Switch from Fears Lifts Stocks

Switch from Trade Fears to Rate-Cut Hopes Lifts Stocks

by Louis Navellier

June 11, 2019

The financial news media has switched its obsession from trade tariffs to a coming Fed rate cut, so the news media is finally reporting some more positive news for a change and the market “melted up” by almost 5% last week, recovering more than two-thirds of its losses suffered in the entire month of May.

Google Ball Image

Despite this sharp rise in the indexes last week, I’d still say stock picking will beat index funds, especially with the NASDAQ 100, where several flagship stocks are under investigation. Google is under Justice Department scrutiny in a potential antitrust probe, and The Wall Street Journal has also reported that the Federal Trade Commission is probing how Facebook’s business practices impact digital competition.

The NASDAQ 100 is also being adversely impacted by Tesla’s woes, so NASDAQ’s former flagship index is under siege as many of its mega-cap stocks falter. Fortunately, I do not own Google, Facebook, or Tesla, so I have not been adversely impacted by these NASDAQ 100 flagships’ recent gyrations.

(Navellier & Associates does not own Tesla, Google or Facebook in managed accounts and our sub-advised mutual fund.  Louis Navellier and his family does not own Tesla or Google or Facebook in personal accounts.)

In This Issue

What a difference one week makes! Bryan Perry examines how some of the “bad news” on the economic front perversely makes a rate cut more likely, which favors stocks. Gary Alexander wonders if China is in danger of the kind of long-term growth malaise Japan has suffered since 1990, if they don’t reform some of their economic shell games. Ivan Martchev also has suspicions about China’s growth rate, in light of falling oil and industrial metals prices. Jason Bodner celebrates the revival of stocks in general, and tech and semi-conductors specifically, as the market wakes up to the good news that has been there all along. In the end, I give three reasons why rates are falling worldwide and why we can expect rate cuts here, too.

Income Mail:
Bond Market Already There and Waiting on Fed to Catch Up
by Bryan Perry
Jerome Powell to Wall Street – “I’ve Got Your Back”

Growth Mail:
Will China’s Growth Machine Suddenly Implode – Like Japan’s Did?
by Gary Alexander
China’s Growth Rates are Already Slowing Dramatically

Global Mail:
Commodities are “From Venus” Too
by Ivan Martchev
You Can't Fake Oil Demand

Sector Spotlight:
It Pays Dividends to Hunt for Good (Realistic) News
by Jason Bodner
Equities were “Tweeted into a Tailspin” in May

A Look Ahead:
What’s Behind the Global Race to Zero (or Negative) Interest Rates?
by Louis Navellier
Most Economic Indicators Point Toward a Slowdown, Fueling Fed Rate Cuts

Income Mail:

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

Bond Market Already There and Waiting on Fed to Catch Up

by Bryan Perry

It is often said that the bond market dictates to the Fed and not the other way around, making this past week’s commentary by Fed Chairman Jerome Powell as simply the Fed acknowledging that they will submit to the power of dramatically lower yields brought on by a massive rotation into U.S. Treasuries.

While the Fed did their own version of a “pivot” back in January, the bond market has put Mr. Powell & Co. under rising pressure to cut the Fed Funds Rate way sooner than the Fed had previously considered.

United States Ten Year Treasury Yield Index Chart

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

Once again, the Fed is playing catch-up with current economic conditions. Soft data from the labor market all but put a lock on the prospects of a quarter-point cut at the upcoming July 31 FOMC meeting. The fed funds futures market currently sees an 85.6% implied likelihood of a rate cut at the July 30-31 FOMC meeting (source: Briefing.com). In just these past two weeks, the economic calendar provided some clear hints of slower growth ahead, with several reports coming in below forecast.

Examples: The ISM Manufacturing Index for May was 52.1 versus 52.6 forecast. Construction Spending for April was 0.0% versus 0.4% forecast. Industrial Production for April was -0.5% versus 0.1% forecast. Durable Orders for April were -2.1% versus -2.0% forecast, and Friday’s employment data showed Non-farm Payrolls growing by 75K versus 180K forecast. That last one put a fork in the notion of an upcoming rate cut. Fed Fund Futures plunged on the labor report.

Fed Funds Future Implied Yield versus Fed Funds Effective Rate Chart

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

Jerome Powell to Wall Street – “I’ve Got Your Back”

As of Friday, the 2-year yield declined five basis points to 1.85%, and the 10-year dropped four basis points to 2.09%. While the 2/10 spread of 24 basis points has improved, there is an inversion in the 1, 3, and 6-month Treasuries – all yield more than the 10-year, which has pulled the Fed’s plan forward, per Mr. Powell’s latest public statement that the Fed would keep the expansion going, however possible.

Yield Curve Table

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

Stocks vaulted higher on the tacit promise of a rate cut by the Fed chief, the S&P all but erasing market losses from the prior three weeks that saw the S&P violate its 200-day moving average for two sessions. The four-day 150-point S&P rally from Tuesday to Friday was juiced by Powell’s hint of rate cuts, reports of a delay in the Mexican tariffs, and crude oil getting bid higher following a protracted sell-off.

As it seems like “happy days are here again” for stocks, corporate spreads faced continued upward pressure due to persistent growth concerns and a sharp fall in the price of crude oil. Leading up to last week’s market reversal, the high yield spread widened by 39 basis points to 480 bps while the investment grade spread widened by six basis points to 117. The high yield spread was approaching its high from the start of the year while the investment grade spread remains a bit below its recent peak. On the positive side, the high yield spread remains under its 10-year average of around 525 bps.

High Yield Spread Chart

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

The high yield market bears watching closely in the months ahead as the pricing of junk bonds has historically been a leading indicator for stocks. Credit analysts have growing concerns about growth prospects in China and Europe, but not all are worried as junk bond issuers sold over $82 billion of paper from January through April of this year, representing an increase of 28% over the prior-year period. So, for now anyway, it appears as if the junk bond and equity markets survived another recession scare.

Below is a long-term chart of the iShares iBoxx $ High Yield Corporate Bond ETF (HYG), the most widely traded high-yield ETF. It is worth a glance, given the mixed messages the market has been sending us. Shares of HYG closed at $86.10 Friday and remain constructive. The low in December 2018 was $79.55 with the 52-week high being $87.04.

How this market trades going forward – under the assumption of a dovish Fed combating slower growth – will be very interesting. Each sell-off in HYG following the Great Recession has proven to be a buying opportunity in stocks, and the recent dip to $84.50 last Tuesday saw buyers step in with gusto. Until more data is known about whether the soft jobs report is a one-off or something more concerning, I expect the junk bond market to remain in a fairly tight range, especially with the Fed set to accommodate markets.

iShares High Yield Corporate Junk Bond Exchange Traded Fund Chart

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

What we do know is that stock markets operate on greed, while investment-grade bond markets operate on fear. Junk bond markets actually operate more on greed than fear, per the appetite for high yields. A better indicator of the health of the high-yield debt market is the direction of bid-offer spreads. While they are just one indicator of risk, junk bond managers closely follow these spreads as a measure of liquidity.

The bid-offer gap stood at 0.96 cents per dollar last Wednesday, near the highest level since the low point of December. Pimco’s fund managers, who oversee $1.75 trillion in bonds, state that such a spread “shows the cost to cash out of corporate bonds keeps getting bigger during sell offs, when funds often face redemptions.” Pimco also believes challenging liquidity conditions are here to stay as long as a trade war with China and political instability in Europe persist.

Liquidity U-Turn Chart

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

Here, too, is simply another way that investors can keep a pulse on a market that tends to have a high correlation with stocks. Like what we saw last week, both the junk bond market and the stock market can right themselves in a matter of just a few days. Rapidly rising and falling liquidity is the “new normal,” and we all just have to get used to it.

Growth Mail:

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

Will China’s Growth Machine Suddenly Implode – Like Japan’s Did?

by Gary Alexander

We celebrated the 75th anniversary of D-Day last week – as well we should. That day was important. It marked the beginning of the end of the European War. But the same dates also marked the beginning of the end for Japan in the Battle of Midway, June 4-7, 1942. Breaking the Japanese code, the U.S. Navy inflicted devastating damage on the Japanese fleet that proved irreparable – just six months after Pearl Harbor. The Japanese fleet never again made a serious advance toward America. Military historian John Keegan called Midway “the most stunning and decisive blow in the history of naval warfare.”

A quarter century later, after graduating from college with a journalism focus and an economic interest, my first job was to take a look at how Japan survived the massive bombing we inflicted upon them in World War II. In a series of three articles in early 1968, I began the first article, “Japan, Industrial Supergiant,” by saying Japan's population had skyrocketed 50% in the previous 20 years, making it the world’s fifth most populous nation, with over 100 million people, but industrially it had risen faster:

“By 1951 — six short years after the war’s total destruction — Japanese industrial output was back to prewar levels. And by 1967, Japan reached a tie for third place (with West Germany) in industrial output, and fourth (behind the U.S., USSR and West Germany) in Gross National Product. The amazing part of this economic miracle is Japan's growth rate. While the huge world powers are satisfied with a two or three percent yearly increase, Japan has averaged a level 10% yearly increase for over a decade! Today, Japan is number one in production of ships, motorcycles, transistor radios, quality cameras, and sewing machines. She is a close second or third in such all-important industries as steel, chemicals, automobiles, paper, and electronics.”

-- from “Japan, Industrial Supergiant” by Gary Alexander, Plain Truth magazine, January 1968

Japan's Aging Population Chart 

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

But it didn’t stay #1 for long. As this chart shows, Japan’s growth rate began to slow in 1975, and its population growth ground to a halt in the year 2000, when it reached 125 million and stayed there. Many demographers now predict that Japan’s aging population will revert back to 100 million by 2050 or 2060.

Projected Population of Japan Chart

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

In “Japan as Number One” (1979), Harvard sociologist Ezra Vogel positioned Japan as a superhuman Hercules and Einstein rolled into one, with wise but silent Samurai who knew everything, led by a government and business consortium that worked tightly for the greater glory of the nation, using state-owned banks that provided loans on demand, and workers who rose early to sing the corporation’s glory.

Japan was so rich with asset inflation by the late 1980s that choice properties in Tokyo sold for $1.5 million per square meter ($140,000 per square foot). It was said that one square mile of Tokyo property was worth more than all of the state of California. When I heard that, I simply said, “No, it isn’t!”

Japan’s stock market index, the Nikkei 225, peaked just shy of 39,000 on December 29, 1989, on the last trading day of the 1980s. It fell below 10,000 by 2012 and trades around 20,000 now. While the Dow Jones index is 10 times its 1989 level, the Nikkei is barely one half its level of 30 years ago.

Nikkei 225 Index Chart

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

In the first quarter of 2017, Japan’s GDP growth rate was 0.8% vs. the U.S. GDP rate of 3.1%, about four-fold faster. But that’s normal. Since 1994, Japan’s economy has averaged 0.8% growth per year.

China’s Growth Rates are Already Slowing Dramatically

The world’s highest official debt-to-GDP ratio today is Japan’s at 236%, but China’s unofficial rate is 300%. In the early 2000s, a rash of books and articles came out saying the same things about China that we once heard about Japan – that their 12% annual GDP growth rate would put them into global leadership ahead of the U.S. by 2030 or sooner. Their causes were the same – their education system is superior to ours; their government works directly with business and captive banks for managed loans to favored industries such as targeted export-centered enterprise zones for markets to specific nations, etc.

But too much was financed by debt. The financial costs are piling up. The Financial Times reported on May 31 that China’s GDP growth forecast reached a 30-year low and its manufacturing employment index reached a 10-year low. Their official manufacturing PMI for May fell to 49.4, down from 50.1 in April, and the index tracking new export orders fell a shocking 3.7 points from 49.2 to 46.5.

China Manufacturing Employment Index Chart

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

China is in danger of going the way of Japan if they don’t change their ways. The factories which now dominate China’s coastal landscape can easily be moved to adjoining nations, just like “Made in Japan” in the 1960s became “Made in Taiwan” and then “Made in Hong Kong” and “Made in South Korea” before those nations got rich and “Made in China” came into vogue. There are plenty of poor nations in Asia, Africa, and elsewhere that are willing to make goods for export if China doesn’t learn to play fairly.

Global Mail:

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

Commodities are “From Venus” Too

by Ivan Martchev

ZeroHedge, in its typical eloquent fashion, noted last week that stocks are from Mars, but bonds are from Venus, in describing the downdraft of U.S. Treasury bond yields and the significant rebound in the stock market. The two do not rhyme very well, which should be expected when the economic ramifications of a protracted trade war with China are difficult to quantify – as we have no idea how long it will last.

London Metals Exchange versus Crude Oil Price Index Chart

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

To that, I can only add that commodities are Venetian, too, as they clearly agree with the message of the Treasury market. The London Metals Exchange Index has now taken out the lows from December 2018 when oil was near $42. There is a heavy correlation between industrial metals’ prices and crude oil. Sometimes they lead, sometimes they lag, but they typically correlate heavily with crude oil, as they are both highly economically sensitive.

The rebound in the stock market is clearly related to both Fed Chairman Powell’s indication that the next move from the Fed is likely to be an interest rate cut, as well as the averted crisis in the immigration standoff with Mexico, as the stock market understood the 5% tariff would not be imposed. Even though the official news came after the close on Friday, there were plenty of leaks suggesting a benign outcome.

United States Two Year Note Yield versus United States Ten Year Note Yield Chart

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

Clearly, if interest rates keep dropping fast and the price of crude oil declines below $40, it would be unlikely that the stock market would keep making headway as those events would indicate a rapidly deteriorating global economy, catalyzed by the trade war. For the stock market to make progress this summer, the trade situation with China would have to be resolved.

China Diesel Demand Chart

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

We have not seen the May numbers yet, but diesel demand in China fell 14% and 17%, year over year, in March and April, respectively, falling to levels not seen in 10 years. The caveat here is that 10 years ago the Chinese economy was much smaller, with a GDP of $5.1 trillion. At the end of 2019, China’s GDP should be over $14 trillion. Something is clearly wrong here.

The Chinese are famous for massaging their GDP numbers. I know of an economist based in Asia who thinks the 1993 devaluation of the yuan was linked to a bad recession in China that showed in banking sector loan-loss numbers but never really was officially admitted by the Chinese authorities. It would not be a stretch to consider that right now the Chinese economy is doing a lot worse than what the official economic releases indicate.

The thing about doctoring economic numbers is that you either have to doctor them all or otherwise one runs the risk of having a situation of showing improving PMI indexes and loan growth numbers and diesel demand that is falling off a cliff, which clearly is not a possibility in an “undoctored” world.

It is unlikely that there will be any big developments in the trade situation with China before the G20 meeting in Osaka on 28-29 June. There are no serious ongoing trade negotiations with the Chinese between now and then, so investors will be carefully watching U.S. economic numbers for further signs of softening, particularly given the weak May employment report last Friday.

You Can't Fake Oil Demand

The thing about the price of oil, or industrial metals for that matter, is that pricing data does not come from the Chinese organization that releases economic statistics. In that regard, it cannot be doctored. I would view any further decline in commodity prices with great suspicion, particularly if Chinese economic numbers do not show any deterioration. Keep in mind that oil demand is very seasonally strong in the summer, so a weakening price in a seasonally strong period suggests a much faster deterioration in demand than previously thought.

The thing about the price of oil, or industrial metals for that matter, is that pricing data does not come from the Chinese organization that releases economic statistics. In that regard, it cannot be doctored. I would view any further decline in commodity prices with great suspicion, particularly if Chinese economic numbers do not show any deterioration. Keep in mind that oil demand is very seasonally strong in the summer, so a weakening price in a seasonally strong period suggests a much faster deterioration in demand than previously thought.

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

It has to be said that the most sensitive sector to oil prices, namely oil service stocks, did not buy the rebound off the $42 per barrel December 2018 low. They did have a feeble rebound as oil went from $42 to $66, and now they marginally undercut their December low near the 74 mark on the OSX Index.

Does the action in the OSX Index mean that oil is headed below $42? We’ll find out soon enough, but oil service stocks have been waving red flags about where oil prices are headed since mid-2018.

Sector Spotlight:

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

It Pays Dividends to Hunt for Good (Realistic) News

by Jason Bodner

A long-forgotten phrase popped into my head this morning: “Yellow dog journalism.” I can still see my history teacher’s beard when he taught us that term. I sat in class wondering why on earth I ever had to memorize it. But things really do have a way of coming full circle. When I searched out the origin of the term, it dawned on me that there was Fake News in the 19th century. It was called “yellow dog journalism, defined as “the term for journalism and associated newspapers that present little or no legitimate well-researched news while instead using eye-catching headlines for increased sales.

Frank Luther Mott, a 1939 Pulitzer Prize winner for his history of magazines identifies yellow journalism based on these five characteristics:

  1. Scare headlines in huge print, often with minor news events.
  2. Lavish use of pictures or imaginary drawings.
  3. Use of faked interviews, misleading headlines, pseudoscience, and a parade of false learning from so-called experts.
  4. Emphasis on full-color Sunday supplements, usually with comic strips.
  5. Dramatic sympathy for the “underdog” against the system.

Sound familiar?

Breaking News Image

Don’t get me wrong – the news is essential and some of it is legitimate, but if it seems as if I’m beating up on the news media relentlessly, it’s because I have. There’s a reason: They deserve it. The investing “headline risk” has been huge for years now. Normal-level stories get inflated into life-or-death fear campaigns, and small whispers of hopes of good news can set the market on a major bull run.

Two examples:

  1. The trade war story vaporized billions of dollars in equity value in May. We read plenty of opinions on why the trade war will derail life as we know it, but if you want to find a more moderate view, you really need to dig. I found one “think piece” buried deeply at NBC News: “Trade War? Try trade tiff. Trump’s Mexico and China tariffs aren’t crippling the economy, or farmers.” It echoes many of my thoughts about the media-overblown situation over tariffs.

Fed Chairman Jerome Powell basically said that the Fed is willing to do whatever it takes to stimulate growth. This rippled into rumors of a rate cut, which sent markets soaring last week.

Office Space Image

Bill Lumbergh is a fictional character in “Office Space” (pictured above). Apparently, everyone got his memo to “Sell in May and go away” because the market had its worst May since 2010, with the Dow off 6.7%, the S&P 500 off 6.6%, and NASDAQ tumbling a gut-wrenching 8.7%. Echoing December, ETF selling spiked at the recent trough of the market – a classic sign that Mom and Pop sold out at the bottom.

Equities were “Tweeted into a Tailspin” in May

May marked the largest monthly outflow in history for equity ETFs, which reached a record $19 billion, according to a State Street Global Advisors Report. As money flew out of stocks, they ran into fixed income ETFs. Matthew Bartolini said, “Global equities were tweeted into a tailspin.” I couldn’t have said it better! Financials, Tech, Industrials, Materials, and Energy saw the biggest ETF outflows in May.

But my, what a difference a week makes. That was the last week of May, but in the first week of June, the smart money wasn’t selling. In fact, we saw verifiable buying. First let’s look at the sector tables:

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.

That is juicy! The Materials sector index exploded more than 9% last week! Semiconductors saw a pop after weeks of blood. Value and blue chips outperformed, but growth still surged.

Here’s what happened under the surface with unusual institutional buying and selling:

MAP Signals Ratios Tables

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

Our data showed exceptional buying. We had tons of “trips” (a stock tripping our model for big volume and volatility but not necessarily making a buy or sell signal.) This came with big up days after many down days and a falling ratio. We examined what that might mean for the near future and it was bullish.

Check the full report here.

Tons of Trips Table

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

The bears are still out there, but I see a different story. Many growth stocks are showing buying...that's bullish. The Information Technology sector is on sale. Many fantastic stocks got hosed in May. The technical distribution pushed the sector down to #2 in terms of our top-rated sectors. Utilities took over with weak fundamentals and strong technicals. Infotech was the opposite.

Hosed Stocks Table

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

U.S. equities are the place to be. Global equity markets face much uncertainty, but the U.S. is the oasis. We have a strong dollar, strong sales and earnings growth, high profits, low taxes, and a strong economy.

Aristotle said, “It is during our darkest moments that we must focus to see the light.” When the market gets bearish and the news makes you sick, it’s probably a good time to focus on the data and get your shopping lists ready. I mean, Aristotle is bullish!

Aristotle Quote 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.*

What’s Behind the Global Race to Zero (or Negative) Interest Rates?

by Louis Navellier

On Thursday, the European Central Bank (ECB) said that it would hold key interest rates steady through the first half of 2019, raising speculation that it might cut key interest rates in the second half! ECB President Mario Draghi, in a news conference, said that the ECB stood ready to lower rates or implement other measures if needed. Furthermore, Draghi said that the ECB “stands ready to act and use all the instruments in the toolbox,” but how many tools are still in their toolbox when rates are already negative?

The biggest financial news last week in the U.S. was the continued collapse in Treasury bond yields. The 10-year Treasury yield hit 2.053% last week. This collapse in Treasury rates is primarily being caused by (1) foreign capital flight, (2) a lack of inflation, and (3) weaker-than-expected economic news. As a result, the Fed Funds futures market is now forecasting two 0.25% Fed key interest rate cuts. Please be aware that the Fed Funds futures market is volatile, but I think it is safe to say that at least one Fed rate cut is now increasingly likely this year. The Federal Open Market Committee (FOMC) statement tomorrow (June 12th) will likely be pivotal, as will Fed Chairman Jerome Powell’s following press conference.

Last Tuesday, Chairman Powell said that the Fed is watching how trade disputes have flared in recent weeks and they are monitoring the impact of those disputes on economic growth. Specifically, Powell said that the Fed will “act as appropriate” to sustain the current economic expansion. Powell added that “We do not know how or when these issues will be resolved. We are closely monitoring the implications of these developments for the U.S. economic outlook and, as always, we will act as appropriate to sustain the expansion, with a strong labor market and inflation near our symmetric 2% objective.”  Translated from Fedspeak, Powell made it clear that the Fed is now considering a key interest rate cut.

On Wednesday, the Fed released its Beige Book survey in conjunction with its upcoming FOMC meeting. The Beige Book survey said that the U.S. economy expanded at “a modest pace overall” from April to mid-May, but growth was partly held in check by labor shortages and worries over tariffs on China.

The good news on the tariff front is that Mexico sent a big delegation to Washington D.C. to cooperate with the Trump Administration on the border crisis in a very serious attempt to avoid a 5% tariff on Mexico’s exports to the U.S. Since the U.S. is by far Mexico’s largest trading partner, there is no doubt that the U.S. has sufficient leverage, and Mexico wanted to cooperate, since its economy boomed under NAFTA. On Friday, President Trump suspended any tariffs on Mexico and on Twitter said that Mexico “has agreed to take strong measures” to stem the flow of Central American migrants into the U.S.

In the meantime, the proposed NAFTA change that both Canada and Mexico agreed on is unlikely to be ratified by the House of Representatives. Apparently, the UAW in Canada, Mexico, and the U.S. had all approved of the NAFTA changes, but the Democratic House does not want to provide the Trump team with a pro-union “win,” so the change recommended by the UAW has not yet cleared the House.

Plane Interior Image

On Thursday, the Commerce Department reported that the trade deficit declined 2.1% in April to $50.8 billion as exports and imports both declined 2.2% to $206.8 billion and $257.6 billion, respectively. Although a shrinking trade deficit is always welcome, this will likely cause economists to cut their second-quarter GDP estimates a bit, due to falling exports. Boeing’s near-term woes affiliated with the 737 Max are also reducing U.S. exports and GDP growth. Interestingly, the trade deficit with China rose 30% in April to $26.9 billion, while the trade deficit with Mexico declined 14% to $8.2 billion. Since both China and Mexico are very dependent on exports to the U.S., I expect these trade disputes to be resolved.

Most Economic Indicators Point Toward a Slowdown, Fueling Fed Rate Cuts

The Commerce Department on Tuesday reported that factory orders declined 0.8% in April after rising 1.3% in March. New orders for durable goods declined 2.1% in April after rising 1.7% in March. Weak orders for transportation equipment accounted for the bulk of the decline in durable goods orders and fell 5.9% in April. The manufacturing sector is clearly being impacted by Boeing’s woes and weak auto sales.

Speaking of the manufacturing sector, the Institute for Supply Management (ISM) last week reported that its manufacturing index slipped to 52.1 in May, down from 52.8 in April. Economists were expecting a small drop to 52.6, so this was a big surprise. The production component declined to 51.3 (the lowest reading since August 2016), while the supplier component declined to 52 in May (down from 54.6 in April). Concerns over tariffs may continue to weigh on the manufacturing sector in upcoming months.

On Wednesday, ISM reported that its non-manufacturing (service) index rose to 56.9 in May, up from 55.5 in April. Fully 16 of the 17 service industries surveyed reported that they were expanding in May. The ISM components that were especially strong were business production, rising to 61.2 in May (from 59.5 in April) and new orders rose to 58.6. This strength in the service sector is very encouraging for GDP growth, since approximately 70% of GDP growth is attributable to the service sector.

The other big news was that the Labor Department reported on Friday that 75,000 payroll jobs were created in May, substantially below economists’ consensus estimate of 180,000. Also significant was that March and April payrolls were revised down by a cumulative 75,000 jobs. Average hourly earnings rose 0.2% and have risen 3.1% in the past 12 months. The unemployment rate remains at 3.6%, near a 50-year low. Clearly, this disappointing payroll report will increase the pressure on the Fed to cut interest rates.

Inflation indicators come out this week, and they should be tame. The Energy Information Administration (EIA) reported that U.S. crude oil inventories rose by 6.8 million barrels in the latest week, while gasoline and distillates (diesel, heating oil, jet fuel, etc.) rose by 3.2 million and 4.6 million barrels respectively. This was a big surprise, since analysts expected crude oil inventories to decline by 1.7 million barrels. As a result of the growing glut of crude oil and refined products due to record U.S. energy production, U.S. energy exports are expected to soar, and more supertankers have been diverted to the Gulf of Mexico.

The fact that crude oil prices are declining while Russia has production problems due to contamination in its largest pipeline to Europe is amazing. In theory, if Russia fixes its pipeline problem and production rises, crude oil prices might soon “crack” $50 per barrel in the upcoming months. Iran and Venezuela crude oil production could also possibly rebound somewhat if these countries come to the negotiating table. No matter how you look at it, the U.S. is now fully in control of worldwide crude oil prices, thanks to record U.S. production; so I expect the deflationary pressure from lower crude oil prices to persist for the next several months, which will help central banks around the world to cut key interest rates.


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Dividend payments are not guaranteed. The amount of a dividend payment, if any, can vary over time and issuers may reduce dividends paid on securities in the event of a recession or adverse event affecting a specific industry or issuer.

None of the stock information, data, and company information presented herein constitutes a recommendation by Navellier or a solicitation of any offer to buy or sell any securities. Any specific securities identified and described do not represent all of the securities purchased, sold, or recommended for advisory clients. The reader should not assume that investments in the securities identified and discussed were or will be profitable.

Information presented is general information that does not take into account your individual circumstances, financial situation, or needs, nor does it present a personalized recommendation to you. Individual stocks presented may not be suitable for you. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. Investment in fixed income securities has the potential for the investment return and principal value of an investment to fluctuate so that an investor's holdings, when redeemed, may be worth less than their original cost.

One cannot invest directly in an index. Results presented include the reinvestment of all dividends and other earnings.

Past performance is no indication of future results.

FEDERAL TAX ADVICE DISCLAIMER: As required by U.S. Treasury Regulations, you are informed that, to the extent this presentation includes any federal tax advice, the presentation is not intended or written by Navellier to be used, and cannot be used, for the purpose of avoiding federal tax penalties. Navellier does not advise on any income tax requirements or issues. Use of any information presented by Navellier is for general information only and does not represent tax advice either express or implied. You are encouraged to seek professional tax advice for income tax questions and assistance.

IMPORTANT NEWSLETTER DISCLOSURE: The performance results for investment newsletters that are authored or edited by Louis Navellier, including Louis Navellier's Growth Investor, Louis Navellier's Breakthrough Stocks, Louis Navellier's Accelerated Profits, and Louis Navellier's Platinum Club, are not based on any actual securities trading, portfolio, or accounts, and the newsletters' reported performances should be considered mere "paper" or proforma performance results. Navellier & Associates, Inc. does not have any relation to or affiliation with the owner of these newsletters. There are material differences between Navellier & Associates' Investment Products and the InvestorPlace Media, LLC newsletter portfolios authored by Louis Navellier. The InvestorPlace Media, LLC newsletters and advertising materials authored by Louis Navellier typically contain performance claims that do not include transaction costs, advisory fees, or other fees a client may incur. As a result, newsletter performance should not be used to evaluate Navellier Investment Products. The owner of the newsletters is InvestorPlace Media, LLC and any questions concerning the newsletters, including any newsletter advertising or performance claims, should be referred to InvestorPlace Media, LLC at (800) 718-8289.

Please note that Navellier & Associates and the Navellier Private Client Group are managed completely independent of the newsletters owned and published by InvestorPlace Media, LLC and written and edited by Louis Navellier, and investment performance of the newsletters should in no way be considered indicative of potential future investment performance for any Navellier & Associates separately managed account portfolio. Potential investors should consult with their financial advisor before investing in any Navellier Investment Product.

Navellier claims compliance with Global Investment Performance Standards (GIPS). To receive a complete list and descriptions of Navellier's composites and/or a presentation that adheres to the GIPS standards, please contact Navellier or click here. It should not be assumed that any securities recommendations made by Navellier & Associates, Inc. in the future will be profitable or equal the performance of securities made in this report. Request here a list of recommendations made by Navellier & Associates, Inc. for the preceding twelve months, please contact Tim Hope at (775) 785-9416.

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