Stocks “Melted Up”

As We Expected, Stocks “Melted Up” After the Fed’s Dovish Words

by Louis Navellier

December 4, 2018

Stocks bounced back last week on improving trading volume as a “melt up” ensued and short sellers ran for cover. The Dow Industrials gained over 1,250 points (+5.16%) on the hope that the Fed may soon tap the brakes on raising key interest rates. The S&P 500 rose 4.85% and the NASDAQ rose 5.64%. Wall Street is now expecting a December Fed rate hike, but maybe just one key interest rate hike in 2019.

On Wednesday, Fed Chairman Jerome Powell got both bond and stock markets excited by appearing to be more dovish in a speech before the Economic Club of New York. Specifically, Chairman Powell said, “Interest rates are still low by historical standards, and they remain just below the broad range of estimates of the level that would be neutral for the economy … that is, neither speeding up nor slowing down growth.”  By saying that rates are “just below neutral,” Powell basically implied that the Fed might be raising rates only once or twice more. In his best Fedspeak, he seemed to be implying that the U.S. economy is close to meeting the Fed’s mandate of promoting maximum employment with price stability.

Balance Scale Image

Over the weekend, all eyes were on President Trump at the G20 meeting in Argentina, where he and Chinese President Xi Jinping met during a long steak dinner to hammer out what was later announced as a 90-day truce to work out the details of a cease fire in the trade war. Trump agreed not to raise tariffs on $200 billion of Chinese goods from 10% to 25% on January 1. China agreed to buy a “very substantial” amount of agricultural, industrial, and energy products, and both sides agreed to open up their markets.

Overall, last week was an encouraging week. I am happy to see the short sellers get squeezed and for the stock market to resume “melting up” on improving trading volume. Despite last week’s strength, financial markets will eventually have to deal with (1) Brexit, (2) a detailed resolution of the trade deal with China, (3) the upcoming FOMC meeting, and (4) a continuing war of words by President Trump toward the Fed.

In This Issue

After the best week in seven years, Bryan Perry still has concerns about the China accord and economic indicators, preferring dividend stocks in 2019. Gary Alexander counters the recent gloom with a closer look at the many other times this bull market has corrected 10% or more. Ivan Martchev may be our most bullish columnist this week, predicting a new high in December or January and no recession before 2020. Jason Bodner notes the return of the growth sectors and the long-awaited return of buyers over sellers, while I cover the escalating war of words by President Trump vs. the Fed Chair over Fed policy decisions.

Income Mail:
Dividend Stocks Should Shine in 2019
by Bryan Perry
Bullish Technical Charts for “Stodgy” Income Assets

Growth Mail:
Another 10% Correction Causes Another Wave of Panic
by Gary Alexander
Buy When Sentiment is “In the Dumpster”

Global Mail:
Here Come New Highs for U.S. Stocks
by Ivan Martchev
2019 Outlook and Beyond

Sector Spotlight:
Growth Sectors Led the Market’s Surge Last Week
by Jason Bodner
The Ratio of Buyers to Sellers Took a Big Leap Up Last Week

A Look Ahead:
Trump Blames Powell for Stalling the Housing & Auto Markets
by Louis Navellier
The Consumer Remains the Brightest Spot in the Economy

Income Mail:

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

Dividend Stocks Should Shine in 2019

by Bryan Perry

The market has provided traders and investors alike with something akin to Mr. Toad’s Wild Ride instead of what we’re more accustomed to – a nice smooth sleigh ride into Christmas. The Thanksgiving holiday week was gut-wrenching, closing down hard on Black Friday to retest the prior lows, but the market held the bottom and this past week has seen investors cheer up as much-needed clarity on key issues emerged.

Investors got what they were hoping for coming into the final month of 2018 – a statement from Fed Chairman Jerome Powell that shed some positive light on interest rates and, more importantly, the likely slower rate of future hikes on short-term rates. To use a common phrase, “It’s what the doctor ordered.”

The S&P 500 traded higher throughout last week after Powell said that he sees current interest rates “just below” neutral. That proved to be a rallying point because the language Mr. Powell used in early October indicated a view that the fed funds rate was “a long way from neutral.” His relatively quick “about face” in the Fed’s narrative is not so surprising when considering the deteriorating tone of the news flow of late.

Third-quarter GDP data releases showed a big jump in unsold inventories of $86.6 billion, well above the estimated $76.3 billion. Consumer spending was revised lower to a 3.6% annual rate from 4.0% due to slower spending on vehicles, which was coincidently followed by headlines of General Motors’ plans to idle five plants and lay off 14,000+ workers – news that sent President Trump into orbital Twitter space.

Additionally, the housing market is starting to plateau on a national level, as prices in New York City, San Francisco, and Seattle fell roughly 10% since last spring or summer. On a broader level, there is a pronounced deceleration as existing home sales fell 2.6% in October to the lowest level in four years. New home sales also showed marked weakness, falling 8.9% to an annual rate of 544,000.

Persistently low interest rates over the past 10 years had fueled double-digit annual home price inflation in most metro areas, but that peaked in the late summer with the air coming out of the market as 15- and 30-year fixed mortgage rates exceeded 5%. Wage-to-mortgage ratios soared past the mortgage industry’s recommended 0.36 benchmark for America’s first-time home buyers seeking a home they can afford.

The five-year chart of the supply of new homes for sale (below) spiked to a 7.4-month supply, but the Fed had an ample heads-up on this trend back in July. To put this number in perspective, during periods of severe economic contraction, like 1980 and 2008, this supply number got up to 11-12 months.

Monthly Supply of Houses in the United States Chart

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

Not surprisingly, the SPDR S&P Homebuilders ETF (XHB) started trading more technically negative in late spring this year and broke down badly in late September.

So, with the two-largest ticket items U.S. consumers consume – homes and cars – on the decline, many are asking why the Fed will likely raise rates again in December. The answer lies in the very robust chart of the Leading Economic Indicators (below) that take into account 10 different components.

Leading Economic Index Bar Chart

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

The Leading Economic Index, sometimes referred to as the Coincident Indicator, increased to 124.54 Index Points in October from 124.26 Index Points in September of 2018, up at a 2.66% annual rate. The coincident indexes combine several indicators to summarize current economic conditions in a single statistic which is skewed heavily toward payroll employment, average hours worked in manufacturing, the unemployment rate, and wage and salary disbursements, as deflated by the consumer price index.

As sales of homes and autos ebb, the source of the Fed’s optimism is the strength of the labor market as evidenced by the latest LEI data posting a record high. With Non-Farm Payrolls for October jumping by 250K, blowing out the estimates of 190K, the robust job market is clearly where the Fed feels not just comfortable, but confident that the economy and the stock market can stand another short-term rate hike.

Fed Chair Powell added in his address to the New York Economic Club that there is no preset policy path. The Fed will be “data-dependent” in its decision making. This also pleased investors, as the market chose to read between the lines that the Fed chair isn’t committed to three rate hikes in 2019. Powell's perceived dovish remarks sent bond yields and the dollar lower. The U.S. Dollar Index dropped 0.6% to 96.84, the 2-yr yield fell three basis points to 2.80%, and the 10-yr yield slipped one basis point to 3.04%.

Bullish Technical Charts for “Stodgy” Income Assets

The signal I see from this latest set of developments is two-fold. First, I expect a continued contraction for P/E multiples for pure growth stocks as the rate of growth of future earnings estimates will continue to come down. Stocks can and do lose value as earnings rise, but not as fast as in prior quarters. Second, the market is already betting on the end of Fed tightening by the outperformance of dividend-paying sectors.

The SPDR Dow Jones REIT ETF (RWR) started making a decisive move up off the October lows as the S&P and most of its leading sectors, like technology, industrials, and consumer discretion, suffered a second nasty retest that left these and most other sectors suffering heavy technical damage. At last week’s close, shares of RWR traded at less than three points off their all-time high and pay a current dividend yield of 3.63%. Its counterpart, the Vanguard Real Estate ETF (VNQ), pays a current yield of 4.70%.

In either case, I see the torch being passed to dividend stocks with high-PE equities going forward.

SPDR Dow Jones REIT Exchange Traded Fund and Utilities Select Sector SPDR Exchange Traded Fund Charts

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

Other notable income-generating assets exhibiting bullish relative strength include the ProShares S&P 500 Dividend Aristocrats ETF (NOBL) and Utilities Select Sector SPDR ETF (XLU). And while a strong case can be made for the “dividend growth” category in consumer discretion, consumer staples, financials, industrials, materials, information technology, and healthcare, most of the highest-rated stocks pay yields under 3%, with the exception of energy, where yields are up because share prices are crushed.

G20 Meeting Image

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

And finally, last weekend’s G20 meeting produced what is being called a “trade truce,” which could support a year-end rally, but both sides are miles apart from resolving their fundamental differences. In fact, other than to not impose more tariffs for 90 days, neither side gave any major concessions over key issues. And while stocks may get a Christmas pop, my view is that institutions will continue to rebalance their portfolios into investment grade corporate bonds, REITs, utilities, and telecom stocks.

The good news is that investors will have a wonderful opportunity to sell their high-flyers into strength.

Growth Mail:

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

Another 10% Correction Causes Another Wave of Panic

by Gary Alexander

“I have a tremendous contempt for this market…it cuts your heart out.
…It’s very hard to be very positive about the market, unless you’re an idiot.”

– Jim Cramer, November 26, 2018

“If you can keep your head when all about you are losing theirs…
Yours is the Earth and everything that’s in it.”

– Rudyard Kipling

Last Monday, Jim Cramer seemed to “lose it” on CNBC, saying, “I have a tremendous contempt for this market, because every time you try to make money with it, it cuts your heart out. That’s a bear market.”

The classic definition of a bear market is a 20% retreat from the previous peak in a major market index. The classic definition of a correction is a 10% decline. Cramer’s math is a little different. “Who cares about the S&P? It’s individual stocks that are down 40 or 50 percent.” Of course, some stocks are down 50%, but if some big-name stocks are down that much, other stocks are flat or even rising. It’s pure math. You can obsess with the stock that is down 50%, or the one that’s up 5%. That’s why we have indexes.

Cramer kept his emotions at “red-alert” levels, saying, “People come in and get their heads cut off. I just feel ashamed. It’s very hard to be very positive about the market unless you’re an idiot.”

Well, call me an idiot. I don’t trade every day, or every week, or every month, and I don’t watch hyper-ventilating or emotional gurus who push buttons on the air an hour or more a day. But fast action seems to be what viewers want. Entertainment value lures more eyeballs, and that’s what advertisers will support.

In the week following Cramer’s rant, the Dow and NASDAQ rose over 5%. In fact, last week was the market’s best week in seven years. That doesn’t mean we’re out of the woods. Cramer might still be right, and the market may go down yet again, but we actually closed November UP in all the major averages:

Markets Year to Date Table

Stocks have been on a yo-yo string all year, with six up months and five down months – a strong January, then a big plunge, a slow claw-back and then another big plunge, and now another start of a recovery with one month to go in a troubled year, but the big picture is a 314% rise in the S&P since March 9, 2009 (despite several major corrections) and a 30% gain since Donald Trump was elected.

Buy When Sentiment is “In the Dumpster”

We have been waiting for a “day of capitulation.” Maybe a breakdown from Jim Cramer is enough, but I prefer to look more logically at market history for guidance. Using the S&P 500, since this bull market began almost 10 years ago, there have been six corrections of 10% or more, including two in the last year. If you want to stretch the traditional 10% measuring stick a tad, there have been eight corrections of 9.8% or more. We also came close to a 20% bear market trigger in 2011 with a 19.4% decline in the S&P 500. In each of these cases, the proper response was to BUY stocks, not panic.

By what logic would Mr. Cramer (or anyone else) say that the proper strategy in the seven previous instances is no longer the proper strategy today? To argue this case, you need to point to a situation of deteriorating fundamentals, such as higher P/E ratios (not so); falling earnings (nope); a looming recession (not close); or significantly higher inflation, interest rates, or taxes (no, nope, and nada).

Bull and Bear Markets and Corrections Chart

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

Each of those previous dips tells a story I remember well. The first big dip in 2010 came during the first major Euro crisis, centered in Greece. The second (largest) dip in the summer of 2011 accompanied a second European crisis with the added circus of a threatened shut-down of the U.S. government following a sovereign debt downgrade of U.S. Treasury bonds and a partisan debate over the debt ceiling. We also saw two terrible crashes of 12% or more within just six months in the summer of 2015 and early 2016.

Let me focus on the last big (13.3%) decline of early 2016. From the start of 2016 to February 11, the Dow Jones Industrials lost 1,765 points in just six weeks. Gold was up 16.6% in six weeks, and oil fell to just $26. According to a CNN/Money posting on February 11, 2016, gloomy feelings stalked Wall Street: “There’s a broad-based lack of confidence,” said Anthony Valeri, investment strategist at LPL Financial. “Everything suggests this market is heading lower in the short term. Psychology is too frail.”

Economist Ed Yardeni’s February 11, 2016 briefing (“Waiting for the Other Shoe”) said that the Investors Intelligence Bull/Bear Ratio fell to 0.63 (the lowest reading since March 2009) and “bearish sentiment climbed to 39.2% (the most bears since October 2011) from 38.1% and 35.4% the prior two weeks.”

That week Fed chair Janet Yellen said that the U.S. is “taking a look” at negative interest rates, which led PIMCO to warn in a report that day (February 11) that negative rates may be having a “chilling effect” on financial markets and carry “unknown consequences.”  At the time, I wrote this headline in Growth Mail (for the week of February 15, 2016): “Market Sentiment is in the Dumpster (That’s Good News).”

On February 11, 2016, the S&P 500 bottomed at 1,829. As of last Friday, it is up 51% from that low. As for sentiment, the American Association for Individual Investors (AAII) was only 25.11% bearish at the market peak of October 4, 2018 but the bears rose to 47.14% on November 22, after the market sagged.

Due to rising earnings and flat prices so far in 2018, growth stocks now cost 17.7 times forward earnings (down from 21.6 last January) while value stocks cost an average 13 times forward earnings (down from 16.6 last January). Growth stock P/Es are far below their “bubble” levels of 40+ in 2000. (The S&P’s overall forward P/E is midway between the growth and value numbers at 15, a modest historic level.)

Forward Price to Earnings Ratios for Standard and Poor's 500 Growth and Value Chart

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

In my view, we should do the same thing now that we did in February of 2016 – buy, or just hold on.

And don’t forget – November to April provide the best six months of the year for stocks, and November already delivered a bit more than its historic norm (1.8% vs. a normal 1.5%), so let’s not panic just yet.

Global Mail:

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

Here Come New Highs for U.S. Stocks

by Ivan Martchev

On October 31, 2018 the S&P 500 Index closed at 2711.74. On November 30, 2018 the index closed at 2760.17. That’s appreciation of 48.43 points or +1.79%. What is the average performance of the S&P 500 for the month of November since 1950 according to the Stock Trader's Almanac? 1.50% (see chart below)

Standard and Poor's 500 Average Monthly Index Returns Bar Chart

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

Now, I know October this year was bad, driven by the triple whammy of Fed jawboning, President Trump’s trade war rhetoric, and divisive midterm election rhetoric. Still, November saw the election come and go with an “as-expected” outcome. The Fed dialed back its hawkish rhetoric and Trump delivered a truce in Buenos Aires with the Chinese trade negotiation team for a 90-day “stay of implementation” of the 25% tariffs on $200 billion of Chinese goods while they hammer out their differences.

Is it conceivable that the S&P 500 may flip into overdrive and make up all the losses it suffered in October? Yes, it sure is, and the chances of hitting an all-time high by December 31 are not insignificant, as that would mean an appreciation of just over 170 S&P 500 points. I would rate those chances at better than even, and if we don't see an all-time high in December, we are likely to see it in January 2019.

United States Two Year Note Yield versus 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.

Empirical evidence from the more professional (and less manic) bond trading world says that the Fed is backing off. In the Treasury market, the 2- and 10-year note Treasury yields declined in November. The 10-year rate finished at 3.01% while the 2-year finished at 2.81% for a grand total of just 20 basis points (bps) difference. Bond yield declining into an expected December Fed rate hike is a sign that the market believes that the Fed is likely to be less aggressive in 2019.

Yield Curve Chart

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

While the difference between the 2- and 10-year notes has not reached zero yet, it will likely invert at some point in 2019, meaning that one should look for a recession in the year 2020. Keep in mind that the all-time highs for the S&P 500 in the prior two cases (in the years 2000 and 2007) came after an inverted yield curve in both cases. This doesn't mean we should follow this same pattern, but it does offer the opportunity that we may yet see the S&P 500 top 3000, particularly if The Donald delivers his victory lap upon a successful Chinese trade deal, which I would view as a major Presidential accomplishment.

2019 Outlook and Beyond

Even with a Chinese trade deal, a dealmaker like Donald Trump cannot eliminate the economic cycle in the United States – or in China, for that matter. The longest economic expansion in the history of the U.S. is 10 years (March 1991-March 2001). It looks likely we will beat that record, as the present economic expansion will become the longest in history as of July 2019. It also looks like there is likely to be a recession before President Trump’s first term ends in January 2021. Dare I say that with a Chinese trade deal under his belt and a denuclearized North Korean peninsula, he has a legitimate claim to run for a second term? Stranger things have happened, like him winning the Presidential election in 2016! That would make the completion of the Mueller investigation a momentous event as the smoke being seen coming from the Special Counsel's office is right now consistent with the size of a California wildfire.

One can say that Season 1 of The Presidential Apprentice was erratic, Season 2 was dramatic but more orderly, but next year’s Season 3 promises to be melodramatic with a Special Counsel’s report ready to be delivered to Congress, which has now flipped Democratic. It is only natural that one should expect political melodrama with such a cast of characters.

Market Declines Chart

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

As to what the stock market might do in a 2019 melodramatic scenario, it is too early to speculate, but suffice it to say that it would depend on the ability of the Federal Reserve to deliver a soft landing for the economy. (It has to be noted that a recession in 2020 or 2021 does not mean a repetition of 2008.)

In the past 100 years there have been only three stock market declines of over 50% – 1929, 1974, and 2008. In all three cases, there was something much bigger than a recession plaguing the stock market. The oil price shock of 1974 was an external event, while 1929 and 2008 were caused by a lot of financial leverage that topped out, culminating in the Great Depression (1930s) and the Great Recession (2008-09).

In the past century, there have been quite a few recessions that did not cause bad bear markets for stocks. Given that the financial system is currently on better footing than it was in 2008 or 1929, the odds are that the next recession would be more normal and not the 1929 or 2008 kind.

Sector Spotlight:

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

Growth Sectors Led the Market’s Surge Last Week

by Jason Bodner

It’s been another exciting week, partially because it was my birthday. OK, what’s so cool about that? What’s cool about that is that the Earth keeps slinging around the Sun at 66,780 miles per hour, so that means the Earth has gone 584,337,600 miles around the Sun since my last birthday!

Stock Market Indices Charts

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

Aside from that, I watched the market work to repair itself. Many don’t trust this rally, but I saw some bullish action last week. First, the market closed higher than it opened every day last week. Even futures that were lower in premarket were bought up before the open. This is a sign of technical strengthening.

The big move in each index (above) obviously came on Wednesday, when Fed Chair Jerome Powell’s dovish comments were read to mean that future rate hikes will be limited, for now, at least in the market’s opinion. The market’s big rally also sparked short covering, which possibly ignited some “real” buying.

More on that in a moment. First, let’s check out the 1-week performance of the sectors – it’s pretty juicy!

Standard and Poor's 500 Sector Indices Changes Table

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

The popular chopping-block sectors got major lifts. Consumer Discretionary, Information Technology, and Communications Services finally got some love. Staples, Real Estate, and Utilities were among the “least-good” performers last week. So, the growth sectors which had been under fire for the last few months found a bid, and the defensive sectors which had been a haven were less compelling last week. Even energy performed pretty well as Crude Oil may have found a floor at $50.

This type of sector performance is a bullish setup.

The Ratio of Buyers to Sellers Took a Big Leap Up Last Week

Most interesting to me is the unusual institutional buying and selling data that I look at. We’ve talked about selling needing to slow before we head higher. Well, selling is slowing. The ratio is also jumping, which happens when selling slows. This is very bullish - I expect a pop in a big way for the market.

For a quick recap on how the MAP-IT ratio works, it calculates a 25-day moving-average ratio of unusual buy signals over unusual sell signals in U.S. stocks. Out of 5,500 stocks, we see an average MAP-IT ratio of 63% over 1,615 trading days of data (since July 2012). Seeing an average signal above 50 makes sense in an up-trending market, which we’ve certainly seen since 2012. (The Russell 2000 ETF, for instance, is up 89% from July 2, 2012 to last Friday’s close.) More buying than selling on individual stocks means we would expect higher market prices. This has been a reliable assumption in these 6+ years of data.

When the ratio heads negative, we would expect to see lower market prices, at least short-term (see chart).

Russell 2000 Chart

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

What’s the ratio telling us now?  The MAP-IT ratio gapping up tell us to expect higher prices. On October 24th it fell below 25% (the dip into the green territory), meaning oversold. We said then to expect a bounce, and it bounced. Then, we retested lows on lower volume – something we also said to expect.

During that retest the ratio actually crept up to the 28% range (above oversold). This was because lower volume meant fewer sell signals. Our ratio went up not because of buying, but because of less selling, as the selling was exhausting itself. Last week, our ratio popped up to near 36%. We are now starting to see buying signals. Because this is a 25-day moving average, I expect it to climb higher as days accumulate.

When can we expect to see the ratio in the 60’s again? We need time, because for a signal to fire in our model, we need to pierce through roughly 11-week highs or lows. This much time must roll off to allow our interim highs and lows to “reset.” (The latest S&P 500 at all-time highs came about 10 weeks ago.)

Our ratio is climbing because the selling is likely over, which is what everyone really wants to hear. The important thing to remember is that a ratio climbing out of oversold territory is very bullish for the overall market, according the MAP data. So, that’s another reason why I am bullish.

Lastly, we have the everyday “reasons” to be bullish. Wall Street is infatuated with reasons. People tend not to accept price action without a logical reason attached to it. I am comfortable accepting price action at first and finding the real reason later. However, the general public likes it this way: Prices change, and the media needs to provide answers because everyone wants answers. We might not know the real reason for weeks or months. Now is no different. I look at the data and announce in real time what I see.

For now, I’ll say that last week’s rally was helped by the dovish comments from the Fed chair. That removes one cloud looming overhead. The G-20 could also remove another major cloud in terms of trade-war progress with Presidents Trump and Xi. It also seems like there was a very real short-covering component last week. But does that spark “real buying”? I believe it does, and I think we will see the market climb in the coming weeks. In addition, the usual past-mentioned reasons I’ve listed still hold: Record sales and earnings, low taxes, stock buy-backs, and a strong dollar all remain wind at our backs.

Low energy prices may seem troublesome, but this is a double-edged sword. Cratering oil is an obvious negative for energy companies relying on higher oil prices to maintain profit margins. The flipside is with gas prices falling at the pump, consumers have more money for holiday shopping and personal spending.

Either way, the data says we are headed higher, and I trust the data. The negative sentiment is still out there, which is one more reason I am positive. Love him or loathe him, there is no denying Elon Musk’s forward-thinking nature and his positive attitude. He said: “I’d rather be optimistic and wrong than pessimistic and right.” The data says, “Be optimistic,” and the data tends to be right.

A Look Ahead

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

Trump Blames Powell for Stalling the Housing & Auto Markets

by Louis Navellier

President Trump provided the Washington Post last Tuesday with a scathing interview, in which he expressed his dissatisfaction with both General Motors and Fed Chairman Jerome Powell. Specifically, President Trump said that he blames Fed Chairman Powell and GM’s decision to close a number of plants and lay off workers for Wall Street’s recent sell-off. Trump said that rising interest rates were hurting the U.S. economy and added that he regrets appointing Powell as Fed Chairman, adding that “I’m not even a little bit happy with my selection of Jay. Not even a little bit.”  Interestingly, President Trump also said that “I’m not blaming anybody, but I’m just telling you that I think the Fed is way off-base with what they’re doing.”  Clearly, if the FOMC raises key interest rates at its December 19th meeting, as many economists anticipate, President Trump’s subsequent reaction is likely to be very assertive!

The Fed loves to raise key interest rates in late December, since it expects to get less grief when we are all distracted around Christmas. However, President Trump is almost guaranteed to belittle the Fed in a vicious tweet or two (or more) if the Fed raises interest rates, as most economists now expect them to do.

Speaking of the automotive industry, GM’s announcement last week to cut up to 14,800 jobs in Canada and the U.S. caused President Trump to tweet: “If GM doesn’t want to keep their jobs in the United States, they should pay back the $11.2 billion bailout that was funded by the American taxpayer.”

GM is essentially following Ford in shutting down its less profitable car lines to focus on its much more profitable truck business. President Trump also tweeted that “We are now looking at cutting all GM subsidies, including for electric cars.”  Ironically, the Chevy Volt plug-in hybrid, was one of the cars that was already on the chopping block, although the all-electric Chevy Bolt will likely survive.

Obviously, the politicians in Maryland, Michigan, and Ohio, where jobs will be lost, were also furious. It will be interesting what plays out moving forward, but since GM is not cutting jobs in China and Mexico, President Trump may get even more furious, and higher tariffs on imported cars may be forthcoming.

Adding to the President’s outrage, there has also been a sudden deceleration in the housing market. On Wednesday, the Commerce Department announced that new home sales plunged 8.9% on October to an annual rate of 544,000, substantially below economists’ consensus estimate of 589,000. In the past 12 months, new home sales declined 12%. The supply of new homes for sale surged to a 7.4-month supply.

On Thursday, the National Association of Realtors (NAR) announced that existing home sales declined 2.6% in October to the lowest level since June 2014. A dramatic 8.9% decline in the West accounted for the majority of the decline, since sales in the Northeast rose 0.7%. The NAR is now forecasting existing home sales to decline by 3.1% in 2018 and for median home prices to decline 2.5% in 2019.

On Tuesday, Case-Shiller reported that its 20-city home price index was flat in September, below the economists’ consensus estimate of a 0.3% increase. In the past 12 months, the Case-Shiller 20-city index was up 5.1%, which was the slowest pace since 2016. Furthermore, now that previously hot markets like Dallas and Denver are cooling off, home price appreciation is expected to continue to slow. Of the 20 cities that Case-Shiller surveyed, eight reported price declines, led by Seattle, San Diego, Los Angeles, and Washington DC, so if the Fed is looking for an excuse to stop raising rates, just look at housing.

The Consumer Remains the Brightest Spot in the Economy

Online Shopping Image

The holiday shopping season is one bright spot. Amazon.com announced that Cyber Monday was its biggest shopping day ever. From Thanksgiving through Cyber Monday, Amazon.com said that over 180 million items were ordered during this five-day span. Clearly, the holiday shopping season is off to a strong start. Furthermore, since Amazon.com is a market leader, there is now much more hope for a stock market recovery. Clearly, consumers are doing their part to insure strong fourth-quarter GDP growth.

The Commerce Department on Thursday reported that personal income rose by 0.5% in October, which represents the largest monthly gain since January and bodes well for continued strong consumer spending. The savings rate slowed to 6.2%, the lowest in almost a year, as consumers are clearly spending more.

The Commerce Department also reported that the Fed’s favorite inflation indicator, namely the Personal Consumption Expenditure (PCE) index rose to a 2% annual pace, due largely to increases for prescription drugs, electricity, and natural gas. Excluding food and energy, the core PCE rose at a 1.8% annual pace. If the PCE decelerates due to lower crude oil prices, the Fed will be more inclined to stop raising rates.

Regarding GDP growth, the Commerce Department on Wednesday reaffirmed that third-quarter GDP rose at a 3.5% annual pace. They also confirmed that corporate profits hit a six-year high. In the past 12 months, corporate profits have risen 10.3%. The Commerce Department also reported that business spending in the third quarter was a bit stronger than previously estimated.

Consumer spending was revised to a 3.6% annual pace in the third quarter, down from 4% previously estimated due to slower spending on vehicles. The amount of unsold inventories in the third quarter rose to $86.6 billion, up from $76.3 billion previously estimated, so inventory growth as well as consumer spending accounted for the bulk of third-quarter GDP growth.

The only glitch is that when there is a big inventory buildup, the next quarter’s GDP growth all too often decelerates, so fourth-quarter GDP is currently estimated at only a 2.5% annual pace by the Atlanta Fed. Perhaps this GDP slowdown could tell a “data dependent” Fed to take it easy on interest rate increases.

(Navellier & Associates owns AMZN in managed accounts and a sub-advised mutual fund.  Louis Navellier and his family own AMZN via the sub-advised mutual fund but does not own GM or Ford.)


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