Rising Retail Sales Boosted Stocks

Rising Retail Sales (and the Fed) Boosted Stocks Last Week

by Louis Navellier

February 22, 2017

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

Last Tuesday, I wrote that I expected a market rally if retail sales came in strong, and that’s just what we saw. Last Wednesday, the Commerce Department announced that retail sales rose 0.4% in January, well above economists’ consensus expectations of a 0.1% rise. Excluding gasoline stations, autos, and auto parts dealers, retail sales rose at a very healthy 0.7%, well above economists’ consensus estimate of 0.3%. The market seemed to like this news. The S&P 500 rose 1.5% last week, with the biggest surge coming on Wednesday. The S&P held on to those gains the next two days, closing the week at a record-high 2,351.

Retail Shopper Image

Fed chatter also helped the stock market last week. In her testimony before the Senate Banking Committee last Tuesday, Fed Chair Janet Yellen implied that the Federal Open Market Committee (FOMC) would gradually raise key interest rates at its upcoming meetings. The next day, Fed Vice Chair Stanley Fischer backed up her commentary by saying that the Fed sees signs of strengthening in the economy and “is a little more confident about where we’re going and how soon we’ll get to full employment with stable prices.” Translated from Fedspeak, my guess is that the “data dependent” Fed will most likely raise rates at its June FOMC meeting. There is a small chance of a Fed rate hike at the March FOMC meeting, but based on market rates, I think a June hike in key interest rates is much more likely.

Despite the anticipation that the Fed may raise rates in March or June, the demand for corporate bonds remains relentless. The spread between investment-grade corporate bonds and Treasuries is now down to only 1.3%, the lowest level since 2014. Furthermore, demand for high-yield corporate bonds is also very strong, pushing the spread between Treasuries and “junk” bonds to only 3.9%. By comparison, just a year ago, high-yield corporate bonds traded at an 8.9% premium, mostly due to rampant concerns about low crude oil prices hurting the energy sector. But in 2017, weekly inflows into investment-grade and high-yield corporate bonds have been strong, compressing the spread between corporates and Treasuries.

In This Issue

In Income Mail, Bryan Perry adds evidence to support our expectations of a Fed rate increase in June (but not necessarily in March). In Growth Mail, Gary Alexander highlights some vital economic news not covered well by our hyper-active press. In Global Mail, Ivan Martchev says the U.S. dollar may be about to resume its bull market strength. In Sector Mail, Jason Bodner compares this rising market to contrarian waterfalls! Then I’ll close with reviews of two recent Bespoke research papers along with a review of recent inflation news.

Income Mail:
To Raise or Not to Raise: That is the Question
by Bryan Perry
German Elections – Not Exactly a Beer-and-Brats Festival

Growth Mail:
Breaking News! Global Prosperity is Growing
by Gary Alexander
Breaking News: The Capital Account Surplus Hit Highest Level Since 2012

Global Mail:
The U.S. Dollar Correction is Likely Over
by Ivan Martchev
The Uptick in U.S. Inflation

Sector Spotlight:
When Water Flows Upward…
by Jason Bodner
The Fundamentals are Finally Catching up to the Prices

A Look Ahead:
Best Stock Sectors Since Trump’s Inauguration
by Louis Navellier
What the Inflation Indicators Mean to the Federal Reserve

Income Mail:

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

To Raise or Not to Raise: That is the Question

by Bryan Perry

Considering the slew of data and the two-day testimony by Fed Chair Janet Yellen on Capitol Hill, it would require some creative thinking to design a week of events more bearish for U.S. Treasuries; but by last Friday’s close, U.S. bond prices remained mostly unchanged for the week. Specifically, the economic calendar delivered a bevy of reports which saw the PPI, CPI, retail sales, and housing starts for January all exceed economists' forecasts. Empire State Manufacturing and the Philly Fed report also beat expectations handily, showing strength in sentiment for the mid-Atlantic's manufacturing sector. So, it is a bit of a head scratcher that virtually all of these factors that normally boost interest rates failed to push them up.

Ms. Yellen sounded more hawkish than usual in her semi-annual Humphrey-Hawkins testimony to the Senate and House committees. Her presentation was carefully calibrated, as it almost always is, yet one can make a case that she let down her dovish guard a bit. Specifically, she reiterated what the market already knows – and, in my view, has priced in – namely, that waiting too long to remove accommodation would be unwise and that if incoming data suggests labor market conditions continue to strengthen and inflation ticks higher, a further adjustment of the federal funds rate would most likely be appropriate.

With the March FOMC meeting roughly a month away, Yellen took the occasion to reiterate that every FOMC meeting should be considered a “live meeting” for a possible rate hike. The stock market handled her commentary with great resolve, comforted perhaps by the understanding that any future adjustment in the fed funds rate would be occurring for the right reasons, namely due to stronger economic growth that would be supportive of stronger earnings growth. With that in mind, the 10-year T-note held firm at 2.5%.

The following “dot plot” grid – a part of the FOMC's Summary of Economic Projections released along with the policy decision statement – shows where each participant in the meeting thinks the fed funds rate should be at the end of the year, for the next few years, and in the “longer run.” As you can see, there is a plurality of FOMC members that thinks the fed funds rate should end 2017 at between 1.25% and 1.5%. Given where we are today, that would equate to three rate hikes of 25 basis points each during 2017.

FOMC Participant's Assessments of Appropriate Monetary Policy Dot Plot

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

Looking at the 10-year bond yield chart (below), a pure technical analyst would likely say that the “high tight flag formation” is reminiscent of a stock chart prior to a big move higher. Using that theory, a break above the 2.65% level sets in motion a move to 2.80% and then 3.00%, depending on how strong the economy grows over the course of the year. But the way the data has been coming in during January and February, the Fed’s goal of raising rates three times this year is looking like a pretty accurate forecast.

Ten Year Bond Yield Chart

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

Bond market participants point to the potential political upheaval in the EU involving power struggles in France and Germany and fiscal crunch time returning to Greece and Italy as catalysts for the renewed strength in the U.S. dollar and a firm bid under U.S. Treasuries. The capital flight from EU debt holders showed no signs of slowdown this past week as elections approach in the Netherlands (March 15th) and France. The first round of the 2017 French presidential election will be held on April 23rd. Should no candidate win a majority, a run-off election between the top two candidates will be held on May 7th.

With Greece once again looking for a life line, the International Monetary Fund (IMF) is now likely to contribute five billion euros to Greece's bailout, according to Spiegel (Reuters, February 17, 2017, “IMF says its view on Greek bailout deal unchanged”). IMF participation is a prerequisite for European participation in the bailout for certain Eurozone finance ministers who (together, as the Eurogroup) make decisions about releasing further aid to Greece.

Over in Rome, the situation is no better, just a lot bigger. The implications of a government bailout stretch beyond Italy, the Eurozone’s third largest economy, which is already running a debt-to-GDP ratio of more than 130% (The Guardian, December 21, 2016, “Italy to bail out Monte dei Paschi di Siena bank with E20 bn rescue fund”). It will be a major test of new EU rules requiring bond holders to take losses before taxpayer money can be injected into banks. It will also be used as a barometer for how the government will tackle the problem inside its banking sector, laden down with €360 billion of bad debts.

A €20 billion ($21 billion) rescue fund for Italy’s banking sector was approved over the Christmas holiday by Italy’s parliament, including a bailout of the world’s oldest bank, Monte dei Paschi di Siena, which failed to obtain last minute funding from the Qatar sovereign wealth fund, a current investor. This banking crisis is not an accident. The toxic loans on the books of the Italian banks are often a result of corruption, political kickbacks, fraud, and abuse. It’s a big, hot Italian mess. 

Monte dei Paschi di Siena Bank Image

German Elections – Not Exactly a Beer-and-Brats Festival

With German chancellor Angela Merkel facing criticism over her controversial open migration policy, she could lose Germany’s election this year. At the moment, German politics is unravelling. The far-right party, the Alternative for Germany (AfD), has made gains in the wake of the migrant crisis and Brexit.

Germany looks set to hold its federal election on Sunday, September 24th, so there is ample time for Mrs. Merkel to regain enough support to be re-elected chancellor before Oktoberfest. In fact, she has signaled for the first time that she might step back from her deeply unpopular open-door migration policy.

Because of the rising political and fiscal uncertainty in Europe, another hike in the fed funds rate will only fuel another rush of capital into the U.S. dollar and America’s already much higher-yielding (than European) bonds. I think the Fed will “talk up” another rate hike in March but refrain from pulling the trigger then.

Because the U.S. went through the fiscal firestorm and came out the other side in one piece after six years of Fed intervention, there is great confidence that the ECB will pull off the same act across the pond. However, a further fracturing of the EU is certain if France hits the exits (in a “Frexit”) as did the UK last June. If so, the backbone of financing big ticket bank bailouts will be more difficult for the ECB. We’ll know more after the French vote. Until then, the Trump trade is alive and well here on the home front.

Growth Mail:

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

Breaking News! Global Prosperity is Growing

by Gary Alexander

“Did you hear the breaking news? Yesterday, 138,000 people rose out of extreme poverty. Another 138,000 rose out of extreme poverty the day before. And the day before that, too.”

– Johan Norberg in the December 2016 issue of Spiked Review (“And the Poor Shall Rise”)

Last Tuesday, Tom Friedman of the New York Times said the alleged Russian hacking of our elections was “a 9/11-scale event” and “a Pearl Harbor-scale event.” On the same day, former CBS anchor Dan Rather said the Trump government’s alleged links to Russia could be a greater scandal than Watergate, posting: “We may look back and see, in the end, that it is at least as big as Watergate. It may become the measure by which all future scandals are judged. It has all the necessary ingredients and that is chilling.”

The two-year nightmare of Watergate caused a 40% market crash and a first-ever Presidential resignation, while World War II and the post-9/11 “War on Terror” generated a huge loss of life and treasure. Despite no solid proof that the Russians hacked one vote, we’re supposed to believe this hazy event is “at least” as bad as Watergate or even a Pearl Harbor/9-11 class of disaster? It looks like some left-leaning journalists like Rather and Friedman inherited the mantle of the Red Scare writers of the McCarthy Era of the 1950s.

Here is some “breaking news” for these scare-mongering journalists: The stock market doesn’t believe you. Most stock market indexes – including the MSCI World Index – made new all-time highs last week.

The surge in the MSCI World Index reflects a recovering global economy. At this time last year, global stocks were down on fears of a global deflationary recession. Breaking news: That didn’t happen. Then, in the middle of 2016, Brexit was anticipated to throw the European economy into a tailspin. That didn’t happen, either. To round out the global trifecta, the widely-anticipated collapse of major Asian economies (notably Japan and China) didn’t happen either. In fact, the Purchasing Managers’ Indexes (PMIs) in all four of these regions recovered sharply in the second half of 2016 and into 2017, as this chart shows:

Purchasing Manager's Index for the Last Two Years Chart

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

According to Greg Ip in last Thursday’s Wall Street Journal (“Around the World, Economic Risks Recede”), “Evercore ISI projects annual growth in nominal Chinese gross domestic product – economic growth plus inflation – will reach 11% in the current quarter, up from less than 7% a year earlier.” As for Europe, Ip quotes Jason Thomas, director of economic research at Carly Group, as saying, “Europe is much stronger in both terms of real business volumes and upside surprises on inflation than the U.S.”  According to J.P. Morgan, the global economy is likely to grow by a fairly healthy 3.4% for all of 2017.

As Ed Yardeni wrote last Monday (in “Good Rotation”), China’s Year of the Rooster has given the bulls something to “crow” about. Specifically, he wrote, China’s merchandise exports and imports (in yuan terms) rose 22.1% and 44.4%, respectively, year-over-year. Then, on Wednesday (in “Running Hotter”), Yardeni noted that the Small Business Optimism Index (charted below) rose faster than at any time since Ronald Reagan’s election in 1980 and our subsequent emergence from a deep recession in 1982-83. The index rose 11 points from 94.9 last October (pre-Trump) to 105.9 in January, the highest level since 2004.

Small Business Optimism Index Chart

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

Breaking News: The Capital Account Surplus Hit Highest Level Since 2012

According to the weekend Wall Street Journal, “The Trump administration is considering changing the way it calculates U.S. trade deficits, a shift that would make the country’s trade gap appear larger ….”

This proposed change is too Byzantine to summarize here, but the basic problem with trade statistics is that they are an archaic reflection of a bygone era of mercantilism overlaid on today’s complex system of globalization, which involves designing products in one nation, manufacturing parts in various nations, and assembling the final product in another nation. The whole idea of “trade deficits” needs to be retired.

On February 7th, numerous media outlets (CNBC, ABC News, Fox News, Marketwatch, etc.) headlined: “Trade deficit hits highest level since 2012,” referring to last year’s $502.3 billion trade deficit. As John Dessauer wrote in his hotline last week, the headline could just as easily be: “Capital account surplus hit highest level since 2012.” Trade accounts, by definition, must balance. When we import more than we export, it’s called a deficit, based on the centuries-old, archaic school of economics called “mercantilism,” meaning (in brief) “more money is better than more goods.” But when we export money to import goods, (a “deficit”), both sides win: Poor nations get more of our dollars, and we get more affordable goods.

Americans won’t want to pay the lofty price tags for exclusively “Made in America” products if we shut out trade from nations with a low-cost labor pool, such as Mexico, China, and other emerging nations.

Prosperity in America depends a great deal on the world continuing to grow, which brings me back to the opening quote, about 50 million people emerging from absolute poverty each year (i.e., 138,000 per day).  In the December 2016 issue of Spiked Review (“And the Poor Shall Rise”), Johan Norberg explained:

“Since 1990, when social critic Naomi Klein claimed that global capitalism lapsed into its most savage form, the proportion who live in extreme poverty – according to a $1.9-a-day poverty line, adjusted for local purchasing power and inflation – has been reduced from 37% to less than 10 %. At the United Nations Millennium Summit in 2000, the world’s countries set the goal of halving the 1990 incidence of extreme poverty by 2015. This was met five years ahead of the deadline.”

In 1820, he said, a billion people lived in extreme poverty and only 60 million (6%) lived in comfort. Today, with seven-fold more people, only 700 million are poor, so poverty is down from 94% to 6%.

The capitalist Industrial Revolution was the engine that made this escape from poverty possible, first in England, then America, then the world. China’s conversion to a form of practical capitalism since 1980 has become its own belated Industrial Revolution. (In East Asia, poverty has fallen from 81% to 4%.)

Here’s some final breaking news. The just-released World Economic Freedom Index from the Heritage Foundation lists two small Asian nations as “most free” while the U.S. is buried down at #17.

Index of Economic Freedom Table

Three former Soviet states (Estonia, Georgia, and Lithuania) are economically more free than America?!  #1-rated Hong Kong is officially a part of “Red” China, though under the “One China, Two Systems” model. Meanwhile, America’s freedom index rating peaked in 2006 and has declined in nine of the last 10 years, reaching its lowest level since the index was first published in 1995. Much of the blame, according to the Heritage Foundation, is Obama’s added regulations, higher spending, and failed stimulus programs.

Meanwhile, East Asian nations are ascending the Index of Economic Freedom. As Norberg wrote:

“If countries continue to grow at the rate that they have in the past 10 years and income distribution remains the same, extreme poverty would fall to 5.6% of the developing world’s population by 2030. In East Asia the headcount of the severely impoverished would be at 0.3% and, in South Asia, 1.3%.”

Now, that’s the kind of slowly-breaking news I like to see.

Global Mail:

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

The U.S. Dollar Correction is Likely Over

by Ivan Martchev

The zag lower in the U.S. Dollar Index during January made a lot of “fake news,” as if the long-term (since 2014) rally in the greenback was in trouble, but it was not. Many reporters look for sound-bites and extrapolate trends in linear fashion but the markets move in fits and starts and zigs and zags. If the zigs are bigger than the zags we have a bullish trend, which is still very much alive and well in this case.

United States Dollar Chart

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

The U.S. dollar broke out above major resistance at 100 after the Presidential election. In the month of January, it pulled back to 100. Traders like to say that resistance (at the 100 level in this case) becomes support, as the pullback ended right around that three-digit level. Keep in mind that points of support and resistance are not precise numbers but areas around a number. While we did briefly trade under 100 for a few days, it was only marginal, which means 100 “held as support,” in trading terminology.

Fundamentals drive charts, not the other way around. Readers of this column know that I need to know what is going on behind the numbers on a chart. In this case, we have multi-speed central bank policy, where the European Central Bank (ECB), Bank of Japan (BOJ), and Bank of England (BOE) are all in accommodative mode, while the Fed is in the process of slowly removing its monetary policy accommodation. The accommodation from major world central banks is ranging from aggressive “unlimited” QE by the BOJ to less aggressive measures in the case of the ECB and the BOE.

Thirty Day Fed Funds - Daily Line Chart

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

The green and black lines in the chart above indicate the December 2018 and the December 2017 fed funds futures, which traders use to predict Federal Reserve policy. The forecasted fed funds rate is 100 minus the contract price (so 100 less 98.86 = 1.14% for December 2017 and 100 less 98.41=1.59% for December 2018). Keep in mind that this is what the market forecasts right now and that by the time those contracts expire the fed funds rate may be different. For example, in January 2016 the December 2016 fed fund futures (not pictured and now expired) was calling for a rate cut in December 2016 and the same contract was calling for a rate cut right after the Brexit vote in June 2016. In the end, we got one fed funds rate hike, so a lot can change by the time the December 2017 and 2018 fed funds futures contracts expire.

The fed funds futures contracts sold off after the U.S. Presidential election, anticipating more rate hikes as President Trump had announced an ambitious agenda to stimulate the economy. We have yet to find out the details of his infrastructure and tax plans, but suffice it to say that it has not been a boring first month in office. His latest press conference was truly historic – and surreal at the same time. It makes people look forward to his next press conference! The parallels to reality TV are inescapable and his first year in office could end up being dubbed The Presidential Apprentice, Season 1.

Ten Year France Government Bond versus Ten Year United States Government Bond Chart

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

While the details of President Trump’s tax and infrastructure spending plans are not yet known, we do know about the election cycle coming in Europe, where France, the Netherlands, and Germany all have elections. The first round of the vote in France will be held on April 23, 2017. Since the odds are overwhelming that no candidate will win the necessary majority, France's next President will be elected in a run-off election which will take place on May 7, 2017. Then come some other European elections.

As the French Presidential election approaches, the French bond market is under pressure, with 10-year bonds closing at 1.038% last Friday. Incidentally, U.S. 10-year Treasuries are no longer selling off, closing last week at 2.4147% while the relevant German bunds are also seeing a safe-haven bid with yields dropping to 0.3020% having made it to almost 0.5% earlier in January 2017.

Ten Year German Government Bond Chart

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

It is not hard to foresee a safe-haven bid in Treasuries, bunds, and the U.S. dollar as the French and other elections come closer. While Euro-skeptic candidate Le Pen does not have favorable votes to win in a run-off, all we need is another truck attack like the one we saw in Nice in July 2016, or a similar event, and the unthinkable election outcome may materialize. I am not rooting for such an outcome, but suffice it to say that the EU and the euro cannot survive a Frexit. In the middle of all this mess we also have Brexit negotiations, so pressure on both the euro and the British pound is likely in 2017. (Bear in mind the fact that the euro and pound have weights of 57.6% and 11.9%, respectively, in the U.S. Dollar Index.)

Then there is a possible overnight Chinese devaluation, which the Chinese may choose to do to deal with the effects of their busted credit bubble similarly to the way they devalued by 34% in December 1993 (see my February 18, 2017 Marketwatch article, “China’s economy is dangerously close to unraveling”).

Such a devaluation cannot be predicted ahead of time, but I believe the odds for it are increasing on a daily basis, as a “hard” (overnight) devaluation bypasses an improperly functioning financial system riddled with bad loans and acts as an adrenalin shot in the heart of the Chinese economy, similar to Vincent Vega (played by John Travolta in Pulp Fiction, below) delivering an adrenaline shot.

Vincent Vega giving Adrenaline Shot Image

All of the quoted considerations in this column suggest a much higher exchange rate for the U.S. dollar and higher prices for U.S. Treasury bonds as safe havens from global economic and political risks. I think that we may see the 10-year Treasury go to 1% or lower and the U.S. Dollar Index rise to 120 by the time President Trump’s first term in office is complete – as outlandish as it may sound at this very moment.

The Uptick in U.S. Inflation

With headline inflation running at 2.5% and having increased notably in the past year, many are suggesting that the Fed is behind the curve and more rate hikes are coming. I agree that more hikes are likely coming, but I have to point out that inflation is a lagging indicator. In some cases banks end up fighting inflation just as it is about to fall off a cliff on its own. For the time being, I would assume more interest rates hikes by the Fed – if there is no Frexit and if the Chinese don’t devalue the yuan.

Those are two very big “ifs.”

United States Inflation versus Federal Funds Rate Chart

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

At the time of their December 2015 historic rate hike, the Fed forecast two to four rate hikes in 2016. In reality, we got only one hike. In 2017 we are getting indications of two or three rate hikes, with a March rate increase at the FOMC meeting very much on the table. I am watching with great interest to see how many rate hikes we get this year, given difficult-to-quantify global political risks in China and Europe.

Sector Spotlight:

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

When Water Flows Upward…

by Jason Bodner

Albeit rare, there are waterfalls on earth that fall up. Counterintuitive as it seems, they have been observed in Ireland, Hawaii, Iceland, and Chile. The truth is that there is immense force in the water of a waterfall, which is measured in something called “flow rate.” As a point of reference, we’ve all lugged a heavy gallon of water into the kitchen at some point. A gallon of water weighs about 8.4 pounds. Each second at Niagara Falls, over 150,000 gallons of water (1.25 million pounds) flow over its edge. In upside-down waterfalls, however, strong winds come along and blow the water straight up! Imagine the force of the wind reversing the weight of all that water! It’s amazing to think about and mesmerizing to watch.

Upside Down Waterfall Image

The point here is: there is always a force that can come along and move the seemingly unmovable. The fact that waterfalls can reverse direction and flow upward with some strong wind should actually seem familiar from market action! Just think of the will of many investors suddenly shifting sentiment and watching the cascading market in free-fall reverse direction and climb miraculously. We see it all the time. When investors capitulate, throw out the baby with the bathwater, and give up there is always that moment when the last seller sells and everything reverses. Obviously, we are far from there yet, but we were there in June and November of 2015, even though it all seems like a distant memory now!

Standard and Poor's 500 Index Chart

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

Looking at the S&P 500, we are way up relative to November’s bounce off the 200-day moving average. It has been a dizzying rise that may give you vertigo. Yet again, with all the talk of the market being overbought (me included, as my metrics still exhibit ripe over-buying) the averages just keep rising higher. This is a place to be cautious, but it is also a place to dig under the hood and see why.

A few months ago, I described this rally as being led by fundamentally weak stocks rising on technical strength. I also noted that many times major bullish themes can begin this way, as fundamentals lag and take time to catch up to technical strength. “Mr. Market” often knows all of this in advance, which is why it is so crucial to at least be aware of technical strength in the absence of fundamentals.

The Fundamentals are Finally Catching up to the Prices

What do we see now? According to FactSet Earnings Insight (February 17, 2017), 82 companies in the S&P 500 have reported with 66% beatings earnings estimates and 53% beating sales. The S&P’s 12-month forward P/E ratio of 17.6 does seem lofty, considering the 10-year average of 14.4. Yet we have now seen two straight quarters of earnings and sales growth year-over-year. In short, the fundamentals are catching up to prices.

Standard and Poor's 500 Change in Forward Twelve Month EPS Versus Change in Price Chart

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

On a sector-by-sector basis, Financials continue to be the engine of this November-born rally. This week saw Financials rally nearly 3%. Over the last six months, Financials rallied 25.61%; but looking back over 12 months, the Financials Index has vaulted almost 44%! According to FactSet:

“The Real Estate (+11.0%) and Energy (+8.8%) sectors are reporting the largest upside aggregate differences between actual earnings and estimated earnings, while the Telecom Services (-0.7%) sector is reporting the largest downside aggregate difference between actual earnings and estimated earnings. At the sector level, the Information Technology, (68%), Real Estate (68%) and Energy (64%) sectors have the highest percentages of companies reporting revenues above estimates, while the Utilities (7%) and Telecom Services (25%) sectors have the lowest percentages of companies reporting revenue above estimates. The Consumer Discretionary (+1.9%) and Materials (+1.9%) sectors are reporting the largest upside aggregate differences between actual sales and estimated sales, while the Utilities (-8.7%) sector is reporting the largest downside aggregate difference between actual sales and estimated sales.”

 Standard and Poor's 500 Sector Indices Changes Tables

So what’s working best now? As I said before, earnings and sales are largely pleasing the street. What I find more interesting, however, is that previous leaders are coming back with strong earnings, including surprises to the upside. Several bellwether stocks which fell out of favor for a long time are now retuning to the forefront. The good news is that as markets continue to lift, earnings and sales are moving in the right direction and leadership is resuming. The bad news is that the market is overheated, there are still weak fundamentals driving some price action, and technically the market remains heavily overbought.

All sectors seem to be forging ahead, led by Financials, Information Technology, Materials, and Consumer Staples. We should be vigilant for Real Estate and Utilities, too. Rate sensitive securities will become more of a topic of conversation as the date of a pending rate hike becomes hotly debated.

One thing is clear. In this environment, with hotly debated valuations and sector rotations that may not always seem justified, one theme continues to work over time. Identifying stocks with solid fundamentals such as continued growing earnings and sales, increasing market share, and essential innovations within its associated field, is a winning recipe. Prices may fluctuate with broad market forces or sector rotations, but over time leaders lead. The beauty of this formula is that laggards can turn into tomorrow’s leaders. True leadership may go on holiday for a while, but more often than not it keeps coming back.

Finding companies that exhibit these qualities is the key. In analyzing markets, it is common to impose limits and “norms.” For instance, a nearly 50% rally in 12 months for one sector is not “normal” and may fall outside many people’s perceived limits. The broad indices continuing higher uninterrupted seems to fall outside our perceived limits. Waterfalls flowing upside-down may certainly be breaking the limits of our perception, but in the words of the great Michael Jordan: “Limits, like fear, are often an illusion.”

Basketball Player Silhouette 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.*

Best Stock Sectors Since Trump’s Inauguration

by Louis Navellier

In the four weeks since Inauguration Day, the S&P 500 is up over 3.5%. Last week, NASDAQ closed up 1.82% (and 8.46% for the year so far), setting 18 all-time record highs so far in 2017 – the most of any year since 1999.  The S&P 500 is up 5.02% in 2017 and has already set nine all-time highs this year.  The Dow Jones Industrials has also set nine all-time highs in 2017.  The S&P 500 has now gone 89 straight days without a 1% decline.  The stock market is clearly not listening to the media hysteria about Trump.

Our friends at Bespoke Investment Group issued a great report on Wednesday (“Post-Inauguration Decile Analysis”) documenting the best stock market segments since the Presidential Inauguration (through last Tuesday).  The lowest decile gain came from the 10% smallest-cap stocks (+0.4%) vs. a 2.8% gain for the overall S&P Index in the same time frame.  The best gain was the 4.99% rise in the Top 10% of stocks with the strongest analyst ratings.  This is great news for well-selected growth stocks which have seen strong analyst earnings revisions following their fourth-quarter 2016 earnings announcement.

On Friday, the Bespoke team issued another fascinating report (“Overbought Odds”) saying that when the stock market is “overbought” (defined as when the S&P 500 closes “at least two standard deviations above its 50-day moving average for three straight trading days”), the market usually keeps rising.  The Bespoke report showed that the S&P has had eight previous overbought signals in the last eight years of the current bull market, with the market rising over the following year in each case.

This doesn’t mean we won’t see corrections this year, but the fact of the matter is that whenever the stock market appears tired, President Trump starts to talk up the market by promising tax cuts or meeting with business and union leaders.  For example, on Friday, the stock market was sloppy until President Trump showed up at a major aircraft manufacturing facility in South Carolina and the stock market firmed up.

Trump is very proud that the S&P 500 is up.  Having a cheerleader for business and labor in the White House is very positive for the overall stock market, so stocks may remain overbought, especially since March and April are seasonally strong months.  As a result, every dip in late February should be viewed as a buying opportunity, which is what I stressed last Thursday during my latest CNBC appearance.

What the Inflation Indicators Mean to the Federal Reserve

Last Tuesday, the Labor Department announced that the Producer Price Index (PPI) surged 0.6% in January, the largest monthly gain in four years and well above economists’ consensus of a 0.3% increase.  The rise was mostly due to a whopping 4.7% increase in energy prices, due largely to almost a 13% surge in wholesale gasoline prices.  Excluding food, energy, and retail margins (the new definition of the “core” rate), the core PPI rose only 0.2% in January and at a 1.6% annual pace for the last 12 months.

On Wednesday, the Labor Department announced that the Consumer Price Index (CPI) also surged 0.6% in January, its biggest gain in four years and well above economists’ consensus of a 0.3% rise.  Also like the PPI, the culprit was rising gasoline prices, which surged 7.8% in January.  Overall energy prices rose 4% in January.  Interestingly, real (inflation-adjusted) wages were flat in the past 12 months, which means that wage growth is matching the CPI, which essentially means that there is no real increase in wages.  Excluding food and energy, the core PPI rose 0.3% in January.  In the past 12 months, the CPI is up 2.5% and the core CPI rose 2.3%.  That’s above the Fed’s 2% target rate, but the Fed’s favorite inflation indication, the Personal Consumption Expenditure index, has remained below 2% since 2011.

Personal Consumption Expenditure Price Index Chart

Low wage-rate growth and low inflation – as measured by the Fed’s favorite index, the PCE – comprise two reasons why I think the Fed will most likely delay its first rate increase until June’s FOMC meeting.


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

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

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

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

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

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

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

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

Past performance is no indication of future results.

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

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

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

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

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