Stock Selection is Very Important

After a Rapid Recovery, Stock Selection is Very Important

by Louis Navellier

March 19, 2019

The S&P 500 has now risen 20% since its Christmas Eve low and the VIX (volatility index) is now at its lowest level since early October, when the stock market peaked, and ETF arbitrage spun out of control.

The Wall Street Journal had an interesting article last week entitled, “Riskier Stocks Are Paying Off.”  The article concluded that companies with weaker earnings are outperforming those with steadier profits. If you have any questions about your stocks, I urge you to use my Dividend Grader and Stock Grader databases, which are not experiencing the same issue, probably because my Quantitative grade measures include persistent institutional buying pressure, which sometimes transcends the traditional fundamentals. The bottom line is that the fundamentals are working, especially for stocks with high Quantitative grades.

Strong Dollar Image

Our friends at Bespoke Investment Group also pointed out that the smallest stocks in the S&P 500, based on market capitalization, continue to substantially outperform the overall S&P 500. This bottom 10% (50 stocks) is more domestic-oriented, less adversely impacted by a strong U.S. dollar that continues to negatively impact large multinational companies that are being hurt by a global economic slowdown.

In This Issue

With the market rising again, our authors take a Spring Break with some valuable market tutorials. Bryan Perry looks at rising second-half 2019 earnings forecasts and a 5-point checklist on why the market seems so optimistic. Gary Alexander hearkens back to the roots of our crippling federal entitlement programs and the first war between the Fed and the President in the 1960s. Ivan Martchev addresses common myths about QE and the “excess reserves” vs. inflation and “printing money,” while Jason Bodner expands on his 30-year long-term indicator for overbought vs. oversold markets, using red, green, and yellow bands. Then, I’ll return to present-day events with an analysis of Brexit and the latest U.S. economic indicators.

Income Mail:
Earnings Pendulum Expected to Swing Higher
by Bryan Perry
Making a Second-Half Global Rebound Checklist

Growth Mail:
When Presidents and Fed Chairs REALLY Went to War…
by Gary Alexander
“How Are We Ever Going to SPEND All This Money?”

Global Mail:
The Mystery of the Credit Multiplier
by Ivan Martchev
How the Fed Increases Liquidity Without Fueling Inflation

Sector Spotlight:
The S&P 500 is Like a 20-1 Longshot that Paid Off
by Jason Bodner
What the Red, Green, and Yellow Bands Tell Us

A Look Ahead:
10 Days Until Brexit Explodes into a “No Deal” No Man’s Land
by Louis Navellier
Fed Chairman Powell Has Learned to “Watch His Language”

Income Mail:

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

Earnings Pendulum Expected to Swing Higher

by Bryan Perry

It is no secret that first-quarter earnings are going to fall a fair amount from year-ago-comparisons as well as sequentially from the fourth quarter of 2018. The latest data from FactSet predicts an earnings decline of -3.6% for the S&P, marking the first year-over-year decline since 2016. That would also mark a sharp downward revision of -7.3% from the earnings estimates when the year started.

Piling on to this dramatic lowering of profit expectations, at least 77 S&P companies have issued negative guidance for Q1 2019. Interestingly, within the analyst community, the sector with the highest level of analyst optimism is energy, a sector that delivered the fourth-best year-to-date performance (+14.2%) but one of the most unpopular investment sectors, a victim of volatile oil prices and global slowdown risk.

Back in December 2018, WTI crude was trading at $46.24 a barrel, but during the week leading up to Christmas, everything was tanking. As sentiment for a second-half 2019 recovery is starting to take hold, there is a growing acceptance that the first quarter of 2019 will define an earnings trough. Let’s hope this is the case, because the S&P is trading back up to a P/E of 16.4, which is in line with its 5-year average.

Standard and Poor's 500 Forward 12 Month Price to Earnings Ratio Chart

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

Looking ahead, FactSet reports that analysts see low single-digit earnings growth for the second and third quarters of 2019, followed by high single-digit growth in the fourth quarter, so while investors would seem to be paying up for first-quarter earnings when they are heading down, the market is not all about the here and now, but rather a fluid narrative that is embracing both a domestic as well as global earnings rebound, six to nine months out. Investors buying this market clearly feel that better earnings are coming.

Knowing that forward earnings estimates are fluid, the most recent numbers show second-quarter earnings are expected to increase by just 0.1%, third-quarter earnings are expected to be up 1.8%, and fourth-quarter earnings are expected to increase a heftier 8.1%, which is what the current stock market rally is really embracing, driven by several factors that in and of themselves are also highly fluid.

Making a Second-Half Global Rebound Checklist

The bullish narrative fueling last week’s market surge is predicated on some open-ended situations that seem to be coming toward resolution. First, the drumbeat of a trade deal with China being finalized soon is feeding a second-half rebound narrative that will lead to a bottoming of China’s slowdown and upward revisions for earnings estimates fueled by renewed confidence and plans for more business investment.

Secondly, a reinforced Fed policy – galvanized by the 60 Minutes interview with Fed Chairman Jerome Powell – paved the way for last week’s rally on the notion that Powell’s forecast of a prolonged economic expansion will likely play out. Even with the U.S. economy currently slowing, the Fed’s new directive to be accommodative whenever and wherever necessary is a 180-degree pivot in policy that market participants hope to see resulting in fresh growth prospects during the second half of the year.

Thirdly, some green shoots in the semiconductor sector in the form of a more upbeat tone from chip and chip equipment companies suggest a cyclical bottom for the industry in the making. Because of their widespread use in industrial applications, semiconductors are seen as having “leading indicator” status.

Fourthly, the recent rise in oil prices is seen by some as a bet on second half 2019 demand picking up. Since hitting a recent bottom of $46.24 per barrel in December, WTI crude has rallied back to $58.36 as of last Friday. A clean break above $60 would signal breaking overhead resistance and a new uptrend.

West Texas Intermediate Crude Oil Prices Chart

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

Fifth and last, the almighty dollar, which has been strong (trading to a new one-year high two weeks ago at 97.71) retreated to 96.50 on Powell’s interview and on the notion that the U.S. economy has been comparatively strong vs. other economies. However, if other economies start to see growth pick up, the dollar could lose some of its luster. If so, this condition would bode well for U.S. multinationals and export growth, which would translate into upward earnings growth and bullish analyst revisions.

Investors shouldn’t lose sight that earnings matter all the time. We’ve seen how the market’s wrath can be unloaded on companies that fail to meet Wall Street expectations when the mindset of the investment community is focused on slowing global growth. But, when investor attention pivots to a more bullish forward-looking view of economic conditions both here and abroad, the market can look past the current soft earnings projections for the current quarter and see a brighter future in outlying quarters.

This is how I would best summarize, along with others, how and why the market is rationalizing this rally when earnings projections for Q1 have deteriorated so much. Leave no doubt, there is still clear-cut risk of a trade deal with China unraveling, a hard Brexit, a negative credit event in Italy, a fresh spike in the dollar, or other macro events upsetting this narrative. And while the price action has the market feeling expensive at the moment – which is a major griping point on the financial media cable stations – the market is sending a message that the big picture, though not fully clear yet, is turning sunnier.

Growth Mail:

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

When Presidents and Fed Chairs REALLY Went to War…

by Gary Alexander

In my last few columns, I have been writing about events from 50 or 100 years ago, saying that things aren’t quite so bad now as they were then. You don’t have to go back to the 1860s Civil War to find more fractious times in America. The scary press, radical environmentalism, paranoid Presidents, domestic terrorists, and political polarities were just as bad or worse then. Let me take a short look now at the war of words between the Chairman of the Federal Reserve (now Jerome Powell) and the President (now Donald Trump), something that reached what the press characterized as approaching Defcon-1 last December.

Consider the war between the Fed chair and President 55 years ago: 1964 (like 2017) was a dream year for bulls, as everyone’s taxes were cut (as recently), the U.S. was asserting itself at Tonkin Gulf (“Don’t tread on us!”), and in November President Lyndon Johnson was elected in his own right in the biggest one-party sweep in history: The House was 295-140 Democratic and the Senate was 66-34 True Blue.

But on June 1, 1965, Fed Chairman William McChesney Martin – who had been in that office since 1951 and who was famous for saying that his job was to “take away the punch bowl just as the party gets going” did just that. In his principal address to the Alumni Federation at a Commencement Day luncheon at Columbia University, he said that he saw “disquieting similarities between our present prosperity and the fabulous 1920s.” He recited a recurring mantra of “then, as now” comparisons, including the fact that “many government officials, scholars, and businessmen were convinced that a new economic era had opened, an era in which business fluctuations had become a thing of the past.” He said, “Some experts” (the President’s advisors?) “seem resolved to ignore the lessons of the past.” He turned Biblical, saying that “then as now” there had been seven fat years of uninterrupted economic progress…. Prosperity was unequally concentrated…domestic debt was soaring” (source: “Once in Golconda” by John Brooks).

In the midst of this bullish nirvana (1964-65), according to a 2018 book by former Fed Chairman Alan Greenspan and The Economist political editor Adrian Wooldridge (“Capitalism in America”), President Lyndon Johnson had “pushed his New Frontier economic policies to extremes, as if producing economic growth was a sheer matter of will and determination. In 1964, he bullied the Federal Reserve into keeping interest rates as low as possible at the same time as delivering a powerful fiscal stimulus by signing tax cuts into law. When William McChesney Martin, the chairman of the Fed, demurred, Johnson invited him to his Texas ranch and gave him the once-over, shoving him around the room, yelling in his face,

According to a New York Times report on that meeting, based on several sources present, Johnson told Martin, “You took advantage of me and I’m not going to forget it, because here I am, a sick man. You’ve got me into a position where you can run a rapier into me, and you’ve run it. Martin, my boys are dying in Vietnam, and you won’t print the money I need.” Wow! And you thought Trump’s tweets were cheeky?!

Public Posture of Fed Chairman and President Image

Can you imagine such a war of words and physical shoving going on between President Trump and Fed chairman Powell today? I can’t. Things were indeed further out of had 55 years ago than they are today.

“How Are We Ever Going to SPEND All This Money?”

Part of the hubris of the 1960-74 imperial Presidencies (JFK, LBJ, Nixon) is that they each hired an army of Keynesian economists – disciples of the late British economist John Maynard Keynes – to run their Council of Economic Advisors. According to Greenspan and Woolridge (in “Capitalism in America”), those advisors told them that “the biggest problem facing the country was that the Treasury was raising too much money. The large federal surplus would act as a deflationary brake on economic growth … and the government needed to find ways of spending money. Predictably, there was no shortage of ideas for doing the spending: the 1964 tax cut, a program to put a man on the moon, and… lots of social spending.”

After the JFK assassination, LBJ doubled down, adding a huge array of new Great Society entitlements – Medicare, Medicaid, additions to Social Security, Aid to Families with Dependent Children (AFDC), a war on poverty, public TV and radio (plus escalating Vietnam costs). “Hell,” he said, “I’m sick of all the people who talk about the things we can’t do. We’re the richest country in the world. We can do it all.”

Then, President Nixon “presided over an even bigger expansion of the entitlement state than LBJ,” according to Greenspan and Wooldridge. Nixon’s entitlement expenditures grew 20% faster than LBJ’s.

Entitlements Will Consume All Tax Revenues Chart

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

At first, it seemed to work. By 1973, the nation’s real income was 70% higher than it was in 1961. Magic! In the middle of that 12-year expansion, a top census official said that America’s most pressing problem would be how to consume all the wealth it was producing: “A continuation of recent trends will carry us to unbelievable levels of economic activity in our own lifetimes.” (Are you tired of winning yet?)

Then came the ignominious end of the Vietnam War, Watergate, domestic unrest, the OPEC oil embargo, gas lines, and deep questions about who we are and what we stand for as a nation. As the government attempted to do more and more for us, the citizenry seemed to respect government less. The percentage of Americans who said they “trust the American government” fell from 75% in 1965 to 25% in the late ‘70s.

And now we come full circle to a gaggle of Democratic Presidential hopefuls promising to spend up to $93 trillion in a New Green Deal, including Medicare for All, with Free Education and Guaranteed Jobs!

“Hell, we’re the richest nation in the world, why not?”  Increasingly, their response is Modern Monetary Theory (MMT). Economist Stephanie Kelton, a Bernie Sanders acolyte, argues that governments like the United States can borrow in their own currencies, because we’ll never run out of money, since money, like bonds issued to finance federal deficits, is actually a government promise, not a physical commodity.

Older, wiser economists beg to differ. Larry Summers, economist, professor, former advisor to Presidents Clinton and Obama, told CNBC last week that applying MMT to finance Medicare-for-all or a Green New Deal is dangerous. He said: “Countries all over South America have tried it with disastrous results.”

Fed Chair Jerome Powell was asked about MMT during his semiannual report to Congress. He said: “The idea that deficits don’t matter for countries that can borrow in their own currencies, I think is just wrong.”

MMT proponents also ignore the reality of bond markets. Investors demand high interest rates from governments with high debts and rising borrowing needs. The U.S. national debt is fairly high compared with GDP and is growing faster than the economy. Adopting MMT would surely scare investors and result in much higher interest rates. Rising interest costs would absorb money that was supposed to pay for the free stuff. Obviously, that would result in a financial crisis. The value of the dollar would decline, and inflation would rise. Larry Summers pointed out that MMT-like policies were tried and reversed in the early 1980s in France and the late 1990s in Germany. MMT cannot work. It’s like monetary alchemy.

The Keynesian whiz-kids were wrong in the 1960s, and the MMT knuckleheads are even crazier today.

Global Mail:

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

The Mystery of the Credit Multiplier

by Ivan Martchev

I had one of the strangest conversations with an investor this month regarding the Federal Reserve. He tried to convince me that the Fed does not know what it is doing by paying interest on excess reserves. When they pay interest on excess reserves, he said, they cause banks to hoard cash and not lend, which is why there are so many excess reverses in the system. “The Fed discourages lending with such policies.”

The silence between his statement and my answer may have seemed uncomfortably long. Here is why:

Excess reserves at depository institutions are a function of quantitative easing (QE). They were created on purpose by the Fed, and they are most definitely not a function of the Fed paying excess reserve interest rates. As the Fed bought bonds from primary dealers, they credited their accounts at the Federal Reserve Bank of New York (FRBNY) with electronic cash (excess reserves).

Excess Reserves versus Total Assets Chart

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

FRBNY is a bank for commercial banks and all other open-market operations. FRBNY is to a bank what an average person's neighborhood bank is to that person's checking account. When the Fed rolled out QE, it bought the bonds and credited the primary dealer’s accounts at FRBNY with electronic credits, so when the inflationists say that “the Fed is printing money,” there is no actual ink used. It’s all electronic.

The reason why the Fed created those excess reserves was to stimulate lending, not to prevent it from happening. If they had not done that, the Great Recession of 2008 might have become the Second Great Depression, because the real estate bubble-related losses in the banking system were gargantuan. Such losses resulted from the oxymoronic AAA-rated subprime CDOs and other absurdities that made hedge fund managers like John Paulson of Paulson and Co. very rich by shorting these instruments.

With their QE monetarist maneuvers, the Fed succeeded in creating a very long economic recovery and record profits for the S&P 500 Index, which in turn pushed the S&P 500 Index to an all-time high in 2018. In July 2019, the present economic expansion will become the longest in U.S. history. Since I don't believe there will be a recession in 2019 and maybe not in 2020– with fingers crossed for the Chinese trade deal and President Trump surviving the Mueller mess – we very well may see a fresh all-time high for the S&P 500 Index in 2019, too.

At the root of this massive bull market in U.S. stocks are those very excess reserves which were created with the help of Fed Chairman Ben Bernanke and his Ph.D. in monetary economics from MIT.

In addition to helping credit growth in the U.S. banking system recover from the monstrous real-estate bubble losses, QE is the largest carry trade in the world. The Fed buys bonds with electronic credits (excess reserves) and pockets the interest rate differential between the yields on the bonds they buy and the interest on excess reserves they pay the banks. The interest rate differential between the excess reserve rate and the yield on the Fed bond portfolio is remitted to the U.S. Treasury Department. One could characterize that enormous Fed-designed carry trade as a very profitable side effect of quantitative easing.

How the Fed Increases Liquidity Without Fueling Inflation

When large amounts of excess reserves are created, with the primary task being to stimulate lending in a financial system that is tending toward deflation, the Fed had to solve another big problem, and that is, how to prevent hyperinflation.

Interest Rate on Excess Reserves versus Federal Funds Rate Chart

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

Without interest on excess reserves, the credit multiplier effect that is embedded in the fractional reserve banking system would have produced hyperinflation when those excess reserves enter the fed funds market. (The fed funds market is a place where banks can lend their excess reserves to each other with the supervision of fed funds traders employed by FRBNY that keep the interest rates on those loans within the band specified by the FOMC, presently at 2.25-2.50%.) The variability of the effective fed funds rate is obvious in the chart above as those transactions are being made throughout the day.

When the interest on excess reserves is higher than the fed funds rate, as has been the case for most of the last 10 years, the activity on the fed funds market grinds down. You could say that Ben Bernanke may have caused some of his own fed funds traders to look for other careers, as he was trying to prevent spiraling unemployment caused by the Great Recession. This, as they say, is where the plot thickens.

As the excess reserve interest rate is converging with the fed funds rate and excess reserves themselves are dropping due to the ongoing policy of quantitative tightening done by the Federal Reserve (evident in the Fed’s shrinking balance sheet), it appears to me that the Federal Reserve is trying to resuscitate the credit multiplier effect in the U.S. financial system and return the system back to more normal ways of operation. It’s too early to declare victory yet, but it would appear the Fed is hell-bent on succeeding.

If they succeed, it would appear that job advertisements will be more plentiful for fed funds traders in New York City and that Ben Bernanke will be at the top of the list for the Nobel Prize in Economics.

And the bottom line in the whole process is that the Fed is most certainly not stupid.

Sector Spotlight:

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

The S&P 500 is Like a 20-1 Longshot that Paid Off

by Jason Bodner

Talk about a longshot. In 1923, a horse named “Sweet Kiss” was a 20-1 outsider in a steeplechase race at Belmont race track, New York. The jockey was no jockey at all, but a 35-year-old trainer named Frank Hayes. Furthermore, he suffered a heart attack and died in the middle of the race, but his horse kept on going, so fast he won the race. Hayes was winless before the race and remained winless while alive.

Belmont Track Winner “Sweet Kiss” Image

Well, if horse racing isn’t your thing, I am guessing markets are. Back in December, it seemed like you would have gotten better odds for a dead jockey winning the Kentucky Derby than a +20% market rally in under 12 weeks, but we live in strange times and those who took the bet are smiling now. I won’t strain to pat myself on the back, but while we were living on The Planet of the Bears, I was lonely but bullish.

The Planet of the Stock Market Bears Image

The nay-sayers have piped down considerably in the past 10 weeks, but did you notice last week when the market fell under some pressure, the news headlines immediately adopted a sour note?  Headlines turned negative in an effort to seize eyeballs. For sure, we should pay attention to see if any fundamentals have changed, but when market slippage is met with immediate buying, we should also pay close attention.

We have now spent 26 trading days with an unusual institutional (UI) buy/sell ratio above 80%. The ratio had been declining, but it has stopped falling. And now buying is picking up again. This all started on Monday March 11. Looking at the table below, you can the green column of buying, for March 6th, 7th, and 8th, as the buyers went on vacation. Well, last week they came back and pushed the market higher.

One Month of Map Ratio Table

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

As you can see, that right-most column is the 250-Day Moving Average of the daily measure of buying to selling. It has caught itself and, as buying resumes, we can expect the ratio to start moving higher.

Now, why do I care so much about this ratio of supposed institutional buyers over sellers? Well, I believe that so much of the market’s behavior is dictated by what the big money is doing. Wall Street has forever been fixated on what the “smart money” is doing, but it has had few ways of actually observing and measuring their behavior. That’s what makes this approach so unique. That’s why I focus on this ratio. It can be an excellent guide for future trends, especially at or near market lows.

Don’t just take my word for it. Let’s have a look into 30 years of market price behavior.

What the Red, Green, and Yellow Bands Tell Us

The chart below may look like a groovy 1960s psychedelic album cover, but the trippy colors are actually telling us something about unusual institutional trading activity and its extremes.

Standard and Poor's 500 Price Plots Chart

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

Let’s walk through this chart. The rising big blue mountain range is the S&P 500 price plots for 30 years. When we look at the colored stripes in the sky above it, we notice immediately that most of the time in the past 30 years was spent in yellow. The ratio is yellow when the ratio is in the middle of the range – for our purposes 50% to 70%. This means when the buying is slightly more than selling. This is a healthy reading which indicates a market grinding higher and not at much risk of getting out in front of its skis.

What we should notice next are the green bands. These are readings of extreme buying, periods of being “overbought.” Timing tops with green bands are not always conclusive, but typically line up with advances in market prices after periods of being overbought – not often preceding big drops.

The most interesting correlation of this chart must be the red bands to local troughs in the S&P 500. Red represents periods of prolonged or unsustainable selling, lining up very nicely with market bottoms. This gives further visual evidence that when the market goes oversold, we can expect higher prices afterwards.

So right now, we are in a period of sustained extreme buying (green), which the above chart tells us, more times than not, that we can expect bullish action. This is especially true in the wake of a big washout, the likes of which we saw in late 2018, especially going into the Christmas break.

The best part about this, for me, is what we are observing in terms of what’s being bought. Looking below we see our index and sector returns from Christmas Eve, 2018. Growth is leading the charge. The Russell 2000 and NASDAQ are each up roughly 23% since then. That’s “dead jockey” performance!

Standard and Poor's 500 Sector Indices Changes Tables

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

Leading the growth charge this last week was undoubtedly Information Technology. It vaulted 4.9% for the week. And the Infotech index is up +26.7% since Christmas. Energy, Health, Financials, Materials, Real Estate, and Discretionary were also strong performers last week.

The defensive categories have not performed nearly as well since December lows. But when we look into lesser known indexes, we start to really see what’s up. The Russell 2000 Growth index is up +26.4% since Christmas. The Russell 3000 Growth index was up +3.1% last week alone. But once again there is a clear head-and-shoulders above everyone winner.

And that winner is Semiconductors.

The PHLX Semiconductor rose 5.6% last week. AVGO’s strong Friday performance is helping bolster the entire group. Since the December lows, the PHLX Semis Index is up an astonishing +30%.

Putting unusual buying and selling into context, this action shows that this V-shaped recovery is for real. This is not a rotation out of growth into defensive. This was a rotation out of growth, back into growth.

This is evident on a per stock basis as well. Look at where the biggest buying was this past week. There was hardly any selling to speak of market wide, and buying was concentrated in Infotech, 114-to-2.

Biggest Buying Table

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

When consensus is pervasive and unidirectional, beware. The bears were out there, saying the bull was dead. But if you had bet on a 20-1 horse with a winless jockey who died mid-race, you would have won that bet. Sometimes one voice can’t be drowned out by the many (if you can silence them out). As Nobel laureate Malala Yousafzai said, “When the whole world is silent, even one voice becomes powerful.”

Malala Yousafzai Quote Image

A Look Ahead

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

10 Days Until Brexit Explodes into a “No Deal” No Man’s Land

by Louis Navellier

Brexit is turning out to be a disaster. Last Tuesday, members of Britain’s Parliament overwhelmingly defeated Prime Minister Theresa May’s “Plan B” for Brexit by a 391 to 242 vote. Even though this vote was less decisive than the Brexit plan the Prime Minister May proposed in January (i.e., “Plan A”), this was still a very decisive vote. Then, on Wednesday, British lawmakers rejected by a super-slim margin of only four votes (312 to 308) a “no deal” plan for Brexit on March 29th, setting up a Brexit delay vote.

Brexit Exit Image

On Thursday, members of Parliament voted 412 to 202 to delay Brexit – pursuant to Article 50 – seeking an unspecified extension that the European Commission is expected to grant. Even though the British pound and euro rallied in anticipation of a Brexit delay, U.S. Treasury bond yields continue to meander slightly lower in a clear sign of a flight to quality and continued international capital flight.

As an example of the global economic slowdown hitting European markets, dealers at the Geneva Motor Show seemed downbeat due to slowing vehicle sales in China and Europe. Additionally, these auto makers introduced predominantly new electric vehicles (EV) which cost them tremendously high research and development sunken costs, so their profitability is under tremendous pressure.

Fed Chairman Powell Has Learned to “Watch His Language”

On 60 Minutes nine days ago, Fed Chairman Jerome Powell did a good job as a cheerleader for the U.S. economy. Specifically, he said, “We’ve seen a bit of slowing, but still to healthy levels, in the U.S. economy this year,” adding, “I would say there’s no reason why this economy cannot continue to expand.”

The truth of the matter is that the U.S. economy often suffers from slow economic growth during the first quarter, due to severe winter weather. Now that spring is coming, consumers’ moods should improve and I expect retail spending will improve. Furthermore, economic data in recent weeks has been encouraging, signaling that there is pent-up demand that should help GDP steadily grow in the upcoming months.

For example, the Commerce Department announced that retail sales rose 0.2% in January, but when autos and gasoline sales were excluded, core retail sales rose a robust 1.2%. Discounts for vehicles and lower gasoline prices hindered overall retail sales for January, since auto sales declined 2.4% and sales at gas stations declined 2%. December retail sales were revised down to a 1.6% decline, down from 1.2% originally reported, which marks the largest monthly drop since 2009. However, an early Thanksgiving remains the primary culprit for weak December retail sales. Overall, January retail sales were encouraging and should help to boost the perception that consumer spending will steadily improve in 2019.

On Tuesday, the Labor Department announced that the Consumer Price Index (CPI) rose 0.2% in February, in-line with economists’ expectations. This was the first monthly increase after three straight months of 0% change. Food and energy prices each rose 0.4% in February. Excluding food and energy, the core CPI rose 0.1% in February, the smallest monthly increase in six months. In the past 12 months, the CPI and the core CPI have risen 1.5% and 2.1%, respectively. I should add that gasoline prices rose 1.5% in February, but have declined 9.1% in the 12 months, so there appears to be minimal inflation risk.

Then, on Wednesday, the Labor Department announced that the Producer Price Index (PPI) rose 0.1% in February, below economists’ consensus estimate of a 0.2%. The core PPI, excluding food and energy, also rose 0.1% in February, so there was little evidence of any inflation on the wholesale level. In the past 12 months, the PPI and core PPI rose 1.9% and 2.3%, respectively. Last summer, the PPI and core PPI were running at an annual pace of 3.4% and 3%, respectively, so wholesale inflation has cooled off dramatically in the past several months – one reason why the Fed has hit the “pause” button.

The construction sector is heating up. On Wednesday, the Commerce Department reported that construction spending rose 1.3% in January, substantially higher than economists’ estimate of 0.4% and the largest monthly increase since last April. It was driven by a dramatic 4.9% increase in public construction projects, which is the largest monthly increase in over eight years (since September 2010). December’s construction spending was also revised up dramatically to a 0.8% increase, up from a previous reported 0.6% decline. Overall, this was a very bullish report for continued strong GDP growth.

The Commerce Department also announced on Wednesday that durable goods orders rose 0.4% in January, substantially higher than economists’ consensus estimate of a 0.1% decline. Excluding transportation orders, durable goods orders declined 0.1%. Although commercial aircraft orders remain strong, the transportation sector is still hindered by a 1% decline in auto parts, due predominantly to weakening auto sales. The good news is the orders for core durable goods rose 0.8% in January, the largest increase in six months. December durable goods orders were revised up to a 1.3% increase.

Although this was a positive durable goods report, durable goods orders could plunge if Boeing has any order cancellations due to the 737 Max grounding. The 737 Max issue seems to be related to autopilot software stall characteristics that some pilots may not have been properly trained for, so hopefully between a software update and better pilot training, Boeing will not have massive order cancellations. I actually bought more Boeing stock last week in a sub-advised mutual fund, managed accounts, and a family account, since I am confident that Boeing will act swiftly to address the necessary software and pilot training issues. I should add that the 737 Max is substantially more efficient than older 737 models, so I would be shocked if airlines cancelled their orders, since there is no viable competitor from Airbus.

(Navellier & Associates does own BA in managed accounts and our sub-advised mutual fund.  Louis Navellier and his family do own BA in personal accounts.)

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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