Rising Earnings

Rising Earnings Could Generate Double-Digit Market Gains in 2017

by Louis Navellier

January 3, 2017

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

Last week, the S&P 500 declined by 1.1%, so the S&P slipped slightly below a double-digit gain for the full year.  The S&P 500 rose 9.5% for all of 2016 and the Dow Jones Industrials rose 13.4%, its best year since 2013. The Russell 2000 soared 19.5% in 2016 – most of that rise coming in the last two months.

In the last week of 2016, volume was low since many Wall Street traders and analysts have been skiing (or otherwise on vacation) this past week.  However, when the analysts get back to work this week, I fear they will begin to trim their earnings estimates for many multinational stocks that are fighting a strong currency headwind from a strong U.S. dollar.  As a result, there may be some consolidation in the New Year but fundamentally strong domestic stocks are likely to benefit from the upcoming earnings season.

Strong Dollar Image

While 20,000 on the Dow Industrials continues to be a temporary ceiling, I expect that the upcoming fourth-quarter announcement season could turn that temporary ceiling into a new floor.  In fact, “Dow 20,000” could become a “launching pad” if fourth-quarter sales and earnings beat analyst estimates.

In This Issue

Nothing is set in stone and no crystal ball is 100% clear, but it’s traditional to make predictions at the start of each year, so in this opening Marketmail of 2017 I’ve given my team free rein to imagine 2017, even if some of their ideas differ. To paraphrase a cable TV network, “we imagine; you decide.”  Specifically, Ivan Martchev and Gary Alexander share differing outlooks on gold and recessions, while Bryan Perry examines the benefits of private equity partnerships and Jason Bodner dissects sector volatility dispersion. My closing view examines the prospects for lower taxes and higher earnings generating rising confidence.

Income Mail:
My Fearless Income Sector Forecast for 2017
by Bryan Perry
The Re-Emergence of Private Equity Partnerships

Growth Mail:
Three Contrarian Forecasts for 2017
by Gary Alexander
Predictions for Stocks, the Economy, and Gold

Global Mail:
Conflicting Indicators for the New Year
by Ivan Martchev
How High Can the U.S. Stock Market Go?

Sector Spotlight:
Expect the Unexpected in 2017
by Jason Bodner
This Rally is Different – in Terms of Volatility Dispersion

A Look Ahead:
20% Earnings Growth Could Fuel Double-Digit S&P Gains
by Louis Navellier
Soaring Consumer Confidence Implies a Rising Stock Market in 2017

Income Mail:

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

My Fearless Income Sector Forecast for 2017

by Bryan Perry

As the world opens for business in 2017, we are making endless resolutions, predictions, and forecasts as we await the seismic shift in the change of power at 1600 Pennsylvania Avenue.  Investors have wasted no time in placing their bets on the front-running investment themes. Broad deregulation, lower corporate and personal income taxes, immigration reform, massive infrastructure spending, and repatriation of capital lead the hot list of what will likely be the front-and-center agenda items in Trump’s first 100 days.

For income investors, such a bullish backdrop for the economy will very likely lead to gradually higher interest rates and a furthering of the rally in the U.S. dollar, which create very real headwinds for the great majority of high-yielding asset classes. What’s more, earnings comparisons for the S&P 500 could be more favorable as the market comes out of an earnings recession with some market economists calling for a rise of 20% for S&P earnings if the reduction in the corporate tax rate from 35% to 15% takes effect in 2017.

It’s clear to me that the financial sector will benefit from further rate hikes by the Fed in the form of increased lending activity, stock buy-backs, and rising dividends based on stronger revenue and earnings. The problem for most investors today is that dividend yields for most common stocks fall well short of keeping up with the cost of living. As a result, investors end up selling shares that have hopefully appreciated to compensate for the lower income derived from stocks in favored sectors.

The top 15 bank stocks now offer an average 1.88% dividend yield, representing a payout ratio of 29%. I don’t know anyone who can live on 1.88% return on their investment capital. One million dollars at that rate generates an annual income of only $18,800. So how does one who depends on dividend income to stay ahead of household expenses, taxes, and inflation play this hot financial sector when rates are moving higher? One option is by being long shares of private equity partnerships. This is where a lot of the big institutional money is flowing, as it represents the quintessential “have your cake and eat it, too” income strategy for 2017.

The Re-Emergence of Private Equity Partnerships

Private equity (PE) firms manage investment capital in order to acquire equity ownership of companies through a variety of strategies, including venture capital and leveraged buyouts. Private equity firms operate with long-term investment horizons, typically 5-7 years. After obtaining equity interest in a company, a private equity firm looks to profit from either selling the company or launching an IPO.

As a sub-set of the financial sector, private equity stocks were crushed in the 2008-2010 timeframe as asset values fell, IPO markets were shut, and spreads on high yield bonds surged following a post-crisis tightening of credit. And for the five years following 2010, PE firms have been busy raising money, issuing debt, and snapping up deep-value assets around the globe when their stock prices were still lagging the broad market indexes, primarily weighed down by overexposure in the slumping energy sector.

Since late 2015, these difficult conditions have improved and PE firms may now be in their best position to capitalize on the attractive investments they’ve acquired during the tough times when valuations were deeply discounted. (Some of the headline-making deals of 2016 range up to a $60 billion public-to-private buyout of EMC.) The top ten PE firms have amassed a combined trillion-plus dollars in assets under management as they enter 2017 with a history of outperformance for the past 15 years on their side.

Private Equity Consistently Outperforms Public Markets Image

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

In addition, PE companies are not registered investment companies, such as REITs or Business Development Companies (BDCs). They don't want to be because of the requirement that virtually all income has to be paid out to shareholders. Instead, they are formed as partnerships. Under the partnership structure, they avoid most corporate income taxes earned from fund fees and incentives. Not all of their income qualifies for favorable partnership treatment, but they have a way around that, too. Income that isn't qualified gets sent to a taxable subsidiary, gets taxed, and then paid out to the parent company.

Through the magic of the tax code, these distributions are qualified, and thus, both firms avoid corporate taxes on a majority of their income. Therefore, in most cases, much of the income flows straight through to shareholders, who pay taxes at the individual level. The only tangible difference is the tax form: Private equity shareholders receive a K-1 form for being a member of a partnership. As a result, a good portion of income received is tax-advantaged, similar to that of energy Master Limited Partnerships (MLPs).

Aside from pensions, institutional funds, and wealthy individuals, the world of sovereign wealth funds is awash in dry powder with a rising percentage dedicated to PE funds. David Rubenstein, co-founder and co-chief executive officer of Carlyle Group, told attendees at the Private Equity Exclusive conference that sovereign wealth funds could overtake public pension funds as the most significant source of private equity capital in the next five years.

U.S. public pension funds have historically been the biggest source of capital for private equity firms and today account for 30% to 35% of capital, according to Mr. Rubenstein. Sovereign wealth fund assets are growing rapidly, and are expected to increase to $9 trillion by 2020 from $1 trillion in 2004, according to Mr. Rubenstein, citing a Pricewaterhouse Coopers report. “In the next five years, sovereign wealth funds will be the largest source of capital for private equity,” he said. “The average private equity fund will perform better than anything else you can do — legally,” Mr. Rubenstein quipped (Source: Pension & Investments “Rubenstein: Sovereign Wealth Funds to Become Largest Private Equity Allocator” – July 25, 2016).

Largest Sovereign Worldwide Wealth Funds Bar Chart

In partnerships, quarterly distributions ebb and flow with quarterly profits. In an environment where there is an increase in deal flow, IPOs and merger activity afford higher fees and more lucrative exits of private portfolio holdings, higher profits result in higher payouts. We are entering an investing landscape that should provide several catalysts for private equity firms that, in turn, should reward shareholders with rising income and rising stock prices.

That is a difference maker and one that income investors seeking to outgun the Fed, the inflation genie, the taxman and the broad market indexes ought to take to heart. As the New Year begins, a fresh look at private equity stocks should be on every investor’s list of resolutions to consider. They offer an income-raising strategy that greatly reduces risks from higher interest rates, rising inflation, and a stronger U.S. dollar. 

Growth Mail:

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

Three Contrarian Forecasts for 2017

by Gary Alexander

Predictions are in the air – on these pages and everywhere else – so I may as well add my own two-cents to the massive opinion-drenched Internet.  I call these predictions “contrarian,” but specifically, the last two predictions differ sharply from one of our other MarketMail contributors.  More on that later….

Prediction #1: A 12% to 16% Gain in the S&P 500 in 2017

My first “contrarian” pick makes me more bullish than the 15 most famous Wall Street analytical firms:

In “How Will Stocks Make Out in 2017?” (USA Today, December 27, 2016), Adam Shell examined the 2017 S&P 500 forecasts from 15 major Wall Street firms.  All 15 see a positive 2017, but most of them see only modest gains, averaging 5.5%.  On the low end, five of the 15 analysts see an S&P 500 year-end reading of 2,300, only 2.7% above the 2016 year-ending benchmark of 2,239.  Only one analyst (Jonathan Golub, chief equity strategist at RBC Capital Markets) sees a double-digit 2017 S&P gain, at +11.67%.

In my experience, Wall Street operates as a brotherhood, a herd, with a tendency toward “more of the same” analysis.  When the market is up moderately, like this year, they predict more of the same.  But when the market declines, all of a sudden the herd starts to predict a more dismal stock market future.

For example, the stock market began 2016 with a 10% correction.  In mid-February, Business Insider contacted 18 major market firms to see if they changed their minds (“Here’s what 18 Wall Street pros are predicting for the stock market in 2016,” February 15, 2016).  Almost without exception, these leading firms cut their 2016 forecasts. Two leading firms reduced their 2,200 target for the S&P (close to the actual outcome) to 2,000.  Only two firms stuck by their guns in predicting an S&P 500 rising to 2,300.

I tend to look at the herd and go the other way.  Therefore, I see the S&P climbing 12% to 16% in 2017, closing at 2,500 to 2,600, based on an expected 15% to 20% gain in underlying S&P 500 earnings.  This prediction, in turn, is contingent on Congress passing a significantly lower corporate tax rate, along with a few other pro-growth measures, which should promote GDP growth of around 3% in 2017 and 2018.

Prediction #2: No First-Term (2017-2020) Recession Under Trump

It’s fairly easy to predict no recession in 2017, due to “hope and change” after the election of a new President – similar to the economic surge we enjoyed in 2009 after Barack Obama’s inauguration.

However, as Ivan Martchev points out, it has been almost eight years since the current economic recovery began, and no growth cycle in U.S. history has stretched beyond 10 years.  However, records are made to be broken.  The 10-year recovery of 1991 to 2001 itself broke the previous record of 8 years and 10 months (February 1961 to December 1969), which broke the World War II record of 6 years and 8 months (June, 1938 to February, 1945), which broke the previous record of five years (1848 to 1853).

The reason I think this recovery will last beyond 10 years (i.e., to 2019 or later) is that 2009-2016 growth rates have been so slow.  A “Goldilocks” recovery (“neither too hot nor too cold”) can last longer than an overheated one.  Historically, U.S. recoveries end with over-heated growth leading to over-investment.  We haven’t seen that happen. Even though the unemployment rate is now below 5%, too many have left the labor force for this 5% reading to be designated “full employment.”  The current recovery averages barely 2% growth vs. 4.1% in the 1980s recovery and 3.5% per year in the 10-year 1990s recovery.

Gross Domestic Product Growth During Each Expansion Bar Chart

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

Look at these recoveries in terms of aggregate percentage growth: Eight years of 4.1% real growth (1982-90) delivered a total accumulated growth of 38%, while 10 years of 3.5% annual growth (1991-2001) delivered 41% growth.  But eight years of 2.1% growth (2009-16) will total only 18% aggregate growth.  We have a long way to go if we went to see 40% aggregate growth during the current recovery. In fact, the slow growth we’ve seen lately reduces the chances of an inflated market bubble or a deep recession.

Ends of cycles are usually characterized by inflation and rising interest rates.  Although both have risen incrementally lately, inflation and interest rates are currently well below historical norms.  The world is more concerned with deflation than inflation now. And if inflation should return, the Federal Reserve has a new tool –$2.5 trillion sitting on the Fed’s balance sheet. Reducing the Fed’s balance sheet by selling government securities would be one immediate way of reducing inflation risks in the financial system.

Despite Donald Trump’s promise of 4% or greater growth in 2017, economists are now estimating that fourth-quarter 2016 GDP will grow at a much slower annual rate of 2.4%, with 2017 predictions of more of the same. A moderately rising economy in 2017 implies a continued recovery, perhaps into the 2020s.

Prediction #3: Gold Will Stay Above $1,000 Throughout 2017

I’m about to go out on a limb, and risk $1,000 in doing so.  Ivan Martchev’s 2017 prediction (published here on December 13th) was that gold will fall below $1,000 per ounce in 2017.  This has become a very popular prediction on the Web, republished on many sites.  I’m taking a contrarian position by betting Ivan $1,000 that gold will stay above $1,000 on every London pm fix in 2017.  The first day gold closes below $1,000, I will send Ivan a $1,000 check and urge him to use it to buy one ultra-cheap ounce of gold, but if gold stays above $1,000 all year, he promises to write me a $1,000 check on January 1, 2018.

Why would I risk that much money on an inert (but admittedly pretty) metal?  For one thing, I expect Russia and China to keep buying central bank gold. In October 2016, Russia bought 40.4 metric tons of gold, its largest monthly purchase since 1998, and in November, Russia bought 31.1 more metric tons.  Russia has quadrupled its gold horde since 2006 (see the chart, below).  China has tripled its central bank gold in the same decade. Global central bank gold purchases topped 500 tons per year in 2014 and 2015.

Russian Central Bank Gold Reserves Bar Chart

As Ivan pointed out two weeks ago, gold can correct nearly 50% and still be in a bull market.  I’m betting that gold will stop short of correcting 50%, as it did in the 1970s, when gold peaked at $195 on December 30, 1974 (based on the London pm fix that day).  In the following 21 months, gold fell 47%, reaching a London pm price fix low of $103.50 on September 25, 1976.  Back then, $200 gold seemed like a price ceiling, while the fear of falling below $100 created a psychological “floor” for gold in the late 1970s.

London Gold AM Fix Chart

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

Gold peaked at around $1,920 in September 2011 and it has since fallen as low as $1,049 in late 2015. I think $1,000 will be a psychological “floor” for gold – as $100 was in 1976.  Buyers in India, China and the rest of the world tend to be very price-sensitive and will buy more gold if its price approaches $1,000.

Gold is also a proven crisis hedge when foreign conflicts erupt, as is likely to happen in early 2017.

So, I’m betting Ivan $1,000 that gold will stay above $1,000 in 2017.  Then, next year, we can bet on my prediction #2 – on whether or not the U.S. can run longer than 10 years without falling into a recession.

Global Mail:

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

Conflicting Indicators for the New Year

by Ivan Martchev

When I sat down to write my first column of 2017, I literally had no topic in mind. I had already made my predictions for 2017 three weeks ago. Typically there are interesting developments during the week, or upcoming events that I have an opinion on, so in many cases the columns “write themselves.” This time, I decided to look at many of the macro indicators that follow to see what jumps out. Here is the result.

While the majority of investors I talk with are worried that interest rates are only going to rise in 2017, some bonds in Europe were sinking further and further into record negative yield territory in late 2016.

European Financial Stability Facility Bond Yield Chart

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

While it is all over the news that a major top is in place in the U.S. bond market – a sentiment I don’t share – the EU confederate bonds reached an all-time low yield of -0.48%. The European Financial Stability Facility is a special-purpose vehicle with ability to borrow up to 440 billion euros, backed by members of the Eurozone, to address the European sovereign-debt crisis. Something is not quite right in the Eurozone, as the yields on EFSF bonds keep sinking further and further into negative territory.

For comparison, German 10-year bunds closed out 2016 with a positive yield of 0.208%. Germany is the biggest contributor to EFSF and those interest rates used to be correlated. German 10-year bund yields have been cut in half from the highs they saw after the U.S. Presidential election – from 40 to 20 basis points. It would be difficult for U.S. interest rates to rise dramatically in this global deflationary context.

Those who assumed that the U.S. Presidential Election marked a top in the U.S. Treasury market may be rather surprised in 2017. The global deflationary problem is far from over and it may get worse in 2017 depending on political developments in the weakened EU and the economic developments in China.

United States Ten Year Government Bond Chart

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

Major turns in the bond market take years to complete. The last time we went from a falling interest-rate environment to a rising-rate environment (1920 to 1940, above), we saw a 15-year bottoming trend from 1940 to 1955. The ensuing peak in interest rates in the early 1980s was jagged and volatile, but some of that volatility can be attributed to the aggressive measures taken under the Fed Chairman, Paul Volcker, to target money supply and let interest rates spike.  But 10-year rates have declined ever since 1981.

While President-Elect Trump has uttered some big promises for the U.S. economy, we will have to wait and see if he can deliver, as he is the only President with no political career before taking office. (Dwight Eisenhower was a 5-star general before becoming President, which arguably is a very political position.)

In the 240-year history of the United States there has never been an economic expansion longer than 10 years (March 1991-March 2001). June 2017 will mark year eight of the present expansion. The statistical distribution of recessions in the history of the U.S. suggests that the incoming Trump administration will face a recession in the next 2-½ years, if the 240 years of economic history can serve as any guide.  This suggests that the spike in long-term interest rates in the U.S. in late 2016 may not be a long-term bottom.

Another important indicator I have previously mentioned in this column is the flight of capital out of China, as estimated by their foreign exchange reserves. The November numbers show a re-acceleration of that flight of capital with a $70 billion monthly outflow. (The December numbers will be available soon.)

Chinese Yuan versus China Foreign Exchange Reserves Chart

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

For all intents and purposes, at least $1 trillion has left China since the bursting of China’s credit bubble in 2014. There may have to be a hard (overnight) devaluation if the Chinese economy keeps deteriorating in 2017, as I suspect it will. Kynikos Associates has prepared an alternate reserve calculation that nets out foreign dollar borrowings by mainland entities (chart, below). That means the Chinese foreign exchange reserves are significantly lower than what the official numbers suggest (seen in the chart above).

China Foreign Reserves Chart

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

We are approaching crisis mode in China and it will be interesting to see if 2017 is the year in which the Chinese economic numbers begin to deteriorate more notably.

Many commodity markets crashed in 2014-15 due to the Chinese economic slowdown. The Chinese stock market crashed in 2015 because of too much margin leverage, and it is entirely possible that the Chinese economy crashes this year. Right now, it is deteriorating in an orderly manner, but such deflating credit bubble situations sometimes can spiral out of control quickly. If capital flight out of China accelerates in 2017, that would be a major red flag to look for more significant economic deterioration in China in 2017.

How High Can the U.S. Stock Market Go?

I get this question all the time and most investors would be surprised to find out that there is no limit to how high the stock market can go. If the economy grows and earnings in the stock market grow, stocks can go higher once again in 2017.  Earnings growth is estimated to accelerate in 2017 so while we are in a very mature economic expansion, I see no sign of a recession on the horizon yet. There are bigger risks to the global economy emanating from Europe and China than anything that will come from the U.S.

Dow Jones Industrial Average Chart

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

That said, I would not be surprised if 2017 turns out to be a more volatile year for the U.S. stock market as the new President seems hell-bent on making many changes, some of them controversial. He also has a rather trigger-happy Twitter finger. Making public policy with 140-character tweets should be interesting.

My biggest concern is that Trump may launch a trade war with China as a first step, before embarking on his domestic policy agenda. That would be the wrong sequence of events, in my opinion, as I do not believe he will be able to achieve the domestic economic acceleration he is looking for during a trade war. I guess we'll find out soon enough, as he has prepared many executive orders for his first day in office.

Sector Spotlight:

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

Expect the Unexpected in 2017

by Jason Bodner

A New Year implies a fresh start, psychologically and on the calendar, but astronomically, January 1st is just another day. The earth spins endlessly, hurling itself around the sun every 365.241 twists. Yet, in our shared experience, the dawn of a New Year is a phenomenon that can bring about change of mass sentiment and shifts of attitudes as well as markets. One thing we can expect in 2017 is the unexpected.

For example, the extremely warm weather we experienced in the summer of 2013 caused unexpected consequences in several nuclear power plants across the world. Warm water temperatures brought about a surge of the jellyfish population which in-turn clogged the seawater filters. With blocked filters, the water could not get through to cool the reactor, which could cause a meltdown. Several nuclear sites – including some in Japan, Israel, Sweden, and Scotland – were forced to shut down their reactors temporarily.

Clogged Sea Water Filters Image

Several unexpected experiences in 2016 stand out, including Wikileaks, Brexit, Trump’s win – and the back-to-back deaths of Carrie Fisher and her mother Debbie Reynolds in the week following the latest Star Wars movie release. I could list countless other unexpected events here, but one thing is clear: We have no idea what will happen next. Certainly, President Obama, the pollsters, and pundits did not expect a Trump victory. The media fully discounted a win by Hillary Clinton. They also discounted the Brexit referendum. I'm sure no one was expecting Putin to promise much warmer relations with the U.S. soon.

Putin Assange Trump Image

Several unexpected experiences in 2016 stand out, including Wikileaks, Brexit, Trump’s win – and the back-to-back deaths of Carrie Fisher and her mother Debbie Reynolds in the week following the latest Star Wars movie release. I could list countless other unexpected events here, but one thing is clear: We have no idea what will happen next. Certainly, President Obama, the pollsters, and pundits did not expect a Trump victory. The media fully discounted a win by Hillary Clinton. They also discounted the Brexit referendum. I'm sure no one was expecting Putin to promise much warmer relations with the U.S. soon.

Standard and Poors 500 Daily, Weekly, and Yearly Sector Indices Changes Tables

This Rally is Different – in Terms of Volatility Dispersion

The hallmark of 2016 was frequent sector rotations with little predictability. That changed significantly last autumn and especially after the election.  In the world of derivatives, there is a certain type of trade known as a dispersion trade. A simple illustration would be trying to isolate the volatility of individual stocks versus a broad index. For instance, if we treat volatility as an asset in and of itself we would buy cheap volatility in hopes that it would go higher. One can buy volatility on many individual stocks and then sell the volatility of the index, the S&P 500 for instance.  The investor then has a hedged bet that individual stock volatility will outstrip the volatility of the index as a whole. The hope is that the index volatility and the individual stocks’ volatilities are dispersed, and a spread of their volatilities can be extracted.

Well, correlation is the opposite of dispersion. When dispersion is high, then correlation is low. That is, the stocks’ volatilities are less correlated to the index.  As 2016 marked frequent rotations, this was a good bet. But since the November election, correlation has surged closer to 1, or 100% correlated. Now stocks and the index are correlated in the midst of a big fat rally.  What that means is that everything is going up in closer to the same velocities as the index, and certainly more in tandem than they have been for the past 18 months. To me, this means the rally is real and not just another rotation in disguise.

The image on the left (below) indicates higher correlation (lower dispersion) while the image on the right indicates higher dispersion (lower correlation).  (This example is taken from a scientific journal.)

Correlation versus Dispersion Charts

With all of this said, buying has been exhausting itself and institutional buying has been slowing as it normally does at the end of the year.  If this trend continues, it seems likely the market will pull back without the throttle of institutional buying behind it. We may witness this happen early in the new year.

We also look forward to what new geopolitical and domestic political/economic landscapes mean for the market. By the time you read this, the markets will be open for business and the first moves of 2017 will be underway. But as multimillion-dollar nuclear power plants didn't plan for an attack of jellyfish to shut them down, we must approach 2017 with eyes wide open. As Robert Burns wrote in “To A Mouse”, “The best laid schemes of mice and men often go awry.”  John Steinbeck borrowed that phrase in a 1937 novel:

Schemes of Mice and Men 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.*

The Coming Race Between Tax Cuts and Pro-Growth Spending

by Louis Navellier

My favorite economist, Ed Yardini, recently said on CNBC that instead of the S&P 500’s earnings being up 8% in 2017, “it could be closer to 20%.”  Specifically, Yardini stressed, “That’s the kind of impact the substantial (corporate) tax cuts could have.”  So essentially, Yardini implied that much of the “animal spirits” that have driving the stock market since Donald Trump won the Presidential election are due to the anticipation of substantially higher earnings after his much-lower corporate tax rates are instituted.

With lower corporate taxes, we could see a massive repatriation of overseas corporate cash. This, in turn, should help to boost stock buy-back activity, which would further boost corporate earnings-per-share.

The Wall Street Journal also seems to be getting excited about corporate tax reform. Last week, The WSJ pointed out that corporate stock repurchases seem to be on the upswing, according to data from Goldman Sachs.  Specifically, Goldman Sachs forecasted that S&P 500 companies will repatriate $200 billion of their $1 trillion in cash held overseas in 2017 and that $150 billion of those funds will be spent on share repurchases.  Since the start of 2009 (through September 30, 2016), S&P 500 companies have spent $3.24 trillion in stock buybacks, led by big stocks with relatively low-to-moderate price-to-earnings (P/E) ratios.

Soaring Consumer Confidence Implies a Rising Stock Market in 2017

Last Tuesday, the Conference Board reported that consumer confidence surged to 113.7 in December, up from a revised 109.4 in November.  This came as a big surprise, since economists were forecasting a rise to only 109.8 in December.  As a result, consumer confidence is now at the highest level in the last 15 years (since August, 2001).  The detailed components of consumer confidence were uniformly bullish. For instance, expectations for the next six months surged to 105.5, up from 94.4 in November.  Clearly, many Americans expect the new President to make their lives better in the upcoming months.

The Conference Board survey also showed that the percentage of consumers expecting higher stock prices spiked from 30.9% in October to 44.7% in November.  According to Bespoke Investment Group (in “Stampeding on to the Stock Market Bandwagon,” December 27, 2016), that’s the second largest one-month increase in this market-confidence index, just shy of the largest (14%) rise in November, 1998.

Normally, I would say that is a “contrarian signal” implying over-confidence before a possible correction, but Bespoke looked up the last seven times (since 1987) when the percentage of consumers expecting higher stock prices rose by more than 10 percentage points from one month to the next.  Their study showed that the S&P 500 moved higher each time in the next three months (up an average 6.71%), six months (+10.62% on average), and 12 months (+19.76%, on average). The last time this happened (March to April, 2009), the stock market rose 13.14% in three months and 35.96% over the following 12 months.

Another factor helping to boost consumer confidence is that U.S. home prices continue to steadily rise.  On Tuesday, the S&P CoreLogic Case-Shiller 20-city home price index was up 5.6% in the 12 months through October 31, 2016.  All 20 cities posted price appreciation, ranging from 1.7% in New York to 10.7% in Seattle, and 10.3% in Portland.  Clearly, tight home inventories and low mortgage rates helped to boost median home prices.  Now that mortgage rates are rising, home price appreciate may slow, but not while the inventories of existing homes remain tight.  As a result, I expect home prices to keep rising.


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

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

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

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

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

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

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

Past performance is no indication of future results.

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

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

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

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

Marketmail Archives Trade Summary

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

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

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

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

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

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

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

Past performance is no indication of future results.

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

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

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

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

Marketmail Archives