Tax-Cut Talk is the Medicine

Tax-Cut Talk is the Medicine the Market Needed

by Louis Navellier

February 14, 2017

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

The stock market rally on Thursday and Friday was sparked by President Trump’s comment that his “phenomenal” tax-cut plan would be unveiled in the next two to three weeks. If this tax plan includes major corporate tax reform, I believe the stock market will get even more excited, since lower corporate taxes will (1) boost earnings, (2) fuel cash repatriation from overseas, (3) boost dividends, and (4) increase stock buy-back activity. I think it is safe to assume that President Trump will want to see a higher stock market under his watch, so he will likely be a reliable cheerleader for the stock market from time to time.

So far, fourth-quarter earnings announcement season is shaping up to be the best quarter since 2011. Not only are the S&P 500’s earnings running at a 4% annual pace (up from expectations of a 3.4% rate), but sales are also positive, despite currency headwinds from a strong U.S. dollar that can impede commodity-based companies and multinational stocks. Furthermore, S&P 500 company guidance is the strongest since 2011. In addition, the S&P 500’s earnings are expected to get stronger during each quarter this year.

Bank Entrance Image

Banking stocks rallied on Friday on the hope banking regulations would continue to be eased. The other big banking news event on Friday was that Fed Governor Daniel Tarullo resigned abruptly. Tarullo was extremely influential on banking regulations, especially regarding safeguards on major banks. He likely resigned because he did not want be a part of the Trump administration’s banking deregulation agenda.

In This Issue

Bryan Perry and Gary Alexander expand on the likely economic and market repercussions of Trump’s forthcoming tax plan, while Ivan Martchev takes a cautionary look at China and the Euro-zone (notably Greece and France). Jason Bodner profiles the latest sector reversals in this seemingly “immortal” bull market, while I close with an examination of the outlook for earnings and the U.S. dollar this year.

Income Mail:
Stock Market Readies for a “Phenomenal” Liftoff
by Bryan Perry
The Art of the Business Investment Deal

Growth Mail:
Tax Cuts Should Revive GDP & Fuel Market Gains
by Gary Alexander
Lower Tax Rates Spur Market Growth
Dow 20k – Just Another February Milestone?

Global Mail:
China is Running Hard, Just to Stand Still
by Ivan Martchev
The Greek Tragedy Revisited

Sector Spotlight:
The Market that Refuses to “Die”
by Jason Bodner
All 11 S&P Sectors are Up since the November Election

A Look Ahead:
Trump Talk + Rising Earnings = New Market Highs
by Louis Navellier
The Dollar Should Keep Rising due to a Crumbling Eurozone

Income Mail:

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

Stock Market Readies for a “Phenomenal” Liftoff

by Bryan Perry

The URL address www.nasa.gov/launchschedule will take you to NASA’s “launches and landings” calendar, including the February 18, 2017 SpaceX CRS-10 Camp Mission to the International Space Station, the February 22, 2017 Progress 66 Launch, the late February Expedition 50 “Unlocking and Landing,” and then the early March Expedition 51 Launch, the March 19, 2017 Orbital ATK Resupply Mission to the International Space Station – and the list goes on from there. All very cool stuff and a very cool website. Check it out.

One thing missing from the NASA liftoff schedule is the pre-destined launch of the U.S. stock market when President Trump’s “phenomenal” new tax plan hits the floor of the House of Representatives.

Saturn Rocket Launch Image

Mr. Trump took some heat from his populist base last week for what was seen as delaying the promised repeal and replacement of Obamacare, as well as instituting tax reform. But on Thursday he cleared the air by saying that “lowering the overall tax burden on American business is big league, that’s coming along very well…. we’re going to be announcing something – I would say over the next two or three weeks – that will be phenomenal." You could almost hear the NYSE floor traders counting down to liftoff.

In his opening note today, Louis Navellier said that he believes the stock market will get more excited, since lower corporate taxes will (1) boost earnings, (2) fuel cash repatriation from overseas, (3) boost dividends, and (4) increase stock buy-back activity. I would add a fifth point: Corporate tax cuts should fuel mergers and acquisitions. Cutting corporate taxes from 35% to 15% or so will spark deals galore, even in Democratic (“blue”) states. I suppose even Senator Chuck Schumer will find a way to carve out a pound or two of political flesh for his constituency when the ink dries on the new tax code.

So, if we assume that a 15% to 20% top corporate tax rate becomes law, it’s my view that the impact will be nothing short of massively positive. Not only could cutting the corporate tax rate improve America’s competitive position in the global economy, but it could also boost economic growth and benefit U.S. workers. A lower corporate tax rate could lower the cost of capital, which would boost the level of investment in the economy. And this is a key point of any tax bill: Increased investment should also raise the productivity and wages of American workers which, in turn, would lead to higher living standards.

The Art of the Business Investment Deal

A well-scripted set of conditions should be included in the tax bill to deal with corporations that are provided a tax holiday to repatriate money from overseas accounts. Bear in mind that it’s not easy to discern the actual size of the stash of corporate money abroad. One figure comes from the congressional Joint Committee on Taxation, which estimated last August that the total of “undistributed” and “not previously taxed” foreign earnings of American companies (as of 2015) amounted to $2.6 trillion (N.Y. Times – “A Stranded $2 Trillion Overseas Stash Gets Closer to Coming Home,” November 4, 2016).

Foreign Cash Reserves Bar Chart

Some of the biggest hoarders of foreign cash are listed above, as reported by CNBC last year (“U.S. Companies are Hoarding $2.5 Trillion in Cash Overseas” September 20, 2016). Of course, these figures are debatable when doing a search for hard numbers. I imagine that when all is tallied up, something north of $3 trillion could be involved.

Mr. Trump’s tax plan should include stated terms for business investment of repatriated cash to help steer how those trillions are directed. Otherwise, middle America will keep suffering, in Trump’s own words, from “rusted factories” dotting the landscape “like tombstones.” Various proposals have been floated on giving companies a break for repatriation. The last time Washington lawmakers made such a deal was in 2004. Last year, Barack Obama proposed a one-time 14% tax on overseas cash, with a 19% levy on future earnings. Trump wants to lower those numbers to 10% for overseas cash and 15% on future earnings.

I guess we will know soon enough just how ‘phenomenal’ this tax package will or won’t be, but investors aren’t waiting to find out. When wind of Mr. Trump’s words crossed the news wires, the S&P promptly rallied 25 points from early Thursday through Friday’s closing bell. As the perception of the plan becomes reality and details of the plan are released, look for the major averages to push higher as earnings for corporations and the S&P 500 are revised higher – as well as GDP growth predictions.

The Tax Foundation chart below illustrates that if corporate income taxes were totally eliminated, the size of the economy could grow by 6.1%. This would lead to more jobs and higher wages. The additional growth could leave total federal revenue virtually unchanged in the long run, though the government would likely lose revenue as the economy adjusts. In the long run, the loss of corporate tax revenue due to cutting the corporate tax rate is recouped through the combination of increased economic growth and the distribution of the untaxed money to taxpaying individuals. This is what Mr. Trump is betting on.

Percent Change in GDP Due to Tax Rate Changes Bar Chart

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

To summarize, the doom-and-gloomers, short sellers, Trump haters, and naysayers are about to have their pessimistic lunch handed to them in a big way. U.S. companies are holding $1.94 trillion in cash here at home, the highest in two years, according to the latest Federal Reserve data. In addition, $2.66 trillion of other dollars are lying fallow around the country in near zero-yielding money markets holding investor cash. Banks are storing $2.15 trillion in excess reserves at the Fed, plus about $2.5 trillion stored overseas (source: New York Times, “A Stranded $2 Trillion Overseas Stash Gets Closer to Coming Home,” November 4, 2016). When adding the estimated overseas cash to domestic reserves, some $9+ trillion in cash is doing basically nothing. If this aircraft carrier full of cash starts moving into the stock market, this bull market rally could carry on for many more months, surprising even the most brazen perma-bulls.

Growth Mail:

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

Tax Cuts Should Revive GDP & Fuel Market Gains

by Gary Alexander

“It is a paradoxical truth that tax rates are too high and tax revenues are too low and the soundest way to raise revenues in the long run is to cut rates now…to achieve a more prosperous, expanding economy….”

– President John F. Kennedy at a news conference, November 20, 1962.

After two weeks of controversial Executive Orders and nocturnal tweets, Week #3 of the Trump era took a positive turn after the President mentioned his tax cut plans last Thursday, fueling a late-week market surge.

According to Bloomberg (“White House: Cohn-Led Tax Plan is Real and it’s Phenomenal,” February 10, 2017), Trump’s tax plan, to be released in two or three weeks, will be “the most comprehensive business and individual tax overhaul since 1986.”  That’s saying something, since the landmark 1986 tax bill cut many deductions and reduced the top rate to 28% for the rich, 15% for the middle class, and 0% for the poor.

The major historical tax cuts of the 1920s, 1960s, 1970s, and 2000s each fueled rapid economic and stock market gains.  In three of those instances, Republicans were in the White House (Coolidge in the 1920s, Reagan in the 1980s, and George W. Bush in the 2000s), but the 1960s tax cuts came under the Democrats.

The Kennedy-Johnson tax cuts (“The Revenue Act of 1964”), signed into law February 26, 1964, cut the top rate from 91% to 70%, while all other rates fell and a standard deduction was added.  Prosperity soon erupted: The jobless rate fell from 5.2% in 1964 to 3.8% in 1966 and 3.5% in 1969, the lowest rate in the last 50 years.  Initial fears of a loss of revenue were forgotten when tax revenues increased each year.

The fastest-growing economy of the last 70 years came in the Kennedy-Johnson years of the 1960s:

Fastest Growing Economy of the Last 70 Years Table

According to data from the Bureau of Economic Analysis, the average annual GDP growth in Obama’s eight years was worse than all other postwar presidents.  The average growth rate in Obama’s tenure was 1.46%.  Even worse, Obama is the only president since Hoover who did not have a single year when the economy grew at a 3% rate.  By contrast, Clinton and Reagan each had six (of eight) years with growth over 3%.  Even George W. Bush, whose years included the 2008 crash, had two years of over 3% growth.

Average Annual Real Gross Domestic Product Growth by President Bar Chart

Obama’s apologists say that he inherited the 2008 financial crisis, but Reagan inherited a double-dip recession (1979-80 and 1981-82), in which interest rates, inflation, and unemployment rates were all over 10% in his first years, yet his series of tax cuts still fueled the strongest recovery since the 1960s.

Lower Tax Rates Spur Market Growth

Now for the investment payoff: The stock market surged during each of these four tax-cutting decades:

Stock Market Surged Table

We could do just as well in the next four to eight years if we see major corporate tax rate cuts, including a token (10%) tax on corporate cash repatriated from lower-tax nations abroad.  Too much corporate money is sitting in overseas bank accounts, since corporate profits are punished here at home.  The U.S. has the highest corporate income tax rate in the developed world, at 39%, well above the OECD overage of 25%.

Ireland has staged a near-miraculous economic recovery by lowering its corporate tax rate to 13%.  The U.S. would be far more competitive if our top tax rate were cut to 15%, near the Irish magic formula.

Corporate Tax Rates by Country Bar Chart

Corporate tax cuts are important for big business, but small businesses also need some relief on the regulatory front.  This would help President Trump deliver on his promise of more jobs – specifically, 25 million new jobs in a decade! – since small and medium-sized businesses account for 90% of job growth.

ADP is the main source for logging private-sector payroll job creation statistics.  Since ADP made their data available in 2005, small firms (under 50 employees) accounted for nearly half (48.7%) of all new hires.  Medium-sized companies (50 to 499 people) accounted for another 41.3%, while large firms only attracted 10% of new hires.  Specifically, small firms added 5.9 million jobs, medium-sized firms added 5.0 million jobs, and big firms added only 1.2 million to their payrolls.  To treat smaller businesses fairly, Trump’s people need to cut the cords of crony capitalism that feed the lobbyist army in The DC Swamp.

So far, small businesses are hopeful, as reflected in the 10.9-point jump in the NFIB Small Business Optimism Index over the last two months of 2016, reaching 105.8, the highest level since December of 2004.  (Source for this segment: Ed Yardeni, Entrepreneurial vs. Crony Capitalists,” February 6, 2017)

Dow 20k – Just Another February Milestone?

The Dow Jones Industrial Average (DJIA, or “the Dow”) has closed above 20,000 every day since February 3, 2017.  Perhaps 20k will become the new floor in a long series of February Dow benchmarks:

  • On February 28, 1964, the Dow surpassed 800 for the first time.  
  • On February 9, 1966, the Dow hit a record 1,001, inter-day, but then it closed at 995.  That’s as close as the Dow got to the magic four-figure barrier for the next seven years.
  • On February 24, 1983, the Dow first closed above 1,100.  It seemed like a lofty peak back then.
  • On February 23, 1995, the Dow closed above 4,000 for the first time.
  • On February 13, 1997, the Dow-Jones industrials topped the 7,000 mark for the first time.

Source: The Almanac Investor 

Global Mail:

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

China is Running Hard, Just to Stand Still

by Ivan Martchev

“Now here, you see, it takes all the running you can do to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!”

– The Red Queen in “Through the Looking Glass” (1871) by Lewis Carroll

It came not with a bang but a whimper. The January data emerging from China finally confirmed that China’s foreign exchange reserves have dipped below $3 trillion. In January, China's foreign exchange reserves fell by $12.3 billion to $2.998 trillion, vs. the all-time high of $3.993 trillion in June of 2014.

A trillion here, a trillion there, and pretty soon we start discussing real money, right?

Chinese Yuan versus China Foreign Exchange Reserves Chart

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

What the official reserve data does not show is that there are massive borrowings outside of China that have been accumulated in the past 15 years that bring the net reserves somewhere down to around $1.7 trillion, according to statistics prepared by Kynikos Associates (see chart, below).  That much smaller reserve amount is not necessarily large enough to support the yuan exchange rate, particularly if forex outflows accelerate again as the Chinese credit bubble has now burst, in my opinion.

China Gross Foreign Reserves versus China Net Foreign Reserves Chart

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

China has a total debt-to-GDP ratio of close to 400%, if one includes the infamous unregulated shadow banking system that is habitually omitted from official statistics. In the year 2000, China’s total debt-to-GDP ratio stood near 100%. As the Chinese GDP grew from $1.094 trillion at the end of the 20th century to the present level of $11.75 trillion at the end of 2016, the total leverage ratio in the Chinese economy ballooned. As China’s economy grew 11-fold, total credit in the financial system grew by over 40-fold.

Annual Chinese Gross Domestic Product Growth Rate Chart

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

As the Chinese economy slows down, the level of borrowing is accelerating, as can be seen in China’s “total social financing” data (below). This credit metric includes off-balance sheet financing outside the conventional bank lending system – such as initial public offerings, loans from trust companies, and bond sales. If Chinese GDP continues to slow – and there are many observers (myself included) that do not believe the 2016 GDP growth rate of 6.7% – and total credit in the economy continues to surge, then the Chinese economy would in effect be running as fast as it can, just to stand still. Such accelerating borrowing with slowing GDP growth is the classic definition of a busted credit bubble.

China Total Social Financing Bar Chart

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

What was most surprising in 2016 is how orderly the situation in China had been. There is also evidence of a slight uptick in economic activity, if one looks at the official statistics, which I don't believe to be fully accurate, because the Chinese have a history of “smoothing out” their official economic statistics. For example, their 34% devaluation of the yuan in December 1993 was aimed to help China deal with a recession that was never officially acknowledged. Evidence of the recession only showed up in secondary loan loss data and other “undoctored” metrics.

I am surprised at the current calm in China as credit bubbles tend to pick up speed historically and get rather disorderly when they begin to unravel. I don’t know if this unraveling will come in 2017 or later, but I am watching the official forex reserve data for evidence of accelerating outflows, which would be one sign that the unraveling is picking up steam.

Top United States Trade Partners Table

On top of China’s own epic credit bubble, we have a phenomenon called Donald J. Trump, who has made it a priority to rebalance the U.S. trade deficit. While I fully support the President in his quest, he has been most vocal about Mexico and China. He appears to point the finger at both nations in the same fashion. However, the Mexican situation is very different than the Chinese (see my January 31, 2017 MarketWatch article, “Donald Trump picks the wrong target with his Mexican standoff”), where the imbalance in the 2016 trade data is running out of control.

In 2016, as the table (above) shows, the Chinese bought $115.775 billion of U.S. goods and services, while the U.S. bought $462.813 billion worth of Chinese goods and services, which makes for a gargantuan ($347 billion) bilateral trade imbalance – making up the lion’s share of the U.S. trade deficit.

United States Balance of Trade Chart

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

To be fair to President Trump, the Chinese have been running a persistent trade surplus with the rest of the world over the past 10 years, but that surplus has been getting bigger because exports to China are slowing down with the decline in Chinese GDP growth. More importantly, the Chinese have been using trade as a political tool as they habitually run bilateral trade deficits with many of their Asian trade partners in order to increase their political influence in the region. Such trade strategies are unlikely to influence the Trump administration, which is hell-bent on rebalancing the U.S.-China trade imbalance.

China Balance of Trade Chart

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

Trump’s clash with China on the trade issue comes at precisely the wrong time for the Chinese as their epic credit bubble is unraveling. While trade frictions and financial issues in China are completely unrelated events, the election of Donald. J. Trump is like kerosene thrown on an already burning economic fire in China. What I foresee happening here is similar to the Asian Crisis in 1997-1998, this time emanating from China, with the caveat that today’s Chinese GDP is much bigger than the total Asian GDP in 1997.

To those who may suggest that I am merely making observations and not predictions, please see my January 23, 2015 MarketWatch article, “Why 2015 could be rough for China” which I wrote before the bulk of China’s $1 trillion forex outflow materialized. I am not sure if 2017 will be the year when the wheels come off the wagon in China, but I have seen increasing evidence of a credit bubble theory and the economic repercussions likely to follow. 

The Greek Tragedy Revisited

Last week, two-year Greek government bonds traded above 10%, in effect yielding more than the corresponding 10-year government bonds. This is an “inverted yield curve” situation and a phenomenon that preceded the default and debt restructuring that happened in the Eurozone Crisis in 2011 and the Syriza-induced banking system implosion in the summer of 2015.

Greece Ten Year Government Bond Chart

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

Will Greece deliver a “Grexit” this time? They may not have a choice. While it is widely reported that the present contraction in Greek GDP is proportionately worse than the Great Depression in the U.S., what isn't widely reported is that the shadow economy in Greece is likely much larger relative to officially-reported GDP compared to the situation in the U.S. in the 1930s. I would not be surprised if the unreported Greek GDP is 50% to 100% of the size of the official number. I am intimately familiar with how the economies in the glorious Balkan Peninsula operate and I am sorry to say Greece is no different.

Post Crisis Real Gross Domestic Product Output Chart

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

The trouble now is that if any more countries exit the EU, there could be a likely domino effect of sovereign defaults that will happen if the EU disintegrates. A French exit (“Frexit”) after their upcoming election would virtually guarantee a Grexit, and then the rest of the dominoes will likely fall, which is why the election calendar in Europe in 2017 promises to be a series of nail-biting events for the Eurozone.

Sector Spotlight:

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

The Market that Refuses to “Die”

by Jason Bodner

“Our new Constitution is now established, and has an appearance that promises permanency; but in this world nothing can be said to be certain, except death and taxes.”

— Benjamin Franklin, in a 1789 letter to Jean-Baptiste Leroy

How many times have we heard this quote? But there are some exceptions. The tax part is true, unless of course you are Donald Trump, while the death part applies to every species except Turritopsis dohrnii. No, that's not a disease – it’s a species of jellyfish which is technically immortal. This jellyfish reverts to an earlier state of life prior to reproduction asexually. This process brings the jellyfish back to a state when a polyp can colonize into many new jellyfish. This occurs through a cellular change known as transdifferentiation. Theoretically, this process can go on indefinitely. Of course, no known human is as lucky as the immortal jellyfish, and most of us are not as lucky as Trump when it comes to paying taxes.

Trump and Jellyfish Image

The fact is there are several living organisms that seem to cheat death. Lobsters don't really get older in the creaky bones sense, they just get bigger and bigger. A New York restaurant was going to serve up a 23-pound lobster named "Larry" thought to be 130 years old until it was rescued and placed in a sanctuary. But this 1880s-born lobster seems like a whippersnapper compared to giant clams known to be nearly 500 years old. The glass sponge seems to be the oldest of all, reaching about 15,000 of age.

At the basic level, the whole “avoiding death” thing seems to defy logic. When looking at this unstoppable market, it also seems to defy logic – boldly defying the “what goes up must come down” axiom, as if to add the corollary, “unless it doesn't want to come down.” It's almost illogical when we look at the backdrop portrayed by the media. There is a lot of uncertainty and fear enveloped around the new 45th President. Tough talk by the man himself, coupled with oodles of rhetoric, disputes over facts, possible ethics violations, deportations, immigration hard lining, and Putin-tastic praise, all should be a full enough bucket to weigh the market down. Yet the market defies logic and keeps hitting new highs.

For some time now, I have pointed out that valuations do not always match current sales and earnings. At the same time, I have also pointed out that the fundamentals can sometimes lag. Oftentimes the market has the gift of foresight and lofty valuations justify themselves later on. On the positive side, fourth-quarter sales and earnings have been largely positive and seem to be lifting market spirits. The economic news is also getting stronger and the possibility of favorable tax reform for corporate America may bode extremely well for more bullish action. As illogical as it may seem, a North Korean missile test, a chilling Mexican-American relationship, and some potential foreign relations embarrassment don’t seem to matter as much.

All 11 S&P Sectors are Up since the November Election

Looking into the sectors, the action last week was led by Industrials, Consumer Discretionary, and Information Technology. Industrials continue to be a beneficiary of the new Trump administration with a renewed bump of +1.59% last week. The most compelling story last week was Information Technology.  Despite not being the #1 sector for the week, its revival over the past month puts it back in first place for the three-month performance sweepstakes. Financials had held the top spot for a while and now Tech seems to have returned. This is largely because of earnings and guidance providing the lift. Healthcare saw a nearly 2% rally month-to-date and is actually positive for the last three months. In fact, all 11 sectors are positive for three months, punctuating the “Trump-Bump” by saying all cylinders are firing. Energy saw weakness last week as the only negative sector. Energy is, however, positive for three months. Telecom Services, with its notably small universe, is the only negative sector month-to-date.

Standard and Poor's 500 Sector Indices Changes Tables

With all 11 sectors on the rise since the November election, I expect that we will witness a rotation soon. While the market is undeniably rising with each passing week, the one factor that keeps me from getting swept away with the euphoria is the institutional activity monitors that I follow. That data tells me that the market continues to be consistently “overbought.” Now, a market can remain in a protracted overbought state for a long period of time, but just as every determined salesperson thinks, “Each no brings me closer to a yes,” the market is telling me, “each new high brings us closer to a correction.”

Markets defy logic, even though many smart people spend an awful lot of energy and time trying to predict and explain them. Many investors choose to react rather than predict, so market cycles will go on as long as there are markets, whether they are controlled by robots or humans. The fundamental drivers of greed and fear won't be going away anytime soon – likely not in the lifespan of a stately lobster, or even a giant clam. Either way, we are in the midst of a changing market and a changing political landscape.

Death and taxes are a certainty for almost all of us. Mark Twain made this humorous comparison: “What is the difference between a taxidermist and a tax collector? The taxidermist takes only your skin.”

Albert Einstein concurred when he said, “The hardest thing in the world to understand is income taxes.”

Albert Einstein Sticking Out Tongue 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.*

Trump Talk + Rising Earnings = New Market Highs

by Louis Navellier

“It may not be chocolate and peanut butter, but a dose of healthy earnings and pro-business comments from President Donald Trump was enough to send the major indexes to all-time highs last week.”

--Ben Levisohn, Barron’s (“Trump Talks, Market Listens, Up 0.8% on Week,” February 13, 2017)

On Thursday, a single word uttered by President Trump (“phenomenal”), in reference to his forthcoming tax plan, added $175 billion in market value on Thursday and another $100 billion on Friday, according to Wiltshire Associates’ calculations (Barron’s, “Magical Mystery Tax Plan,” February 13, 2017).  It’s not often that a single adjective can add $275 billion in wealth (about $862 per citizen), but I’m not complaining.

According to Bespoke Investment Group (“On the Riser,” February 10, 2017), the S&P 500 has not had a daily 1% retracement since October 10, 2016 – 84 straight market days.  That’s the longest streak since 2006.  Going back further, the S&P 500 has gone 159 trading days through last Friday without a 5% correction, the longest such streak in the current bull market – which turns eight years old next month.  This is also the longest stretch without a 5% correction since February 2007, a decade ago.  But the most dramatic fact is that the S&P 500 traded at 1810 a year ago (February 11, 2016), so it is up 28% in the last year.

The market is hopeful that the Trump tax policies will spur economic growth, but more importantly the market is responding to positive earnings reports for the S&P 500.  We’re seeing good economic news in the U.S., and also from our major trading partners like China, Germany, and South Korea.  In China, retail sales rose 10.9% and its industrial production rose 6% in 2016.  In Germany, factory orders surged 5.2% in December, the biggest monthly rise in the past 2½ years.  South Korea’s January exports to China and the European Union rose 13.5% and 13.4%, respectively.  Overall, it appears that global GDP growth may hit a 4% pace in 2017, due to exceptionally strong GDP growth in many of the leading emerging markets.

The Dollar Should Keep Rising due to a Crumbling Eurozone

In the currency and bond markets, U.S. Treasury bond yields declined briefly last Wednesday due to capital flight from the brewing political and fiscal crisis in the European Union.  Specifically, Marine Le Pen is widely expected to be elected the next French president in April (or May, in the runoff), since she is currently leading in the polls.  Le Pen is a right-wing candidate famous for being nationalistic.  As a nationalist, she wants to put France first, which could potentially undermine European Union (EU) unity, since she has pushed for France to leave the EU.  Furthermore, German Chancellor Angela Merkel is no longer leading in German polls, so the leadership of the two largest countries in the EU could change this year.  In addition, there are growing concerns about growing government debt burdens in Greece and Italy.

Container Ship Image

This capital flight from the EU caused the U.S. dollar to reassert itself last week.  The bad news is that a strong U.S. dollar tends to hurt the U.S. trade deficit.  The Commerce Department announced that the U.S. trade deficit in 2016 rose to $502.3 billion, the highest level in four years.  Countries with weak currencies have a major advantage when trading with the U.S.  For example, the U.S. trade deficit with Mexico rose 4.2% to $63.2 billion, the highest level in five years!  The country with the largest trade deficit with the U.S. is China, with a massive $347 billion deficit.  As the dollar strengthens, our trade deficit will likely increase.

Consumer sentiment is still positive, but the next big test will be retail sales, released tomorrow.  In fact, we’ll see four important indicators for January released on Wednesday:  The Consumer Price Index (CPI), which may rise by 0.3% (a 3.6% annual rate); retail sales, which are predicted to be flat.  Industrial production is also expected to come in flat, as is capacity utilization, a leading indicator for inflation.  My hunch is that if we see positive numbers on retail sales or industrial production, the market could rally.

Happy Valentine’s Day!


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 Trade Summary

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