Surprises and Buy-backs Hold Promise

Earnings Surprises and Share Buy-backs Hold Promise for May

by Louis Navellier

May 7, 2019

Waves on the Beach Image

It is starting to get bumpy, but I was encouraged by wave after wave of strong sales and earnings announcements last week. So far, the S&P 500’s annualized earnings are 5.6% above estimates.

We had an incredible April, which is a seasonally strong month that benefits from pension funding and the fact that some of the best earnings surprises tend to be released in April. However, in May, earnings surprises tend to be not quite as strong, so the overall market could get bumpy in the upcoming week.

Last May was incredible, however, fueled by wave after wave of stock buy-backs. Specifically, companies suspend stock buy-backs in this “quiet period” (during earnings announcement season), but immediately after their first-quarter results are announced, they are free to commence more stock buy-backs.  Since there were $227 billion in stock buy-backs in the first quarter and bond yields have since fallen, I expect stock buy-back activity to pick up in the second quarter, so May could be a great month, just like last year.

Speaking of buy-backs, Apple confirmed on Tuesday that it is boosting its stock buy-back program by $75 billion. Big multinational companies like Apple can issue debt at ultralow interest rates to buy back more shares. With rates so low, it appears that the second-quarter buy-back frenzy may be stronger than in 2018! 

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

In This Issue

Bryan Perry sees some “green shoots” of growth emerging in Europe and elsewhere around the globe, with a potential for high yields in selected European banks. Gary Alexander focuses on the misuse of economic growth statistics during the election cycle: Beware of bias, even by the “best and brightest.”  Ivan Martchev sees the charts and the fundamentals pointing to a Dow heading for 30,000 (and the S&P to 3,250), perhaps this year. Jason Bodner follows the phenomenal growth story of semiconductors and software within the tech sector, while I cover the upbeat economic scorecard and the Fed’s latest meeting.

Income Mail:
Economic Green Shoots in Europe Sparking Optimism
by Bryan Perry
Fat Dividend Yields from European Bank Stocks Come with Elevated Risks

Growth Mail:
Happy Birthday, Karl Marx…Now, Please Just Die!
by Gary Alexander
How the Best and Brightest “Lie with Statistics”

Global Mail:
The Dow Chart Says It’s Going to 30,000
by Ivan Martchev
Why the Fundamentals Support the Technical View

Sector Spotlight:
Finding the Truth Amid the Noise
by Jason Bodner
Semiconductors and Software Lead the Tech Charge

A Look Ahead:
A Powerful Jobs Report Lifts the Market Friday
by Louis Navellier
The Fed (as Expected) Left Interest Rates Alone

Income Mail:

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

Economic Green Shoots in Europe Sparking Optimism

by Bryan Perry

For most of the month of April, I have been highlighting the strong technical action for world markets, while the economic data outside the U.S. has been nothing to write home about. But for all of us that respect the charts, the strong price action in global indexes was simply a precursor to what is now just crossing the tape in the past two weeks – evidence that the global economy is turning up.

It started on April 16 with the release China’s first-quarter GDP reading of +6.4%, just above the +6.3% rate of expansion expected by analysts surveyed by Reuters. Global markets were quick to respond by trading higher. Then, two weeks later, on April 30, it was reported that first-quarter Eurozone growth rose to +0.4%, double that of the +0.2% rate recorded in the fourth quarter of 2018.

Three main takeaways included Spain leading the way with +0.7% growth, France maintained its +0.3% growth rate, and Italy may be out of recessionary territory after posting growth of +0.2%. (All numbers are quarter-over-quarter, not annualized.) The common driver to this better-than-expected GDP data appears to be job creation. Unemployment across Europe fell to its lowest level since at least 2000.

European Unemployment Rates Chart

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

The U.S. market, as measured by the S&P’s +18.26% YTD performance, has held center stage for where the best risk/reward ratios appear to be, but the Euro STOXX 50 Index has quietly rallied +16.69% YTD. Unlike the S&P, which is trading at a new all-time high, the Euro STOXX 50 Index, which closed at 3,502 last Friday, is 2,000 points (or 36%) off of its all-time high of 5,500 set back in early 2000.

Similarly, China’s Shanghai Composite Index (chart below) is trading 49% below its all-time high, set back in 2007, and Japan’s Nikkei 225 index is trading 43% below its all-time high of 38,957 set on December 29, 1989. While Japan’s aging population and strict immigration laws are a major long-term headwind toward any quest for new market highs, China’s booming population and ambitious overseas expansion into emerging markets makes for a better case for that market to exceed the prior high.

China Shanghai Composite Index Chart

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

As to Europe, that’s a tough call. Many of the finest industrial, healthcare, and consumer products in the world are made in Europe, but that continent suffers from an economic model that has aged, along with its population. Most of the great companies in Europe were formed many decades ago. There is no “Silicon Valley” of emerging technologies in Europe and the region badly needs new leadership in this area.

Europe can do something about their ongoing sovereign debt crisis, the immigration crisis, the pending Brexit crisis, and trade challenges when elections to a new European Parliament take place later this month (May 23-26). That will bring in new leadership that includes a new head of the European Central Bank and the European Commission. Europe is heavily dependent on exports, and some new blood might do much to improve the trade tensions and promote more free-trade agreements. With this said, European stocks are higher on what I believe is hopeful optimism that the elections will bring positive change.

Fat Dividend Yields from European Bank Stocks Come with Elevated Risks

The hunt for safe yield around the globe has brought a flight of capital to the U.S. for both income-producing bonds and equities. Aside from the attraction of U.S. Treasuries, the market is awash in investment-grade corporate debt and blue-chip stocks that pay 3%-5%. The high quality of those income streams backed by a bull market in the dollar just keeps the money flowing in from around the globe.

With the latest round of economic news for Europe showing signs of improvement, will investors start to accumulate a sector that has been rocked and not really been a part of the year-to-date rally for the Euro STOXX 50 Index? I’m speaking of the banking sector, which has been acting like a rudderless ship because of the ill-timed taking on of emerging market debt, coupled by a long and very slow climb out of the Great Recession, of which the effects still weigh heavily on Italy’s banks and Germany’s big banks.

However, within the carnage of the broader banking sector in Europe, there seem to be some potential diamonds in the rough that are sporting some juicy payouts. After citing some improving growth trends in Spain and France, the stocks of France’s top bank, Société Générale ADR (SCGLY), paying a 7.7% dividend yield and Spain’s top bank, Banco Santander S.A. ADR (SAN), paying a 5.3% dividend yield, are starting to show positive fund flows and gradual stock price appreciation.

Euro STOXX 50 Index Chart

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

I don’t own either stock and am simply making an observation about how the charts of both stocks are looking better. Shares of London-based HSBC Holdings plc (HSBC), which pays out an attractive 5.7% dividend yield, and has huge exposure to Asia, is also the breaking out to the upside from a six-month basing formation. Swiss-based UBS Group AG (UBS) is also catching a bid and pays a yield of 5.22%.

(Navellier & Associates does not own SCGLY, HSBC, UBS and SAN in managed accounts or our sub-advised mutual fund.  Bryan Perry does not own SCGLY, HSBC, UBS and SAN in personal accounts.)

I have no position in HSBC or UBS, either, but am becoming increasingly intrigued by the positive turn for these leading bank stocks and others. Is this move higher for the sector a bull-trap, or is something happening fundamentally underneath that isn’t getting much mention by the analyst community?

So much depends on how the ongoing trade and tariff situation plays out. All that emerging market debt (some of which is non-performing) is still very much there. But if the charts don’t lie, then just maybe, the bottom for Europe’s banking sector is in.

Growth Mail:

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

Happy Birthday, Karl Marx…Now, Please Just Die!

by Gary Alexander

Back around 1990, utopia was in sight. After centuries of struggle, capitalism had won. The Berlin Wall had fallen. A crippled East Germany was healed by joining a thriving West Germany. The Soviet Union collapsed. It was “Morning Again in America” after the malaise of the Nixon-Ford-Carter nightmare. It seemed like the “End of History” (Francis Fukayama). Capitalism stood at the “Commanding Heights” (Daniel Yergin). The best ideas had won. We understood “How the World Works” (Jude Wanniski).

But then we forget everything … all over again. More young Americans (“Millennials”) now prefer socialism (51%) over capitalism (45%). A young (29-year-old) freshman Congresswoman Alexandria Ocasio-Cortez and her ideological grandfather, Bernie Sanders, 77, are leading the New Progressives.

In 2014, a young French economist, Thomas Piketty (born this date, May 7, 1971), helped ignite this socialist time bomb with his attempt to reincarnate another economist born near this date (May 5, 1818), Karl Marx. Piketty wrote a top-selling 700-page political-economic book in 2014, called “Capital in the 21st Century,” a title that bore an intended resemblance to Marx’s three-volume sleeping pill, Das Kapital.

Piketty’s tome seemed to be on every left-leaning coffee table in the politically-charged year of 2015.The main premise of Piketty’s book is that capital growth exceeds economic growth, so the vast majority of wealth will tend to end in the hands of a very few capitalists, who will then pass their wealth through inheritance to a select few, exacerbating the division of wealth. His solution to the uneven distribution of wealth is a coordinated international attack on the rich through high (up to 80%) income taxes and an annual 2% tax on the net worth of the rich. This was thought to be radical in 2014 but it is now being put forth seriously by some candidates as the only logical and moral means to provide “social justice.”

Something so innocuous sounding as a 2% Wealth Tax could have devastating economic consequences. Many of the top 1% are business people who are invested up to the gills in equipment and people. They exist on a thin margin of profit. To sell 2% of their assets each year would involve a major downsizing in some area. Even for passive investors, it would involve a forced sale of assets, pushing asset prices down.

There are a limited number of super-rich. If you tax 80% of their income one year, you might get $100 billion, but you’ll get very little the second year, because they will find ways to shelter their income.

Using IRS data from 2016 (the last year with full data available), 150.3 million taxpayers filed personal tax returns, of which 50.2 million paid no income taxes at all. Only 16,087 made over $10 million in adjusted gross income (AGI) and 424,442 made over $1 million. The top 1% made over $500,000. This top 1% of taxpayers paid 36.5% of all income taxes – their “fair share,” I would say (see charts, below).

Income Taxes Paid by Group as Percent of Total Taxes Paid Bar Charts

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

From these charts, notice how the percentage of taxes paid by the richest 1% (making over $500,000) increased dramatically after President Bush’s 2003 “tax cut on the rich.” And all taxpayers making over $100,000 pay more over time – they have routinely paid about 80% of all income taxes in recent years.

How the Best and Brightest “Lie with Statistics”

A month ago, I presented a series of posts about “How to Lie with Statistics.” This is important because it impacts our portfolios. If we believe that 90% of Americans are too poor to invest, for instance, it will change our belief in whether or not this bull market has any fundamental long-term buying power left.

During the coming political year, you will hear all kinds of rhetoric about the wealth divide, with some famous economists backing up the claim with selective data. In the April 19 New York Times, Nobel Prize winner Joseph Stiglitz wrote in his opening paragraph on the editorial page that “90% have seen their incomes stagnate or decline in the past 30 years” since “the United States has the highest level of inequality among the advanced countries and one of the lowest levels of opportunity—with the fortunes of young Americans more dependent on the income and education of their parents than elsewhere.”

How can the nation’s real GDP more than double (+110% since 1989) if 90% of us are no better off?

It’s sad when economists of Nobel-caliber status succumb to bending the truth for political reasons. Ed Yardeni, once a student of Stiglitz at Yale, said Stiglitz is using “the worst data series ever,” real median income, compiled annually by the Census Bureau – “an extremely flawed measure of income, yet it is widely used by Progressives to prove their claim of widespread and prolonged income stagnation.”

Consider: (1) This data is based on surveys that focus on money income alone and relies on respondents’ honesty and memory. On its website, the Census Bureau warns that “users should be aware that for many different reasons there is a tendency in household surveys for respondents to underreport their income.” (2) This measure omits ALL noncash government-provided benefits, which have grown greatly in the last 30 years – Medicare, Medicaid, food stamps, public housing, and more. Also, (3) the Census Bureau uses the inflated CPI (not the PCED) to subtract the impact of inflation, and (4) the shrinking size of average households (now including many more single-person households) warps the per-capita income data.

While pessimists (calling themselves Progressives) sing the Sad Song of Stagnation, more realistic data shows that over the past 30 years (from March 1989 through March 2019), inflation-adjusted average hourly earnings of production and nonsupervisory workers is up 32% (chart below), using the PCED and a measure of wages that covers over 80% of payroll employment. Disposable income and consumption, compiled monthly by the Bureau of Economic Statistics on a per-household basis, are up 62% and 67%, respectively, from March 1989 through March 2019. Real GDP per household is up 54% over this period.

Real Average Hourly Earnings Chart

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

Yardeni concludes: “Income stagnation is a myth. Income inequality isn’t a myth but an inherent characteristic of free-market capitalism, an economic system that awards the biggest prizes to those capitalists who benefit the most consumers with their goods and services. Perversely, inequality tends to be greatest during periods of widespread prosperity. Rather than bemoaning that development, we should celebrate that so many households are prospering, even if a few are doing so more than the rest of us.”

Read the economic data skeptically, armed with “alternative views,” in the next 18-month election cycle.

Global Mail:

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

The Dow Chart Says It’s Going to 30,000

by Ivan Martchev

The retail investors’ favorite index – the Dow Jones Industrial Average – looks like it’s going to 30,000. I have never been one to make an investing decision based on charts alone, but my line of work has given me the experience to know that charts are used very extensively by futures traders and, as such, are a major tool in short-term trading decisions.

The same way that charts on the major indexes were bearish in late 2018, they are bullish now.

Dow Jones Industrial Average versus United States Central Bank Balance Sheet Chart

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

The question that begs to be asked is: If December was not a time to sell, does that mean now is not the time to buy? Here is my take: In December, a very interesting technical pattern on the major indexes – the Dow Jones Industrial Average, S&P 500, Nasdaq 100 – “broke.”  It was a “head and shoulders top” with the head the previous all-time highs in late September and the shoulders being lower highs surrounding it.

This head-and-shoulders pattern indicated that the Dow was headed below 22,000 and the S&P 500 would fall below 2,400, which happened on Christmas Eve. Now we have a pattern called an “inverse head and shoulders,” which typically happens after protracted bear markets. The problem is: Despite the magnitude of the decline in the major indexes in the fourth quarter, I do not believe this was a real bear market. This was, as I maintained at the time, a sharp sell-off in a good economy, and most sharp sell-offs in a good economy tend to reverse themselves pretty quickly – as this one did.

Still, the present “inverse head and shoulders” pattern had its “head” at the Christmas Eve low and its shoulders at the December 2018 and March 2019 highs in the major averages that form “the neckline.” The breakout above that neckline happened in the last two weeks and the measured move now points to about 30,000 on the Dow and perhaps in the neighborhood of 3,250 on the S&P 500 – this year!

I know it sounds outlandish, but this is what the charts say. Now, we have to ask: Could the charts be wrong? Sure could, but in this case the charts are pointing higher and I think they are right. Here is why.

Why the Fundamentals Support the Technical View

Any chart is just the summary of all the buy and sell decisions of all investors in that market, where sellers are wrong at the bottom and buyers are wrong at the top. I prefer to understand what drives the charts, or the fundamental part of the investing equation, and not look at the charts alone. Looking at the charts alone is just looking at squiggly lines. One is bound to make a costly strategic mistake that way.

You can describe fundamentals as “strategy,” and the technicals as “tactics.” As the legendary Chinese general Sun Tzu has timelessly professed: “Strategy without tactics is the slowest route to victory. Tactics without strategy is the noise before defeat.” If we apply Sun Tzu’s wisdom to the stock market, he clearly means that the fundamentals are more important than the technicals, but one needs to use both.

In June 2019, the present economic expansion will become the longest in U.S. history. That does not mean it is about to end. The first few years of the recovery that began in June 2009 were weak and the economy did not feel normal until 2012. It is possible that because of the severity of the Great Recession and the abnormal nature of the recovery the present expansion may last much longer. How much longer is impossible to say, but right now it looks like there won’t be a recession in Trump's first term in office.

The caveat is that Trump could still start a major trade war, or the Fed could overshoot, despite their stopping the pace of tightening. Absent a major policy mistake of this sort, there is no recession in sight.

Major deregulation and tax policy overhaul tend to have longer-term effects. The effects of President Reagan’s policies carried all the way to 1990, when George H.W. Bush ended up facing a recession. The effects of Donald Trump’s policies will likely carry him through the next election without a recession, which is (historically) an electoral edge. This is not a political statement, just an economic observation.

United States Federal Corporate Tax Rates versus United States Federal Government Budget Chart

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

Tax cuts have a major effect on economic activity, and they tend to have a “second leg” effect. The Bush tax cuts of 2003 had a major impact that year, a pause, and then a reacceleration of economic activity in late 2004. How many investors today are looking for the economy to accelerate in late 2019? Not many, but that is exactly what may happen.

I must say I like lower taxes, but I don't like high budget deficits. The 2017 tax cut could have been done better with less impact on the exploding federal deficit! If tax cuts pay for themselves, we are still waiting on the 2003 Bush tax cuts to pay for themselves and it has been 16 years of waiting.

That’s a lot of waiting.

Sector Spotlight:

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

Finding the Truth Amid the Noise

by Jason Bodner

There are 25 billion chickens on earth. What’s cooler is that the chicken is the closest living relative of the Tyrannosaurus Rex. But the bird made news for a ridiculous reason last week. House Democrat Steve Cohen was trying to skewer Attorney General Barr for blowing off his hearing, so he sat down and started eating a bucket of KFC. His performance got mostly sour reviews, but I think that misses the point. He knew that an old dude crushing some fried chicken is entertainment, so he would make the evening news!

Democrat Steve Cohen, Kentucky Fried Chicken Eater Image

There are many perma-bears on the market, but I’m a perma-bearish on the financial media. I think it does the same thing as putting cameras on the “finger-lickin’” publicity stunt. Most daily noise takes away from what is really going on behind the scene, so let’s put the drumsticks down and take a good look.

I just spent a week at a conference where bright minds gave their best investment ideas. I’ll get to mine in a moment, but a main theme was that many people are bearish on stocks. I heard many reasons – like high valuations, historical analogs, and simply “the bull market is 10 years old,” which was stated as a foregone conclusion, like “everyone knows the market has to fall pretty soon; it’s only a matter of when, right?”

I heard this right before I told a room filled with 100+ people why this big bull is just getting started!

On a conference call with Louis Navellier on Friday morning, he said it best: “There’s just nowhere else to go!” He’s right. Europe is a mess. Germany and Italy teeter in and out of recession. Brexit is a major ulcer. China has made progress but hasn’t resolved its trade issues with the U.S. Latin America is just downright ugly, especially with the woes in Argentina and Venezuela. (Talk of civil war is never a good thing for investors’ nerves.) These pain points help lure trillions in capital here to the U.S.

When foreign capital arrives, Treasuries don’t offer as compelling returns as equities. Dividends earned on U.S. stocks are taxed at long-term capital gains rates, while bond interest is taxed at ordinary income (higher) rates. Bonds also don’t offer the capital appreciation potential of stocks. With 78% the S&P 500 reporting earnings, 76% beat estimates and 60% beat revenue estimates. That isn’t bearish, people.

Semiconductors and Software Lead the Tech Charge

My investment idea at the conference came from the big buying I see in the market. I’ve been talking about this for a long time here. Without going over the same ground, the biggest buying I am seeing is in Semiconductors and Software. I think these two groups are raw fuel for the bull market. When big investors, like hedge funds and institutions, plow cash into these groups, it’s very bullish for stocks.

Last week saw broad strength, especially small caps, despite turbulence under the surface. Earnings season is seeing outsized reactions to reports. Some companies meet or beat earnings, but if lower guidance is issued, they pay the price – literally. Stocks have been routinely seeing 10%-20% downside reactions to lower guidance warnings. But here’s the thing: I think good stocks will bounce right back.

Standard and Poor's 500 Sector Indices Changes Tables

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

In our MAP Score, we saw big buying again last week in Tech, Industrials, and Financials. Selling hit Energy, Health Care, Telecom, and Materials. This general theme has been playing out since the Christmas lows. Looking below, based on MAP scoring methodology, Infotech is our strongest sector, but Semis and Software are the standout tech industry groups. This is the power of the current tech rally.

MAP Score Tables

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

I decided to comb through our 30 years of data to see how the current buying in Software and Semis compared to our nearly 650,000 overall signals since January 1, 1990. The first thing you should know is that big buying outnumbered big selling for all stocks in that time period by 58.5% to 41.5%. That makes sense, reflecting the overall bullish trend in that time period. Looking at the sectors, I noticed that Health Care, Infotech, and Utilities saw the biggest imbalance of buying versus selling. The weakest sectors in terms of unusual buying were Real Estate, Energy, and Telecom.

So let’s focus on Information Technology: When we dig for what accounted for that buy imbalance, we see (you guessed it): Software and Semiconductors. What’s significant is 62% of signals in Software and semis since 1990 were buys. But when you get to the bottom of the table, your eyes should pop. Since New Year’s 2019, Semis saw 95% buy signals and Software saw 90% - that’s unprecedented.

MAP Signals Table

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

Don’t let the market’s chicken-eaters distract you from the real trend. The game is Software and Semis. The biggest players have been fanning the flames for a bullish growth trend. Pay attention to the big stuff.

As Mark Zuckerberg said: “Figuring out what the next big trend is tells us what we should focus on.”

A Look Ahead

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

A Powerful Jobs Report Lifts the Market Friday

by Louis Navellier

Payroll Jobs Image

The Labor Department reported last Friday that a whopping 263,000 payroll jobs were created in April, substantially above economists’ consensus estimate of 190,000. The unemployment rate fell to 3.6%, the lowest rate in nearly 50 years (since late 1969). The February and March payrolls were also revised up by a cumulative 16,000 jobs to 56,000 and 189,000, respectively. Average hourly earnings rose 0.2% to $27.77, up 3.2% in the past 12 months. I should add that ADP announced on Wednesday that the private sector created 275,000 jobs in April, substantially higher than economists’ consensus expectation of 180,000. Overall, the job market remains very healthy – and without causing excessive wage inflation.

The other economic news last week was also positive. First, the Commerce Department announced that consumer spending surged 0.9% in March, the largest monthly gain in almost a decade. In the past 12 months, consumer spending has risen 2.9% and is the primary driver of GDP growth, which may explain why the preliminary estimate for first-quarter GDP growth was over 3%. The Commerce Department also announced that factory orders rose 1.9% in March, the largest monthly increase since last August, so between a strong consumer and manufacturing sector, first-quarter GDP may now be revised higher.

The Conference Board on Tuesday announced that consumer confidence surged to 129.2 in April, up from 124.2 in March. Economists had only estimated a rise to 126. Especially strong were the “present situation” component, surging to 168.3 in April, up from 163 in March, and the “futures expectations“ component, reaching 103 in April, up from 98.3 in March. This bodes well for second-quarter growth.

The National Association of Realtors on Tuesday announced that its index of pending home sales surged 3.8% in March, a massive surprise, since economists were only expecting a 0.7% increase. Three of four regions surveyed reported a surge, with the West leading the way with an 8.7% increase. Lawrence Yun, chief economist for the National Association of Realtors, said that, “There is a pent-up demand in the market, and we should see a better performing market in the coming quarters and years.” 

The other big news on Tuesday was that the S&P CoreLogic Case-Shiller 20-city home price index rose 0.2% in February and 3% in the past 12 months. Six of the 20 metro areas surveyed reported that median home prices declined or were unchanged. Overall, slower home price appreciation means that inflationary forces continue to decline, which means that the Fed is unlikely to raise key interest rates.

The Institute of Supply Management (ISM) announced on Friday that its non-manufacturing (service) index slipped to 56.1 in March, down from a robust 59.7 in February. This was the lowest reading in 19 months, but since any reading over 50 signals an expansion, the ISM survey was still positive, and 16 of the 18 service industries that ISM surveyed reported expanding in March, which is very positive.

Overall, first-quarter GDP will likely be revised higher due to this week’s net-positive news from March.

The Fed (as Expected) Left Interest Rates Alone

The Federal Open Market Committee (FOMC) met on Wednesday and left key interest rates unchanged, citing the recent decline in inflation as a reason to hold rates steady. Specifically, the FOMC statement acknowledged that overall and core inflation “have declined and are running below” its 2% target.

There is no doubt that the FOMC is now more upbeat on overall GDP growth and Fed Chairman Jerome Powell said, “I see us on a good path” after his post-FOMC press conference. However, Powell also said that he believes the slackening in price pressure is “transient,” which surprised some Fed watchers, since it implies that the Fed Chairman apparently believes that inflation may re-accelerate. Essentially, the Fed is now fearing phantom inflation, so I expect the FOMC will remain data-driven and “patient.”

Interestingly, after Chairman Powell’s press conference, Fed Presidents James Bullard and Charles Evans, from St. Louis and Chicago, respectively, both signaled that they are open to interest rate cuts, due to a lack of inflation. Bullard and Evans are “doves” and do not share the majority opinion on the FOMC, so it will be interesting to see the FOMC minutes to monitor any dovish debates over inflation expectations.

As I have repeatedly said, the Fed never fights market rates, so a strong U.S. dollar and foreign capital inflows are expected to be the primary force that will influence Treasury yields in the upcoming months. In other words, if short-term Treasury yields fall due to international capital flight, the FOMC may have room to cut short-term rates. However, for now, it appears that the FOMC will maintain a steady course.


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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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