The Hawk-Talking Fed

The Hawk-Talking Fed Turns Back into Doves

by Louis Navellier

June 21, 2016

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

The big news last week was the Fed’s Federal Open Market Committee (FOMC) meeting, where they decided to leave key interest rates unchanged.  The FOMC signaled that they would now take an even slower path to normalizing rates, lowering their 2016 GDP forecast to 2%, down from 2.2% previously estimated.  At a press conference, Fed Chairman Janet Yellen acknowledged that “vulnerabilities in the global economy remain” and emphasized that “our cautious approach to policy remains appropriate.”

Dove Image

Yellen also said that the Fed would closely monitor the June employment data, due out in early July, for evidence that hiring has rebounded after a surprising slowdown in May and April.  It is crystal clear that the May payroll report and the previous month’s downward revisions caught the “data dependent” Fed flatfooted, which is why the FOMC is now so cautious with its guidance.  When asked about a July rate hike, Yellen said it was “not impossible,” a convoluted Fed-speak phrase by a clearly frustrated Yellen.

Interestingly, only six of the 17 FOMC members now expect just one rate increase this year, vs. the four rate hikes they expected last December.  In barely six months, the Fed has done an abrupt about-face and unwound its previous hawkish guidance.  Not surprisingly, 10-year Treasury bond yields declined below the 1.6% level after the FOMC statement and Yellen’s comments.  Overall, it is unfortunate that the Fed has contributed to financial market volatility this year by being hawkish in December and dovish now.

In This Issue

The theme of this week’s issue is the market tension over several serious but unresolved issues.  The obvious lead story is Brexit, but we’re also concerned about the low quality of our Presidential choices this year, slowing global growth (especially in China), the Fed’s waffling words, and the resulting market volatility.  Bryan Perry covers the Fed and Brexit, while Gary Alexander shows how the U.S. is still the “least bad” economy among rich nations.  Ivan Martchev covers Brexit, foreign exchange, and the oil market, while Jason Bodner examines our manic-depressive mood swings over major S&P sectors.  I’ll close with a look at Brexit and its implications for rising nationalism worldwide – and here at home, too.

Income Mail:
Waiting for the “All Clear” Sign
by Bryan Perry
Bracing for Brexit – A Perfect Storm or Another Y2K?

Growth Mail:
U.S. Still the Gold Standard of Economies
by Gary Alexander
The Hemispheric Olympics

Global Mail:
FX Volatility Ahead
by Ivan Martchev
Was $52 the Seasonal Top in Oil?

Sector Spotlight:
The Changing Nature of Our Perceptions
by Jason Bodner
Healthcare Caught a Cold Last Week

A Look Ahead:
What a Brexit Vote Means to Britain and the World
by Louis Navellier
Nationalism is Rising Everywhere – Even Here

Income Mail:

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

Waiting for the “All Clear” Sign

by Bryan Perry

This past week was highlighted by both the FOMC meeting on Wednesday and the Bank of Japan meeting on Thursday, both of which ended in each central bank refraining from any fiscal action or offering any additional monetary stimulus. Many consider the Federal Reserve the world’s central bank, where the world looks for fiscal policy leadership. If so, the U.S. is already on the other side of the QE process. The Fed now wants to normalize interest rates, albeit at a slower rate than they once hoped for.

The Bank of Japan has been trying to stimulate that economy in one form or another for the past 20 years. Despite anemic growth, Japan’s central bank held pat on further immediate stimulus, which sent the yen spiking to a two-year high that clouds an already tough outlook for a country dependent on export growth.

These decisions come a week after the European Central Bank made no changes in its program to revive the Eurozone, as it expressed slightly more optimism about the prospects for growth in the euro region.

This collective set of non-actions by the three most powerful central banks left the U.S. Fed Funds rate at the 0.25%-0.50% benchmark range, while the ECB yields near-zero and the BOJ still maintains negative overnight rates. To call this a zero-sum situation might be fairly accurate as the snail-like rate of recovery for these three economies continues to extend out their time lines for seeing GDP growth of 2.0% again.

History of United States Ten Year Interest Rate Chart

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

Last Thursday, the yield on the U.S. 10-year Treasury fell to 1.52% after the Dow opened down triple digits in the first day of trading following the FOMC meeting. For the Fed to talk up normalizing interest rates only to retract back into a dovish stance calls into question the credibility of their rhetoric. The bond market punctuated that very point, taking the 10-year T-note yield near a new low for the past 150 years, as per the chart above. It’s not hard to see why. The malaise associated with slack global growth and deflationary pressures after untold amounts of fiscal stimulus has a clenched grip on global bond markets.

On June 15, the Conference Board published their forecast for annual real GDP for the U.S. to be 1.7% for 2016 and 1.9% for 2017. The ECB predicted in their most recent June 2 meeting that real GDP for the Eurozone would grow at 1.6% for 2016 and 1.7% for both 2017 and 2018. The IMF sees Japan’s GDP growth tracking at 0.5% for 2016, 0.0% for 2017, and 0.4% for 2018. The #2 economy, China, is expected to experience real GDP growth of between 6.0% and 6.5% for 2016 and then sub-6% in 2017 and beyond.

All these numbers need to experience some upward revision in the next six months if we want to see restored confidence in how the major central banks are engineering economic recoveries regionally and globally. If and when the market senses a trough in slowing growth rates, equity markets will likely come roaring out of the funk they are currently mired in. But recent data has been mixed and second-quarter earnings from S&P 500 companies that start to cross the tape after the July 4th weekend will carry a ton of weight as to whether the bullish camp can finally break out of range-bound averages to higher ground.

Bracing for Brexit – A Perfect Storm or Another Y2K?

With so much to consider in global markets, my advice is still to stick with U.S.-based assets that aren’t going to be hurt badly from a rising dollar and external events out of our control – like how the U.S. could fare if the U.K. ends up leaving the European Union (EU). As reported in The Guardian over the weekend (see June 18, “What is Brexit and why does it matter: The EU referendum guide for Americans”), the campaign for Brexit – a British exit from the EU – feeds on decades-old homegrown resentments. Real or imagined, these fears include nostalgia for imperial certainties and for pre-globalization jobs for life, plus resentment of immigrants and rules imposed by “unelected” courts and commissions in Brussels. Such are the demons said to restrain national “sovereignty” or, for some, free market spirits. “Take back control” is Brexit’s catch-all slogan, designed to appeal to both social isolationists and blue-water buccaneers.

Early analysis points to some degree of stress in global financial markets while raising the prospect of new geopolitical risks. JPMorgan Chase CEO Jamie Dimon is saying that Brexit would seriously hurt not only his company, but also the global economy. At a minimum, he said, a “Brexit will result in years of uncertainty, and I believe that this will hurt the economies of both Britain and the European Union.” (Source: Barrons, June 16 – “What Does Brexit Mean for U.S. Markets?”)

European Union and British Union Flags Image

“Brexiteers” deride such scary scenarios as “Project Fear.” They have their own slew of figures to show how much money would be freed up by the return of Britain’s £8 billion a year contributed to the EU, a figure much disputed and already spent many times over by the “Leave” campaign. On the other side, experts in every field – from London city giants and economists to university researchers and public health officials – are overwhelmingly for the “Remain” vote.

To be sure, the British government isn’t required to act on a successful vote for Brexit; the referendum is merely advisory and not mandatory. David Cameron, the U.K.’s Prime Minister, is an opponent of the Brexit proposal so one can expect that he will use every means necessary to keep Britain in the European fold. The Financial Times is already suggesting that U.K.’s parliament “could try to re-negotiate another deal and put that to another referendum. There is, after all, a tradition of EU member states repeating referendums on EU-related matters until voters eventually vote the ‘right’ way” (source: FT, June 14).

If I were a betting man – and sometimes I am – I’d say that the first vote won’t be the last vote and the initial reaction to the vote will be muted, whatever the outcome, because most economists will conclude that any impact from an exit from the EU won’t be felt for three-to-five years and sales of Beefeater Gin in Beijing will just continue to grow. Is this whole Brexit scare just a tempest in a teapot or another Y2K?

It’s hard to say, but one thing that is certain is that stocks have pulled back on the prospect of a winning “leave” vote and that is presenting income investors with some very attractive entry points for getting into market-leading dividend stocks where serious growth and rising quarterly payouts combine to make for a powerful investment theme in an otherwise extremely narrow market.

Growth Mail:

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

U.S. Still the Gold Standard of Economies

by Gary Alexander

With the Olympics coming to Rio in August, we’ll be seeing a lot of gold, silver, and bronze medals awarded this summer.  If there were an Olympics of global economies – or hemispheric rivals – the U.S. would win in both categories.  According to a new report by the Organization of Economic Cooperation and Development (OECD) – a kind of country club for rich nations– the U.S. leads the three major developed economic zones (Europe, the U.S., and Japan) since the last global recession in 2008-09.

The OECD’s “Economic Outlook No. 99 – June 2016” (released June 1) showed that the U.S. had negative GDP growth rates in 2008 and 2009, but positive years ever since, while Japan suffered negative growth in 2011 and 2014 and the OECD’s Euro area suffered down years in 2012 and 2013.  Last week, The Wall Street Journal’s Eric Morath weighed the OECD’s data (June 16: “The U.S. Economy Is in Great Shape (Compared with its Peers),” ranking Europe, Japan, and the U.S. in several categories.

Change in Gross Domestic Product Table

These figures are somewhat mirrored in the growth rates for business investment in the last eight years:

Change in Business Investment Table

The OECD began as a union of 18 European nations plus the U.S. and Canada in 1961.  Japan was added in 1964.  The 34 current members include 25 European nations plus the U.S., Canada, Japan, Australia, New Zealand, Mexico (added in 1994), South Korea (1996), Chile, and Israel (both added in 2010).

On June 1, the OECD lowered its estimate for the growth of the 34 OECD countries to 1.8% this year and 2.1% in 2017 from 2.2% and 2.3% respectively last November.  On June 7, the World Bank followed suit, revising its 2016 global growth forecast lower to 2.4% from January’s 2.9% projection, citing “sluggish growth in advanced economies, stubbornly low commodity prices, weak global trade, and diminishing capital flows.”  (Source: Yardeni Research, June 9, “Global Earnings Lack Luster.”)

Expanding to the developing economies, here are the 10 largest national GDP totals estimated for 2015:

Top Ten Countries by Gross Domestic Product Bar Chart

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

Global stock markets reflect U.S. leadership since the Great Recession.  According to the same Yardeni report from June 9: “Since the start of the bull market in early March 2009, the US MSCI stock price index is up 212%, while the All Country World ex-US MSCI is up 83% in local currencies and 82% in dollars. Over this same period, forward earnings are up 90% for the former and 26% for the latter.”

2016 Scorecard for the Big Three in the OECD Table

Overall, the U.S. wins the gold medal in most of these categories, vs. the other two developed powers.

Looking forward, America faces big challenges in this election year – avoiding the trade protectionism of candidate Donald Trump or the stifling business regulations of candidate Hillary Clinton.  In the best of all possible worlds, the winner will be restrained by Congress from fulfilling unwise campaign promises, but their rhetoric does not augur well for the continuation of American economic supremacy in 2017.

Last year, Jim Clifton, Chairman and CEO of Gallup said: “The U.S. now ranks not first, not second, not third, but 12th among developed nations in terms of business startup activity. Countries such as Hungary, Denmark, Finland, New Zealand, Sweden, Israel, and Italy all have higher startup rates than America does. We are behind in starting new firms per capita, and this is our single most serious economic problem. Yet it seems like a secret. You never see it mentioned in the media, nor hear from a politician that, for the first time in 35 years, American business deaths now outnumber business births” (source: Gallup’s Business Journal, January 13, 2015, “American Entrepreneurship: Dead or Alive?”).

In 2012 the Institute for Justice’s “License to Work: A National Study of Burdens from Occupational Licensing,” found that “in the 1950s only one in 20 U.S. workers needed the government’s permission to pursue their chosen occupation. Today, that figure stands at almost one in three.”  To get a license to braid hair in Mississippi, it took “a cosmetology license, requiring 1,500 hours of training and $10,000 in tuition – and yet none of the training had anything to do with braiding hair.”  In 2005, Mississippi changed that law and there are now 1,500 hair-braiding entrepreneurs in Mississippi (source: CEI, June 7, 2016).

The Hemispheric Olympics

“There are four kinds of countries in the world: developed countries, undeveloped countries, Japan and Argentina.”  -- Nobel-Prize-winning economist Simon Kuznets.

In Houston tonight, the U.S. men’s soccer team faces mighty Argentina in the semifinals of the centennial edition of Copa America, a hemispheric soccer tournament.  Argentina is currently ranked #1 in the world (by FIFA, the controversial soccer organization) vs. the 31st-ranked U.S. men’s team.  Argentina will probably win, but the more important competition has been in the economic policies of growth in what were the top two economic powers of the Western Hemisphere 100 years ago – Argentina and the U.S.

This year marks the centennial of Copa America and the bicentennial birthday for Argentina, which declared its national independence on July 9, 1816 (Wikipedia, “Independence of Argentina”). A century ago, Argentina was the 8th richest nation in the world, behind only the U.S. and six European powers.

“In 1909, per capita income in Argentina was 50% higher than in Italy, 180% higher than Japan and almost five times higher than in neighboring Brazil. Over the course of the 20th century, Argentina’s relative standing in world incomes fell sharply. By 2000, Argentina’s income was less than half that of Italy or Japan” (source: New York Times, Oct. 6, 2009, “What Happened to Argentina?” by Edward L. Glaeser, a Harvard economics professor).

A century later, no hemispheric economy is even one-tenth the size of the U.S.  Once-mighty Argentina has fallen from #2 to #5 (for GDP) in the hemisphere and fell from #8 to a distant 21st in the world:

The Five Biggest Economies in the Western Hemisphere Table

The major cause of Argentina’s decline was trade protectionism and Peronism – the impact of Juan Peron, his wife Eva Peron, and their recent incarnations in President Nelson Kirchner and his widow, Christine Kirchner.  They ruled Argentina from 2003 to 2015.  There is hope under new President Mauricio Macri, but the damage from 70 years of Peronism and protectionism since Peron’s 1946 ascension is very deep.

I’m running out of space, so I may continue this Argentina story next week, since it is a cautionary tale for accepting the kind of trade protectionism being touted by our 2016 Republican presidential candidate.

In the meantime, here’s an optional homework assignment: Read one or both of these excellent surveys:

 “Argentina: The Superpower that Never Was” (Financial Times, May 22, 2009) by Alan Beattie
“A Century of Decline: 100 years ago, Argentina was the future. What went wrong?” (Economist, February 15, 2014)

Global Mail:

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

FX Volatility Ahead

by Ivan Martchev

In addition to the assassination of a pro-EU British MP, the fleeting probability that Britain will vote to leave the EU is causing turmoil in financial markets. Last week, the German 10-year bund traded with a negative yield for the first time ever. The 10-year Treasury note yield declined to $1.52% – just 13 basis points away from an all-time low – while the Japanese yen declined below 104 and the embattled British pound barely held $1.40.

While the Brexit boat was rocking notably more last week than the week before, this is the kind of rocking that is only going to intensify due to the clearly visible storm right in front of us with Thursday’s vote. I suppose there is always the possibility that another politician might be assassinated in the UK or a terrorist attack may take place that postpones the Brexit referendum. But barring those unfortunate possibilities, Britons now look likely to shake up financial markets one way or the other on June 23rd.

I don’t understand how pragmatic people like the Brits cannot see through the self-destructive implications of this referendum. Cooler heads prevailed in the Scottish independence referendum in 2014, but the Scots are overwhelmingly pro-EU. Great Britain leaving the EU might serve as a trigger for another independence referendum in Scotland, which this time may succeed.  It would look rather embarrassing for the British government to have its citizens vote to leave the EU and then have Scotland leave the UK later on. While there are doubts that David Cameron would survive as Prime Minister if Great Britain leaves the EU, he definitely won't survive a vote for Scottish independence.

To be fair, voting to leave the EU in a referendum is not exactly the same as actually leaving it, as there are many more votes that need to be taken for that to happen. Still, it certainly opens the door for a messy Brexit, so it is difficult to see how the GBPUSD exchange rate can end up anywhere but down. That said, last week the GBPUSD exchange rate ended up, as it appears that the news of the Labour MP’s tragic assassination caused a violent short squeeze as Brexit campaigning was suspended.

Over the weekend there were news reports that bookmakers in Britain were giving the “Remain” vote a 75% chance of prevailing. This is actual money being bet that way, which is very different from telephone polls. While there was clear momentum for the “Leave” vote last week, it appears that the politically-motivated assassination of a British MP may have given the “Remain” camp a positive nudge. The latest polls show a dead heat, while the bookies favor the EU supporters.

British Pound versus United States Dollar - Daily OHLC Chart

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

Cable, as traders call the GBPUSD cross rate, has serious support at $1.40 and it closed last week at serious resistance under $1.44. It should be all downhill for cable this week barring assassinations or terrorist acts, particularly if the Brexit vote is successful. There could be a violent reaction higher if the Brexit vote is defeated (now close to a 50-50 chance) or lower if Brexit wins (also an even probability).

Nikkei Yen - Daily Nearest Line Chart

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

One indication of large investors’ increasing risk aversion is the rally in the Japanese yen caused by the unwinding of carry trades (where less yen per dollar means a stronger yen on the inverted chart, above). The yen registered a fresh 52-week high at 103.55 against the dollar and I suspect it will trade through 100 this week if we have a successful Brexit vote.

Since the Nikkei 225 large cap benchmark index is so heavily correlated to the USDJPY exchange rate, those yen moves are tradable via Nikkei proxies. For example, the move in the yen last week caused about a 1000-point move lower in the Nikkei. Furthermore, the Nikkei 225 index is holding just above major support near 15,500 which is likely to “break” if the yen breaks 100, in my opinion.

United Kingdom Ten Year Government Bond Chart

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

While German bunds traded down to a -0.03% yield last week, the UK 10-year gilts registered a record low of 1.11%. The gilts will likely be flirting with 1% in the event of a successful Brexit vote, while the all-time low yield in U.S. 10-year Treasurys (at 1.39% from 2012) also comes into play.

It is worth pointing out that Brexit is certainly not the primary reason for the 10-year Treasury yield to make an all-time low, but merely a catalyst. U.S. Treasury yields were headed to all-time lows anyway because of the global deflationary problem we have that seems to be intensifying, but Brexit surely seems to be in a prime position to catalyze this move. (See my annual prediction published by Marketwatch on December 29, 2015 “Will 2016 Bring New Treasury Yield Lows?) It is also necessary to point out that the consensus was calling for four Fed funds rate hikes in December 2015, but so far there have been none, and we very well may not get any rate hikes until the end of 2016, or in 2017 for that matter.

United States Dollar Index - Monthly OHLC Chart

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

The fact that there may be no more rate hikes does not suggest that the dollar cannot go higher from here. I think it is headed well past 100 on the U.S. Dollar Index (pictured above) and definitely much higher on the Broad Trade Weighted Dollar Index, which I have featured previously in this column.

For the dollar to rally, we need global deflation (which we already have), corporate and governmental global deleveraging (we have that, too), and shrinking global trade and central bank FX reserves (we certainly have that). Add in the fact that the biggest component of the U.S. Dollar Index – the euro, at 57% – has just added major Brexit-generated political risk to its belated QE problems and overall economic stagnation, and I am actually surprised that we are not above 100 on the U.S. Dollar Index at this moment.

I think it is only matter of time for the dollar to make fresh 52-week and multi-year highs this year.

Was $52 the Seasonal Top in Oil?

The seasonal rally in oil I was looking for (see Navellier Marketmail for March 8, 2016 “Was this the Seasonal Low in Oil?”) seems to be playing itself out earlier than scheduled. Typical oil demand has a seasonal uptick in the March to September period, but this time the rally started earlier than it did in 2015 as the preceding sell-off was much more severe. Crude oil futures made a low in January near $26, retested that low in February, and they have been as high as $52/bbl this month on the August 2016 WTI contract.

West Texas Intermediate Crude Oil - Weekly Nearest OHLC Chart

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

Futures traders can forecast seasonal demand, which is why different months of the year have different prices, but they are far from perfect. On Friday, February 2017 crude oil futures closed at $50.76. I think that come February 2017 that CLG17 contract price will start with the number 2 or 3, not the number 5.

Futures Contracts Table

Basically, I think oil is ultimately headed back to $20/bbl as neither inventories nor production have declined much. In addition to seasonal factors that come into play in the fall and winter, we have cyclical factors to worry about. I think the hard landing in China I am looking for keeps getting pushed out as the Chinese authorities keep accelerating lending into a busted credit bubble; but ultimately when the Chinese hard landing arrives, crude oil will have trouble holding $20/bbl, as China is the number one consumer of oil.

Sector Spotlight:

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

The Changing Nature of Our Perceptions

by Jason Bodner

I read somewhere that Finland and North Korea are separated by only one country. This, of course, initially seems a bit unlikely until you realize that the country in question is Russia.

Russia has slightly more surface area than the former planet called Pluto. Again, this seems unlikely, but Pluto would actually fit inside the United States, which is itself barely half the size of Russia.

With all of the debate over the years over whether or not Pluto is a planet, a planetoid, or a dwarf planet, consider this: Pluto hasn’t even completed half of one orbit around the sun since it was discovered in 1930. After that, it was put into kid’s science books, debated about, and finally declassified as a planet in 2006. This seems mind-blowing until we consider that one Plutonian year is equal to 247.7 Earth years.

Perceptions Govern Thoughts and Behavior Image

The takeaway here is that human thought and behavior are governed largely by perceptions. Perceptions form a bias, which becomes ultimate truth – at least in our own minds. This is what makes the media so powerful and has stirred a lot of discussion about the current election cycle. As Louie points out below, in current politics you don’t have to be right, just inflammatory. The use of modern outlets in the form of social media is unprecedented in our history. The availability and demand for instantaneous information at our fingertips has had an observable effect on the average human attention span When we couple perception and bias, we get a population that is more malleable and impressionable than any in previous history.

It seems that virtually everyone is plugged into social media these days, to the point that some may have a hard time communicating with their families in the old fashioned way. How many of you have tried to get your kid’s attention verbally several times without success and have had to resort to texting them or Facebook-messaging them to insure they get your message? Some say that’s progress, some say regress. Maybe we just need to adapt and find better ways of dealing with this new phenomenon/plague:

Tongue Texting Image

No matter which way you lean on the values and merits of social media and instant information, these are the same undeniable forces at work on the markets as well. I contend that market volatility is at-least in part due to faster reactions to ever-faster information. Whether the delivery method is through news outlets, instant messaging, or social media, this is a new and evolving market paradigm. We continue to see markets trade one day independently and another day in extreme tandem. Needless to say, there have been extreme rallies and sell-offs, spikes and troughs in the VIX (Volatility Index), alternating cheer and gloom, wars of words between hawks and doves, fear and exuberance, and all in the span of a few months.

Looking at the equity markets, bullish sentiment waned then turned bearish according to this sentiment chart:

United States Investor Sentiment Chart

Headlines definitely drive markets. The past 24 months have seen ISIS beheadings, commercial jets blown out of the sky or disappearing altogether, Ebola fears, China fears, Healthcare fears, new lows in campaign rhetoric, Fed policy uncertainty, global growth concerns, numerous terror attacks, and more.  Lately, Brexit is clearly weighing down the markets. The fall in global equities shows the anxiety is real.

Healthcare Caught a Cold Last Week

This past week saw evident selling in Healthcare. The S&P 500 Healthcare Index was down over 2% for the week. Valeant Pharmaceutical (VRX; I hold no position) lowered its revenue guidance and saw its share price plummet 50%, adding to pressure on the sector. Industrials, Information Technology, and Materials began the week with each sector dropping more than 1% on Monday. Financials was the weak sector on Tuesday selling off almost 1.5%. The weakest sectors for the week were Financials, Information Technology, and Healthcare. These three sectors are also the laggards for June, so far.

Financials and Infotech are also the weakest for the past three months. Telecom, Utilities, and Consumer Staples are the top performing sectors month-to-date, consistent with risk adverse trade. Investors want yield as yields continue to go negative globally. It is worth noting that while Energy is the clear sector winner for the past three months, the rally has been losing steam. Despite Brent crude oil’s 4.2% jump on Friday, the commodity still finished down on the week and below $50 per barrel.

Standard and Poor's 500 Sector Indices Changes Tables

As media, speed and availability of information, and volatile sentiment drive the market, longer-term trends become more difficult to see. We live in a market of quick reaction and frequent turnover as evidenced by the sector rotations of the past year. I expect as Brexit uncertainty resolves in the near future, campaign headlines and global interest rate concerns will continue to drive some volatility in the equity markets. Historical seasonal shifts in the price of oil imply a rally into the summer and a fall into the, well, fall. Seasonal volatility in the price of oil will also likely add to the market’s unpredictability.

The market’s fluctuations will continue to be amplified and driven by human perception. Even if every trader is one day replaced by robots, the algorithms instructing those robots what to do will necessarily be programmed by humans. How this information is presented and ultimately perceived is what makes an impact on these programmers and their bias. As Aldous Huxley wrote: “There are things known and there are things unknown, and in between are the doors of perception.” Let’s break on through those doors!

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 a Brexit Vote Means to Britain and the World

by Louis Navellier

In America, both the Fed and the financial markets remain very concerned about Brexit.  The flight of capital out of Britain is so severe that 10-year German government bonds hit a negative yield of -0.006% and joined Japan and Switzerland as the other major countries with negative 10-year bond yields.

If Britain votes to exit the European Union (EU), it will likely weaken the euro as well as the British pound, since speculation will mount regarding which other countries will want to exit the EU next.  Since Britain held onto its own currency, it is much less messy for the Brits to exit the European Union. However, for those countries that share the euro, exiting the EU would be a fiscal disaster, since setting up a new currency and central bank is not easy and likely more trouble than exiting the European Union.

At the heart of the problem between Britain and the European Union is growing resentment against all the changes that Brussels is mandating, such as the new refugees that are overwhelming British schools and further undermining their national healthcare system.  Britain also worries about losing its national identity and heritage, of which it is immensely proud.  The view from the United Kingdom is that all the regulations that Brussels is imposing are being influenced most by mighty Germany.  Even though Germany is viewed as a disciplined, well-run country, clearly not everyone in Britain wants to become more Germanic in nature.  Overall, the European Union has been an interesting experiment, promoted by Germany to make Europe stronger; but in the end some countries do not want to lose their national identity and that will likely be demonstrated on June 23rd if Britain votes to exit the European Union.

Brexit Button Image

Another outcome of Britain exiting the EU is that the U.S. dollar will likely strengthen further, which will put new downward pressure on commodity prices, like crude oil and agricultural crops.  As a result, companies that are sensitive to the U.S. dollar, like multinationals, energy, and materials-related companies, will likely suffer accordingly.  Since energy, commodity, and materials-related companies have performed relatively well since the February 11th lows, this means that a massive shift in market leadership is likely, especially if the U.S. dollar continues to climb and deflationary fears mount.

I should add that even though gold prices tend to decline when the U.S. dollar rallies, primarily because gold is priced in U.S. dollars, this time around I expect that gold will continue to perform well due to the related concerns about Brexit, negative interest rates around the world, and the growing impression that central banks have dug themselves a hole with negative interest rates and quantitative easing with no viable exit plan.  I am not a fear monger, but if there is ever a “domino event” that freaks out financial markets around the world, it might be triggered by Brexit and the disintegration of the European Union.

Nationalism is Rising Everywhere – Even Here

There is no doubt that nationalism is on the rise around the world as many fear losing their national identity.  Even though free trade helps to improve global living standards, globalization might have happened too fast, since many folks do not think that they benefit from global trade.  In the U.S., where middle class incomes have not improved for over 15 years, many folks are frustrated, which is why our Presidential election this year seems so wild.  Nationalist candidates have been surging all over the world as countries reject globalization and take pride in what makes their respective countries unique.

In politics, you do not have to necessarily be “right” anymore, just mad as hell; so all I can tell you is that when Hillary Clinton debates Donald Trump, it may be higher-rated than a Super Bowl.  In a normal Presidential election year, candidates run around and suck up to voters by promising anything and everything, smiling all the while.  This time around, however, I suspect that the insults will just increase. Negative ads will intensify and relentless attacks will not end until after the November elections, if then.

Normally the stock market rallies into Presidential elections, with rising consumer confidence, which then rubs off on investor confidence.  However, deep anxieties about terrorism, the economy, opportunity, and equality will likely rise this time around, so it will be interesting if opening these wounds and exposing all our national problems so openly and forcibly will weigh on consumer confidence.  All I can tell you is that, like most Americans, I believe what is about to unfold is going to be very entertaining and even over the top.  Like Britain has endured in the run-up to Brexit, we are about to see over four months of scare tactics.

I should add that, due to all the chaos in the world as well as in the U.S., plus political uncertainty, there are multiple reports that cash on the sidelines is building.  Even though companies are increasingly utilizing some of this cash to buy back their respective stock, the cash that investors and professional money managers are holding could help boost the stock market as soon as investors conclude that it is safe to invest.  This flood of cash back into the stock market could begin whenever the uncertainty ends.

Whenever the Fed stops teasing us about rates, when the outcome of the Presidential campaign becomes clear, when (or if) the European Union’s chaos diminishes, then this pall of uncertainty should diminish. Investor confidence could then rise and much of that sideline cash could return to the stock market.

Naturally, I am taking no chances and making sure that I am “locked and loaded” with fundamentally strong stocks that will likely post better-than-expected results in the upcoming weeks and 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.

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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.

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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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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.

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