The Market Hits Another New High

The Market Hits Another New High on a Positive Jobs Report

by Louis Navellier

August 9, 2016

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

The S&P 500 trended down most of last week, but closed up strongly on Friday to set a new record high of 2182.87, based in large part on another strong jobs report, including positive revisions to previous months.

Summer Holiday View Image

Welcome to August!  With most Europeans on vacation and many Americans planning a late summer holiday, the stock market is essentially being neglected.  Fortunately, we have seen some positive second-quarter sales and earnings released; but there is no doubt that the stock market is now being distracted by outside events like (1) crude oil closing at $39.51 last Tuesday, (2) President Obama calling Donald Trump “unfit to serve” for over five minutes in a press conference, and (3) a Wall Street Journal report of a private plane with $400 million in cash delivered to Iran in exchange for four hostages a few months ago.

The Presidential campaign season is usually positive for the market since candidates try to promise voters anything and everything; but this time around they are both fomenting fear of “the other,” so we might as well get used to political distractions until after the election, since this mudslinging is not going to end.

I am also concerned about what will happen to crude oil prices in September when seasonal demand usually falls.  If crude oil can fall below $40 per barrel during peak summer demand, then $35 per barrel is likely in the fall and $32 per barrel by year’s end.  In the event that crude oil breaks $30 per barrel, it could really hurt U.S. GDP growth, since so many states now depend on crude oil production.

In This Issue

Our authors express some concerns about the fundamentals underlying the market’s relentless rise to new highs, but we tend to agree that the U.S. market remains the best place to be.  Bryan Perry calls the U.S. a “steady as she goes” market, while Gary Alexander calls America an “oasis of safety.”  Ivan Martchev examines the strange case of the “disappearing rate hikes” (in the fed fund futures market), while Jason Bodner examines the difficulty of reaching “escape velocity” into space or on the trading floor.  Then, I’ll share some reasons why I hate to see the kinds of market shenanigans that often surface during August.

Income Mail:
The Bulls Run with Strong Jobs Data
by Bryan Perry
A “Steady as She Goes” U.S. Beats the Competition

Growth Mail:
Going for the Gold in Global Growth
by Gary Alexander
U.S. Remains a Relative “Oasis of Safety”

Global Mail:
More Disappearing Rate Hikes
by Ivan Martchev
Commodities Nearing 25-Year Lows

Sector Spotlight:
The Market Reaches “Escape Velocity”
by Jason Bodner
Information Technology Leads the Rally Pack

A Look Ahead:
Why I Hate August!
by Louis Navellier
Central Bank Shenanigans Also Tend to Escalate in August

Income Mail:

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

The Bulls Run with Strong Jobs Data

by Bryan Perry

The market loves a good headline and last Friday’s non-farm payroll number of 255,000 vs. estimates of 185,000 was all the bulls needed to put an end to the recent eight-day slide for the major averages. Maybe the month of August won’t live up to its reputation of being a ball-and-chain on equity portfolios after all.

What went unnoticed, however, was the U-6 rate of 9.7% vs. the headline U-3 number of 4.9%. The U-6 figure takes into account total unemployment, including displaced workers and those actively looking for work. U-6 is actually a more accurate picture of the state of the labor force than the U-3 headline number.

Not only did the U-6 rate edge higher (from 9.6% in June to 9.7% in July), but the Labor Participation Rate – which measures the share of Americans at least 16 years old who are either employed or actively looking for work – dipped last month to a 38-year low, clocking in at an underwhelming 62.6% (source: Bureau of Labor Statistics). Regardless of the market’s bullish reaction to the headlines, structurally speaking, the job market should be in much better shape during an economic recovery in its eighth year.

Percent Change in Nonfarm Payroll Employment Chart

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

The other side of this debate comes into focus by a glance at the above chart. Since the economy lost so many more jobs in the 2008-09 Great Recession than in prior recessions, it has taken longer to get back to the pre-recession growth arc. This slow recovery is why there have been so many naysayers and “market is long-in-the-tooth” pontificators that have been so wrong about the current bull market’s sustainability.

Due to slow growth around the world, record lows for interest rates, record amounts of stock buy-backs, central bank stimulus, and low inflation risk, we have seen a wave of risk capital fueling higher equity prices in U.S. markets. That is why, in my view, there is more room for the market to run, with dividend growth stocks being the lead draft horse. Stocks that throw off attractive yields within the technology, aerospace, and healthcare sectors fared best last week with Friday’s big gain in the financial, materials, and industrial sectors providing some much-needed breadth to add technical support to the recent breakout.

The first half of 2016 was characterized by narrow leadership as consumer staples, utilities, REITs, bonds, and consumer discretionary seemed (at first) to be the only game in town. Now, we see some early signs of risk-on capital searching desperately for sectors and stocks that have lagged, figuring that in a rising market that just broke out of a 14-month trading range, “all boats will float higher.” However, chasing whatever hasn’t moved can be dangerous to one’s financial health. All dogs don’t hunt equally well.

The good news from the Labor Department has investors and traders piling into cyclical sectors, but three factors at work here need to be considered in light of Friday’s jobs data: (1) The renewed weakness in the energy markets, (2) the lower revision for GDP, and (3) a ho-hum earnings season that has yet to impress.

Several U.S.-based heavy machinery, heavy trucking, and industrial companies are not exactly optimistic about the outlook for the rest of the year; and yet, their stocks are busting out to the upside on renewed optimism. Either investors are putting the cart before the horse or 2017 is going to be a major earnings story for the heavy-metal stocks. Only time will tell. Bear in mind that several leading cyclical stocks with hefty dividend yields are not generating enough earnings to support those payouts, so they are instead issuing debt, hoping to see some earnings recovery before they are forced to cut their dividends.

Those companies that make up the who’s who of heavy industry offered some of the gloomiest outlooks of the earnings season while delivering steep declines in second-quarter profit and revenue and lowering guidance for the full year, putting them on track for a fourth full year of declining sales and revenue.

These companies are caught in a perfect storm, as they have a significant part of their sales overseas, which are being hurt by the strong dollar. Equipment makers serve all the sectors that have been hurt by low commodity prices and weak demand, from energy to resource industries to construction. Like the energy rally that recently faded, investors chasing yield in deep cyclicals should be wary of recent gains.

A “Steady as She Goes” U.S. Beats the Competition

Adding up all the data, we’re in what might be called a “steady as she goes” economy, which is music to the ears of dividend- and high yield-investors. These strategies have outpaced the major averages year-to-date and I do not expect to see any change in these trends. A good many investors we come in contact with each week remain skeptical about the unevenness of the global economy. While the U.S. market is setting new records, the other big three stock markets – in China, Japan, and Europe -- continue to reflect the anemic growth prospects of each of those regions, as underscored by the charts of each, below.

Big Three Stock Markets Charts

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

There remains a lot of work to do in China, Japan, and especially Europe, where any slippage of the nascent gains in recent data will take a toll on the already-cautious global investor sentiment.

Nothing has changed in this landscape. In fact, the central bank of England just cut its key interest rate to 0.25% from 0.50%, their first cut in seven years. The Bank of England also committed 100 billion-pound sterling to encourage banks to lend more in order to ward off risk of a Brexit-related recession.

With that said, the market is taking the “glass half full “approach as cash on the sidelines is being put to work, resulting in the Dow, S&P 500, Nasdaq, and Russell 2000 all building on the July rally and setting record highs on Friday. Now, I would like to see better retail numbers to reflect the improved jobs data, turning the slack GDP rate of 1.2% for the second quarter into a distant memory after a nice year-end rally that will make 2016 a better year than the majority of investors would have expected last January.

Growth Mail:

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

Going for the Gold in Global Growth

by Gary Alexander

The first Olympic gold medal went to a young female shooter, Ginny Thrasher, who won the 10-meter air rifle contest on Saturday morning.  The U.S. is a prohibitive favorite to win the most gold (and most total) medals – China will likely be #2.  The U.S. sent the most athletes of any country, 554, and well over half of them (292) are women.  It’s likely that more U.S. women will win gold than men, partly because there are 30 women on our favored soccer and basketball squads vs. only 12 men on our great basketball team.

Despite anemic GDP growth in 2012, it’s likely that the U.S. economy will remain “best in show” for 2016, despite sub-par corporate earnings, some chronic unemployment, a slowdown in manufacturing exports, a slowdown in business spending, random terror attacks, and a dismal Presidential election race.

When it comes to the three largest global economic zones, there is a clear hierarchy on the medal stand:

Largest Global Economic Zones Table

The U.S. is the economic elephant in the global room, but our growth rate is smaller than some emerging Asian economies, led by India and China.  Economist Robert Gordon’s 2016 book, “The Rise and Fall of American Growth,” argues that “Economic growth is not a steady process that creates economic advance at a regular pace, century after century. Instead progress occurs much more rapidly in some times than in others.”  Gordon claims we are entering an extended period of slower growth, due to a slowdown in the incredible technological advances that fueled our phenomenal 150 years of economic growth after 1865.

I critiqued Gordon’s thesis in my Groundhog Day Growth Mail (A Dormant Winter Often Precedes a Spring Rally, February 2, 2016), saying he fails to see (1) that which is invisible – future technological changes – and (2) the Law of Large Numbers, which tends to lower our annual percentage GDP gains. Younger, smaller, hungrier economies – like those in Asia – can post much higher GDP percentage gains:

Gross Domestic Product Growth Rates Table

Turning to trade advantages, the leaders in current-account surpluses over the last 12 months would be:

Trade Surpluses Table

According to The Economist, the gold medal for the strongest currency to the U.S. dollar over the last 12 months is the Japanese yen, up 14%.  A few others gained 2% or so against the U.S. dollar, including the Olympic host (the Brazilian real) and the Australian dollar, but the U.S. dollar rose against nearly every other major currency in the last 12 months, thereby hurting the earnings of many major U.S. exporters.

When it comes to stock markets, a rogues’ gallery of recent basket cases led the parade in 2016 so far:

Year to Date Stock Gains Table

Turning to the richer, developed, high-capitalization stock markets, the total gains are smaller but they are presumably a tad more secure than gains in the developing markets’ crap-shoot.  The big-cap winners are resource-rich Canada and Australia, which have profited from the first-half recovery in commodity prices.

Year to Date Stock Returns Table

When it comes to the four biggest stock markets, the leadership is ultra-clear: The U.S. wins Gold with a positive 5.3% (in the DJIA, through August 3), with no real competition: The Eurozone wins a tainted Silver medal at -10.9% (Euro Stoxx 50), while the Japanese market (Nikkei 225) wins a rusty Bronze medal with a -15.5% YTD decline, edging out the Shanghai market (SSEA index), down 15.8%, YTD.

U.S. Remains a Relative “Oasis of Safety”

The U.S. is a Goldilocks economy in more ways than one.  In the classic sense, our economic porridge is neither too hot nor too cold.  We also strike a balance in not being overly reliant on commodity prices (as in Canada, South Africa, or Australia) or relying too much on exports or heavy manufacturing (like China, Japan, Germany, and South Korea) or relying on a shaky, artificial trading alliance (the European Union).

America has suffered two major crashes in the new century (2000-02 and 2007-09), but we quickly recovered from both reversals.  Not so in Japan and Europe.  The Tokyo market has not seen a new high since the last trading day of 1989.  The Euro Stoxx 50 index is also down sharply over the last 15 years.  Its all-time high was set in April, 2000.  Most of the big euro-zone stock markets are down in 2016, too:

Year to Date Eurozone Stock Markets Table

Europe has also witnessed a series of existential crises, threatening the survival of the Euro-zone as a unit.  There have been at least three major Grexit threats since 2010, huge unemployment rates (20% or more) in Spain, bad banks in Italy, a Scottish and British vote for separation, and an ongoing refugee crisis.

America survived similar scares – including the S&P downgrade of our debt in 2011, the “fiscal cliff” and fear of budget cuts (sequestration) in 2013, but the U.S. market is up strongly since 2009 – and in 2016.

Can this continue?  In his August 1, 2016 briefing (“Could the S&P 500 Double from Here?”), economist Ed Yardeni gives a 30% subjective probability to “a melt-up led by dividend-yielding stocks.”  He gives a 60% chance for “a long and leisurely secular bull market” and only a 10% chance of a market meltdown.  His admittedly subjective reasoning is that “the U.S. economy deserves an A-plus for resilience.”

America remains an oasis of safety, but it would be a mistake to give up on the rest of the world.  Ed Yardeni reported on July 26 that industrial production in the emerging market economies (EMEs) was up 4.2% in the 12 months through May, vs. a recent low of 2.2% growth as of the end of 2015.  “Leading the way with solid gains at or near record highs were Indonesia (up 7.1% y/y through May), China (6.1% through June), Poland (6.0% through June), and Malaysia (2.6% through May)…. Singapore’s production is up 12.1% YTD through May; and Taiwan’s output is up 3.2% over the past four months through June.”

Billions of eager young people are fighting for a better life for themselves and their families.  Decades of repressive communism did not kill China or Eastern Europe.  Some of the top growth rates in Europe are among the former Soviet satellites, like Poland (+3.3%) and the Czech Republic (+2.3%).  Relative peace and a desire for prosperity virtually guarantee that the global economy will continue to reward investors.

Global Mail:

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

More Disappearing Rate Hikes

by Ivan Martchev

The news of the strong July jobs reports sent stocks to all-time highs and caused renewed talk of more Fed rate hikes as early as September. The trouble with that prediction is that the evidence in the fed funds futures market reflects an extremely low probability for rate hikes in the rest of 2016. A look at the December 2016 fed funds futures (ZQZ16), shows a Friday close of 99.525 – after the July jobs report.

Thirty Day Fed Funds - Daily OHLC Chart

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

As a reminder, the fed funds futures price predicts the fed funds rate by subtracting the ZQZ16 price from 100. A Friday close of 99.525 for ZQZ16 (dark line) means a forecasted fed funds rate of 0.475% at year-end. Since the present target fed funds rate is 0.50%, it is fair to say that at present fed fund futures do not indicate any probability of a rate hike. What’s more interesting is that on news of the Brexit referendum outcome, this same fed fund futures market was predicting a rate cut – as the price ran up to 99.70.

Looking one year out, the plot thickens. The December 2017 fed fund futures forecast (ZQZ17), plotted in the green line above, has been bobbing and weaving in tandem with its year-younger brother but the difference between the two lines has been getting smaller. A year ago, when ZQZ16 was trading near 99, ZQZ17 was trading near 98.40. That means that a year ago ZQZ16 was forecasting a fed fund rate of 1% in December 2016 and a fed fund rate of 1.6% in December 2017. Now that a year has passed, it would be an understatement to say that fed funds futures traders have changed their minds. At the time of this writing, the December 2017 forecast sees maybe one quarter-point rate hike by the end of next year.

The reason why I think there won’t be any rate hikes in 2016 is that employment is a lagging indicator. Overall, U.S. economic data has not been on the strong side in 2016 and there are signs that business investment is hopelessly trailing the good news on the jobs front. Also, the employment picture is a bit artificial as the Labor Force Participation rate has dropped dramatically since the last recession. There are 92.9 million people not in the labor force today; that number was closer to 80 million in the last recession.

United States Labor Force Participation Rate Chart

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

If the Labor Force Participation rate was where it was 10 years ago (above 66%), today’s unemployment rate would be over 7%. I think we may see even lower participation rates in 2016 and 2017; couple that with a sluggish investment cycle and rate hikes look highly unlikely. This is why it is not surprising that long-term interest rates have dropped substantially since the Fed’s misguided December 2015 rate hike.

United States Ten Year Government Bond Chart

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

I would be surprised if we don’t see a sub-1% 10-year Treasury note in 2017. How far under 1% it can go I cannot be sure. Previously, many bond traders erroneously assumed that the floor was “zero,” but as holders of Japanese bonds and some European government bonds have found out, zero is not a floor.

Granted, a sub-zero 10-year government bond yield is a sign of serious deflation, which we don't have in the U.S.; but all of those institutional investors from sub-zero-yield countries are probably flocking into the U.S. Treasury market right now as they have to hold a certain level of risk-fee fixed income assets.

The total of negative-rate sovereign bonds is flirting with $12 trillion at last count. The question arises: How can those assets be considered risk-free if some of them guarantee a loss in nominal terms if they are held to maturity? The only positive outcome for a nominal 10-year yield at -0.5% happens if the inflation rate is -1% for the life of the bond. That means the “real” interest rate is actually a positive 0.5%, which is the faint attraction for those who currently invest in governmental bond markets with negative yields.

I think the U.S. stock market may make substantial further gains – perhaps for the wrong reasons, since earnings growth is stagnant – but with the 10-year Treasury falling toward 1% and the dividend yield on the S&P 500 at just under 2%, any further declines in Treasury yields will put a floor under the market.

This happened with the German stock market when the 10-year bund yield declined dramatically from 2% all the way to a hair above 0% in early 2015, while the DAX 30 stock market index kept rising.

German Stock Market Versus German Ten Year Bond Yield Chart

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

Then, as this chart shows, German bund yields surged from a hair above 0% all the way to 1%. At the time (April, 2015) the infamous Bill Gross of Janus called the German bund market “the short of a lifetime,” (Bloomberg  April 21, 2015, Janus’s Gross Sees German 10-Year Bunds Short of Lifetime”) as bund yields surged temporarily to 1%. But as I opined then, drawing parallels from a similar statement in 2003 by the legendary Barton Biggs about the Japanese bond market (see Marketmail May 4, 2015 The “Short of the Century” May Last a Little Longer”), that short may take longer to work out. My point now is that this “short of a lifetime” has not worked out over the last 16 months – unless he meant that sharp and short-lived surge to 1% in early 2015 – so the German bund market has not been a very good short.

As German bund prices have surged and their yields have dropped to as low as -0.19% as of last month, German stock prices are no longer surging. This is because deflation has now spread to Germany. This deflation causes weak corporate earnings and revenues. For the time being, enjoy the decline of 10-year Treasury yields to 1%, but don't forget that there is a limit to interest rate sensitivity in the stock market.

Commodities Nearing 25-Year Lows

The dramatic weakening of commodity markets in July, led by oil, is not making that many headlines as the S&P 500 Index hits another all-time high. Still, this dramatic weakening in commodity prices is highly relevant to the present global deflationary backdrop that is resulting in negative governmental bond yields in some markets. That little zig lower in the S&P GSCI Commodity Index (pictured below) surely looks destined for a retest of the low near 1900 from January of this year, which nearly matched the Asian Crisis low in 1999. The CRB Commodity Index (not pictured) has already take out the Asian Crisis low.

GSCI Commodity Index Chart

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

We don’t have a similar Asian Crisis at present, but commodity prices have still collapsed. I think the main culprit for the current collapse is the situation in China. The boom in commodity prices coincided with the surge in China’s GDP from $1 trillion at the turn of the century to $10.9 trillion at the end of 2015. The decline in commodity price coincides with the recent deceleration of China’s growth rate.

I happen to think that the Chinese credit bubble has already burst and the Chinese are accelerating lending in order to avoid a hard landing, which I don’t think can be avoided. When China had a GDP of $1 trillion at the turn of the century its total debt to GDP ratio was 100%. With over $11 trillion in GDP this year, their debt to GDP ratio is now 400%, if one counts unregulated shadow banking lending. Chinese GDP growth has been rapid, but the total leverage ratio in the economy has gone up four-fold. Such leverage ratios, in my view, practically guarantee a hard landing. It is only a matter of time before this happens.

This is why I think commodity prices are headed lower and are likely to take out their January 2016 lows. In the process, I think that the oil price will take out $20 in this environment, most likely in 2017.

Sector Spotlight:

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

The Market Reaches “Escape Velocity”

by Jason Bodner

It is fun for many, especially me, to look up at the night sky and wonder.  I also like to look up in the daytime and wonder what's beyond the blue sky. Space always seems so far away but it is actually quite close to where we are right now. In fact, if you were able to get in your car and drive vertically, as if you were on a freeway, you could reach space in an hour. The Kármán line – the commonly-accepted boundary line between Earth’s atmosphere and space – is only 62 miles above sea level, so getting into space is really close and theoretically easy. Naturally, it’s not practically easy as we need to reach escape velocity, which requires a tremendous amount of energy. If we wanted to propel our car into space, it would need to reach seven miles per second, roughly 25,000 miles per hour. It’s worth noting at this point that the current land speed record for our fastest car stands at 771 mph set by Thrust SSC, so we still have a long way to go!

Rocket Car Image

Typically, 90% of a rocket’s weight is propellant. With the average car weighing 4,000 pounds, we would need at least 36,000 pounds of fuel to escape earth’s atmosphere. Our theoretical “rocket-car” would then weigh as much as a blue whale – the biggest animal on earth. For comparison, the Space Shuttle, with all of its boosters, tanks, and payload prior to launch, weighed 4.4 million pounds, the size of 110 blue whales. So while space may be close, it is still too far for most of us to ever go, practically speaking. The only way to get into space is straight up, and anything that goes straight up requires a lot of energy.

Remember that movie Castaway, where Chuck Noland (played by Tom Hanks) is trying to escape the island over the large breaking waves? He needed the right wind to push him past on his makeshift sea craft. It took him years of planning and energy just to get over that reef. If you’re going to build a rocket car to get into space, you’re going to need company, so make sure “Wilson” is along for the ride.

Rocket Sled and Wilson Along For the Ride Images

Speaking of going straight up, with the exception of Brexit, that’s where the market has gone. According to FactSet, since the February 11th lows, the S&P 500 has vaulted 19.34%. The market's insatiable rally has fueled scrutiny over whether or not this rally has legs, so let’s take a quick closer look at this rally.

We have seen relentless quantitative easing by global central banks. We also have fears of bank health, especially European banks. Despite two quarters of relative strength, energy prices, namely crude oil, are well below 50% of their price at this point in 2014. We have a U.S. election which is hotly debated and (for many voters) dreaded. We have an ever-growing threat of terrorism, both domestically and abroad.

“But what about strong earnings and fundamentals?” you may ask. It seems to me that we are in an environment where “less bad” is the new “great.” According to FactSet Earnings Insight, of the 86% of companies in the S&P 500 that have reported earnings to date for Q2 2016, there are some concerns:

  • 69% have reported earnings above the mean estimate and 54% have reported sales above the mean estimate. This is the good news. However:
  • Earnings Growth for Q2 2016 is -3.5%. Q2 may mark the first time we’ve seen five consecutive quarters of year-over-year earnings declines since Q3 2008 through Q3 2009.
  • Earnings Revisions for Q2 2016 were -5.5%, but seven of the 10 S&P sectors have higher growth rates today (compared to June 30), due to upside earnings surprises, led by Infotech.
  • Earnings Guidance for Q3 2016 so far has seen 53 companies issue negative EPS guidance compared with 26 companies issuing positive EPS guidance.
  • The forward 12-month P/E ratio for the S&P 500 is 17.0, well above the five-year average (14.7) and 10-year average (14.3).
  • As of today, the estimated earnings decline for the S&P 500 for Calendar Year 2016 is -0.3%.
  • If CY 2016 earnings decline, it would be the first time with two consecutive years of earnings declines since CY 2008 (-25.4%) and CY 2009 (-8.0%).
  • The energy sector is projected to report a YOY earnings decline of a mere -72%

Standard and Poor's 500 Earnings Growth Rate Calendar Year 2016 Chart

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

For comparison, here’s the performance of the S&P 500 during the same period – also from FactSet:

Standard and Poor's 500 Performance Chart

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

So what should an equity market do in that environment? Why, rally of course! The equity market is humming along and the downbeat earnings news I’ve highlighted above doesn’t seem to matter. “Buy the dip. “Buy the rip” or “Just buy it” seems to be the mantra these days. They say good things come to those who wait. Well, a lot of people have been waiting for the equity market to break out of its funk and now that it finally seems to be doing so, maybe we need to look for some good reasons for it to continue.

Information Technology Leads the Rally Pack

If we look at the 10 S&P sectors, there is interesting evidence to lend credibility for the thesis of a sustained rally.  Currently, this rally boils down to two sectors: Information Technology and Healthcare.  Infotech has been leading for a month now, as we are starting to see signs of life in life sciences. In particular, biotech and pharma have been perking up and seeing noticeable accumulation.

Standard and Poor's 500 Weekly Sector Indices Changes Tables

The top four sectors for the last six months are Infotech, Energy, Materials, and Health Care.

Standard and Poor's 500 Annual Sector Indices Changes Tables

All 10 sectors are up at least 8% in the last six months, even though the news is bad, the fundamentals aren’t good, and the political prospects look dismal. The market simply does not care about all that. It has wanted to go up for a while now. As we all know, August is typically a volatile month with thinner volumes, and some of the algo-traders like to take advantage of that. So the questions remain:

  • Are we overbought, or are we just getting started?
  • If “What goes up must come down,” how far and for how long can it go up before coming down?
  • Will weak fundamentals turn strong and, if so, did the market know this beforehand?
  • Will the current rally sustain itself through the election, and:
  • Are we going to see a return to volatility?

If the equity market has indeed “healed itself,” it may be poised to sustain a run higher. If so, it brings to mind Thomas Paine’s comment: “The harder the conflict, the more glorious the triumph.”

I suppose anything can happen. Even a backyard rocket could theoretically reach escape velocity…

Back Yard Rocket 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.*

Why I Hate August!

by Louis Navellier

August is generally a weak market month, except in election years.  Last Monday (in “August Intra-Month Pattern”), Bespoke Investment Group showed that the average August of the last 30 years (1986-2015) delivered negative (-0.62%) average returns, but the Augusts in the seven Presidential election years rose by an average 0.77%.  This year, I don’t know if we’ll see a rising August if our Presidential candidates continue slinging mud instead of promising a better economy under their proposed policies.

I hate August!  It is not the hot weather I hate most, but the market shenanigans.  For instance, last August 24, the market’s “circuit breakers” stopped trading in 1,278 stocks and the ETF specialists took advantage of that situation for over 90 minutes to pick off unwary investors by trading ETFs at up to a 35% discount to their underlying net asset value.  These ETF specialists annoy me to no end.  In my opinion, when the NYSE cannot price stocks right due to circuit breakers, ETFs with these stocks should also be suspended.

On that same day (August 24, 2015), an academic study was published by the Stanford Business School (titled “Are Exchange-Traded Funds Dumbing Down the Markets?”).  It reviewed a study by professors at Arison University (Israel), Stanford, and UCLA which pointed out that ETFs are more expensive to trade and are taking individual stock analysis out of the equation, hence “dumbing down” the stock markets.

This study also warned that “there may be another shoe to drop” as Wall Street has increasingly pushed algorithms to trade stocks and ETFs.  This rising ETF demand is increasingly driving the market.  The big asset gatherers like to assure investors that they are not charging much of a management fee, but they fail to disclose that the real money in ETFs comes via the wide bid/ask spreads these ETF specialists charge!

In the process, investors are being systematically duped by some big ETF firms.  In my opinion, investors are increasingly being lured into passive ETF investments that systematically churn their ETFs every 90 days, making lots of money via bid/ask spreads (instead of fees) during each ETF quarterly rebalancing as well as in market crisis conditions – such as happened in the collapse of the China stock market bubble on August 24, 2015.

So, as many traders go on vacation in August, I take a deep breath and wait for another ETF shenanigan to occur, most likely triggered by an unscrupulous short seller spreading rumors and taking advantage of thin market conditions when most of Europe is on holiday and many folks on Wall Street are also absent.

That is the bad news.  The good news is that stock buy-backs also tend pick up in August as the second-quarter announcement season winds down and we enter pre-announcement guidance season.  I have also noticed a seismic shift back to domestic, small-to-mid capitalization stocks since Brexit.  Specifically, the Russell 2000 posted its biggest surge in 4½ years after Brexit.  After such a dramatic rise, I’ve noticed that Wall Street’s investment strategist allocations are now suddenly calling for a lot more small-cap stocks.

Central Bank Shenanigans Also Tend to Escalate in August

Clearly, we live in a strange new world where deflation rules and central banks seem to be losing control. Specifically, central banks in Japan and England acted last week.  In Japan, government bond yields rose from -0.3% to 0% due to the Bank of Japan boosting its super-caffeinated version of quantitative easing.

Bank of England Image

On Thursday, the Bank of England cut its key interest rate to 0.25% from 0.5%, which represents its first interest rate cut in seven years and the lowest rate in the 322-year history of the British central bank.  The Bank also boosted quantitative easing by 60 billion pounds ($79 billion), of which up to 10 billion pounds were earmarked for corporate bonds.  Essentially, the Bank of England is following the European Central Bank by pumping money into the banking system to buy corporate bonds, which fosters low interest rates, which in turn fuels more stock buy-backs, since corporations can borrow money at ultra-low interest rates.

The official statement from the Bank of England said that “The outlook for growth in the short-to-medium term has weakened markedly,” and slashed its annual forecasted GDP growth to only 0.8%, down from its previous forecast of 2.3%.  At Governor Mark Carney’s press conference, he reiterated that interest rates are expected to remain low for an extended period of time and that Britain is facing a period of uncertainty.

The Bank of England also hinted about another rate cut (perhaps to 0%) later this year.  Governor Carney was repeatedly asked about negative interest rates at his press conference.  For the record, Carney made it crystal clear that negative interest rates would not occur under his watch, but the fact of the matter is that deflationary forces are spreading, so no major central banks will likely be raising key rates anytime soon.

In America, the Labor Department announced that 255,000 payroll jobs were created in July, but the most important number could be that the average hourly earnings rose 0.3% (8 cents) to $25.69.  In a time of deflation, wages have risen 2.6% in the past 12 months, so the wage inflation that the Fed wanted to see is finally unfolding.  To me, this means the Fed is now more likely to raise key interest rates later this year, but I expect the Fed will wait until December, after the November Presidential elections, to raise rates.

Multiple Fed regional bank presidents said that a September key interest rate hike is still “on the table,” but with business spending shaky and crude oil prices falling, there is no way the Fed will raise interest rates in September.  The Fed’s intention may be clarified during Fed Chairman Janet Yellen’s Jackson Hole speech on August 26, so if she hints that the Fed may raise rates in September, we might see a brief market sell-off.


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.

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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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