Strongest January Since 1987

The Strongest January Since 1987 Lifts U.S. Stocks

by Louis Navellier

February 4, 2019

The S&P 500 rose 2.34% last week, nearly 8% in January, and 15% since Christmas. This January was the strongest in 32 years, especially for small-capitalization stocks, which had their strongest start in over 40 years. Despite this strength, the market initially got up on the wrong side of the bed last week after some big companies warned that sales were slowing down, mostly due to a lack of demand from China.

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Complicating matters further for these multinational companies is the fact that the U.S. dollar remains strong, while the Chinese yuan and most other currencies remain weak, so when multinational companies are paid in eroding currencies, they all too often have to issue revenue warnings. The Eurozone’s growth is now increasingly precarious. Since approximately 50% of the S&P 500’s sales are generated outside of the U.S., I expect more multinational companies to issue revenue warnings in the upcoming weeks.

Fortunately, some multinational companies are prospering. For example, on Wednesday, Boeing posted a substantial earnings surprise and provided positive guidance. So far, fourth-quarter results for S&P 500 stocks are running at an annual sales gain of 7.4% and annual earnings pace of around 13%. I believe that companies which continue to surprise and guide higher, like Boeing, will continue to be market leaders.

Navellier & Associates owns BA in managed accounts and a sub-advised mutual fund.  Louis Navellier and his family do not own BA privately.

In This Issue

Bryan Perry opens with a mixed review of the current fundamentals, fearing the market may “retrace some of its recent gains” before rising further. Gary Alexander examines the manic-depressive winter market and projects a “pause that refreshes” before the normal Spring rally. Ivan Martchev sees added hope with the Fed’s new “patience,” along with indications that the U.S. dollar should remain relatively strong. Jason Bodner is pleased to see positive fundamentals once again driving the market, and growth-oriented sectors leading this recovery. Then, I’ll add my closing look at the economy and stock market.

Income Mail:
The Market Appears to be “Mai-tais and Yahtzee” for Now
by Bryan Perry
“Confused” Doesn’t Begin to Explain the Current Investment Landscape

Growth Mail:
The Winter of Our Discontent – and Spring of Hope?
by Gary Alexander
Most Fundamentals Support Further Market Gains

Global Mail:
The Fed’s Expeditious U-Turn
by Ivan Martchev
Implications for the U.S. Dollar

Sector Spotlight:
Where Have All the Bears Gone?
by Jason Bodner
Growth Sectors are Leading the Charge

A Look Ahead:
“As January Goes, So Goes the Year”?
by Louis Navellier
A Great Jobs Report Capped a “Mixed” Week of Indicators

Income Mail:

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

The Market Appears to be Just “Mai-tais and Yahtzee” for Now

by Bryan Perry

“Well, it’s not exactly Mai-tais and Yahtzee out here – but let’s do it.”

--Actor Nicholas Cage in “Con Air” (1991)

In one of the great scenes from the movie “Con Air,” Nicholas Cage is playing an undercover agent who says, “It’s not exactly Mai-tais and Yahtzee out here,” when describing the volatile situation he was facing.

I love this line, because it speaks of a cool-headed guy conducting himself smoothly within the midst of a situational meltdown. And Nick Cage always came out on top, because the screen writer made it happen!

In the real world – the world of global finance and high-frequency trading that dominates over 70% of the average daily volume of stock market activity – we often feel like we’re in the midst of a movie being played out in real time. I find it amazing that on Christmas Eve (!), investors were beyond convinced – and I’m talking about investors with billion-dollar account balances – that the bottom was falling out from under them, but we can thank the algorithm-driven program traders for that dramatic Christmas Eve.

So, after getting pushed into correction territory for a brief period, the stock market found its footing after the Fed came to a new corporate conclusion, that its members did not want to go down in history as “the gang that killed the bull market.” This is what I hate about many who call themselves “analysts.” They get fixated on a myopic plan – in this case, a “dot plot” – and get all revved up with their fiscal narratives about containing inflation (of which there is hardly any), and then turn tail and run because they were out of sync with reality. Then, they try to sound calmly knowing, in order to preserve a smidge of street cred.

The Fed swallowed their lofty pride and reverted to a full-on ‘neutral’ position last Wednesday when they issued a post-FOMC policy statement that used the word “patience” no fewer than eight times! Really? Are we now in a new era of Twitter-induced, knee-jerk policy making? I guess so, and that sows the seeds of further volatility, when any ultra-short-term mass-perception can overly sway market momentum.

Hey, don’t get me wrong. I’m thrilled that the S&P 500 has rallied back from 2,346 to 2,706 as of last Friday. That’s 360 points off the bottom in five weeks, or +15.35% from trough to present. The S&P 500 is now closing in on its 200-day moving average, which stands at 2,740. It now seems that all past fears about the Fed raising interest rates and the “global slowdown of GDP growth” are suddenly unwarranted.

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

But alas, in my humble view, I’m not so sure that a “Mai-tais and Yahtzee” break is a done deal.

“Confused” Doesn’t Begin to Explain the Current Investment Landscape

First of all, let’s commend the optimists (like those here at Navellier) for usually looking at the world’s collective situation as a “glass half full.” Optimism is a hard sell, especially within the mainstream media, which badly wants to crucify the Trump team. But last Friday’s jobs report showed non-farm payrolls rising by 304,000 jobs versus the 170,000-job consensus estimate. Am I missing something? Since when did prosperity become bad news? That was an eye-popping number, because it showed that people who had been on the sidelines for months (if not years) are re-entering the job market. And that is beautiful.

However, there is still a lot of wood to chop if this market is to regain a clear “bull trend,” which would imply a higher level than where we currently trade. Based on uncertainty surrounding the structure of the U.S./China trade deal, the terms of the Brexit deal, the on-going politics of Trump versus the Washington establishment, and the “flip-flop Fed” (which now might have to walk back their “neutral narrative” following a blistering jobs report), I’m not so sure the market doesn’t retrace some of its recent gains.

If traders are ready to sing “Happy Days are Here Again,” then why is the closely-watched 10-year/2-year spread moving lower once again? The bond market is at least 10 times larger than the stock market, and it votes every day. While the Fed is doing a 180-degree turn on its policy narrative, and stocks are rallying, the bond market has not been celebrating – and I find this worthy of keeping a close eye on.

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

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And what’s up with the rally in gold? Out of nowhere, gold prices are spiking higher on what I can only imagine as a potential currency dislocation, with the pound sterling dropping due to fears of a hard Brexit and failed trade talks with China, both of which would be highly disruptive for financial markets.

We’re in a weird time, almost like Rod Serling’s “Twilight Zone,” of which I was an avid watcher for years. Being now 59, my high-school Friday nights in the late 1970s were always the same – football, followed by pizza and party, then getting home in time for SNL and The Twilight Zone. Life was simple.

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My weekly musings here aren’t as bubbly positive as they usually are, I admit, but at the same time, I (like many of my decades-old colleagues in the financial industry) are just trying to read between the lines as to whether the pain endured from October 4 through December 24 was completely unwarranted, or whether it was a “canary” in the global coal mine. Time will tell, it always does, and in the meantime, I’ll close by saying, “May the stock market damn all the torpedoes and make full steam ahead” for 2019!

Growth Mail:

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

The Winter of our Discontent (and Spring of Hope?)

by Gary Alexander

It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair…”

– The opening lines of “A Tale of Two Cities” by Charles Dickens

To quote Shakespeare, last December marked what looked like “a Winter of our Discontent,” but then Charles Dickens’ more balanced laundry list gave us the full story: It was both the best of times – the best stock market gains in January in 32 years – and the worst of times, the worst December since 1931.

So which month is telling the truth – Depressing December or Joyful January?

Today marks the 46th day of winter – the midway point of the 91-day season. Wall Street’s tale of the tape for the first half of winter began with a market bottom on December 24. The fall season (aptly-named this year) brought a 19.8% fall in the S&P 500 – just short of an official “bear market” (-20%) designation. Since then, the S&P has recovered by 15% on a closing basis (in just 26 trading days since December 24).

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Act III is yet to come. Will we see another “worst of times” or just a “pause that refreshes”? (It’s highly unlikely we’ll see another 15% gain in the next 38 days. Trees don’t usually grow that rapidly in winter.)

Last year, I hate to remind you, the markets soared by an equivalent amount in January – until the last three trading days of the month, when the market began a horrendous 10% decline in 10 trading days. Could that happen again? Anything’s possible with algo-raiders, but the numbers don’t justify a collapse.

Most Fundamentals Imply Further Market Gains

Earnings are coming in slightly better-than-expected. As of February 1, according to FactSet, 46% of S&P 500 companies have reported fourth-quarter earnings and revenues, with 70% reporting positive earnings surprises (exceeding analysts’ estimates), with blended year-over-year (y/y) earnings growth of 12.4%, slightly above expectations of 12.2%. While 12.4% is down from the phenomenal 24+% gains in earlier quarters, any gains over 10% would be outstanding. Although we’re not yet halfway through the reporting cycle, the last quarter of 2018 should mark the 5th straight double-digit gain for earnings, the 11th straight quarter of revenue growth, and the 10th straight quarter of y/y corporate earnings growth.

Also, as of February 1, fourth-quarter GDP is expected to be +2.5%, meaning “no recession in sight.”

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

The stock market is up partly based on an expected solution with China over its trade policies. China is in danger of a debt implosion or recession if they don’t mend fences with the U.S. Meanwhile, President Trump has tweeted that China’s slower growth rates should compel them to make a ‘real deal’ on trade.

The euro region is also slowing down. Last quarter, Italy’s economy contracted for a second consecutive quarter, the definition of a recession. Germany barely escaped entering a recession. Italy’s public debt is 130% of GDP. France raised fuel taxes and has suffered a variety of street protests. Italy is looking more and more like debt-ridden Greece once looked, so the U.S. is still the steadiest economy in the world.

Last Friday’s jobs report was excellent. It appears that we have gone well beyond “full employment” to a growing “labor shortage.” Reports from the Fed’s January 2019 Beige Book said, “…all Districts noted that labor markets were tight” and “firms were struggling to find workers at any skill level.” The previous Beige Book suggested that severe labor shortages were seen mainly at low- and middle-skill levels, but this time the Dallas district noted a lack of both high- and low-skilled workers, especially in construction, energy, hospitality, health care, banking, and transportation. Contacts in the San Francisco Fed region “observed intense compensation pressures for more highly skilled workers,” and a majority of Kansas City area respondents “continued to report labor shortages for low- and medium-skill workers.” Boston noted that finding workers was difficult, but “one contact reported that after a ‘market adjustment’ raised compensation by 10 percent to 15 percent, difficulties in hiring and retention dramatically eased.” A Minneapolis district retailer noted that “every business is hiring, and the hiring pool is shallow.”

The January Beige Book also reported wage increases across all skill levels. New York district employers are “budgeting for moderately larger wage increases in 2019 than they did for 2018.” Philadelphia area contacts “typically cited increases for wages and benefits that averaged 3.0 to 3.5 percent. In one of the District’s tightest labor markets, average wage rates were up 6.0 percent over the prior year.”

Putting these numbers together, we should see a gradually rising market in the upcoming Spring of Hope.

Global Mail:

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

The Fed’s Expeditious U-Turn

by Ivan Martchev

The latest FOMC statement and press conference certainly gave investors all they wanted to hear when it comes to Federal Reserve “flexibility,” which was a major issue in the 4Q-‘18 sell-off in the stock market.

“Patiently awaiting greater clarity,” as Jerome Powell put it last week, is very different than the “autopilot” gaffe he delivered on December 19, 2018, sending stocks down. Perhaps Jerome Powell has learned that as Federal Reserve Chairman it’s not just what you say but how you say it that moves the markets. Still, it has to be acknowledged that the numerous Twitter attacks from the President may have goaded the Fed Chairman into taking a firmer stand, which regrettably backfired in the stock market.

My thesis remains that there will be a trade deal with China by the March 1 deadline and, if enough progress is made, it is possible that the final deal will be made at a somewhat later date without tariffs on Chinese goods going from 10% to 25% on March 1. I believe that the announcement of a trade deal with China will serve as a catalyst for the U.S. stock market to retest its all-time highs.

U.S. stocks have already erased about two-thirds of their fourth-quarter losses (blue line, below).

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

I don't believe that anyone is looking for economic reacceleration in the United States in the second half of 2019, but when President George W. Bush passed his tax cuts in 2003, there was a surge in economic activity, a breather of sorts, followed by another surge. Is it possible that the economy will take a breather in the first half of 2019 and then reaccelerate in the second half? It sure is, but such a notion has not been embraced by a majority of investors. If that happens, the S&P 500 should trade above 3000 by year-end.

Implications for the U.S. Dollar

I see a lot of positioning for an end to the U.S. dollar rally, given the outlook for a more patient Fed, but I believe that such positioning is premature. If indeed there is a second-half re-acceleration in the U.S. economy, Fed rate hikes would resume. But it’s not only the Fed rate hikes driving the dollar. The Fed balance sheet unwinding has continued, and it does not show any indication of stopping (or accelerating).

On the other hand, the European Central Bank (ECB) stopped expanding its balance sheet in December 2018. There was talk of “normalization” starting in 2019, which I do not believe will happen this year. With the Fed continuing to unwind its balance sheet and the ECB not unwinding, given a weakening Eurozone economy and the Damocles sword of Brexit, it is possible for the U.S. dollar rally to resume.

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

The euro has certainly rebounded after the end of ECB balance-sheet expansion, but since it is highly unlikely the ECB will shrink its balance sheet in 2019, this rebound is highly suspect. Due to the euro’s disproportionate 57.6% weight in the U.S. Dollar Index, I think the thesis that the U.S. dollar has topped out is misguided.

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

Another reason why the euro rebounded somewhat is that the interest rate differentials (as measured by 10-year bonds) shrank somewhat. On a closing basis, the high in 10-year Treasury yields hit in October 2018 was 3.23%, and that same rate was 2.68% last week. The recent highs in 10-year German bund yields was 0.56% in October 2018. The bunds closed last week at 0.17%, trading intra-week at 0.10%.

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

Since October the Treasury/bund spread has dropped from 267 to 251 basis points at last count. That’s not much shrinkage, but there is some narrowing in this interest-rate differential. Since there is a record supply of Treasuries in 2019, due to the Trump tax cuts, it would not be inconceivable for the Treasury-bund spread to expand again, particularly if the Fed’s balance sheet runoff rate does not decelerate.

Any foray into business or economic forecasting starts with three basic scenarios: best-case, base-case, and worst-case. The base-case scenario, in my view, even with a Brexit deal, is that Europe will continue to stagnate, and the U.S. economy will do well in 2019.

That would make a rebound in the U.S. dollar highly likely.

Sector Spotlight:

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

Where Have all the Bears Gone?

by Jason Bodner

“Houston, we have a problem.”

– Apollo 13 Astronaut Jack Swigert, 1970

This now famous phrase was immortalized in the movie “Apollo 13.” That ill-fated mission was the seventh manned space mission and the third that was supposed to make it to the moon. But two days after its launch, an oxygen tank exploded and crippled the spacecraft. Against impossible odds, the three-man crew created a plan to safely return to earth six days after launch. The method that got them home was a classic momentum play. They performed a slingshot around the moon, that is, a gravitational assist maneuver. They used the gravity of the moon to sling them around and propel them back towards earth.

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This method, while ingenious, supposedly didn’t come from NASA itself, but from a hippy MIT grad student who called to offer his idea. This claim supposedly came from the ex-deputy chief of media relations at the time. Apparently, after meeting the long-haired guy, the space agency withdrew their invitation to present him to the President and the public. “Long-haired freaky people need not apply…”

The power of momentum is immense and shouldn’t be underestimated. The same gravitational slingshot effect has actually been observed at the center of the Milky Way. A supermassive black hole containing a mass billions of times greater than our sun is literally flinging stars around like toys. UCLA astronomer and professor Andrea Ghez did a 10-year time lapse of stars doing this at the center of our galaxy.

You can see it here and it still gives me goosebumps.

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In the depth of the market’s December despair, many thought we were headed way lower. The pessimism around Christmas time resembled the dismal thoughts of many observers as we saw the Apollo 13 astronauts drifting away from earth to certain doom. Yet a reverse momentum slung them back to earth.

So, is it really surprising to find that the market pendulum swung so wildly from bearish to bullish, bringing us this far back so quickly?  Many news headlines said January was the best since 1987. This seems wild considering that we had just experienced a December that was called the worst since 1931.

Yet here we are, so I must ask: “Where have all the bears gone?” The headlines in December were soaked with the words “bear market.” Websites were full of stories making all sorts of comparisons to 2008 and the Great Depression of 1929-41. Fear was spreading rampantly. But where are those scary stories now?

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This is just one classic example of fear grabbing hold of the market only to give way to relief and complacency. But what’s really going on? We have already gone into great detail of how we believe that ETFs were the main culprit in causing the calamitous selling of late 2018. (If you haven’t seen it, I wrote an exhaustive white paper on the subject for Navellier & Associates which can be found here.)

Now that the market has given an “all clear” and the panic selling is done, we have witnessed a seismic shift, so much so that our ratio of buying-to-selling has skyrocketed from oversold (25%) to 69% last Thursday morning. In four short weeks, we have seen hardly any selling signals and an abundance of buying. The algo-traders have clearly reversed course as their eternal thirst for mean-reversion is getting quenched.

What Sectors are Leading the Charge?

We have seen a lot of buying in Information Technology and Consumer Discretionary. Financials have also seen a monstrous recovery from being grossly oversold. This is bullish when we see buying in these traditional growth sectors on such a scale. These growth-heavy sectors are decidedly less defensive than previous sector leaders. It’s worth noting that even if this has been a monster short-squeeze, it bodes well for the future. Forget for a moment that we did extensive research into 17 prior periods of sustained selling over the past 30 years, which showed that more than 80% of the time forward returns were positive for the market from 1-to-12-months out. Forget those things. If shorts are covering and bears are running, that’s a good sign. That said, we are cautious of this level of skewed buying.

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

This year’s “January effect” was highly pronounced. Investment managers needed to deploy capital at the start of the year. This may have started the snowball rolling, but as we wrap up the best January in over 30 years, the setup is encouraging. Sales and earnings appear to be (at least) “not as bad as we thought.”

Semiconductors, the scapegoat whipping boy for 2018, are showing stellar earnings and also monstrous buying. This crowded short saw momentum slingshot around the moon to be positive. This also implies that global growth may not be as bad as previously portrayed. One other thing to notice in the current climate: Negative news isn’t working like it used to. Last year, negative stories morphed into instant fear. Now, fear is not working its usual magic. Now liquidity just needs to keep returning to the market.

Our opinion was that the market backdrop was not as bearish as the popular opinion had painted it. We said that the market would bounce and move into a more selective phase of a bull market. Our view was unpopular for the fall months as the market went south, but we believed the data that we saw.

The Five Man Electrical Band had a great 60’s hit in which they sang “Sign, sign, everywhere a sign. Blockin' out the scenery, breakin' my mind. Do this, don't do that, can't you read the sign?” The thing is, sometimes people don’t want to read the signs. They just want to believe what they want to believe.

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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.*

“As January Goes, So Goes the Year”?

by Louis Navellier

With January up 8%, the saying “as January goes, so goes the year” is obviously a good omen. Between 1950 and 2017, the January barometer has been correct 58 of 67 times (about 87%), according to The Stock Trader's Almanac. However, I still expect market leadership to become increasingly narrow in the upcoming months, simply because earnings momentum will continue to decelerate due to more difficult year-over-year comparisons. Furthermore, since many multinational companies are now hindered by slowing global growth and a strong U.S. dollar, it remains imperative to own more domestic companies, especially the small- and mid-capitalization companies that benefit when the U.S. dollar is strong.

There are three primary reasons why the U.S. dollar continues to be strong: (1) The U.S. is experiencing stronger GDP growth than other developed nations; (2) the Fed has raised key interest rates substantially above most other reserve currencies, and (3) the U.S. has a strong, assertive leader.

Speaking of the Fed, Chairman Jerome Powell last Wednesday turned very dovish, essentially signaling that the Fed will not raise rates for the foreseeable future. Specifically, in his press conference after the Federal Open Market Committee (FOMC) meeting, Powell said the case for higher rates “has weakened” because of muted inflation and somewhat slower U.S. growth, stressing that the Fed will be “patient” before determining its next move. He also clarified that the current level of interest rates is “appropriate.” 

Looking forward, the FOMC minutes said the Fed continues to believe that “the most likely outcome” for the U.S. economy is sustained growth with strong labor market conditions and inflation near 2%. The most interesting comment in the FOMC minutes was this: “In light of global economic and financial developments and muted inflation pressures, the FOMC will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes.”

In other words, China’s economic slowdown, Brexit, and other global events are now influencing the Fed.

A Great Jobs Report Capped a “Mixed” Week of Indicators

The economic news last week was mixed. On Tuesday, the Conference Board announced that its consumer confidence index declined sharply to an 18-month low of 120.2 in January, down from 126.6 in December. This was the third straight monthly decline and substantially below economists’ consensus estimate of 124. The expectations component plunged to 87.3 in January, down from 97.7 in December and is especially alarming. In past federal government shutdowns, consumer confidence has declined, so it will be interesting if consumer confidence will quickly rebound, or if we will fear another shutdown.

Nonetheless, consumer spending is expected to slow dramatically in the first quarter, while the record January cold snap in the Midwest and Northeast is also expected to curtail consumer spending figures.

On Friday, the Labor Department announced that 304,000 payroll jobs were created in January, substantially above economists’ consensus estimate of 170,000. This marked the 100th straight month of net job creation. The unemployment rate actually rose to 4% from 3.9% in December, due to more workers entering the labor force, as the federal government partial shutdown apparently caused some contract workers to seek other jobs, which substantially boosted the number of workers looking for jobs.

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Wages only grew by 0.1% (3 cents) to $27.56 per hour, so wage growth was well below economists’ consensus estimate of 0.3%. The labor force participation rate rose to 63.2%, the highest since 2013. The bad news is that the December payroll report was revised down to 222,000, from 312,000 previously estimated. Meanwhile, the November payroll report was revised up to 196,000, up from 176,000 previously estimated, so in the last two months of 2018, the total of new payroll jobs was revised down by a cumulative 70,000 jobs. Overall, the job market remains very healthy, but with minimal wage growth, inflationary pressures will remain low, so the Fed will not be under any pressure to raise interest rates.

Also on Friday, the Institute of Supply Management (ISM) announced that its manufacturing index re-surged to 56.6 in January, up from 54.3 in December. This was a big surprise, since the consensus estimate by economists was 54.3. Back in November, the ISM manufacturing index stood at 58.8, so the abrupt deceleration in December alarmed some economists, who can now calm down a bit with the January resurgence. These positive ISM numbers bode well for growth in the manufacturing sector. As a result, some economists may now be revising their first-quarter GDP estimates a bit higher.

Overall, we are still in a ‘Goldilocks’ environment with strong job growth, low inflation, stable interest rates, a strong U.S. dollar, and the fifth quarter in a row of double-digit earnings growth for the S&P 500.

As a result, I think we can expect a very positive State of the Union speech on Tuesday night.


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