in annual revenues to make employees 40% of board directors, while requiring outside governors to insure that the company provides vague “benefits” to society beyond mere profits and revenue.

These programs and others include a guaranteed job for all and vastly higher taxes. Ms. Ocasio-Cortes favors 60% to 70% tax rates for the “tippy-top” taxpayers (yes, that’s her quote from 60 Minutes). Mr. Sanders wants to raise the top death tax rate to 77%. The House Ways and Means committee wants to raise the payroll tax to nearly 15% (14.8%), which comes on top of federal, state, and local income taxes. Ms. Warren wants to add a 2% wealth tax on assets above $50 million and 3% on assets above $1 billion.

There are a lot more programs for bringing the American economic engine to a halt, but these comprise a fair sampling of their opening offers. This, of course, puts the Republicans in the role of trying to save capitalism from the plundering hands of the kleptocrats. If one of these many socialist candidates wins in 2020, we can expect a recession and market crash in late 2020 or early 2021, but if some adult enters the party from stage left – perhaps Joe Biden or even Howard Schultz – he can lend some sanity to the race.

Joe Biden has been known to say some very silly things when schmoozing for votes, but he certainly comes across as far more adult-like than the army of other Presidential choices facing us these days.

Global Mail:

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

Is Tesla Ripe for a Fall?

by Ivan Martchev

The stock market’s recent strength has lifted a lot of stocks, especially those in the wildly popular NASDAQ 100 index. However, we expect that at least one flagship stock in the Nasdaq 100 will falter in the upcoming months, namely Tesla (TSLA).

I have to clarify that this is also the view of Louis Navellier, the CIO of Navellier & Associates.

For the record, we are fans of electric vehicles like Audi E-tron and Porsche Taycan. The VW Group (Audi, Bentley, Bugatti, Lamborghini, Porsche, Seat, and VW) will be making the most electric vehicles in 2020. They are widely expected to be less expensive and of higher quality than Tesla’s comparable models. In fact, Tesla recently curtailed production of its expensive S & X models due to increasing competition from quality competitors, including Audi, Jaguar, Mercedes, Porsche, and Volvo.

To be fair, it is not uncommon for a younger company to lose money. Years ago, the more sales Amazon had, the more money it lost. Until the third quarter of 2018, when Tesla reported strong profits, it too was caught in a “rising sales, rising losses” cycle, but I think it’s wrong to think of Tesla as the next Amazon.

Amazon’s CEO Jeff Bezos spent money like a drunken sailor in the first five years of being public in order to get a competitive advantage in Amazon’s distribution network. Bezos understood that no brick-and-mortar business could ultimately equal his lower costs, despite the big initial investment. Walmart, which is the largest retailer in the world to this day, cannot match Amazon’s distribution capability when it comes to home deliveries. I suspect Walmart will get a lot better at home deliveries as time goes by, but Amazon already has a large and happy customer base that will be difficult to convert. But Tesla does not have any competitive advantages in the automotive industry the way Amazon has in the world of retail.

(Navellier & Associates does not own Tesla in managed accounts nor in our sub-advised mutual fund. Navellier & Associates does own Amazon and Walmart in managed accounts and our sub-advised mutual fund.  Ivan Martchev does not own Tesla, Amazon, or Walmart, personally.)

A number of bottom-up investors see trouble on the horizon. Famed short-seller Jim Chanos is betting against the stock and has been very vocal about his position (see August 27, 2018 Marketwatch article, “‘The corporate-governance disaster that is Tesla continues,’ says one of the fiercest critics of Musk and company”). Elon Musk is fighting back and playing dirty in the meantime. He engineered quite the short squeeze in the summer of 2018 with tweets that he had secured financing for the company to go private, a statement which precipitated a fraud charge by the SEC and a large fine. (For more see October 3, 2018 Marketwatch article, “SEC settlement forces Tesla to give Elon Musk adult supervision.”)

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

Model 3 or Die

Tesla is now essentially betting everything on its Model 3, which is an attractive vehicle, but it is also unfortunately characterized by quality problems and poor internal design that complicates manufacturing. For example, there are 12 structural aluminum components in a Model 3 front fender vs. three in most modern cars, so the Model 3 requires more labor and energy to manufacture. Tesla is anticipated to have a growing glut of Model 3 vehicles and recently cut the price by $1,100 per vehicle to stimulate sales.

Too many Teslas have been catching on fire due to battery problems. Tragically, two of Louis’ daughter’s classmates were burned alive last year in a tragic Model S accident in Fort Lauderdale, which the NTSB is investigating. In the Fort Lauderdale incident, the car’s lithium-ion battery ignited twice more after the initial fire, as the Tesla Model S sedan was being loaded onto a tow truck and again at a storage yard. For a car using no gasoline, catching fire three times in a single accident sure does not sound safe.

One problem is that the Teslas are wired to accelerate faster than the Audi and Porsche electric vehicles, but it is bad for lithium batteries to get too hot under extreme acceleration. Tesla’s “ludicrous mode,” which is used to accelerate quickly, overheats lithium batteries and shortens their battery life.

VW Group rejected the dangerous “round” lithium battery cells that Tesla continues to use, and its new mission statement is to quickly surpass Tesla’s market share with higher-quality vehicles that utilize safer as well as longer-lasting lithium batteries. Both VW Group and GM will soon be making higher quality and cheaper electric vehicles than Tesla, so it is not inconceivable that Model 3 sales will keep falling.

Taking all of these issues into consideration, I think the odds are stacked against Tesla. I think the stock is a short, but not for the faint of heart. On top of all this, there is the economic cycle to worry about as Tesla has never operated at any scale during an economic recession. (The present U.S. economic expansion will be the longest in history in July 2019, running at over 10 years.) 

Tesla is still a luxury car maker at a time when competition is intensifying, and its low-end strategy has not yet completely paid off. If there is a recession in the U.S. in the next couple of years, Elon Musk will find out the hard way that selling a premium product in a recession may cause a new stagnation of sales at Tesla, which is just today breaking cash flow positive, to become a heavily money-losing proposition.

Sector Spotlight:

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

It Helps to Be Both Good AND Lucky

by Jason Bodner

They say it’s better to be lucky than smart. On July 28, 1945, a B-25 bomber crashed into the Empire State Building, in New York City. Betty Lou Oliver was the elevator operator on the 80th floor. When the plane hit a floor below, Oliver got burned severely and needed immediate medical attention. Rescuers put her in the elevator, but the cables snapped, sending Betty Lou plummeting 75 floors to the basement of the building. Somehow, Ms. Oliver survived and holds a Guinness World Record for the longest survived elevator fall. She was back to work five months later. She survived the same fall that killed King Kong.

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While that’s undeniably lucky, you could consider yourself a lucky one if you didn’t sell stocks out of desperation late last year. Last Friday morning I saw headlines that Asian markets were down on renewed fears of a slowing U.S. economy and slowing global trade. It’s almost like there is a bin of excuses that get recycled every now and then to try and attract fear-based clicks. The fact is, we are nearly eight weeks off the Christmas lows, with yet another week of strength in the broadly rallying market indexes.

Growth is clearly coming back in the main indexes. The Russell 2000 and NASDAQ are the biggest winners with the broader-based S&P 500 and Dow Industrials “lagging.” I put lagging in quotes because the S&P 500 is up 18.06% vs. 20.66% for NASDAQ, hardly a “laggard” by normal definitions.

Small caps are leading again with the Russell 2000 posting a +4.17% gain last week. The 1-week return of the Russell 2000 Growth is +4.82%. The S&P Small Cap 600 also posted a strong +4.35%. So, growth appears alive and well, blossoming from its drubbing last year. Growth was the whipping boy for those releasing their anxiety over the “global growth faltering” excuse from late last year. Those headlines worked from August to December 2018, so I must at least give the news outlets credit for trying.

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

Growth Sectors Continue to Lead the Pack

Sectors to pay attention to have been Energy, Industrials, Consumer Discretionary, and Info Tech. Again, these are growth-laden sectors, not safe-harbors for bears seeking defensive plays. In fact, some defensive sectors are lagging. Utilities are up only +7.64% from their Christmas lows – and the only sector to show a negative performance last week. It’s crazy to say this, but the third-worst performing sector since Christmas – Health Care – has earned a +14.93% scorecard. What crazy times we live in.

The story is: Unprecedented selling met with unprecedented buying. I remember having conversations right around December 24th where I was told, “This time feels different; I don’t see a V-shaped recovery from this depth. I’d be surprised if that happens.” After two decades, I still feel the market is going to do what it is going to do and the best thing to do to orient oneself is read the data that the market gives you.

December said we were oversold, and our data said we would rally. Now our data says we are overbought but we can stay that way for a long while. Our signals have a time range component in them, that is, we look at roughly a three-month high and low to determine a shift or continuation of near-term trends. A three-month high is way easier to violate right now than a three-month low. What this means is that more time – at least another four weeks must pass, in my opinion – for us to start getting significant sell signals.

So where do I stand? I continue to be bullish on U.S. equities, long term. Near-term, I expect a give-back, but we can cruise on bullish momentum for quite a while. The January effect on big investors needing to deploy capital started the snowball rolling for a melt-up. It’s pushed into February, and we have further wind at our backs via earnings. Sales and earnings are largely working, and we are seeing many surprises.

According to FactSet Earnings Insight for February 15:

  • Earnings Scorecard: For Q4 2018 (with 79% of the companies in the S&P 500 reporting actual results for the quarter), 70% of S&P 500 companies have reported a positive EPS surprise and 62% have reported a positive revenue surprise.
  • Earnings Growth: For Q4 2018, the blended earnings growth rate for the S&P 500 is 13.1%. If 13.1% is the actual growth rate for the quarter, it will mark the fifth straight quarter of double-digit earnings growth for the index.
  • Earnings Revisions: On December 31, the estimated earnings growth rate for Q4 2018 was 12.1%. Seven sectors have higher growth rates today (compared to December 31) due to upward revisions to EPS estimates and positive EPS surprises.
  • Earnings Guidance: For Q1 2019, 59 S&P 500 companies have issued negative EPS guidance and 19 S&P 500 companies have issued positive EPS guidance.
  • Valuation: The forward 12-month P/E ratio for the S&P 500 is 16.0. This P/E ratio is below the 5-year average (16.4) but above the 10-year average (14.6).

With 70% of companies beating earnings and more than 60% beating sales, and five straight quarters of double-digit earnings growth and six sectors revised upwards from December 31, it’s no wonder we are hearing some “negative guidance” as companies are pricing in a more realistic impact of possible growth slowing, but the S&P’s P/E ratio is below its 5-year average. These are not weak stats by any measure.

It would have been very unlucky to have sold at the 2018 lows. The lucky ones held on and are more-or-less back to where they were. Tolstoy said, “The two most powerful warriors are patience and time.”

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A Look Ahead

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

America is Finally Looking Forward, Not Back

by Louis Navellier

With 2020 fast approaching, the news media will finally start focusing more on the Democratic Presidential challengers in 2020, rather than dwelling on all the President’s alleged past mistakes.

It is also now widely being reported that special counsel Robert Mueller’s investigation is winding down. ABC News reported last week that a final report may never be issued. Furthermore, the Senate Intelligence Committee is in the process of concluding its investigation into the 2016 election and has not uncovered any direct evidence of a conspiracy between the Trump campaign and Russia.

As a result, President Trump’s political enemies are “reloading” via the House of Representatives, which is expected to investigate his banking relationships, seek access to his tax returns, and continue to try to taint his legacy. However, since past allegations have not been proven, many in the media are baffled as well as embarrassed, so any new House investigation may not receive as much media attention.

The 2020 Presidential campaign is already underway, so the folks in Iowa and New Hampshire will likely be courted by a perpetually expanding list of candidates. Americans tend to like candidates that inspire them, so it will be interesting to see what inspirational theme “sticks.”  Joe Biden’s brother lives down the street from me and I expect that Joe will enter the race when there is a Democratic theme that emerges as a potential winner. The current themes of a “Green New Deal” and “Medicare for All” have not gained traction, so Biden is wisely waiting for other candidates to test various themes. I fully expect that the 2020 election will be decided by swing states, especially Michigan, Ohio, Pennsylvania, and Wisconsin.

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The fact that General Motors recently announced white collar layoffs and is shutting its manufacturing plant in Lordstown, Ohio will likely be pivotal in the 2020 campaign, since GM continues to expand its operations in China and Mexico. It will be interesting to see how fast the 4,000 laid off GM workers will find employment. I suspect that many will easily find work, but there is no doubt that Lordstown, Ohio will suffer from the plant closure, so Ohio may become the swing state that determines the 2020 election.

The Economic News Continues to Argue Against Rate Increases

In the meantime, Treasury yields remain remarkably stable and the Fed is not anticipated to raise rates anytime soon, which bodes well for more stock market appreciation. Furthermore, inflation remains non-existent. On Wednesday, the Labor Department reported that the Consumer Price Index (CPI) was unchanged in January, below economists’ consensus estimate of a 0.1% rise. Excluding food and energy, the core CPI rose 0.2%. In the past 12 months, the CPI has risen 1.6% and the core CPI has risen 2.2%.

On Thursday, the Labor Department reported that the Producer Price Index (PPI) declined by 0.1% in January, which was below economists’ consensus estimate of a 0.1% rise. This was the second straight month that the PPI declined by 0.1%. Wholesale energy prices declined by 3.8% in January, after falling 4.3% in December. Excluding food, energy, and trade services, the core PPI rose 0.2% in January after being unchanged in December. In the past 12 months, the PPI has risen 2.1% and the core PPI has risen 2.5%, but there is no need for the Fed to raise key interest rates, since inflation is now decelerating.

Speaking of deceleration, the surprising news last week was that the Commerce Department reported on Thursday that retail sales declined 1.2% in December – the biggest monthly drop since September 2009 and substantially below economists’ consensus estimate of a 0.1% rise. Internet retail sales declined by 3.9% and department store sales slipped 3.3%, while health and personal care store sales fell by 2%.

Apparently, an early Thanksgiving caused an early start to the holiday shopping season, hurting the total for December sales, but the biggest reason for the drop was that sales at gas stations plunged by 5.1% due to falling gasoline prices. Overall, retail sales rose 2.3% for the full year of 2018. Since falling gasoline prices put more money in consumers’ pockets, plus new job creation remains robust, retail sales are expected to steadily improve in 2019, despite the disappointing December retail sales report.

It was widely reported last week that a record seven million Americans are now at least 90 days behind on their vehicle payments. According to the New York Fed, there are now one million more Americans delinquent on their vehicle payments than there were back in 2010. This is a clear warning sign for the automotive industry. Consumers under 30 tend to have low credit scores and have not been buying vehicles like previous generations. Overall, this is the first sign of a potential credit problem, so I am glad that I do not own any financial stocks, which are also being hindered by a relatively flat yield curve.

The other disappointing economic news was that the Fed reported on Friday that industrial production declined 0.6% in January, substantially below the economists’ consensus estimate of a 0.3% gain. This was the first monthly decline since May 2018. Meanwhile, December’s industrial production was revised down to a 0.1% increase, from +0.3% previously estimated. Excluding vehicle production, factory output declined by 0.2% in December. Capacity utilization declined by 0.6% in January to 78.2%, impacted by an 8.8% decline in the automotive sector. Overall, it appears that rising vehicle loan delinquencies are now significantly hindering the automotive industry.

So far, with the fourth-quarter announcement season winding down, the S&P 500’s annual sales growth is running over 7% and annual earnings growth is over 13%, which are both above analysts’ consensus estimates. However, looking forward, year-over-year comparisons are becoming more difficult, so S&P 500 earnings results are expected to decelerate sharply in the upcoming months. As a result, stock market leadership is expected to become increasingly narrow.

Typically, my stock portfolios prosper in selective market environments like this – as long as I can find companies that are continuing to post strong sales and earnings in a decelerating earnings environment. The sectors that I believe will perform the best in the upcoming months are energy, healthcare/medical, specialty retail, and cloud computing/cyber security. However, I won’t buy the whole sector, since I believe that 2019 will be more about stock picking and less about locking in on the strongest sectors.


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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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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