Retest of Market Lows

Friday and Monday Marked the Fourth Retest of Market Lows – Just Like Last Spring

by Louis Navellier

December 18, 2018

Let’s start with the good news. The Dow Industrials, the S&P 500 and the NASDAQ Composite all made new intraday lows last Monday. However, many leading NASDAQ stocks quickly rallied on Monday, helping most market averages rally intraday. Subsequently, the stock market opened strong on Tuesday, only to consolidate later. Then, Friday represented the fourth retest of the lows, on light trading volume.

Interestingly, after the February 5 lows, the stock market also had to retest those lows four times on light trading volume for the Dow Industrials and the S&P 500 (the NASDAQ Composite only retested twice). Just like now, it took about three months – until the end of April – for the retests to be exhausted.

BouncingBall.jpg

The bottom line is that the stock market is “bouncing along the bottom” and systematically exhausting all the selling pressure. As long as there is no panic selling on high trading volume, we should not worry and use these dips as potential buying opportunities. I should also add that on recent selloffs, there has been relative strength in many leading NASDAQ stocks under the surface, so there is likely quite a bit of “smart buying” going on from bargain hunters, as well as companies buying back their own shares.

I discussed last week’s many conflicting market dynamics in more detail on my Friday podcast and Monday podcast.

In This Issue

Bryan Perry cites slower growth in Europe and China for causing much of the current market malaise. Both Gary Alexander and Jason Bodner take a fresh look at U.S. market metrics, but they start off with some humor, since market metrics don’t seem to matter to traders these days! I can sympathize, since my column covers how news headlines push the market up and down day to day more than the fundamentals (which don’t change that rapidly). Ivan Martchev wraps up his 2018 predictions on the dollar vs. gold, along with his views on emerging market currencies and Fed policy decisions, and I handicap what might happen tomorrow if the Fed raises rates, but gives us some clear hope that they may be done for now.

Income Mail:
The Nuts and Bolts of the Current Market Landscape
by Bryan Perry
The Global Grinch Stole the U.S. Santa Claus Rally

Growth Mail:
The Keystone Kops are Running Many Major Governments Now
by Gary Alexander
The Market is Fixated with Politics & is Disengaged from the Economy

Global Mail:
A Good Year for the Dollar
by Ivan Martchev
Big Week for the Fed

Sector Spotlight:
All Joking Aside, This Market Will Recover…
by Jason Bodner
Believe it or Not, The Tech Sector is Still Positive Year-to-Date

A Look Ahead:
The Market Isn’t Paying Much Attention to Fundamentals These Days
by Louis Navellier
Sharply Falling Prices Should Put Pressure on the Fed to Leave Rates Alone

Income Mail:

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

The Nuts and Bolts of the Current Market Landscape

by Bryan Perry

The old saying, “When the going gets tough, the tough get going,” is exactly where the bullish camp is sitting at this point. The time for excuses and finger-pointing (at politics or non-economic macro events as to why the market is correcting) is over. History is on the side of “fundamentals winning out,” if in fact the fundamentals are intact. If the most recent data for the U.S. economy points to strong economic growth in 2019 of around 2.5%, then the stock market should hold up, but the piling on of the negative rhetoric within the financial media is heavily skewing the narrative toward the bearish case.

At this point, it is rational to assume that the market has priced in a further rise in the level of tariffs yet to be levied on Chinese goods, as well as the Fed’s decision to raise the Fed funds rate to 2.25%-2.50% (currently a 76.6% probability). And up until early last week, it seemed as if the market had adjusted to both scenarios. But a lingering concern for the bulls got more concerning as of late last week. The latest pothole for the market has been the fear of an economic contraction within the eurozone. The Composite Purchasing Managers’ Index slumped to 51.3 in December, the weakest reading since November 2014.

Nevertheless, the ECB also confirmed that this month will mark the end of its €2.6 trillion money-printing Quantitative Easing (QE) program, which began in early 2015 to ward off the threat of deflation, a move that had Italian bond yields spiking over the past week, hitting their highest levels in four years, as the populist government in Rome has threatened to bust the European Union’s borrowing rules. The ECB is now projecting eurozone GDP growth of 1.9% this year, falling to 1.7% in 2019. This is down from its 2.0% forecast for 2018 and 1.8% for 2019 in its September outlook.

Most market veterans I talk to on a weekly basis are as confounded by the actions of the ECB and the Fed as I am. The eurozone is slowing down and the ECB is not extending QE to manage the Italian bond bubble and the dual-party budget that abandons austerity, or the fluid Brexit crisis, the end of the Greek bailout, riots in France and the unforeseen impact that the trade war will have on the fragile recovery.

The Fed on the other hand is hell-bent on raising short-term rates that will likely push the dollar higher, invert the yield curve, put more stress on the housing market and further impair investor sentiment. Come this Wednesday, when the Fed meets, they should heed the words of Dallas Fed President Robert Kaplan, who said, “one of the key tools we have as a central bank is patience” As I noted last week, historically there is a lag period of 8-12 months between when an interest rate hike takes place and when it impacts the overall economy. This implies that the most recent three rate hikes have not been fully measured.

TenYearBondYield.png

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

Clearly, all eyes and ears are on the Fed’s policy statement. Investors are looking for Fed President Jerome Powell to deliver a dovish dot plot plan for 2019. The ‘one and wait’ chant that is now being bantered all around Wall Street hasn’t done much to ease the pain of the recent selling pressure. Once the FOMC meeting is in the books, it will once again be up to the economic calendar to deliver a Santa Claus rally as the start of the fourth-quarter earnings announcement season is a full month away.

The Global Grinch Stole the U.S. Santa Claus Rally

The global Grinch is currently pushing the S&P 500 down to a monthly loss of 5.8%. Friday's sell-off was a function of poor sentiment driven by global growth concerns and repositioning of portfolios to more defensive sectors in the equity markets and more bond exposure. The overseas selling took on a harsher tone when China reported weaker-than-expected industrial production and retail sales data.

In addition, some weaker-than-expected preliminary manufacturing PMI readings out of the eurozone helped feed into concerns over economic growth and corporate earnings prospects. Below are the current forecasts for 2019 in the world’s key economies. They lay out a pattern of continued uncertainty about economic growth, trade, politics, and the path of interest rates keeping buyers on the sidelines.

WorldEconomicOutlook.png

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

Now for the good news. A solid November U.S. Retail Sales report shows that the market’s decline has had little impact on America’s holiday shopping momentum. Total retail sales increased 0.2% (month over month). If you exclude auto, gasoline station, building materials, food services and drinking places, sales increased 0.9%. That's important because core retail sales are used in the computation of the goods component for personal consumption expenditures in the GDP report.

This week is pivotal for the stock market in how it reacts to the Fed’s decision to raise rates and offer what should be a dovish post-FOMC meeting statement. Even with earnings revisions being lowered in a number of stocks and sectors, the S&P currently trades at a P/E multiple of just 15.1, well below the five-year average of 16.4. This is an attractive valuation assuming the GDP forecast of 2.5% growth for the U.S. is anywhere close to accurate. But what is becoming ever more obvious in light of the slowing growth rate is that if there is a Santa Clause rally, it will be characterized by quality and not quantity with stock picking and active management at a super-premium to that of passive index investing.

Growth Mail:

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

The Keystone Kops are Running Many Major Governments Now

by Gary Alexander

“Yes, forward to the foe, on we go” – The Police in “Pirates of Penzance”
“Yes, but you DON’T GO!” – The Major General, in “Pirates of Penzance”

It’s now almost 30 months since Britain voted to leave the European Union on June 23, 2016, but they haven’t left yet. The Keystone Kops in Parliament (650 in the House of Commons and 800 in the House of Lords) and the 27-nation European Union can’t figure out the terms of divorce from the bureaucrats in Belgium. There’s even a huge new bureaucracy in Britain, “The Department for Exiting the EU.” The resulting soap opera makes the bumbling police in Gilbert & Sullivan’s Pirates of Penzance look efficient.

It’s the same in many other nations. I’ll run down a few of these political soap operas in another pop quiz.

Question #1: How many British Prime Ministers will it take to divorce from the European Union?

Answer: At least three. David Cameron quit, since he couldn’t do it. Theresa May has proven inept at the task for 2-1/2 years and barely survived a vote of confidence last week. If she fails in the next few months (highly likely), a third post-Brexit PM will need to step in to figure out how to “just say no” to Brussels.

A leading European law professor, Michael Dougan, said, “The overwhelming consensus is that these things do not take two years to negotiate; the rough guide that we are all talking about in the field is around 10 years.” My prediction: Britain will never leave Hotel Europa – it’s like “Hotel California”:

Back in 2016,
We were looking for the door.
We had to find the nation
We were living in before.

'Slow down' said all the lawyers.
‘Despite what you believe,
You can check out any time you like,
But you can never leave!'

OK, let’s cross over the Channel to France:

Question #2: When you have the highest tax rates in the world and a restless, poor immigrant minority, what’s the dumbest thing you can do?

Answer: Raise taxes on the poor! The OECD (Organization for Economic Cooperation and Development) released its annual Revenue Statistics report last week. France topped the list with a total tax rate at 46.2% of GDP in 2017 (The OECD average is 34.2%). Rates in Paris are even higher, with payroll, property and sales taxes that hurt the middle class and poor the most. So what did Prime Minister Emmanuel Macron do?  To make a point about his solidarity in fighting global warming, he raised taxes on already heavily-taxed fuels, hitting the poor and middle class the hardest, causing riots that left Paris in flames.

Now for some hard questions about America’s leadership:

Question #3: How many years and how many prestigious lawyers does it take to find one incident in which a Presidential candidate talked with a Russian leader about influencing the 2016 election?

Answer: 30+: According to Wikipedia, over 30 high-profile lawyers on the Mueller team and likely lots of support personnel have searched for over 19 months to find collusion with Russians over tampering in the 2016 elections. So far, they have succeeded in luring several witnesses into a perjury trap to secure their testimony, resulting in some prison sentences but no announced discoveries of election collusion.

Question #4: How many Grinches does it take to shut down the government at Christmas time?

Answer: Just one: We have 435 Members of the House and 100 Senators, but the leader of either Party can shut down the government. In practical fact, either President Donald Trump or Speaker Nancy Pelosi can shutter the government. More likely, there will be a costly compromise, with barrels of pork flowing as they give in to the demands of 435 home districts in exchange for each other’s requests, ballooning the federal deficit. This is what happened at the previous threatened government closure in March. At the time he signed that Omnibus Spending Bill (on March 23), President Trump said, “I will never sign another bill like this again.” If he stands by THAT promise, it looks like the government may shut down.

Question #5: How many economists does it take to raise the Fed Funds rate by a quarter point?

7 of 12: The Federal Reserve in Washington DC employs over 300 economists, but they all have their specialties. There are 12 on the Federal Open Market Committee (FOMC), which meets eight times a year. The FOMC consists of seven members of the Federal Reserve Board, the President of the New York Fed and four of the other 11 regional Fed Bank presidents serving one-year terms on a rotating basis.

A more important question is: How many of the 12 are watching stock prices fall, inflation fall, long-term interest rates fall, housing prices fall, and many global GDP growth rates fall, while they RAISE rates?

The Market is Fixated with Politics & is Disengaged from the Economy

As you can see, I have tried to add a dash of humor today, since serious analysis doesn’t resonate in this market. Bloomberg explained the divergence between economic data and the market like this on Friday:

“The divergence is getting to be historic. Data Friday showed retail sales excluding autos and gasoline grew by more than economists expected in November, prompting Scotiabank Economics to declare – in all caps – that ‘the U.S. consumer is alive and kicking.’ That sent the Atlanta Fed’s fourth-quarter GDP prediction to 3% from 2.4%. Meanwhile, the S&P 500 careened lower by 1.5% and is down 10% for the quarter. If the Fed predictor proves accurate and Santa Claus skips Wall Street, it’d be the first time since 2010 that the economy grew by 3% and the S&P 500 fell at least 10% in the same quarter.”

Truly spoken: With the Dow’s big drop last Friday, each of the three major indexes has now fallen 10%:

MajorIndices.png

Stock prices follow earnings, generally, but stocks have trailed earnings badly this year. How about the longer-term? It depends on how you scale your chart. Mark Perry of the American Enterprise Institute picked a scale of 4:5 for the ratio of S&P profits (in billions, after adjustments) to the S&P 500 (below).

IndexVersusProfits.png

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

Over the long term (since 1990), this chart shows stocks becoming overvalued from 1997 to 2001, then undervalued from 2008 to 2015. The chart shows earnings catching up to stocks now, but that’s based on a randomly-chosen 4:5 ratio of profits to price. An adjustment to that ratio could show stock fairly valued.

The market may indeed be looking at fundamentals – for instance, fearing a slowdown in global growth in 2019, or an erosion of benefits from the tax cut, or a failure to find solutions to the tariff & trade standoff, but most market fears of the last decade have proven to be wrong, and these fears may be overblown, too.

Global Mail:

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

A Good Year for the Dollar

by Ivan Martchev

Last week, the dollar hit a fresh 52-week high of 97.70 on the US Dollar Index. For all intents and purposes, my annual prediction that the dollar would be up in 2018 has worked out well. Emerging market currencies have been much weaker than developed market currencies, so the old US Dollar Index tells only half the story (for more, see December 18, 2017 Marketwatch article “Ivan Martchev’s 2018 predictions: Gold will sink, and the dollar will rally”). Gold is also down so far in 2018, although not as much as I had expected. That would make the accuracy of my annual predictions 4 out of 5, or 80%.

One way to differentiate between the US Dollar Index and the JP Morgan Emerging market currency index is to think that the first rise measures the strength of the US dollar, while the large decline measures the weakness of emerging market currencies. The former measures the exchanges value of the dollar against major developed market currencies only, while the latter concentrates on emerging markets.

While the US Dollar Index has been perky in 2018, the picture in the JP Morgan Emerging markets currency index has been abysmal, with the index hitting an all-time low in 2018. It is fair to say that 2018 has been a lot worse for emerging markets currencies than for developed markets currencies.

EmergingMarketCurrencyIndex.png

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

The extreme cases from the G-20 are those of Turkey and Argentina, where years of rampant dollar borrowing finally caught up with the local currencies and they both were under severe pressure last summer. In the case of Argentina, the IMF got involved yet again. In the case of Turkey, it looks like there are enough forex reserves to cover external debt payments and the current account deficit recieved help from the price of crude oil, which fell like a rock in October and November. In the case of Argentina, it does not appear that the forex reserves are enough to maintain the exchange rate, but we have the IMF actively intervening. It doesn't appear that the worst is over for many emerging markets currencies.

PesoVersusLira.png

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

Conventional wisdom says that if the Fed stops tightening, the dollar would top out, like it did in 2001, when it was obvious that we had entered a recession in the U.S. and that the Fed had begun to reduce the Fed funds rate. Still, the tops in the dollar have tended to come after the Fed has embarked on rate cutting cycles and arguably we have not yet put an end to the present quantitative tightening cycle.

FundsRateVersusDollar.png

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

This Fed tightening cycle is very different, as it is comprised of hiking the Fed funds rate and unwinding the central bank balance sheet. As the pace of quantitative tightening began to accelerate in 2018, the stock market begins to flip like a fish out of water. This is because quantitative tightening sucks electronic cash (in the form of excess reserves) out of the financial system via repurchase agreements. All primary dealers that are counterparties to such repurchase agreements are major players in the stock market. As the suction rate of such repo activity has accelerated, so has risen the volatility of stocks.

BalanceSheetVersusDJIA.png

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

It is hard to say when the runoff rate of the Federal Reserve balance sheet will slow down, as it is so far been ramped up to a level of $600 billion a year, or $50 billion per month. It is that balance sheet runoff rate that also affects the exchange value of the dollar and not just the Fed funds rate.

Big Week for the Fed

This week, the Fed is expected to deliver another Fed funds rate hike to get the target rate to 2.5%. There is speculation that the Fed would soften its language, given the volatility in the stock market and the softening of some economic indicators. If one looks at the December 2019 Fed funds futures – which forecast the Fed funds rate at 100 minus ZQZ19 for settlement in December 2019 – the Fed funds rate is forecasted to be 2.595% based on a ZQZ19 price of 97.405 at the close on Friday.

ThirtyDayFedFunds.png

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

The forecasts of the Fed fund futures markets have taken off the table 40 basis points worth of rate hikes since late October as the stock market has weakened. Since the stock market is one of the leading indicators of the economy, this is only natural.

Still, it is a mistake to focus on the Fed funds rate only as the runoff rate of the balance sheet is just as important, if not more important, in this Fed tightening cycle. I am not aware of any financial instruments that can be used to forecast the Fed balance sheet runoff rate the same way the Feds funds and euro-dollar futures are used to forecast the Fed funds rate.

The situation is so unusual that in theory the Fed could cut the Fed funds rate and increase the balance sheet runoff rate and that still could end up being a tightening move. I am not saying they would do that, but I am suggesting that it is a mistake to focus only on the Fed funds rate, particularly in the present tightening cycle.

Still, I think any material softening of the language of the FOMC statement this week would be cheered by the stock market the same way dialing back the hawkish Fed rhetoric did on November 28.

Sector Spotlight:

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

All Joking Aside, This Market Will Recover…

by Jason Bodner

Joke #1: “The stock market dropping feels like when my girlfriend gets angry. I know there's a reason but I'm still completely clueless. I’ve heard if I spend money things will get better.”

Joke #2:

NormalDay.png

All jokes aside, this bi-polar market is starting to wear on investors’ nerves. The graphic above is not far off, or should I say not that far off. The reality is that most market traders now look more like this:

MarketTraders.jpg

Last Monday, the S&P 500 hit intraday lows of 2583.23 around 11:15 am. The market then proceeded to rally 3.66% to its Wednesday peak of 2684.78. And as Friday’s close, it was a tick under 2600 at 2599.95. If you’re looking for something that is up, the VIX is at 22, as high as a giraffe’s neck, and climbing.

Friday morning the market started off cranky over “global growth slowdown concerns,” with headlines eventually giving way to “China slowdown concerns.”  Then Johnson & Johnson dragged down the healthcare sector on a story about their knowledge of asbestos in the baby powder. It was an old story, but nonetheless it brought down a market stalwart. This pounded XLV (the healthcare select sector ETF), down 3.28%. The broader market was actually met with buying for the first half hour on Friday, then more selling began, which is not atypical for a Friday during a volatile period in the markets.

HealthCareSector.jpg

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

I have been saying that the data I look at has indicated a firming market. Before last week, we observed higher highs and higher lows. The lows were on lower volume. This was bullish. We observed a rising ratio, indicating more buying than selling and the outsized selling was slowing. This was also bullish. We have observed popular stocks being punished, but then showing resiliency. This too was bullish.

(Navellier & Associates Inc. does not own JNJ, in managed accounts or mutual fund.  Jason Bodner does not personally own JNJ.)

That is what I saw for the previous week and a half or so, until this past week. Last week, we saw more sell signals than buy signals. Keep in mind, however, that the number of signals is still within a normal range, but it’s just that selling outweighed buying. This is different from late October, when we saw a massive number of signals coupled with lower prices. Right now, we are getting more sells than buys but on overall lower volume.

This leads us to another troublesome spot: the MAP-IT ratio is declining again. The last time our ratio hit oversold, it worked like clockwork. A big bounce was predicted, and the market did exactly that. But now as the ratio declines along with market prices, we head closer to being oversold. Should selling like this continue for a few weeks, we expect the ratio to drop again into oversold territory, which would likely preface another significant bounce.

Russell2000.png

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

Peak Earnings and sales growth momentum is the scare-du-jour. China trade talks, despite showing positive signs, still have market participants skittish and anxious. The Fed meeting is now imminent and by many accounts, they have less and less impetus to raise rates as markets are in turmoil, and yields are squished as investors flee for safety. The 10-year bond yields just 2.85%, while the S&P 500 dividend yield is 2.01%. As those two numbers creep closer together, the case becomes more compelling to own dividend growth equities. Again, dividend income is taxed at an effective long-term-capital gains rate of 23.8%, while bond interest is taxed at an effective ordinary income maximum rate of 40.8%.

The real tax equilibrium would have the 10-year yielding 2.7% with the S&P 500 dividend yield of 2.1%. We are very far away from that, but a narrowing between the S&P dividend yield and the 10-year is bullish for stocks. Dividend yields expand naturally with lower equity prices. But bond yields still don’t offer enticing features other than, as Bob Dylan put it: “shelter from the storm.” There is no capital appreciation feature like that of stocks. And as equities become more depressed, they become more desirable – unless you subscribe to the whole “world is ending” argument…and if you do, you may want to load up on guns and gold and cans of tuna for your bunker, rather than either bonds or stocks.

Believe it or Not, The Tech Sector is Still Positive Year-to-Date

I’ve never really bought into that “end of world” story, even during the height of fear in 2009. The market has a way of righting itself and trending up over a long period. I am still bullish on U.S. equities. My narrative for this week is that I still believe the market will rebound at some point. The data is supportive of this position. It began, and then basically it failed to hold on. Selling has resumed, and buyers were worse than scarce this week. I’d like to see the MAP-IT ratio resume an upward trend, indicating strong buying under the surface. It will happen, it just didn’t happen this last week.

StandardAndPoors500SectorIndices.png

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

Energy and Financial sectors remain grossly oversold, but they are not the only sore spots. For all the talk of a tech wreck and high-flying growth stocks being the source of pain, performance indicates otherwise:

The worst 3-month performances (from the chart above) are:

  • Energy is -16.48%
  • Industrials is -15.23%
  • Financials is -14.19%
  • Materials is -13.93%
  • Consumer Discretionary is -13.03%
  • Infotech is -13.92%

That’s abysmal, yes, but year-to-date, consider:

  • Infotech is +2.4%
  • Industrials: -12%
  • Communications: -12.9%
  • Financials: -13.6%
  • Energy: -14.7%
  • Materials: -15.5%

As markets get more oversold, sectors go deeply oversold, bond yields contract and dividend yields expand. All this is bullish for stocks. Add some solid fundamentals and the bull case is very much alive, in my view. Talking to bears, I find lots of postulation and theory, but when I look at the data, it tells me those who buy stocks into fear get rewarded long-term. If I am wrong, at least I’m being wrong in an informed way. But if I am right, I wouldn’t want to be short this market. 

A Look Ahead

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

The Market Isn’t Paying Much Attention to Fundamentals These Days

by Louis Navellier

The market doesn’t seem to care much about corporate earnings or the economy these days. It rises or falls from hour to hour based on the latest political headlines. The financial media tells us that the market sold off last Monday due to the postponement of the Brexit vote. Then it briefly rallied on Tuesday due to China slashing its tariffs on U.S. vehicles to 15%, down from 40%. Then it sold off late Tuesday when President Trump had a public spat with incoming House Majority Leader Nancy Pelosi and Senate Minority Leader Chuck Schumer, in which he threatened to shut down the federal government if he does not get funding for his border wall. Then on Wednesday the financial media cited optimism on the China trade talks as the reason that the stock market was rallying. Finally, the stock market finished the week on a sour note after China announced that its industrial production and retail sales were soft in November.

The truth of the matter is that there will always be macro events that influence markets, but right now the market is merely trying to find firmer footing after multiple retests of the lows on light trading volume.

The situation in Britain seems to have calmed down a bit, since Prime Minister Theresa May prevailed on Wednesday night in a confidence vote despite 117 members of Parliament calling for her to be replaced. After staying in power, Prime Minister May said that she will not seek re-election. The truth of the matter is that the Brexit mess is very polarizing and apparently no one wants to be Prime Minister until after the Brexit situation is resolved. Although Prime Minister May remains in power, the challenge to oust her has reduced her influence. The European Union (EU) does not mind if Britain leaves – just as long as Britain pays the EU to exit. Essentially, this “exit fee” to the EU has politicians enraged, so it will be interesting to see if Prime Minister May can eventually successfully implement Brexit. The net result is that the British pound will likely remain weak and political chaos will persist for the foreseeable future.

When it comes to the economic fundamentals, however, the U.S. is doing quite well. The Commerce Department on Friday announced that retail sales rose 0.2% in November, slightly better than economists’ consensus estimate of a 0.1% rise. Excluding sales at gas stations (which declined 2.3% due to lower fuel prices), retail sales rose a much more impressive 0.5% in November. Also encouraging is that October’s retail sales were revised up to a 1.1% increase, up from 0.9% previously estimated. On-line retail sales were especially strong in November, rising 2.3%. In the past 12 months, retail sales have risen 4.2%. Fourth quarter GDP estimates maybe now be revised a bit higher by many economists due to better-than-expected retail sales. The Atlanta Fed is now estimating 3.0% fourth quarter GDP growth, up from 2.4%.

Sharply Falling Prices Should Put Pressure on the Fed to Leave Rates Alone

Amidst all these distractions, market interest rates have meandered lower. This is putting pressure on the Fed to stop raising key interest rates in 2019, which will be clarified at this week’s Federal Open Market Committee (FOMC) meeting. Further putting pressure on the Fed, President Trump made it clear last week that the Fed should not raise rates at this meeting. Buttressing Trump’s case, there was some very positive inflation news last week, which will likely put pressure on the FOMC to not raise rates this week.

Specifically, the Labor Department announced that the November Producer Price Index (PPI) rose just 0.1%. The 14% plunge in wholesale gasoline prices in November was biggest monthly drop in almost three years, while natural gas prices plunged by twice that, 28% in one month. The cost of wholesale goods declined 0.4% in November and the price of raw materials are down 0.7% in the past 12 months.

On Wednesday, the Labor Department announced that its Consumer Price Index (CPI) was unchanged in November. Energy prices declined 2.2% in November, led by a 4.2% decline in gasoline prices. Excluding food and energy, the core CPI rose 0.2% in November and 2.2% in the past 12 months.

The Fed’s mandate is to keep unemployment low and strive for 2% inflation based on the Personal Consumption Expenditure (PCE) index. With unemployment currently at 3.7% and the PCE at a 1.8% annual pace and likely to decelerate further in the upcoming months due to lower energy and commodity prices, the Fed should stop raising key interest rates. Furthermore, by raising key interest rates previously, the Fed has “pricked” the housing bubble, as home prices are flat, and home sales continue to slow.

CarIndustry.jpg

The primary reason that President Trump does not want the Fed to continue raising key interest rates is that higher interest rates have not only impacted home sales, but also auto sales, due to higher financing costs. Furthermore, now that General Motors is laying off auto workers and closing plants due to poor sales, President Trump is blaming the Fed for hurting the domestic auto industry. I should add that I was in Ohio last week and there is a lot of anxiety about the GM layoffs hurting Ohio workers. The bottom line is that there is a tremendous amount of pressure on the Fed imposed by President Trump and Wall Street, which has posted trillions of dollars of losses since October, partially on the fear of higher rates.

(Navellier & Associates Inc. does not own GM, in managed accounts or mutual fund.  Louis Navellier & his family do not own GM in personal accounts.)

So, this week’s FOMC meeting is going to be a big deal. Under no circumstances does the Fed want to be manipulated by President Trump, since it is supposed to be independent, but if the Fed does not raise key interest rates, it has to come up with a good reason – such as weakness in home sales, domestic vehicle production, inflation fizzling faster than anticipated, slowing global growth, etc. If the Fed raises key interest rates to get more in line with market rates, which most economists expect, then the FOMC better have a super-dovish statement to reassure financial markets that future rate hikes in 2019 are less likely due to market rates stabilizing, slowing inflation, moderating economic growth and global events.

Let’s all keep our fingers crossed that the Fed does the right thing and issues a dovish FOMC statement, which should help the stock market erase much of the damage that has been inflicted since October!


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