Tariff Threats Send Stocks Down

Tariff Threats to Mexico & China Send Stocks Down in May

by Louis Navellier

June 4, 2019

MexicanBorder.jpeg

On Friday, the 10-year Treasury bond yield collapsed to 2.13% (a 20-month low) after the stock market sold off in the wake of the surprise tariffs imposed on Mexico, to be enacted on June 10th if the Mexican government does not sufficiently cooperate with the Trump Administration to help stop the flood of illegal immigrants into the U.S.  I expect that Mexico will cooperate to avoid the tariffs, since Mexico is led by savvy business people who do not want to jeopardize their lucrative trade deals with the U.S.

The other factor that spooked the stock market on Friday was that China’s National Bureau of Statistics reported that its purchasing managers index (PMI) slipped to 49.4 in May, down from 50.1 in April.  Since any reading below 50 signals a contraction, China’s official PMI signals that U.S. tariffs on $200 billion in Chinese goods may finally be taking a toll.  The Wall Street Journal on Wednesday had a great article on how “The Real Winners from Trump’s Tariffs Are China’s Neighbors,” like South Korea, Taiwan, Vietnam, and other countries in Southeast Asia, which are taking business away from China.

Overall, despite the fact that the S&P 500 “cracked” its 200-day moving average on Friday, I expect that when trade fears subside there will be a major stock market rebound, since low Treasury bond yields make the stock market incredibly attractive.  Plunging crude oil prices are reigniting deflation fears and thanks to falling market rates, it is now inevitable that the Fed will have to cut key short-term interest rates later this year to get in-line with market rates.  Any such statement from Fed Chair Jerome Powell, Economic Advisor Larry Kudlow, or perhaps President Trump could spark a major stock market rebound.

In This Issue

Despite the S&P’s 6.6% decline in May, there are several “silver linings” in market and economic data, which Bryan Perry sifts out for us in his opening essay. Gary Alexander goes further back in history and shows how the bears’ addiction to the “America in Decline” story has kept them from a 60-fold gain in stocks since Sputnik was launched in 1957. Ivan Martchev is concerned that the Mexican tariff threats are not as constructive as the U.S./China tariff negotiations, but there is some consolation in that the junk bond indicator shows no sign of a U.S. recession yet. Jason Bodner sees more institutional selling bringing more weakness ahead (maybe 5%), but with market strength to follow that. I’ll wrap up with an analysis of the latest European elections and more reasons why the U.S. is still the best place for investment ideas.

Income Mail:
Sifting Out Silver Linings Within the Sell-off
by Bryan Perry
U.S. Consumers Unfazed by Tariffs

Growth Mail:
The Bears Endlessly Tout the Enduring Myth of America’s Decline
by Gary Alexander
Despite Our Growth, Success, and Power, Pessimism Still Rules

Global Mail:
A Bad Time to Escalate Border Issues with Mexico
by Ivan Martchev
Junk Bonds Say Tariffs Are Still Only A Worry, Not a Threat

Sector Spotlight:
Scary News is Good for Media Stocks
by Jason Bodner
More Selling than Buying Generates Near-term Weakness

A Look Ahead:
The European Union Looks Increasingly Dis-United
by Louis Navellier
GDP Up 3.1%, Consumer Confidence Sky-High, but Home Sales Down

Income Mail:

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

Sifting Out Silver Linings Within the Sell-off

by Bryan Perry

Emotional gloom and doom enveloped investor sentiment last week, with the salt in the wound being the threatened tariffs on all Mexican imports into the U.S. if that country doesn’t tamp down the border crisis.

On the heels of rising tensions with the Chinese, deterioration in the European Union structure, and the combative rhetoric with Iran intensifying, the market lost some of its grit and deferred to an increasingly “risk off” posture that resulted in the S&P closing below its 200-day moving average last Friday.

At the same time, NASDAQ also closed below its 200-dma, which last occurred in the first week of March before it quickly recovered to a new high. When the stock market inhales hard, such as the present five-week correction that has shaved 6.8% off the S&P and 8.8% off NASDAQ, it pays to take into account those indicators that typically mark a point when seller exhaustion has peaked.

Every credible market pundit being interviewed by the financial media is asked to provide a prediction of when the “coast is clear” to allocate more capital. With the full understanding of the toll the sell-off is having on stock prices, the market is getting to a place where some technical indicators, contrary indicators, and real-time data points seem to suggest that a selling climax is near – if not already here.

While there is an intense focus on the major averages, more attention should be paid to the sectors that matter most – both to the stock market and to the economy itself – namely, technology and the consumer. When taking into account the charts of these most influential sectors to the market’s health, we see both the Info Tech Sector SPDR ETF (XLK) and the S&P 500 Consumer Discretionary SPDR ETF (XLY) maintaining their technical integrity. Both sector ETFs closed above their 200-day lines (orange line).

MostImportantSectors.png

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

Other sectors that are also holding above their 200-day line include Utilities SPDR ETF (XLU), Real Estate SPDR ETF (XLRE), Communication Services SPDR ETF (XLC), and Consumer Staples SPDR ETF (XLP). Those trading below their 200-dma are Energy SPDR ETF (XLE), Financials SPDR ETF (XLF), Materials SPDR ETF (XLB), Healthcare SPDR ETF (XLV), and IndustrialsSPDR ETF (XLI).

OldVersusNewSectorRatings.png

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

The weakness in the energy, financial, and materials sectors reflects a net positive to the consumer and businesses in the form of cheap gas, diesel, and jet fuel; low interest rates; and low inflation. Chaos in the healthcare sector seems politically irreparable and will likely continue to depress the major averages.

U.S. Consumers Unfazed by Tariffs

If the consumer accounts for two-thirds of domestic GDP, then we should all take note of the spike in last week’s Consumer Confidence report for May, which came in with a reading of 134.1, the highest reading since November 2018. In both months, the market was in full-throated decline! Adding to this data point, the Present Situation Index increased from 169.0 to 175.2 and the Expectations Index rose from 102.7 to 106.6. The key takeaway is that consumer confidence has not been impacted by increased trade tension between the U.S. and China and the implied threat of prices on imports being passed on to the consumer.

ConsumerConfidence.png

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

Another noteworthy development was how the emerging markets suddenly diverged from the unrepentant selling in the U.S. and European markets. The iShares MSCI Emerging Markets ETF (EEM) spent the past week trading higher in what many market pros are calling a completely counterintuitive move. The five-day chart of shares of EEM (below) shows crucial support at $40, trading up thereafter on heavy daily volume averaging over 80 million shares.

Is this an “oversold bounce” or something in the tea leaves that suggests something better? It’s very hard to say when the negative noise level is turned up so high. But here, too, one would expect emerging markets to be taking it on the chin much harder than the current 10% slide EEM shares have endured.

EmergingMarketsETF.png

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

One group that tends to be a quintessential contrary indicator in accurately calling market tops and bottoms is the American Association of Individual Investors (AAII) sentiment poll. The latest survey shows bullish sentiment in the last two weeks to be at its lowest reading, by far, for all of 2019, and the bearish sentiment is at its highest level since January 3, right before the market soared.

SentimentSurvey.png

This table of the year-to-date AAII sentiment surveys shows how in just the past three weeks, bullish sentiment was cut by almost 20 points (43.12% down to 24.79%) and bearish sentiment almost doubled (23.19% to 40.08%). I can’t remember seeing this radical a sentiment change among what are mostly retired investors, and it’s a major departure from the consumer confidence data that better represents the strong labor market and perceived job security of those not watching CNBC every hour of every day.

I’m not saying this compilation of data points is a green light for a major market reversal, but I’m simply taking note of historically pivotal market trends, both here and abroad, that have bent but are not broken.

Growth Mail:

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

The Bears Endlessly Tout the Enduring Myth of America’s Decline

by Gary Alexander

“We choose to go to the Moon, in this decade, and do the other things, not because they are easy, but because they are hard, because that goal will serve to organize and measure the best of our energies...”

 – President John F. Kennedy, Rice University, Houston, September 12, 1962

America has been in decline my whole life. In 7th grade science class in October 1957, Russia’s Sputnik showed how Russia’s science was better than ours. TIME made Nikita Khrushchev its 1957 Man of the Year and LIFE magazine (March 24, 1958, cost: 25-cents) had a 9-page spread on a “crisis in education,” about how Russian kids were learning science and we weren’t. It was time to step up … or surrender.

TimeMagazineCovers.jpg

The economy was also in the tank then. Shortly after Sputnik was launched, the Dow bottomed out at 419.79 on October 22, 1957. In the fourth quarter of 1957, U.S. GDP contracted by 4%, and in the first quarter of 1958, GDP fell at an appalling 10% annual rate. In 1958, a top-secret government report, “Deterrence and Survival in the Nuclear Age” (commonly known as the Gaither Report) said that the Soviets had “probably” (meaning they didn’t really know!) “surpassed us in ICBM development.”

John F. Kennedy, a young Freshman Senator from Massachusetts, turned that secret Gaither Report into a winning 1958 Senatorial campaign, and then a winning 1960 Presidential campaign by promising to close the “Missile Gap,” a gap which never existed. By 1960, the U.S. had 3,000 strategic warheads and 2,000 launchers as well as the world’s first missile submarine, with 16 nuclear-tipped Polaris missiles, immune to a Soviet first strike. Any missile gap was in our favor, but Senator Kennedy warned (in Canton, Ohio, September 27, 1960) that “the United States has reached maturity…our High Noon has passed…our brightest days were earlier, and now we are going into the long slow afternoon.” Harvard professor Henry Kissinger agreed, writing: “Only self-delusion can keep us from admitting our decline to ourselves.”

At the time, the U.S. was in another steep recession with a 5% annualized GDP decline in the fall of 1960. That marked two deep recessions in a three-year period, similar to the double dip recessions of 1979-82.

America’s space program was an obvious failure. The first Atlas rocket launched with a Mercury capsule exploded. The first Mercury-Redstone launch only went about four inches off the ground. But the young new President was undeterred. Just four months into office, JFK said, on May 25, 1961 – a month after a disastrous Bay of Pigs fiasco and 10 days before his embarrassing Vienna summit – that we would put a man on the moon and bring him back safely before the end of the decade. What? Is that man crazy? We had no idea about how to build a spaceship, no portable computers, no rockets capable of entering space.

This is when my family got drafted. Dad was already a rocket scientist working on the classified Bomarc missile program for Boeing in Seattle. He was sent to Huntsville, Alabama in June 1963 to work at the Marshall Space Flight Center and then to the NASA Michoud Assembly facility in New Orleans. (In the process, thousands of mostly white, liberal families entered a racial cauldron, but that is another story.)

Boeing was given overall authority for the creation of Saturn V, the largest and most powerful rocket ever launched. Dad worked with a team of brilliant engineers to build the first stage of Saturn V, the integrator for the entire Saturn rocket stack. There was a cluster of five engines in each of the first two stages of that three-stage rocket. Taller than a 36-story building, it had a total of three million parts, and each had to function reliably and in coordination with the other components. In all, 15 Saturn V rockets were built, and none failed. 50 years ago, the Saturn V delivered the Apollo 11 astronauts to a manned moon landing.

SaturnFiveRocket.jpg

Navellier & Associates owns Boeing in managed accounts and our sub-advised mutual fund.  Gary Alexander does not own Boeing in personal accounts.

Despite Our Growth, Success, and Power, Pessimism Still Rules

Going to the moon was never popular. In 1964, only 26% of Americans thought we should try to “beat the Russians in a manned flight to the moon.” Even after a few successful moon landings, the most common complaint was, “We can put a man on the moon, but we can’t….” (you complete the sentence).

There was no widespread joy in America over Neil Armstrong’s “giant leap for mankind,” which historian Arthur Schlesinger, Jr. called the most important event of the 20th Century. On the same weekend of the moon landing, the press was more consumed with Ted Kennedy’s car careening off a small bridge in Chappaquiddick. The next month, headlines focused more on the Manson murders and Woodstock, along with atrocities in the seemingly endless Vietnam War, and rising protests against it.

Long-term pessimism was still in vogue in 1969. Paul Samuelson, who wrote the dominant economics textbook of the day, and who won the Nobel Prize in Economics in 1970, wrote in the 1967 edition of his textbook that the Soviet system was growing faster than the U.S. and the two systems would reach parity sometime between 1977 and 1995. In 1970, National Security Advisor Henry Kissinger told retired navy chief Elmo Zumwalt that the U.S. had “passed its historical high point like so many earlier civilizations.”

In the 1980s, pundits said Japan would pass us by 2000. By 1991, the Soviet Union was dead, and Japan’s economy was careening downward. Now they’re saying that China will surpass us by 2030. Same song, third verse, probably with the same outcome. China is overspending on a centrally planned global outreach and domestic controlled economy and may come to the same screeching halt as the Soviets did.

Betting against America doesn’t pay. One of the world’s richest men tells the America-in-decline crowd:

“For 240 years it's been a terrible mistake to bet against America, and now is no time to start. America's golden goose of commerce and innovation will continue to lay more and larger eggs.” – Warren Buffett.

Global Mail:

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

A Bad Time to Escalate Border Issues with Mexico

by Ivan Martchev

We were waiting for new tariffs on China and instead got new tariffs on Mexico, a country that has agreed to a new trade deal to replace the old NAFTA. Clearly using tariffs to resolve immigration issues is an innovative tool, but does it really solve anything?

Many of the immigrants President Trump wants to target come through legal ports of entry claiming asylum. I am not familiar with Mexican immigration laws, but are tariffs a way for Mr. Trump to force Mexican immigration laws to change? This seems to be overreaching a bit.

Not even his infamous Wall would solve the issue of immigrants claiming asylum at U.S. border checkpoints. While negotiating a complicated situation with the Chinese – a trade friction that was frankly overdue and completely warranted – the last thing we need is this added “Mexican standoff.”

BondVersusRate.png

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

The markets are unhappy with President Trump’s Mexican standoff. That can be seen in both the stock market and the 10-year Treasury yield dropping to 2.14% last week –36 basis points below the Fed funds rate. The 10-year Treasury yield is not yet below the 2-year note, which is the classic measure of yield curve inversion. The 2-year closed Friday at 2.03%. This is the only silver lining that I can find.

Sharply dropping Treasury yields in a good economy often mean the market is worried that the economy will not be so good a year from now. A big driver of falling yields in the U.S. is the situation in Europe, where the German 10-year bund closed on Friday at -0.20%, while the German 2-year federal note that goes by the uber-long name Bundesschatzanweisungen, closed Friday at -0.64%. The “schatz” bunds have offered negative yields ever since Jeff Gundlach called them the “short of the century” four years ago, so we have very serious issues in Europe if interest rates are stuck in negative territory for so long.

YieldVersusBond.png

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

The latest drop in Treasury yields is not all about the situation in Europe, but also the failure of trade talks with China and new sanctions in Mexico. Those trade frictions have not yet turned out to be an economic event, but they have the potential to become substantial disruptors to economic performance in the United States, Mexico, and China – all at the same time – should they escalate further in the latter part of 2019.

Junk Bonds Say Tariffs Are Still Only A Worry, Not a Threat

Markets worry about the future and sometimes they extrapolate quite a bit further than warranted by actual future events. While junk bond prices have weakened, as they typically are heavily correlated with stock prices, they are not leading the stock market lower. One big difference between now and the fourth quarter of 2018 is that we have much lower Treasury yields this time around, as the market is no longer worried about the Fed overtightening, as it was back then.

JunkBondMarket.png

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

It is my experience that the junk bond market tends to top out before the stock market in a deteriorating economy. It did not do that in the fourth quarter of 2018, nor is it doing so now. Junk bond spreads have not “blown out,” and junk bond prices are declining coincidentally with the stock market, not leading it.

The way I read this situation is that the tariff issue has not become an economic event yet, but it has the potential to become a big economic event, particularly if the situation with Mexico escalates. It could be that President Trump is merely giving the Mexicans a jolt and does not want to escalate the situation with tariffs. He is famous for putting his opponents in a situation where they never really know where they stand, which would make the Mexican tariffs “a Trump thing to do.” We’ll find out soon enough.

The way I see it there are three scenarios: 1) Worst-case, the situation with Mexico and China blows completely out of control, which I would consider unlikely. 2) Most likely, the situation with Mexico is resolved before it blows out control, but the situation with China continues to deteriorate. I would consider that as a base-case scenario and most likely. It is the calculated failure of the trade talks by China that leads me to believe that they never intended to make a deal, while Mexico did agree to a NAFTA renegotiation. 3) Best case, but unlikely, the issues with both Mexico and China are resolved this summer.

The Sun Tzu disciples in Beijing have been getting away with a clever system of purposefully buying less from the U.S. and more from key partners and neighbors to increase their political influence there, as well as forced transfer of technology, and they would likely want to continue with that system. Plus, a failed trade negotiation gives them the political cover to devalue the yuan, which may be their ultimate goal.

As the old Chinese curse goes: “May you live in interesting times.”

Sector Spotlight:

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

Scary News is Good for Media Stocks

by Jason Bodner

It’s funny, but when you get treated like trash, you want to come back for more – it’s human nature. It’s like the attraction some good girls have to bad boys. This is especially true for “luxury” stuff. In fact, a 2014 study found that for high-end luxury brands, truly snobby and rude sales staff got higher sales.

HigherSales.jpg

It reminds me of CNBC, to be honest.  The more shocking and worrisome the headlines, the more people tune in. It’s a model they thrive and rely on.  That got me to thinking that Donald Trump must be great for media stocks. I dug into my data on 5500 stocks and looked up the average three-year sales growth for media stocks.  I looked at around 100 or so media stocks and found that number to be +27.3% per year.

Since Trump’s campaign began and his presidency took shape, he’s been really good for media stocks.  He may love to bash them in a tweetstorm, and they may act injured, but they secretly must love him.

Media companies sell advertising, and they don’t do so very well selling stories of cute puppy dogs and moonbeams.  They need to scare the heck out of you.  And when they do, you tune in more!

And now, the media’s all negative, the market is weak, there are fears of recession and trade wars, and so forth. But we’ve seen this all before. The latest is that Trump will slap a 5% tariff on goods coming from Mexico. Then he’ll hike the tariffs every month until the migrant problem is “solved.”

I’m not going to minimize this threat. China and Mexican tariffs are real. But the media is blowing the effects way out of proportion. Once again, look at the data: The blended Q1 sales growth for the S&P 500 was +5.3%. The first year of tariffs on China brought a price decrease. I still believe that China and the U.S. need each other as trading partners, but all we see is a lot of posturing. I believe we will get a resolution.

More Selling than Buying Generates Near-term Weakness

Selling in stocks has been gaining for weeks now, and our ratio measuring big buying versus selling has been falling in a straight line.

NearTermWeakness.png

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

So now what? Last week, we sent out an update saying our ratio fell below 45.6%. The several times it has done so in the past leads me to believe that we could see perhaps another 5% drop in the stock market.

WorrisomeSector.png

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

From the data above, it appears that Consumer Discretionary is the worrisome sector, but it turns out that selling was orderly and even across the whole sector.  It’s Energy we have to worry about. Crude Oil fell 10% last week.  Most of the Energy selling is in Oil & Gas stocks. Having seen what happened with Oil & Gas in 2014, I suspect with a downward move so intense in the physical commodity, we will continue to see selling pressure on Oil & Gas stocks.  The lower the price of oil, the more the margins evaporate.

Should these energy companies be heavily leveraged, watch out! In fact, out of 246 Oil & Gas-related stocks, the average Total Debt-to-Common Equity ratio is 183%. About 30% (75) of these Oil & Gas companies had over 100% Debt/Equity ratio. This spells pain for heavily-leveraged companies. When margins evaporate, they not only worry about profitability, but they have to worry about debt service.

Does that mean I think a crash is coming? Absolutely not. Does that mean I think a correction is going to provide great opportunities to pick up great stocks? Yes. We’re getting our buy list ready.

Typically, when we see winning stocks with great sales and earnings growth, low debt, and other great fundamentals… and institutional holdings… they’re the ones that bounce the highest, fastest, and furthest.

I expect more volatility. But I also expect another bounce. Now is the time to go shopping for great stocks that might be going on sale. That’s exactly what I’m going to be doing.

We are in the middle of a rare pullback based on nasty headlines. Humans will make the same mistakes again and again. This price action is normal. Those who panic lose in the long run. Corrections make healthy markets. If prices keep rising, it never ends well. Corrective price behavior is important for long-term bull markets. As Voltaire said, “History never repeats itself; man always does.” So just chill.

Voltaire.jpg

A Look Ahead

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

The European Union Looks Increasingly Dis-United

by Louis Navellier

The aftermath of the European Parliament elections is still being evaluated, but a couple things are very clear.  First, a vote for the European Parliament became a referendum on each country’s leaders and, by and large, existing leadership was dealt a stunning blow by populist movements. Second, the cloud of uncertainty over the European Union (EU) persists. Brexit is still on track for an October 31st exit, multiple countries are likely to violate the EU’s budget restrictions, and continued capital flight will cause U.S. Treasury yields to continue to fall. (I explained this concept in more detail in my latest podcast.)

There is no doubt that the populist movement led by the Brexit Party in Britain and the green movements in continental Europe are breaking up the ruling class in Italy and Spain and perhaps France and Germany as well. As a result, Marine Le Pen’s euro-skeptic National Rally party achieved the majority of votes in France and the Greens (Les Verts) scored an impressive third, so French President Emmanuel Macron (whose centrist party took second place) now faces a formidable political challenge from both sides, as well as the national “yellow-vest” protests.  German Chancellor Angela Merkel’s Christian Democratic Union lost substantial seats to the Social Democratic Party and the Greens, so her successor is in doubt.

With the leadership of Britain, France, Germany, Italy, and Spain in chaos after recent elections, selecting a new leader of the European Commission to replace Jean-Claude Juncker will be next to impossible, since ruling coalitions are in disarray and new elections will likely be forthcoming.  Furthermore, French President Macron and German Chancellor Merkel disagree on who should run the European Commission.

When you throw in Brexit in the upcoming months, the continued disintegration of the European Union looks inevitable.  Naturally, this weakens the British pound and euro, so the U.S. dollar continues to strengthen as the preferred reserve currency.  Furthermore, since interest rates in the EU are negative in many countries, capital flight continues to put downward pressure on Treasury yields.

In the meantime, many of the ousted and wounded ruling elite are holed up in Montreux, Switzerland on the shores of Lake Geneva for the Bilderberg Group summit.  Some of the attendees include former U.S. Secretary of State Henry Kissinger, former CIA Director David Petraeus, former Secretary of Defense James Baker, and former Treasury Secretary Robert Rubin.  Other interesting attendees include Roger Altman (Evercore), Dominic Barton (McKinsey & Company), Mark Carney (Bank of England), Niall Ferguson (Hoover Institution), Mary Kay Henry (SEIU), Stephen Kotkin (Princeton), Henry Kravis (KKR), Jared Kushner (The White House), former Senator Claire McCaskill (NBC News), Eric Schmidt (Google founder), Jens Stoltenberg (NATO Secretary General), Peter Thiel (Thiel Capital), and former Daimler Chairman Dieter Zetsche (Mercedes).  These influential people from very powerful organizations must now try to make sense of what the world will look like as populist movements sweep the globe.

As I discussed in last Wednesday’s podcast, my simple conclusion is that the U.S. is the clear winner as you look around the world.  The U.S. has (1) the largest and strongest economy, (2) the strongest central bank, and (3) a strong, colorful leader who is a cheerleader for the U.S. economy.  President Trump is now doing what China has been doing for years. He has effectively “weaponized” the U.S. economy and is expected to continue to prevail in the Chinese trade spat.  The U.S. dollar is clearly the preferred reserve currency in the world. Since commodities are priced in U.S. dollars, deflationary pressure is expected to spread, as collapsing crude oil prices have been demonstrating in recent weeks.  Furthermore, negative interest rates in Japan and continental Europe will continue to push U.S. Treasury yields lower.

I feel that it is now inevitable that the Fed will have to cut key interest rates as market rates continue to decline.  The fact that the Treasury yield curve is inverted is just temporary, since the Fed does not want its Fed Funds rate to interfere with market rates.  As a result, I now expect that the Fed will openly debate a key interest rate cut at its upcoming Federal Open Market Committee (FOMC) meetings.

GDP Up 3.1%, Consumer Confidence Sky-High, but Home Sales Down

The economic news last week was mixed, but net positive.  The good news was that the Conference Board on Tuesday announced that its consumer confidence index surged to 134.1 in May, up from 129.2 in April and is now at the highest level in six months.  Some of the consumer confidence components were even more impressive, such as the “present situation” index, which rose to an 18½ year high of 175.2 and the “future expectation” index, which rose to 106.6 in May (up from 102.7 in April).  Naturally, high consumer confidence bodes well for continued strong retail sales and GDP growth in the quarter.

The Commerce Department reported on Thursday that first-quarter GDP was revised down slightly to a 3.1% annual pace (from the 3.2% previous estimated) due to slower-than-expected business investment, which grew 2.3%.  Corporate profits declined 2.8% in the first quarter, which is the biggest decline since 2015, but profits have risen 3.1% in the past 12 months.  This is the second quarter in a row that corporate profits have declined. The average company in the S&P 500 is now characterized by contracting operating margins, as most earnings are now growing slower than sales.  The other drag on first-quarter GDP growth was durable goods orders, which declined 4.6%, the biggest decline in 10 years. 

The bright spot in the first-quarter GDP was that exports rose 4.8%, while imports only increased by 2.5%, so the trade deficit was less of a drag on overall GDP growth.  The Atlanta Fed is currently estimating second-quarter GDP growth at a 1.3% annual pace, but frequent revisions are common; so if retail sales remain strong, I expect at least 2% annual GDP growth in the second quarter. We could see a higher GDP if China commits to fair trade, but their GDP will fall sharply if they remain stubborn on their indefensible position of not respecting intellectual property rights through product piracy.

The bad news was that the National Association of Realtors on Thursday reported that pending home sales declined 1.5% in April, which was well below economists’ consensus estimate of a 0.5% decline.  This marks the 16th straight month where pending home sales have declined on a trailing 12-month basis.  Only the more affordable Midwest saw pending home sales rise 1.3%.  Despite the fact that median home prices are moderating and mortgage rates are falling, the inventory of existing homes for sale remains tight.  However, due to falling interest rates, existing home sales should improve in the upcoming months.


It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities in this list. Click here to see the preceding 12 month trade report.

Although information in these reports has been obtained from and is based upon sources that Navellier believes to be reliable, Navellier does not guarantee its accuracy and it may be incomplete or condensed. All opinions and estimates constitute Navellier's judgment as of the date the report was created and are subject to change without notice. These reports are for informational purposes only and are not intended as an offer or solicitation for the purchase or sale of a security. Any decision to purchase securities mentioned in these reports must take into account existing public information on such securities or any registered prospectus.

Past performance is no indication of future results. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. It should not be assumed that any securities recommendations made by Navellier. in the future will be profitable or equal the performance of securities made in this report.

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

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

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

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

Past performance is no indication of future results.

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

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

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

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

Marketmail Archives