Stocks Retreat on Tensions

Stocks Retreat on Escalating Tensions in Hong Kong and China

by Louis Navellier

August 20, 2019

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Last week was another roller-coaster ride, but the S&P’s net decline was only 1% for the week, and just -4.5% from its all-time high on July 26. The big news was the ongoing protests in Hong Kong, which are casting a cloud over China and raising concerns about global growth. These protests have now become more violent, including petrol bombs by some rioters and tear gas by the riot police to disperse crowds.

Protestors congregated at the airport, knowing that the Chinese police would not use tear gas within the airport, but riot police stormed the airport last Tuesday to disperse the protestors. These protests are now hurting the Hong Kong economy, so it will be interesting to see how this fight over lost freedoms in Hong Kong will eventually be resolved. In the meantime, the Chinese military remains on the border and if they enter Hong Kong for the first time since just after World War II, the stock market will likely have an adverse reaction. Here is a link to a podcast I recorded last week on these Hong Kong/China protests.

In This Issue

Bryan Perry sees this latest market sell-off as a rare opportunity for active money managers (like us) to show their stuff in selecting the winners that will likely emerge as leaders from the current carnage. Gary Alexander looks beyond the scary headlines of the past and present to identify America as the best place for your stock money now. Ivan Martchev turns his global attention south of the equator to the surprise election outcome in Argentina and what it implies for their currency and stock market. Jason Bodner examines what last week’s down days tell us and why we shouldn’t freak out over a partially inverted yield curve. Then I’ll return to analyze the U.S. market in light of our competitors in China and Europe.

Income Mail:
Looking for Phoenix Stocks from August’s Ashes to Lead the Market Forward
by Bryan Perry
It's Time for Active Managers to Show Their Stuff

Growth Mail:
If Not U.S. Stocks, Where Else? If Not Now, When?
by Gary Alexander
Despite August’s Volatility, Now is a Great Time to Invest

Global Mail:
Time to “Cry for Argentina”?
by Ivan Martchev
Blue Chips are a Hedge for Inflation

Sector Spotlight:
What Happened on Last Week’s Big Down Days?
by Jason Bodner
Don’t Freak Out About the “Inverted Yield Curve”

A Look Ahead:
China and Europe are Slowing, the U.S. is Growing
by Louis Navellier
Are We Headed for an Imminent Recession? I Wouldn’t Bet on It

Income Mail:

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

Looking for Phoenix Stocks from August’s Ashes to Lead the Market Forward

by Bryan Perry

Few would argue against the position that when the S&P 500 hit a new all-time high in late July, it was a new high not to be trusted. Rumors of a trade deal and the prospect of a 50-basis point rate cut were somehow being thought of as having “Street cred” when both assumptions were fairy dust at best. Such a fickle market that goes up on poorly grounded momentum was bound to give way after absorbing a double-dose of disappointment after the Fed cut rates by 25 basis points and China devalued the yuan.

Two weeks later, in the bottom of the ninth inning of second-quarter earnings season, the S&P is back to trading at the same level it was on January 1, 2018. So, after nearly 20 months, index investors have made zero on their money. Collecting a 1.8% dividend yield on the S&P while enduring the wild ride of the past year-and-a-half makes passive investing feel anything but “passive.”

Now, I wouldn’t want to awaken index fund legend Jack Bogle from his long slumber. On a long-term basis, he was probably right about average investors having little chance to outperform the S&P, but a skillful money manager in the late stages of a bull run should be able to beat the S&P with a lower beta.

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

One thing I relish when the market undergoes a nasty correction – such as the past two weeks – is that after every stock has been washed, rinsed, and gone through the spin cycle, we get a clear idea of which stocks are the best to own going forward. In a sell-first, ask-questions-later market landscape, with high-frequency algorithm trading programs going nuts, it truly pays to take special note of those stocks that don’t decouple from their primary uptrends and become the new “institutional darlings.”

It's Time for Active Managers to Show Their Stuff

After the market emerges from its current August correction, as I believe it will, the number of stocks hitting new all-time highs and outperforming the S&P 500 will be reduced. It’s only natural that the market narrows as the bull market matures. Index investors naturally put a floor under stocks that have heavy S&P 500 weightings, which makes the task increasingly difficult in a stock picker’s market.

At present, the FAANG stocks are not leading, whereas Microsoft (MSFT) and Texas Instruments (TXN) are. For the index junkies, Mr. Softie occupies the top spot in the SPDR S&P 500 ETF (SPY), followed by Apple, Amazon.com, Facebook, Berkshire Hathaway, and Alphabet holding positions #2-6, but TXN is nowhere to be found within the top 25 holdings. Instead, the upper 20% of the index is top-heavy with banks, drug, industrial, and energy stocks.

(A few Navellier & Associates clients own positions in Microsoft, Texas Instruments, Apple, Amazon.com, and Facebook, but not Berkshire Hathaway, and Alphabet. Bryan Perry does not own Microsoft, Texas Instruments, Apple, Amazon.com, Facebook, Berkshire Hathaway, or Alphabet in personal accounts.)

So, unless there is a resumption of accelerating growth, which isn’t the case when the Fed is preparing to slash interest rates further, the S&P 500 will likely grind sideways to slightly higher as the safe haven consumer staples, telecoms, and utilities stocks simply don’t make up enough combined weighting to counter the stalling out of many of the big names within the index.

There is also a greater move to own big cap, blue-chip stocks where P/E ratios and strong dividend growth actually factor heavily into forward capital rotation. Very few stocks will get away with having superior top line growth but no earnings or P/E to speak of. Investors will also need to keep a close eye on the S&P advance/decline line, arguably the most important stock market gauge at this stage.

The past two weeks show erratic behavior similar to last May – a market correction month like August, after which the market righted itself. My view is that the ground under the market has shifted and earnings growth tied to attractive P/E ratios will begin to matter more following the kind of shakeout investors have just endured. There will still be plenty of high-beta stocks that will trade higher, but only if they held their crucial technical support levels during the current washout.

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

Professional money is paying super close attention to those stocks that not only exceeded second-quarter sales and earnings estimates, but also provided solid upside guidance for the third quarter and for the full year. Plus, those stocks that have the luxury of dominating their space will also maintain a strong institutional fan base in some of the hottest secular themes, such as 5G technology, the Internet of Things (IoT), artificial intelligence (AI), digital advertising, space wars, mobile e-commerce, and advanced medicine. That may sound like a lot, but the playing field of superior stocks has actually gotten smaller.

Growth Mail:

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

If Not U.S. Stocks, Where Else? If Not Now, When?

by Gary Alexander

August is doing its usual number to investor confidence by whip-sawing the major averages up and down on a daily basis. After last Wednesday’s 800-point fall – the worst this year – warnings came out about more declines to come. Mark Hulbert wrote in MarketWatch on Friday, “Here’s why U.S. stocks could fall further.” Others latched on to the inverted yield curve, pointing to an imminent recession looming. Others pointed to the history of trade wars or the looming conflict between China and Hong Kong. Others looked at the dismal array of Democratic candidates (or the Republican incumbent) and a rising sea of red ink flowing out of Washington and questioned why to invest in America over the next five years.

It’s always easy to find problems at home, but when you compare American fundamentals to the overseas options, it’s quickly obvious that the most comfortable place for your money is here at home. Chinese companies may sport dazzling growth statistics, but are those numbers reliable? Are their accounting procedures guaranteed by accounting firms you respect? Is Beijing still able to favor one company over another on a whim? Can their banking system absorb the huge levels of debt overhanging their economy?

Europe is trapped in a negative-yielding economy with zero growth due in large part to a sclerotic and geriatric welfare-state whose “youth movement” is composed of immigrants who increasingly refuse to work. I just read one study, excerpted in “Scandinavian Unexceptionalism: Culture, Markets and the Failure of Third-Way Socialism” (2015) by Nima Sanandaji, who grew up in an Iranian immigrant family in Sweden. The study examined individuals in the prime working age, 30-55, who were granted disability pensions in Norway between 1992 and 2003. Among native Norwegians, 11% of men and 16% of women claimed disability, while 25% of men and 24% of women living in Norway but born in the Middle East and North Africa age 30-55 claimed disability in those years. Why such high numbers of disabled in one of the healthiest countries in the world – a nation that won the most medals in the 2018 Winter Olympics, despite having only 5 million people?  The author answers, “Many individuals misuse the system. Being granted full disability pension benefits is often more lucrative than being supported by unemployment.”

True, that also happens in the U.S., but only in the mid-single digits, not up to 25% of the population.

Unemployment rates in Europe are generally twice as high in Europe as in the U.S., but it’s important to remember that this army of (falsely claimed) disabled people are NOT counted among the unemployed.

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

Despite August’s Volatility, Now is a Great Time to Invest

As I’ve often shown in the past, this is the best time of year to invest. September and October used to be the worst months of the year, but lately August has earned that distinction. In the last 20 years, the fourth quarter has returned three times the gains of the other three quarters combined. In this year, we have the added advantage of the S&P 500 returning 50 basis points more in yield than the 10-year Treasury bond.

In the business climate, the earnings trough is now behind us. Earnings are expected to pick up in the third quarter and reach +6% in the fourth quarter and return to double digits next year. Profit margins are already in double digits. Corporate tax rates remain low. GDP growth remains healthy. The U.S. holds the best cards in the trade dispute with China while our other major trade partners are already lowering tariffs.

In looking back at 40 years of attending economic seminars, editing market newsletters, and researching columns like this, I can recall book after book that look like the following, popular in the early 1990s:

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I’ve moderated countless bull vs. bear debates in the last 40 years. I recall one in October 1990 after the market had fallen 20% in three months. In an audience of 500, there were only two bulls, but they were the only two poised to profit from the greatest decade in market history – the 1990s. At the time, the Dow was down to 2365 on October 11, 1990 when we held this bull vs. bear panel with only two bulls.

The Ravi Batra book was all the talk of that conference, since he had been proven “right” by the crash of 1990. However, the market recovered. That didn’t stop the bears from believing the worst. When we convened in 1992 and 1993, the Harry Figgie book, “Bankruptcy 1995,” was the talk of the conference. America would go bankrupt in Clinton’s first term, they said. Treasury bonds would default. Instead, we had balanced budgets by 1999 and a Dow Jones average over 11,700, a five-fold gain in nine years.

Here are the latest market anxieties we face today – as seen in the last three covers of The Economist.

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Bears tell a fascinating story, and they sell a lot of books and magazines, but the bulls make more money.

Global Mail:

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

Time to “Cry for Argentina”?

by Ivan Martchev

The Federal Reserve has now largely stopped its monetary tightening, yet the most vulnerable emerging market currencies are still falling like flies. The worst performer is the Argentine peso, which traded as low as 62 to the dollar on the nation’s surprising election results last week. For all intents and purposes, the peso lost about half its value in 2018, catalyzed by the Fed's monetary tightening, and it halved again in 2019, with the political landscape shifting against Argentina’s present President, Mauricio Macri.

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

The populist opposition candidate – Alberto Fernandez, with former center-left ex-president Cristina Fernandez de Kirchner as his running mate – was 15 points ahead of Macri in the primaries. This leaves the Fernandez/de Kirchner ticket as the favorite to win the October election without a second round.

It is entirely another matter that Ms. de Kirchner’s policies put Argentina in this terrible economic state of affairs, which Macri was trying to clean up. As is often the case, trying to make painful reforms necessary to fix the country can get you thrown out of office, which is what appears to be happening with Macri.

The Argentine peso went down on the news of the election result and so did Argentina’s stock market. When compounding the move in the stock market by the depreciation rate of the Argentine peso, the stock market ended up losing 48% in a single day last week. This is like having two back-to-back 1987 “Black Mondays” on Wall Street compressed into a single day.

With the trade friction between the U.S. and China dominating the front-page news here, who’s going to worry about Argentina, right? This is why so little has been reported about this lower hemisphere event.

The reason for the local panic is that the opposition presidential candidate has been known to not favor the $57 billion IMF bailout that Macri secured last year. He went on record last week stating that the country would struggle under present conditions to repay the IMF loan, so he would seek to renegotiate repayment terms. Fernandez described the IMF loan as “harmful,” even though he admitted that without the IMF deal the country would have defaulted on its repayments, adding that the relationship with the IMF had to be one of “respect” not “submission.” This sure sounds like he is trying to have his cake and eat it too, which is often the case in politics when candidates would say almost anything to get into office.

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

This is a dangerous situation for long-term investors in Argentinian stocks, as the October election is some time away, yet the Argentine country ETF got so bombed out that there may be a trade for short-term speculators. There may be a rebound in the AGT ADR “to close the gap” in the country’s iShares and in more than half a dozen Argentine ADRs that are listed on NYSE or Nasdaq. One of the more liquid ADRs is Telecom Argentina (TEO), which looks similarly bombed out to the country’s iShares.

(Navellier & Associates does not own a position in Telecom Argentina (TEO), Ivan Martchev does not own Telecom Argentina (TEO), in personal accounts.)

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

That said, any rebound should be short-lived, for if Fernandez takes over, he may default on the IMF loan, and go through the standard Argentine meat-grinder economic procedure for the country to inflate away its debts. The Argentines sure know how to borrow money and default on their debts. They have perfected that procedure many times over in the past 100 years. Total external debt stands at $275.83 billion as of March 31, 2019, while the central banks foreign exchange reserves stand at $58.6 billion.

Blue Chips are a Hedge for Inflation

As the Argentine peso took the long route from 1-1 on the ARSUSD exchange to over 60-1 last week, the Argentine stock market went parabolic. The Argentine Merval Index declined to a level of 200 index points in 2002 just before the Argentine peso broke the hard peg to the dollar, while before the sell-off from the result of last week's elections the Merval had a high of 44,355.

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

While over the long term the Argentine stock market and the peso are positively correlated, it is significantly more dramatic if one looks at the long-term chart of Telecom Argentina (TEO), priced in U.S. dollars – the point being that the present situation is not a buy-and-hold opportunity until the new Argentine administration is in and has managed to roll out its new peso bastardization plan.

It is a big stretch to call the component of the Merval Index “blue chips,” but the point remains that stocks in general are a hedge against inflation as their revenues and earnings are adjusted for the higher inflation rate. It looks like we are ready to make yet another of those adjustments in Argentina.

Sector Spotlight:

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

What Happened on Last Week’s Big Down Days?

by Jason Bodner

Carol works downstairs. In last Wednesday’s big down day, she asked: “What’s up with this crazy market I see on the news? My nephew is good at trading stocks. He even said its nuts!” I said: “Everyone’s freaked-out about inverted yield-curves; it’s supposed to be a flag for recession. But the news needs to make money. They want your eyeballs. The quickest formula for that is creating fear.”

“I guess so,” she responded, “but stocks are moving so much!”

“Carol, here’s a question: Did you sell stocks this week?”

“No.”

“How about your nephew?”

“No, I don’t think so...”

“I didn’t sell anything! I bet if we ask everyone we know if they sold, their answer would also be no.”

“Then who is selling?” she asked.

“AHA! It’s the machines.”

According to an article in Seeking Alpha published earlier this year, 80% of the market’s volume is based on algorithmic (algo) or computerized trading, which thrives in low-liquidity markets.

Source: “Algo Trading Dominates 80% of Stock Market,” January 1, 2019.

On Wall Street, many are lounging in their summer-vacation homes. Desks are staffed by junior traders. With fewer actual people on Wall Street, computers push prices around to capture intraday volatility.

As selling spiked last Monday, a $2 billion fund trader asked me why. I’ll summarize my answer:

  1. Our buy ratio fell, indicating that buying dried up. Whenever we see the buy/sell ratio fall below 45%, we’ve always seen more selling. Another selling week could see it drop below 45%.
  2. Only 22% of signals were buying, down from 35% the week prior. Buying hasn’t returned. ETF volumes rose – buying risk-off, selling risk-on. ETF volume typically spikes at the bottoms.
  3. Volumes were high on Monday but lower through the week. I think that selling isn’t over. Buying was defensive – concentrated in Reits, Utilities, and Health Care.
  4. This week was not the capitulation low. Normally, that’s when 50% of our universe shows sell signals. Think: the end of December 2018 – a definitive bottom.
  5. Looking at sectors, Energy, Financials, Materials, Industrials, & Discretionary felt the worst pain. Only Energy is close to oversold. That means we’ve seen worse selling before

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

Bottom line: I expect to see more downside, but long-term investors should prepare for buying opportunities now. Near-term patience rewards investors.

We’ve warned of this August volatility for the past several weeks. All through July, we wrote about it, and right on cue, August 1 delivered heavy volatility. When liquidity dries up, algorithms need bad news to act on. Wednesday the news hit that the yield-curve inverted. Doom and gloom freaks everyone out (and sells more ads). Then algo-traders take advantage and push prices around. High-frequency, short-term, and day trading … all cause volatility. Bespoke Research says August is one of the worst months for performance and volatility. I have bad news for you: September sucks too, so be prepared:

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

Don’t Freak Out About the “Inverted Yield Curve”

In the meantime, don’t freak about the inverted yield-curve.

Headlines paint the end of the world and a red flag for recession. But is it?

Not really. Things in the U.S. are looking great. Second-quarter earnings just wrapped up with fantastic numbers. About 75% beat earnings and 57% beat sales estimates. Profit margins are increasing.

Overseas, Germany slipped into a recession, and there is global growth slowdown as China’s admitting a slowdown. Latin America is a mess, evidenced by Argentina’s Miraval Index one-day -48% plummet last week, so global investors realize that U.S. stocks are an oasis. There’s a capital flight out of European stocks. They’re nervous about everything: Brexit, global slowdown, the U.S. wanting to buy Greenland!

Investors are fleeing to long-dated bonds because they’re safer, which squishes yields. If you lend for a long time, you get a premium. If you lend a short time, you get less. That’s a normal yield-curve (yellow below). But when everybody rushes to buy 30-year bonds, that yield-curve squishes down, and the front end might invert a little bit, delivering a red (last month), blue (last week), or green (now) yield curve.

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

One headline screamed: “First yield-curve inversion since 2005, which preceded 2007-2009 recession: Inversions preceded every recession.” But, that’s just another way to lie with statistics… A more accurate way to phrase that correlation would be this: While every recession was preceded with a yield-curve inversion, not every yield-curve inversion has preceded a recession.

And frankly, this time, it IS different.

2007 was a leveraged debt bomb with speculative home buying assuming never-falling prices. Big banks bundled those mortgages together and sold them as AAA-rated paper to pension funds and endowments.

What happened? Defaults soared above expectations, and the housing market collapsed. The whole thing went up in flames. But today, we don’t have major levered debt bombs that anybody’s talking about.

But people still worry, so much so that most of Europe’s yield is negative, meaning investors prefer to pay for safe money than earn a risky return.

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

Again, U.S. earnings are great, corporate tax rates are low, and profit margins are high. While there are clear international risks, once logic prevails, there will be a rush into U.S. equities: specifically, there will likely be a focus on domestic small-cap names with low international exposure.

As you know, Trump delayed tariffs until December, but that rally fizzled after one day, met with negative yield-curve news. But facts remain, Bond interest is taxed as ordinary income while dividends are taxed as long-term capital gains. For high-income investors, holding stocks delivers 62% more profit!

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

This is very bullish, not bearish. Even if a recession comes, market peaks historically wait for 18–24 months after that event. And how does the market typically do after a yield-curve inversion? These are the average returns for the S&P 500 post yield-curve inversions since 1978.

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

Now is a good time to look for the best stocks with the strongest fundamentals, including those with strong 1-3-year growth rates, high profits, low debt, and unique business models.

These tend to be the big winners, so don’t freak. Relax and take a vacation – like Wall Street is doing.

This is August. But don’t forget September. Or October. Mark Twain once said: “October: This is one of the peculiarly dangerous months to speculate in stocks in. The others are July, January, September, April, November, May, March, June, December, August and February.”

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A Look Ahead

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

China and Europe are Slowing, the U.S. is Growing

by Louis Navellier

If you watch Bloomberg TV, they are increasingly blaming the Trump Administration for the China trade talk standoffs. I look at things a bit differently. President Trump’s negotiation style is to make everyone involved as uncomfortable as possible to try to get a better outcome. Whether the Chinese delegation will come to Washington D.C. in September for continued negotiations is now in question. If these formal trade negotiations get canceled, then all bets are off and financial markets could have an adverse reaction.

In a surprise move to lure China back to the trade table, the Trump Administration delayed the 10% tariffs on $300 billion in imported goods until December. This lifted the market on Tuesday. This move also gives the Trump Administration room to negotiate from strength in September with the threat of another 10% tariffs on $300 billion to be imposed in December. Clearly, the Trump Administration wants to try multiple avenues to negotiate a new trade deal with China before the election season peaks in mid-2020.

On Wednesday, the Chinese National Bureau of Statistics announced that its industrial output rose 4.8% in July compared to a year ago – a significant deceleration from the 6.3% increase reported in June. Retail sales in China also slowed to a 7.6% annual pace in July, down from a 9.8% pace in June and economists’ expectations of an 8.5% annual growth in July, so this was a major disappointment.

In the meantime, the International Monetary Fund (IMF) apparently is not siding with the U.S. after it declared China a currency manipulator – which is a serious allegation. If the IMF had concluded that China is a currency manipulator, then U.S. businesses would be able to sue for damages, which would create a big, endless legal mess. Instead, the IMF apparently believes that the weakness in the Chinese yuan is due to its decelerating economic growth, exacerbated by the Hong Kong protests. I should add that since the head of the IMF, Christine Lagarde, is due to become the President of the European Central Bank (ECB) in November, the last thing she wants is to pick a fight with China to tarnish her IMF legacy.

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I should add that Christine Lagarde’s greatest achievement at the IMF was helping Argentina to stabilize its economy. Unfortunately, Argentina’s bond and stock markets collapsed last week in the wake of President Mauricio Macri’s preliminary defeat in primary elections. It is now widely anticipated that Argentina will elect a populist President in October, invoking protectionism and an attempt to renegotiate its debt with the IMF. If this happens, the IMF may not negotiate, and Argentina will have no choice other than to devalue its currency to cope with the crushing debt that is now hindering its economy.

I should add that Argentina is a good case study that even when the IMF can temporarily stabilize an economy, it is just a Band-Aid that tends to postpone the inevitable pain. This makes me concerned that when Christine Lagarde becomes head of the ECB in November she will just use Band-Aids to try to fix the European Union’s (EU) economic woes. Negative interest rates and more quantitative easing are no solution for the EU, but merely proof that generous social benefits are not sustainable without currency devaluation. Negative interest rates devalue the euro, so a slow, persistent euro devaluation is unfolding.

The big news from Europe last week was that mighty Germany’s economy contracted at an annual rate of 0.4% last quarter. Declining exports were largely responsible for contracting GDP growth. The German 10-year bond is now yielding -0.684% and all maturities out to 30 years continue to have negative yields.

Are We Headed for an Imminent Recession? I Wouldn’t Bet on It

In the meantime, there is growing pressure on the Fed to continue to cut key interest rates, since Treasury yields remain ultra-low. The 30-year Treasury bond briefly fell below 2% and hit an all-time low last week. Furthermore, the 2-year Treasury note yielded more than the 10-year Treasury bond, which caused the entire financial media to shout “recession” on Wednesday. I’m not convinced. (For details, here is a link to a podcast I recorded last Wednesday on falling interest rates and the inverted yield curve.)

The Fed is essentially “tethered” to market rates, so as negative interest rates around the world proliferate (over $16 trillion in sovereign bonds now yield less than zero), international capital money pours into the U.S. and drives Treasury yields lower. As I have repeatedly said, the Fed never fights market rates, so it looks like there will be at least two additional 0.25% key interest rate cuts in the upcoming months if the Fed wants to un-invert the Treasury yield curve. In the meantime, an inverted yield curve is devastating for banks’ operating margins, but that does not mean that a recession is imminent. Still, I am proud that I am not recommending any bank stocks, since financial stocks were hit especially hard last week.

The Labor Department on Tuesday announced that the Consumer Price Index (CPI) rose 0.3% in July, in-line with economists’ consensus expectation. Energy prices rose 2.4% in July and shelter prices (rent and housing) rose 3.5%. The core CPI, excluding food and energy, also rose 0.3% in July. In the past 12 months, the CPI and core CPI have risen 1.8% and 2.2%, respectively. Energy prices are falling in August, while median home prices are growing at the slowest pace in the past few years, so the CPI should moderate in upcoming months. What will likely get the Fed’s attention is that after adjusting for inflation, hourly wages declined 0.1% in July and rose only 1.3% in the past 12 months. Since the Fed is striving to boost wage growth in a tight labor market, another rate cut could boost wage growth. Overall, the July CPI was an anomaly and the annual rate of inflation should decelerate in the upcoming months.

On Thursday, the Labor Department reported that productivity rose at an annual pace of 2.3% in the second quarter, down from a 3.5% annual pace in the first quarter. In the past year, productivity has risen 1.8%. Interestingly, hours worked in the second quarter fell 0.4%, so the second-quarter productivity rise is even more impressive, considering that hours declined!  This is great news for continued wage growth, since higher productivity typically precedes wage growth, since workers are producing more output. In the past year, unit labor costs have risen 2.4% and should continue to steadily rise as productivity improves.

The Commerce Department announced on Thursday that retail sales rose a healthy 0.7% in July, which was substantially higher than economists’ consensus expectation of a 0.3% increase. Excluding vehicle and gas station sales, retail sales rose by an even more impressive 0.9%. On-line sales surged 2.8% in July, led by Amazon Prime Day. Consumer spending remains strong, which bodes well for GDP growth.

Finally, the Kansas City Fed Conference in Jackson Hole, Wyoming is going to be a big deal this week, since central bankers and monetary officials from all over the world will be attending the conference. I expect Fed Chairman Jerome Powell to signal that a key 0.25% interest rate cut will likely be forthcoming at the next Federal Open Market Committee (FOMC) meeting in September, which will likely help boost the stock market heading into the Labor Day weekend. As I have repeatedly said, the Fed never fights market rates, so two Fed 0.25% rate cuts are now anticipated if the Fed wants to un-invert the Treasury yield curve, which it must do, since banks tend to curtail their lending during inverted yield curves.


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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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