Stocks will Likely Follow Earnings

Stocks will Likely Follow Earnings more than Political News

by Louis Navellier

February 7, 2017

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

In the wake of Friday’s payroll report and the Trump Administration’s announcement that many Dodd-Frank regulations might be repealed, the stock market surged on Friday, led by the financial stocks. The Dow Industrials shot back over 20,000 on Friday, while the S&P 500 closed in on a new all-time high around 2,300. No matter what the Trump Administration and its many critics keep throwing at us, the market usually focuses more on corporate earnings than politics. Since we are in the middle of earnings season, stocks with strong sales, earnings, and forward guidance will likely continue to lead the market.

Stock Graph Image

The good news is that the earnings environment is likely going to get better as 2017 unfolds, especially if corporate tax reform is passed. The only wild card is just how much a strong U.S. dollar may impede GDP growth, like it did in the fourth quarter. Obviously, the Trump Administration is striving for 4% annual growth, which is very ambitious, but high consumer and business confidence could deliver 3+% growth.

For the first four days of last week, there was a rotation out of “Trump stocks” (like financials, industrials, materials, and energy stocks – which have done so well since the election). Some of this exodus appears to be caused by Congressional grumbling about healthcare reform, tax reform, the new Supreme Court pick, and other Trump moves. The fear that more bottlenecks in Congress might slow some key parts of the Trump Administration’s agenda have “spooked” the market, but I’d say that the main reason why these Trump stocks were spooked is that many of them are simply not characterized by strong enough sales or earnings.

In This Issue

In Income Mail, Bryan Perry discusses a superior way to play the “hot” financial sector – through private equity (PE) firms. In Growth Mail, Gary Alexander concludes his two-part series on the different ways nations tax (or attack) the rich. In Global Mail, Ivan Martchev discusses the ebb and flow of the yen carry trade, as well as our flawed jobless statistics. Jason Bodner dissects sector strengths and weaknesses in the latest quarterly earnings data, while I close with an updated handicapping of the Fed’s strategies for 2017.

Income Mail:
Financial Sector Breakout 2.0
by Bryan Perry
Publicly-Traded Private Equity and “The Art of the Deal”

Growth Mail:
The Global War on Wealth (Part 2)
by Gary Alexander
The Late 1960s Tax Surcharge and “Alternative Minimum” Tax

Global Mail:
The Strong Yen May Be a Warning Sign
by Ivan Martchev
The True Unemployment Rate is Higher

Sector Spotlight:
Market Moves Aren’t Always Logical
by Jason Bodner
Overview of the Latest Quarterly Reports

A Look Ahead:
The Fed Postpones any Rate Increase to March (or Later)
by Louis Navellier
Another Wave of (Mostly) Positive Economic Statistics

Income Mail:

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

Financial Sector Breakout 2.0

by Bryan Perry

Coming into the New Year, all the hoopla about the big run-up in the financial sector was couched with the notion that investors should be patient and wait for the textbook retracement that would surely follow the near-20% move off the pre-election lows. It’s only natural to expect any massive sector breakout to follow the rules of the technical handbook because the most widely-held view has been that the financials simply got too extended on the upside relative to their earnings and are due for a constructive pullback that will provide another entry point to go long on banks, brokers, insurance, and private equity stocks.

Alas, to the chagrin of ‘the crowd’ that was waiting to ‘buy the dip,’ that opportunity may not materialize. Last Friday’s employment data, which showed the economy adding 227,000 jobs to non-farm payrolls against estimates of 175,000, sparked a sudden fast-forward change in sentiment that was communicated to the market as the Fed’s “green light” to raise rates another quarter-point, possibly at the next FOMC meeting in March. The widely-held Financial Select Sector SPDR ETF (XLF) gapped higher by 2.02% on trading volume of 85.8 million shares, closing within 16 cents of its 52-week high. (Please note: Bryan Perry does not currently hold a position in XLF. Navellier & Associates, Inc. does currently hold a position in XLF for some client portfolios. Please read important disclosures at the end of this letter.)

Financial Select Sector SPDR ETF Chart

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

This latest move has all the markings of a fresh leg up. Some are still standing on the platform waiting for the train to slow down so they can get on, but this train isn’t slowing down to where it intends to give any new passengers a good seat. After November’s sharp rise, financial stocks have been consolidating for a full two months, digesting the early gains. The momentum indicators I follow (stochastics, money flow, MACD, RSI) have all recycled and now are registering over-sold readings while XLF presses up against its recent high. With the latest jobs data giving the sector new-found optimism for another rate hike in the not-too-distant future, it’s no wonder the market decided to run with the bulls on Friday.

Pamplona, Spain Bull Run Image

Though bank stocks got most of the media attention, since they are the most widely held and widely traded financial stocks, they offer little in the way of dividend yield. In fact, there isn’t a single large-cap multinational or regional bank that pays a dividend yield above 3%. Although it’s nice to ride a sector that’s appreciating, I suspect income investors can’t be happy with the 1.0%-2.5% yields that most big banks offer.

Publicly-Traded Private Equity and “The Art of the Deal”

For higher income potential, I recently highlighted private equity (PE) firms as a 2017 investment theme. It just seemed natural that these high-profile, multi-faceted, and highly innovative financial shops that have many tentacles of revenue generation would have their day in the sun when business conditions for monetizing maturing portfolio assets improved. The landscape for most business sub-sectors which these publicly-traded partnerships deal in has gained quite a bit of traction in late 2016 and early 2017.

With the stock market reaching new all-time highs fueled by improving earnings, stock repurchases, and a good dose of merger and acquisition (M&A) activity, a few big ticket initial public offerings are finding their way into welcome arms of buyers seeking fresh equity commitments to newly-traded companies. 

Recently listed Invitation Homes (INVH) raised $1.54 billion last Wednesday in the largest residential REIT offering since 2014. Strong showings in previous listings greased Q4 earnings for PE firms, sending their respective stock prices to new 52-week highs. At the same time, most of the PE companies declared sizable quarterly cash distributions, further rewarding shareholders. Typically these firms reserve their larger quarterly payouts for the second half of the year. Because they are structured as partnerships, the quarterly distributions will vary, sometimes widely, but with what could be a big year ahead for what are called “exits” of appreciated portfolio holdings, the run in these stocks has, in my view, just begun. (Please note: Bryan Perry does not currently hold a position in INVH. Navellier & Associates, Inc. does not currently hold a position in INVH for any client portfolios. Please read important disclosures at the end of this letter.)

This should be music to every income investor’s ears when hunting for high-yield stocks in the newly-hot financial sector that stands to benefit from rising inflation, increasing deal flow, and a market where there is a growing appetite for IPOs, spin offs, mergers, and just harvesting gains from private sales of certain long-held assets. It’s a very exciting time to be involved in a sector whose fundamentals are strengthening much faster than at commercial banks, which are still beset by regulatory headwinds. And though interest rates have edged higher, the cost of capital remains relatively cheap, affording PE firms very attractive terms for financing the acquisition of new assets.

The one-year annual return for the S&P Listed Private Equity Index (SPLPEQTY) is 24.75%, or roughly twice the return of the S&P 500. From the five-year chart below, it is clear the sector is just now getting back to levels not seen since mid-2015 when the IPO market all but dried up with the massive correction in the energy, commodity, European bank debt, and distressed credit markets. As those once out-of-favor markets enjoyed varying levels of recovery, PE firms and the markets they work in, many of which are non-liquid or devoid of exchanges, have made big strides in a reflationary environment.

Standard and Poor's 500 Listed Private Equity Index Chart

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

What’s nice about the PE sector is that for the many publicly traded PE firms and other specialty finance companies, yields range from 3.6% to 11.7%, with money pouring into a sector that is considered a huge beneficiary of financial deregulation and the pro-business stance being pursued by President Trump.

Growth Mail:

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

The Global War on Wealth (Part 2)

by Gary Alexander

Over the last week, I’ve been on The Jazz Cruise in the Caribbean – my annual mid-winter break.  This year, we honored the 100th birthday of great jazz artists like Ella Fitzgerald, Thelonius Monk, Buddy Rich, and Dizzy Gillespie, as well as the centennial of the first commercial jazz recording in February 1917.

In advance of this vacation, I wrote last week’s and this week’s Growth Mail in advance, with a long time horizon.  (Jason Bodner adds science for perspective; Ivan and Bryan use historical charts; I use history.)

Last week, I covered how the Bolshevik revolution of 100 years ago seized the wealth of the Russian aristocracy, then imprisoned, humiliated, tortured, or murdered their extended family members who could not escape.  The same was true in Germany 75 years ago, when Jewish assets and businesses were seized and millions executed, while America’s rich financed our victory in both world wars through higher taxes and in making the armaments which won two huge wars against Germany, Japan, and other Axis nations.

Fifty years ago, something similar happened in China with the advent of the Cultural Revolution.  In a massive (659-page) new study (“The Killing Wind: A Chinese County’s Descent into Madness During the Cultural Revolution,” published December 14, 2016), Chinese author and researcher Tan Hecheng covered just one localized but typical cleansing of the rich in Hunan Province’s Dao County (Daoxian) in the late summer of 1967.  Over 9,000 innocent people were killed, less than 1% of China’s death toll in that decade of overt class warfare, but sometimes these specific and localized events are more dramatic than a broad survey.  Stalin said, “One death is a tragedy. A million deaths is a statistic.”  He should know.

According to Tan, “The Daoxian massacre resulted in 9,093 deaths by unnatural causes, and around 90 percent of the victims were landlords and rich peasants or their offspring.”  The victims weren’t really rich – perhaps a little less poor than their neighbors.  They “were not the kind of tyrannical landlords depicted in revolutionary operas,” but were “hard-working law-abiding people whose assets technically qualified them as members of the rural middle class.”  Some “class clues” were: Being educated, wearing glasses, or dressing above the norm.  (I won’t relate any specific atrocities here.  You can consult the book for that.)

The Cultural Revolution and those “revolutionary operas” were the brainstorm of Jiang Qing, Mao’s wife. After Mao’s death, she led the “Gang of Four” that wanted to continue Mao’s repressive regime but Deng Xiaoping took over by late 1978 and China developed into a rapidly growing quasi-capitalist superpower.

At the same time, however, a mini-Cultural Revolution broke out in Cambodia under Pol Pot.  Enlisting children into his army, Pol Pot tortured and murdered the rich (or educated) citizens first.  After the film, “The Killing Fields” was made, actor Haing S. Ngor won an Academy Award for Best Supporting Actor in his role as Cambodian journalist Dith Pran.  He wasn’t really “acting” since he also lived through the nightmare as a doctor who escaped by eating insects in the jungle before crawling across the border to safety.  At the New Orleans Investment Conference in the late 1980s, I had the opportunity to dine with Ngor for two hours.  He kept telling me, “The movie was real, but not real enough.  It was much worse.”

By the way, women and children act no better than men when given absolute power.  A woman (Mrs. Mao) and children (the Red Guard in China and Khmer Rouge in Cambodia) were the killers back then.

By contrast, America taxed its rich people while leaders in Russia, China, Cambodia, and Germany put them in prisons or worse.  The top U.S. tax rate was 94% in World War II and the top rate remained over 90% every year from 1950 to 1963, after which the Kennedy-Johnson tax cuts lowered the top tax rate to 70%.  Amazingly enough, our top tax rate was 70% or more for 45 straight years, from 1936 to 1980.

The Late 1960s Tax Surcharge and “Alternative Minimum” Tax

The only increase in the top tax rate for individual income between the end of the Korean War (1953) and the end of the Cold War (1990) came in 1968 and 1969, the peak years of Vietnam War escalation, when LBJ needed to fuel the escalating costs of his “guns and butter” (Vietnam and social spending) agenda.

According to Joseph J. Thorndike (in “Historical Perspective: Sacrifice and Surcharge,” December 4, 2005), Johnson’s economic advisors insisted on a tax increase.  “In January 1967 Johnson asked Congress to approve ‘a sensible course of fiscal and budgetary policy,’ including a 6 percent surcharge on personal and corporate income taxes.  The special levy, designed to help pay for the war, would last a maximum of two years – less if swift victory allowed U.S. forces to withdraw sooner.”  In August 1967, Johnson upped the ante, asking for a 10% surcharge on corporations and the rich.  That idea became The Revenue and Expenditure Control Act of 1968, signed by Johnson on June 28, 1968.  It pushed the top tax rate to 75%.

Johnson Era Top Tax Rate Table

Then came a bombshell.  In LBJ’s last week in office (January 17, 1969), his Treasury Secretary Joseph Barr testified before a Joint Economic Committee on taxation that 21 Americans with incomes over $1 million paid no taxes at all.  Barr called them tax evaders, but they merely took advantage of legal tax provisions that allowed them to reduce their taxable income by arranging their affairs appropriately.  Even though the number was tiny (21), a national outrage followed, so new President Richard Nixon signed the Tax Reform Act of 1969 to create a Frankenstein monster called the Alternative Minimum Tax (AMT).

Gerald Ford expanded the scope of the AMT in the Tax Reform Act of 1976, lowering the AMT threshold to $200,000 per year.  In 1977 only 60 Americans made $200,000 or more and paid no income taxes, so Congress reduced the threshold for the AMT to $40,000 for couples in 1986.  For the last 30 years, the onerous task of filing AMT forms has fallen primarily on middle class families, while the rich have professional tax help.  By 1998, 1,467 Americans with incomes above $200,000 still paid no federal income taxes, mostly due to business losses and tax-exempt interest on municipal bonds (source: “The Alternative Minimum Tax Scheme,” Bruce Bartlett, April 26, 2002).  Donald Trump may be one of them!

For the 2016 tax year – which we are all beginning to struggle with, leading up to April 15 – the AMT thresholds are fairly low – just $41,900 for married filing separately, $83,800 for married filing jointly, or $53,900 for single filers.  Those are fairly low income levels for middle class professionals or for those working in costly coastal enclaves like New York City, Washington, San Francisco, Los Angeles, etc.

The richest 2.7% still pay more federal income tax than the poorest 97.3%, although you would never know that if you believe Bernie Sanders’ “soak the rich” rhetoric.  Here’s the tax breakdown as of 2013:

Mostly the Rich Pay Income Taxes Table

You can argue that the rich should pay more, but this chart shows how progressive and basically fair the tax distribution is – with the richest 16% (earning over $100,000) paying almost 80% of all income taxes.

High taxes on the rich can be counter-productive to growth, but it sure beats asset seizures and/or death!

Global Mail:

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

The Strong Yen May Be a Warning Sign

by Ivan Martchev

The yen is rallying again. Those that have followed the yen over the past 20 years know that the Bank of Japan (BOJ) became the first to introduce quantitative easing (QE) in 1998, as well as a zero interest rate policy (ZIRP) and a negative interest rate policy (NIRP) in 2016. The rebound in the Japanese yen – seen as a move lower in the inverted chart below, where less yen per dollar means a stronger yen – started in mid-December 2016, right around the time the 10-year U.S. Treasury note hit a recent high of 2.63%.

Japanese Yen Chart

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

Such a rebound, if it continues, should be viewed as rather disconcerting news for stock market bulls.

While I think 2017 will be an up year for the U.S. stock market, due to resumption of earnings growth after six consecutive quarters in flat-to-declining earnings, I also think that it may be a more volatile year than 2016. This is because we have major political risks facing the European Union, where elections in France, the Netherlands, Germany, and possibly Italy, may produce populist results that threaten the existence of the EU itself. There are also those Presidential policy tweets that tend to raise eyebrows…

The rallying yen could be a harbinger of heightened volatility. The yen tends to strengthen when carry trades are being unwound. Institutional carry traders tend to borrow in yen due to its ultra-low interest rates, then sell the yen for a currency they will use to buy their targeted assets and pocket the interest rate differential – if this is what they are after – plus any appreciation of the non-yen asset they purchased.

If a carry trader is concerned about the viability of the carry trade, that trader may choose to unwind it by selling the carried asset, generating a foreign currency amount, which then is used to buy yen in order to liquidate the yen-denominated loan that financed the carry trade. Therefore, if institutions liquidate carry trades en masse the yen tends to rise. This is why the yen rallied from 120 when negative interest rates were announced in Japan in late January 2016 all the way to under 100 after the Brexit vote last June.

The USDJPY exchange rate was at 118.65 on December 15, 2016. It closed last week at 112.55. I think this yen appreciation may be due in part to the unwinding carry trades. Historically this has preceded, or coincided with, heightened volatility in financial markets. The recent low in the yen in mid-December also coincides with the recent low in U.S. Treasury bond prices. The iShares 20-year Bond (TLT) ETF and the CurrencyShares Yen Trust (FXY) ETF have become rather positively correlated in the past two years, where a strong performance for U.S. Treasury bond prices (a deflationary sign) was accompanied by strong performance for the Japanese yen (also a deflationary sign). The yen ETF in this case (green line, below) is not inverted as the USDJPY exchange rate, so a rising line means a stronger ETF price. (Please note: Ivan Martchev does not currently hold a position in FXY. Navellier & Associates, Inc. does not currently hold a position in FXY for any client portfolios. Please read the important disclosures at the end of this letter.)

iShares Twenty Year Bond - Daily Line Chart

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

The recent rebound in the yen not only coincides with a rebound in U.S. Treasury bond prices, but also with the token rise in JGB yields. The BOJ tweaked its QE operations in September 2016 and dubbed them QQE (quantitative and qualitative easing). Basically, QQE is “unlimited QE” that aims to control the yield curve in Japan. One objective is to hold the 10-year JGB yield (pictured below) near zero. While closing at 0.10% last week the 10-year JGB still technically qualifies as to being “near zero,” the fact that this key interest rate has been consistently positive in the last 3-4 months is being read by some as reflecting the fact that the BOJ is somewhat ambivalent about its zero-yield target.

Japanese Ten Year Government Bond Chart

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

It is understandable that the unlimited buying of 10-year JGBs by the BOJ would cause the yen to weaken. But it would be a definite warning sign for investors if the yen continues to strengthen, even with this unlimited JGB buying, since the primary reason for such strength would likely be unwinding carry trades. When institutional investors unwind carry trades in large numbers, they are turning cautious.

Standard and Poor's 500 Volatility Index Chart

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

The S&P 500 Volatility Index dropped marginally below 10 (intraday) last week. The last time such a dip occurred was at the end of 2006 and very early in 2007. While I certainly do not read the VIX below 10 as a sign that a repeat of 2008 is close, it is a sign that investors are rather complacent. And the present yen strength suggests to me that they may be about to experience rising volatility in financial markets.

The True Unemployment Rate is Higher

The good news from the January payroll report was celebrated by both stocks and bonds, while the lack of wage growth was seen as giving the Fed ammunition to wait before delivering more rate hikes. We also heard suggestions by the new administration that a new measure of unemployment may have to be used as the present method understates actual unemployment in the U.S.

I completely agree with the “understatement” issue.

United States Labor Force Participation versus Unemployment Rate Chart

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

The present labor force participation rate is 62.9%. The labor force participation rate reached an all-time high of 67.3% in January of 2000 and a record low of 58.1% in December of 1954. While we are near the long-term average of 63% at the moment, there have been two major shifts in the labor force participation rate: It rose when women entered the labor force in the 1970s, and then it fell sharply after the year 2000.

Thousands of Persons not in Labor Force Chart

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

If one cannot find a meaningful job and stops looking for work, that person is no longer “unemployed,” according to the government’s definition. The number of persons not in the labor force (above) is near a record 94.3 million people. So there is plenty of room for President Trump to Make America Great Again by targeting those 15 million or so that left the labor force since the onset of the Great Recession in 2008.

Sector Spotlight:

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

Market Moves Aren’t Always Logical

by Jason Bodner

Sometimes hearing a new fact can seem interesting at first, until you realize the logic behind that fact. For instance, the fact that Antarctica is the only continent with no spiders seems amazing at first, since spiders are ubiquitous on the other six continents. But then you realize that Antarctica’s low temperatures and ice restrict the existence of wildlife in general. After that delayed-but-logical “aha” moment, the fact becomes far less interesting. But here are some less logical facts: Antarctica has no government and no ownership. It is the only continent that has no time zone. Despite holding 70% of the Earth’s fresh water, it also has the world’s largest desert. It is the driest place on earth, with an average precipitation of just 10 cm a year.

Antarctic Desert Image

Logic (hopefully) drives much of human action. Yet there are countless incidents of action and reaction which occur in direct contrast to logic. After last Friday’s market rally, I had a discussion with someone who astutely pointed out that “the market can’t just go up forever, but it keeps going up.” There are many explanations for the current market environment, but one undeniable fact is that the higher it rises – the more new all-time highs it sets – the less comfort those lofty prices should instill in the educated investor.

Let’s examine some specific examples of what I mean. Logic dictates that value should generally increase based on merit and quantifiable data. This means a stock should generally appreciate over the long-term because it is firing on the proper cylinders to fuel growth. A stock should ideally be growing revenues, growing earnings, increasing market share, increasing brand awareness, and generally being innovative and exhibiting leadership in its space. Of course, while this is logical, it is not always the case.

Enter human emotion. Humans may thrive on mathematical analysis, but we also love a great story. We also like it when a decision seems easy to make. But when greed mixes with speculation and snowballs into euphoria, this creates the perfect recipe for market bubbles. Bubbles come in many shapes and sizes, from one single stock through an entire sector, all the way up to an entire general market index.

For instance, I have been highlighting here for some time the sector strength of Financials. This sector, along with industrials, materials, and energy has been driving the market higher since Trump won. We have also highlighted repeatedly how the fundamentals haven’t necessarily supported this seismic shift. The fact of the matter is that sales and earnings of these groups have been lackluster.

These sectors were sagging notably in the earlier part of last week. The hope for benefit to these sectors from suspected Trump administration policies has been a major factor in these sector rallies. This week saw some distribution as shockwaves continue to reverberate from Trump’s travel restrictions, nominees, and geopolitical posturing. The realization that sales and earnings may not be there to provide ballast for continued growth may be setting in. Yet, many times we can observe “Mr. Market” knowing these things far in advance of the everyday investor. Mr. Market just has a way of always knowing before anyone else. Most investors don’t make their move until well after the fact. At that point, Mr. Market may be selling.

Overview of the Latest Quarterly Reports

The good news is that earnings are generally positive overall. According to FactSet Earnings Insight, as of February 3, 2017, 55% of the S&P 500 has reported results for Q4 2016 and 65% of them beat earnings estimates while 52% beat sales estimates. The less rosy news is that 44 S&P 500 companies guided lower while only 21 guided higher. Looking at the table below, we see that the Financials sector improved on its dead-last sales disappointments from two weeks ago. Utilities now hold that dubious honor with 100% disappointing on revenues. Consumer Staples has 80% of companies reporting revenues below estimates. Financials improved from 100% to now 47% of companies disappointing in revenues. The Trump Bump stocks are showing signs that buying support may wane in the absence of solid fundamentals. On the flip side of the coin, many financial companies and energy companies are beating and guiding optimistically.

Standard and Poor's 500 Earnings and Revenues Bar Charts

The market is still very reactive, as it always will be. Friday saw cheer as Trump turned his sights on repealing Dodd-Frank. Financials rallied nearly 2% on the news. Perhaps surprisingly, Health Care was the week’s winner with a +2.43% move higher, despite the President talking of reform and price cutting. As discussed above, last week’s losers were Energy, Industrials, Materials, and Telecom.

Standard and Poor's 500 Sector Indices Changes Tables

Things sometimes initially appear one way until some basic thought is applied, and then they can appear another way altogether. There is no spider walking across Antarctica. After a slight pause, we say, “Duh!” Financials, Industrials, and Materials have all been rallying on speculation over a new administration.  Now we may be seeing signs of investors paying more attention to the fundamentals. While I am not saying that this sector surge is a bubble, the truth is that bubbles begin with speculation and can be fueled by euphoria for quite a long time. We may see continued strength until it becomes a self-fulfilling process of earnings and revenues catching up to valuations. Time will tell, but the obvious doesn’t always make itself immediately apparent. According to The New York Times, sales of George Orwell’s “Animal Farm” have skyrocketed, reaching best-seller status on Amazon last week. Orwell may have been on to something when he said: “Sometimes the first duty of intelligent men is the restatement of the obvious.”

Animal Farm Pigs Image

A Look Ahead:

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

The Fed Postpones any Rate Increase to March (or Later)

by Louis Navellier

Last Wednesday, the Federal Open Market Committee (FOMC) kept key interest rates unchanged because business investment remains “soft.”  However, the FOMC statement also said that “measures of consumer and business sentiment have improved of late.”  This two-sided double speak (“on the one hand” and “on the other hand”) statement by the Fed implies that there may not be another rate hike at its March FOMC meeting, unless there is sufficient economic evidence that economic growth and inflation are both rising.

However, two days after the Fed met, we saw better-than-expected job growth and continued wage increases.  Since Fed Chair Janet Yellen is primarily a labor economist, these are two measures she is watching closely when it comes to raising rates.  She will be testifying before Congress February 15th, so Fed watchers will have to wait until then to try to get more insight into the “data dependent” FOMC.

Speaking of jobs, the big news last week was the January payroll report.  The Labor Department reported last Friday that 227,000 payroll jobs were created in January, well above the economists’ consensus estimate of 175,000.  But that positive surprise was offset by the 39,000-job downward revision of the previous two months.  Also, the unemployment rate rose to 4.8% in January, up from 4.7% in December, because 584,000 entered the workforce in January.  Average hourly wages rose by just 3 cents (+0.1%) to $26 per hour, but wages are still up 2.5% in the past 12 months.  In a parallel report on Wednesday, ADP reported that 246,000 private payroll jobs were added in January – well above the estimates of 168,000.

Another Wave of (Mostly) Positive Economic Statistics

On Tuesday, the Conference Board announced that its consumer confidence index slipped from a 15-year high of 113.3 in December to 111.8 in January.  Economists were expecting the index to slip to 112.9 in January, so the dip was larger than expected.  The primary reason for this decline was that the expectations component plunged to 99.8 in January, down from 106.4 in December.  However, the present situation component surged to 129.7 in January, up from 123.5 in December.  So overall, consumers are confident.

Machinists Manufacturing Image

On Wednesday, the Institute of Supply Management (ISM) reported that its manufacturing index rose to 56 in January, up from 54.5 in December, significantly higher than economists’ consensus estimate of 55 and the fifth straight monthly rise.  The ISM manufacturing index is now at the highest level since November 2014, so the manufacturing sector is still growing despite the headwinds of a strong U.S. dollar.

On Thursday, the Fed announced that productivity slowed dramatically from a 3.5% annual pace in the third quarter to only 1.3% in the fourth quarter.  According to the Fed, labor costs were rising at a 1.7% annual pace in the fourth quarter, up from a 1.5% pace in the third quarter.  For all of 2016, productivity rose only 0.2%.  Since rising productivity often helps to boost wages, any deceleration in productivity is a concern for the Fed, since it means that wage growth may also slow.  Overall, the deceleration in productivity may be another reason why the FOMC could decide to postpone any rate increase in March.

On Friday, the ISM service index slipped slightly to 56.5 in January, down from 56.6 in December.  The ISM component for new orders and inventories declined, which suppressed the overall ISM service index.  Overall, since any reading over 50 signals an expansion, the ISM service index remains very encouraging.

Turning back to the market, we will likely continue to see rapid sector rotation since the explosion of ETFs has promoted “theme” investing – where investors can jump on (or off) any bandwagon.  As wave after wave of companies announce their fourth-quarter results and first-quarter guidance, “cracks” have emerged in the foundation supporting many Trump-Bump stocks.  Specifically, many energy and financial stocks are posting better quarterly results and have a rosy outlook.  Unfortunately, many industrial and materials stocks are struggling and will not have the strong sales and earnings that I demand until late 2017 or 2018.


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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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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