The Market Responds Favorably

The Market Responds Favorably to the Fed’s Rate Increase

by Louis Navellier

March 21, 2017

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

Last Wednesday, the Federal Open Market Committee (FOMC) raised key interest rates 0.25% to 0.75%, to get more in line with rising long-term market rates.  Even through Fed Chair Janet Yellen said that three interest rates hikes were possible in 2017, she also signaled that 2% is not a firm ceiling on inflation.  This essentially means that the Fed is not overreacting to rising inflation but is showing confidence in economic growth.  The bottom line is that Yellen is very cautious and does not want to rattle the financial markets. She succeeded, as both the stock market and Treasury bonds rallied and interest rates settled down a bit.

Cherry Blossoms Image

The S&P 500 rose by only 0.24% last week, but there is some historical hope for a better market this week, since Bespoke Investment Group issued a report (“Stock Seasonality,” March 13, 2017) showing that all 11 S&P sectors have risen substantially (+0.84% to +1.92%) during the third and fourth weeks of March over the past 10 years.  Much of this seasonal strength is due to quarter-end window dressing and realignment of equal-weight and smart-beta ETFs that tend to reward the most fundamentally strong stocks.

In This Issue

In Income Mail, Bryan Perry analyzes the Fed’s decision and post-conference statement and also discusses some post-rate-hike opportunities for income investors.  In Growth Mail, Gary Alexander asks why optimism has “levitated” the S&P 14% higher since November, including 108 straight days without a 1% daily drop.  In Global Mail, Ivan Martchev analyzes the oxymoron of “dovish rate increases” and the surprise decline of the U.S. dollar last week.  In Sector Spotlight, Jason Bodner tells us a fascinating story of survival and optimism, vs. the programmed pessimism of our daily news.  Then, I close with an analysis of the market’s first 50 days of 2017 along with the outlook for the Fed’s next “data dependent” rate hike. 

Income Mail:
The Fed Strikes a Resounding Note of Confidence
by Bryan Perry
Goldilocks Sighting at the Chicago Bond Trading Pits

Growth Mail:
How Can This Market Continue to “Levitate”?
by Gary Alexander
Flow of Funds Data Reveals “Share Shortages”

Global Mail:
An Oxymoronic “Dovish” Rate Hike
by Ivan Martchev
What’s Behind the Sharp Dollar Pullback?

Sector Spotlight:
Do News Headlines Make You Feel “Lost at Sea”?
by Jason Bodner
We are Born Positive, then Programmed to be Negative

A Look Ahead:
What the First 50 Trading Days of 2017 Tell Us
by Louis Navellier
Higher Inflation and Lower Retail Sales Didn’t Faze the Fed

Income Mail:

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

The Fed Strikes a Resounding Note of Confidence

by Bryan Perry

The writing was on the wall and the Fed did not disappoint. Last Wednesday the Federal Open Market Committee stayed true to its previous rhetoric by bumping up the target range for the fed funds rate by 25 basis points to a range of 0.75% to 1.00%. Their post-meeting policy statement noted that business fixed investment has firmed and that inflation will stabilize around 2% over the medium term.

More importantly, the Fed statement said that the stance of monetary policy should support some further strengthening in labor market conditions and a sustained return to 2% inflation. The committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the fed funds rate.

The thrust of the directive is that the committee sees economic conditions improving enough that it is confident in sustained inflation around 2%. Over the past 12 months, the CPI is running at a 2.7% annual pace, the highest rate since February 2012, leaving the glide path clear for further rate hikes this year.

The closely-watched Consumer Price Index (CPI-U) is compiled by the Bureau of Labor Statistics. (The “U” at the end of its acronym means that it is a measure of changes in the price of a basket of goods and services purchased by urban consumers, representing the majority of the U.S. population.)

The CPI-U index set at an initial value of 100 in a three-year span, 1982-84. Therefore, February’s 243.6 CPI-U reading represents 143.6% inflation in the last 34 years, or about 2.7% per year, compounded.

Longer-term, inflation has been much higher. An item that cost 10-cents in 1913 would cost $2.39 in 2016, a gain of 2,290% (source: InflationData.com – Historical Consumer Price Index (CPI-U) Index).

United States Consumer Price Index Bar Chart

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

In their statement last week, the Fed was careful in maintaining their median projections for the change in real GDP, the unemployment rate, and PCE inflation, which supports the view that the committee is not speculating on the impact of fiscal stimulus from Trump initiatives without knowing the details and the timing of any fiscal stimulus package. The Fed has “cried wolf” too often, so they will not speculate now on any future stimulus in the form of tax reform, repatriation of capital, budget cuts, or deregulation.

As such, the Fed's median federal funds rate projections for 2017 and 2018 were left unchanged at 1.4% and 2.1%, respectively. The projection for 2019 was bumped up slightly from 2.9% to 3.0%. The market can live with a 3.0% fed funds rate as it would signal a pretty healthy economy with strong wage growth.

Below is a chart of the Fed’s updated “dot plot” plan.

Implied Fed Funds Target Rate Dot Plot

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

Goldilocks Sighting at the Chicago Bond Trading Pits

Separately, Fed Chair Yellen emphasized that the fed funds rate target is the committee's key policy tool, creating an impression for market participants that the Fed isn't in a hurry to reduce its balance sheet.

That single impression sparked a surprisingly significant rally in the long end of the yield curve following the FOMC announcement. The 10-year bond saw its yield drop by 10 basis points to 2.50% in reaction as short-covering activity is probably aiding in the move. That drop in the long end of the yield curve as well as profit taking in the U.S. dollar fueled equity markets to the upside as investors basically liked what they heard.

The major take-away of this Fed meeting is that the market pretty much got its “Goldilocks” outcome – a rate hike that acknowledges improvement toward the Fed's objectives, a dot-plot sticking with a plan for only three rate hikes this year, and a reiteration that the committee still thinks a gradual normalization path in the fed funds rate will be warranted for the right economic reasons. The wider understanding – that the Fed doesn’t seem to be in a hurry to reduce its balance sheet – turned out to be the cherry on the sundae.

Even better, the stock market acted in a more grown up manner than after previous rate increases. The move was constructive and not euphoric. After all, the cost of money just went up and rising interest rates can prove to be a headwind. But all in all, the Fed is exhibiting a kind of new confidence not seen before.

So, with the Fed good to go, energy prices at multi-month lows, a mild winter under our belts, and most economic data points indicating a strengthening first quarter, growth and income investors may well want to get in front of the next earnings reporting season by owning top-rated, dividend-paying equities that reward shareholders by growing dividend payouts by 10% to 20% per year. This is truly the “sweet spot” for long-term investing, especially for investors that rely on dividend income above CPI inflation rates.

Growth Mail:

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

How Can This Market Continue to “Levitate”?

by Gary Alexander

If you watch the news – any news – or log on to the Internet, or chat with friends, how can you possibly believe that U.S. optimism is at the highest level in 17 years?  The Sunday morning political talk shows express one outrage after another.  Every Internet portal makes you scan through a selection of blog-like headlines – all designed to outrage you.  In such an environment, how can this market keep rising?

Consumers are more optimistic than any year since 2000, according to the latest University of Michigan survey (Wall Street Journal, “Consumers Say Economic Conditions are the Best Since 2000,” March 17, 2017). The University of Michigan’s preliminary reading of consumer sentiment rose to 97.6 in March, up from 96.3 in February and 91.0 in March 2016.  The Journal article said, “The recent rise in optimism reflects a turnaround from consumers’ attitudes in October, when sentiment had matched a two-year low.”

Part of this swing in optimism is politically-based.  Half of the nation seems to be almost giddy with new hope, while the other half lives a life of quiet (or often very noisy) desperation.  The Michigan survey’s Chief Economist Richard Curtin shared these shocking numbers: “Among Democrats, the Expectations Index at 55.3 signaled that a deep recession was imminent, while among Republicans the Index at 122.4 indicated a new era of economic growth was ahead.  Interestingly, those who identified as Independents had an Expectations Index of 88.3, which was nearly equal to the midpoint of the partisan difference.”  He also said this could lead to uneven growth: “Optimism promotes discretionary spending, and uncertainty makes consumers more cautious spenders.”  (Does this mean Republicans spend and Democrats save?)

Amid all this, the stock market – as measured by the Dow or S&P 500 – has not had a 1% down day since October 11, 2016 – that’s 108 trading days as of last Friday.  The market rose through Trump’s surprise victory and Inauguration, through four ballistic missile firings by North Korea and two Fed rate increases, all without falling a significant amount.  In the last 50 years, the only time the Dow or S&P 500 went over 108 days without a 1% decline was in 1993 in the Dow (a streak of 117 days) and in 1995 in the S&P 500 (111 days).  If the S&P avoids a 1% decline in the first four days of this week, it will become the longest such streak since 1965-66 – a streak which ran an astounding 155 days (ending March 1, 1966  Source: Marketwatch, “The S&P 500 and Dow have now gone 108 days without a 1% decline,” March 17, 2017).

Since November 4th, the Friday before the election, the S&P 500 has risen over 14%.  Optimism has risen even faster.  According to economist Ed Yardeni (in “Animal Spirits Showing Up in Earnings,” March 15, 2017), the survey of small business owners conducted by the National Federation of Independent Business (NFIB) showed that optimism jumped from 94.9 last October to 105.9 during January, remaining at 105.3 in February, making the first two months of 2017 the two most optimistic readings since December, 2004.

The percentage expecting better (rather than worse) business conditions six months from now was mostly negative from 2006 to 2016 (see chart, below), but it leaped sharply in January – similar to previous gains after Reagan’s election (1980), the rapid victory in Gulf War I (1991), and the first GW Bush year (2001).

National Federation of Independent Business Outlook for General Business Conditions Chart

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

Putting these pendulum swings and political divisions aside, most indicators seen to support higher market averages.  I’ll cite two this week – the latest Flow of Funds data and early-2017 China trade.

Flow of Funds Data Reveals “Share Shortages”

The Fed released its quarterly “Financial Accounts of the United States” last week, covering financial details for the fourth quarter and all of 2016.  In reviewing the data last Tuesday (“Go With the Flows, March 14, 2017), economist Ed Yardeni lauded its “amazingly comprehensive insights into the flow of funds.”

To me, the most amazing figure in the Fed’s release is the net issuance of new nonfinancial equities.  Last year, the net issuance of equities was a MINUS $229.7 billion (see chart, below).  More shockingly, the net issuance of nonfinancial corporate (NFC) equities was MINUS $565.7 billion.  In the second chart below you can see that cumulative non-financial equity creation has been net negative ever since 2000.

Net Issuance of Equities Bar Chart

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

In the bottom two charts, we see a positive issuance of $269.7 billion in financial issues, led by a $283.9 billion increase in equity ETFs, the biggest four-quarter increase on record.

On the demand side, Yardeni reports that “Equity mutual funds have been net sellers for the past five quarters, reducing their holdings by $151.3 billion over this period. Over the same period, equity ETFs purchased $266.4 billion, with their Q4-2016 purchases a record $485.4 billion, at a seasonally adjusted annual rate. Other institutional investors have been selling equities for the past 24 consecutive quarters, i.e., during most of the bull market! Foreign investors have also been net sellers over this same period.”

This reduction in available equities is primarily due to stock buy-backs and merger & acquisitions (M&A), which have eclipsed new shares from IPOs.  Fewer available shares lead not only to higher net earnings for the remaining shares but more demand for fewer shares, which tends to bid share prices up.

Before closing, let me add another surprising statistic – and a caution.  Chinese trade has been growing by leaps and bounds this year.  Trade statistics can’t be faked since they represent double-entry accounting by two nations.  Exports and imports create balance of payments accounts.  In February, Chinese imports were 38.1% greater than in February 2016, even though exports were down 1.3%.  This is because China is changing from an export-driven economy to an import-focused economy fueled by domestic demand.

When you put together China’s imports and exports, January and February data showed that China’s total trade volume rose 13.3% over the same period in 2016.  If the current Trump Administration doesn’t turn into trade tyrants with some kind of Border Adjustment Tax (BAT), continuation of reasonably free trade between the U.S. and the world will help global growth to continue.  (For more details, see “Kill the Border Tax Before it Kills Us,” by Gene Epstein in the March 20, 2017 Barron’s.)  Let’s kill this batty idea!

Global Mail:

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

An Oxymoronic “Dovish” Rate Hike

by Ivan Martchev

I heard a lot about last week’s rate hike being “dovish,” which sounds like a contradiction. A rate hike is an attempt to tighten monetary policy, while “dovish” (in Fed-speak) means looser and less restrictive. Perhaps market participants heard what they wanted to hear and not necessarily what the Fed actually said, but the number and magnitude of rate hikes in 2017 will give us clues as to how dovish the Fed is.

United States Two Year Treasury Note Versus Ten Year Government Bond Chart

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

The action in 2-year note yields (blue line, above) tells that this rate hike was anything but dovish and that more are coming. Two-year Treasury note yields kept making multi-year highs last week as they are the most sensitive to Fed policy and short-term economic conditions. Surging 2-year note yields mean more rate hikes and an expectation of a stronger economy. Sharply falling 2-year note yields – the last time we saw that was in 2008 – mean a sharply weakening economy and an expectation of loosening Fed policy.

The action in 10-year Treasuries (black line, above) is quite different. Yields actually declined after the Fed began hiking rates in December 2015. While the 2- and 10-year yields are on different scales in the chart above, you can see that after the Presidential election there was a surge in 10-year yields faster than the surge in 2-year yields, causing “a steepening yield curve” as the difference in yield between the 2- and 10-year yields is called. Last August, the 2-10 spread was 76 basis points, but the gap surged to 134 basis points in December. Now, the yield curve is flattening again with the 2-10 spread at 118 basis points.

This yield curve analysis may seem esoteric, but it says a lot about the state of the economy and the banking sector. Banks love a steep yield curve environment as they can borrow short (tied to short-term rates) and lend long (tied to long-term rates). A steep yield curve means the banking business is more profitable. This is why some bank stocks surged after the election.

Goldman Sachs Group - Monthly OHLC Chart

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

This brings me to my personal Goldman Sachs (GS) indicator. I am always wary of a market where GS stock is weak (as it was in early 2016). I usually look at the stock market more positively when GS stock is acting well (like it is right now). If the best-run Wall Street firm is acting well, that tells me a lot about the stock market and the economy. Without necessarily singling out Goldman Sachs as an indicator, I think one could also use J.P. Morgan Chase (JPM) as a similar indicator, even though it is organized much differently as a money-center bank. It would not be an overstatement to say that I think JPM is the best-run bank in the U.S., having largely avoided the balance sheet problems many banks suffered in 2008. (Please note: Ivan Martchev does not currently hold positions in GS or JPM. Navellier & Associates, Inc. does not currently hold a position in GS for any client portfolios. Navellier & Associates, Inc. does currently hold a position in JPM for some client portfolios. Please see important disclosures at the end of this letter.)

J. P. Morgan Chase and Company - Monthly OHLC Chart

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

While the action in the banking sector and the overall market is constructive, we are at the beginning of a Fed tightening cycle. Fed tightening cycles tend to invert the yield curve, a.k.a. the 2-10 spread, and an inverted yield curve has preceded every one of the past five recessions. Such monetary policy operations have created a notion that the Fed actually causes every recession in the U.S. economy. The Fed certainly made the Great Depression worse by tightening monetary policy at the wrong time. The other big factor that made the Great Depression worse was the Smoot-Hawley Act Tariff act implemented in 1930 that hints at uncomfortable parallels with the present political debate on a Border Adjustment Tax (BAT).

Beginning of a Fed Tightening Cycle Chart

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

Even though the yield curve did steepen somewhat from a short-term perspective after the Presidential election, it has been flattening quite a bit in the past three years as the economic expansion has aged.

This coming June, the present economic expansion will be eight years old, which would make it the third longest in the 240-year history of the U.S. The two longer economic expansions were 8 years and 10 months (in the 1960s), while the longest one ran exactly 10 years, from March 1991 to March 2001.

Since the present administration has been in the White House only two months, one would have to say that it is too soon to say if any new policy initiatives will extend the present economic cycle in order to beat the 10-year record. It is my opinion that if there is sensible tax reform that repatriates the corporate cash from abroad combined with a federal infrastructure program, the present economic expansion may be given a boost. If there is a trade war with Mexico, China, or both, however, the present expansion may be cut short. It is too early to say which way the administration will go. The present policy agenda is still too erratic for one to be able to make a firm judgement call as to the likely economic effects.

What’s Behind the Sharp Dollar Pullback?

Despite last week’s Fed rate hike, the dollar pulled back sharply to near the 100 level on the U.S. Dollar Index. That would seem like a counterintuitive move, but I think the outcome may be due to political reasons.

United States Dollar Index Chart

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

Specifically, the March 15, 2017 parliamentary elections in the Netherlands did not go the way of the Trump-Brexit political nationalism. Simply put, the populist leader Geert Wilders did not do as well as some had feared. As a result, a more sensible pro-EU political party will get to form a government there.

Mr. Wilders’ Populist Party won just 13% of the vote (20 seats) while the Liberals, led by Prime Minister Mark Rutte won 21% of the vote (33 seats). There was also a notable gain for the pro-EU GreenLeft party with 9% of the vote. That election result caused a surge in the EURUSD cross rate. With a 57.6% weight in the U.S. Dollar Index, the euro strengthened and the dollar declined, despite a higher fed funds rate.

I think we will see more defensive trading in the EURUSD cross rate as the first round of the French Presidential election draws near at the end of April. No candidate is likely to win 50% of the vote, based on present polls, so the second round on May 7th will decide the next President of France. There are French parliamentary elections a month later, which could check the nationalist inclinations of a Le Pen victory.

German Two Year Schatz Yield Chart

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

There will also be German federal elections on September 24, 2017. This gives us plenty of time for the euro to weaken and the U.S. dollar to rally. Yields on the 2-year bundesschatzanweisungen (German federal treasury notes), more conveniently referred to as “the Schatz 2-year yield” (to avoid tongue injuries), are still deeply in negative territory, having been as low as -0.96% on February 24. They closed at -0.78% last Friday with “the Schatz” selling off marginally to get a smaller negative yield as cooler heads prevailed after the results of the Netherlands parliamentary election came in.

Think of the negative Schatz yields as an insurance premium against the domino effect expected after a feared dissolution of the EU and eurozone, which would likely result in sovereign defaults and bank failures. With the German federal government being the least likely eurozone nation to default in such an unfortunate scenario, it gets to charge investors 0.78% a year for two years to hold their money for them!

How about that?

Sector Spotlight:

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

Do News Headlines Make You Feel “Lost at Sea”?

by Jason Bodner

On November 17th 2012, news headlines were fairly quiet. In that day’s news, a Russian Spacecraft docked with the International Space Station, West Jerusalem was rocketed by Hamas, a tragic crash killed 49 schoolchildren in Egypt, and President Barack Obama met with Olympic gymnast McKayla Maroney.

Both looked unimpressed:

Barack Obama and Olympic Gymnast McKayla Maroney Not Impressed Image

These banal headlines seem almost laughable in the wake of the circus we awake to on a daily basis now. Nevertheless, that day’s news held little consequence for two fishermen who had embarked from Costa Azul off the coast of Chiapas, Mexico that morning. A sudden five-day storm blew them off course in their 24-foot roofless fiberglass boat. When the engine failed and the radio died, the boat began to drift aimlessly across the Pacific Ocean. No one ever saw the two men again – for 438 days, that is, until on January 30th, 2014 on Ebon Atoll, a remote corner of the Marshall Islands. Some 5,500 miles away from his last known land sighting, Jose Salvador Alvarenga finally washed ashore. He was alone, bedraggled, nearly naked, in pain, but in otherwise surprisingly good health. He had survived over 14 months at sea on this boat, performing feats that you or I might find incomprehensible. His shipmate did not survive.

Alvarenga's Ocean Survival Image

Jose Salvador Alvarenga briefly became a household name as his unbelievable story hit the global headlines. Despite most of the details of his story lining up with what he claimed, as soon as it became international news, it became a forum for the press to hotly debate and debunk his story. In short, his recounting explained his survival by eating raw birds, turtles, fish, and other flotsam. He hid from the intense sun under his ice-box and he drank collected rainwater when he could and even resorted to drinking his own urine in the absence of all else. Yet this was just too improbable for many critics as they tried to discredit his experience. “Experts” sat in their comfortable studio chairs and dispensed incredulity because his appearance was too round, or he didn’t match what the image of a survivor should look like in their heads. It is highly unlikely that most of the individuals disputing Alvarenga’s side of things were ever stranded anywhere for more than an hour, most likely spent waiting impatiently for assistance.

I always wondered what had happened to Alvarenga. He suffered deep psychological effects from his year of isolation and deprivation. He shied away from the media and disappeared back to his native El Salvador. His tale is well chronicled in the great book, “438 Days: An Extraordinary True Story of Survival at Sea,” written with Jonathan Franklin, based on scores of hours of interviews with Alvarenga.

We are Born Positive, then Programmed to be Negative

I have written often about humans being wired toward negativity and its appeal. I think I may change my tune. It’s a subtle but meaningful difference that an esteemed colleague pointed out to me: Babies are born wired towards the positive, receptive toward learning and love, but then programmed by the outside world to gravitate toward the negative. A child hearing Alvarenga’s tale will immediately believe it and launch into imagination, but an adult will immediately discount it and say, “How is that even possible?”

The markets offer a forum for every investor to express their opinions and feelings through their actions.  Optimism, pessimism, fear, and greed all have their place. Market participants also tend to look at things differently. At the basic level, there are traders and there are investors. Traders seek to generate alpha returns (above a benchmark) over the short term. Investors seek a return on their capital over the longer term. King Warren Buffett has used a very simple formula to generate gargantuan returns based on his commitment to stay with the process. The question is: Which is more exciting? Trading is glorified in the financial media as fast-paced and adrenaline-infused. Investing is less sexy – it’s a patient person’s game.

Trading, not investing, is typically responsible for the shifting of sectors. It would be hard to imagine, for instance, that Technology would be a less suitable investment this afternoon than, say, yesterday. But indeed, sector price fluctuations convey messages like this. Let’s look at sector movements last week.

Positive news and a rate hike on Wednesday buoyed the market: 10 of the 11 sectors rose, Financials being the only sagging one on Wednesday. This cascaded over to the weekly performance of Financials – down almost 1%. The big winners for the week were Real Estate, followed by Utilities, and Telecom.  These rate sensitive securities benefitted from a “less aggressive” rate hike and dovish tone from Yellen.

Standard and Poor's 500 Daily and Weekly Sector Indices Changes Tables

Month-to-date, Information Technology is up 2.30%, adding to the three-month leadership of Information Technology, posting a nearly +11% performance. Real Estate’s poor month-to-date performance of -3% continues to weigh down the sector’s 3-month performance. It is still positive for 3 months: +2%.

Standard and Poor's 500 Monthly Sector Indices Changes Table

Looking at the last three months, Energy is still the big loser: down -9.12%. This stands to reason with the recent weakness of crude oil prices as surplus inventory numbers come back to haunt the commodity. Aside from Energy, we see some pretty strong performance across the board for the past three 3 months.

Standard and Poor's 500 Quarterly Sector Indices Changes Table

Sector rotations continue. Short-term fluctuations should be expected and this new and unconventional administration influences our daily news. The short-term noise surely causes sectors to dive and vault, but the long-term environment bodes well for the stock market – at least historically speaking.

We are born to be positive but are programmed throughout life to be negative. This is relevant to life and markets. The final words of “438 Days” find Alvarenga saying, “Be strong. Think positive. If you start to think to the contrary, you are headed to failure.” If anyone is licensed to dispense useful advice for long term survival, it is the man who arguably endured the most extreme story of survival yet recounted.

Jose Alvarenga One Year Later Image

A Look Ahead:

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

What the First 50 Trading Days of 2017 Tell Us

by Louis Navellier

Last week, Bespoke Investment Group (in “Beware the Ides of March?” on March 15) showed that when the S&P 500 rises more than 5% in the first 50 trading days of the year, there is a 95.5% chance that it will continue to rise for the remainder of the year.  Out of 21 historical instances, only 1987 delivered a greater-than-5% gain in the first 50 trading days followed by a decline the rest of the year.  However, 1987 was a manic-depressive year.  The market soared 39% through late August but it crashed memorably in October.

In a more specific comparison, there were five times when the S&P 500 rose 5% or more during the first 50 trading days in the first year of a Presidential cycle.  All five delivered 23% or greater full-year gains:

First Fifty Trading Days in the Standard and Poor's 500 Index Table

In another report (“S&P 500 Decile Analysis,” March 13, 2017), our friends at Bespoke updated their decile analysis of the S&P 500, ranking the 10 deciles in eight categories (80 total cells) since Inauguration Day (January 20th).  The largest gains came from the 10% of S&P 500 stocks with the lowest short interest (+6.80%) and the top 10% of stocks with the most positive analyst earnings revisions (+6.34%).  The worst performances were by the 10% of stocks with the highest P/E ratio (-3.65%), stocks with the highest short interest (-3.01%), and 10% in smallest market cap (-2.21%).  This is further confirmation that the fundamentally superior stocks with the strongest upward analyst earnings revisions are performing best.

Higher Inflation and Lower Retail Sales Didn’t Faze the Fed

Last week, I mentioned that retail sales and Consumer Price Inflation would come out on the same day as the Fed’s decision.  With both figures rising – though only slightly – the Fed would not be thrown off its clear goal of raising rates for the third time in this cycle.  On Wednesday morning, the Commerce Department reported that retail sales rose only 0.1% in February – the smallest monthly increase in retail sales in the past six months.  Only four of the 13 major industries surveyed reported an increase in sales.

The Fed employs over 300 PhD economists, so I’m sure they looked more closely at the details than the press normally do.  In the details, February sales at gas stations declined 0.6%, but that is due to lower prices, not lower volume.  Auto sales also slipped 0.2%, so excluding gas stations and auto sales, overall retail sales rose 0.2% in February, a bit healthier than the headline number.  A delay in federal tax refunds also contributed to the decline.  Specifically, only $127 billion in tax refunds were processed through February 24th, 10.5% below the same period a year ago.  In the past 12 months, retail sales rose at a healthy 3.7% annual pace and there is no need to believe that consumer spending will decelerate in March or April.

On the inflation front, the Labor Department reported on Tuesday that the Producer Price Index (PPI) rose 0.3% in February – a 3.6% annual rate – significantly faster than economists’ consensus estimate of 0.1%.  In the past 12 months, the PPI rose 2.2%, the highest 12-month total since March 2012.  By contrast, the Consumer Price Index (CPI) rose only 0.1% in February, the smallest monthly rise since last July, but the CPI is up more (2.7%) in the last 12 months, reaching its highest 12-month increase since February 2012.

With inflation’s highest 12-month rise in five years, it’s clear why Ms. Yellen and her team elected to act last week.  Interestingly, however, inflation-adjusted wages rose only 0.1% in February, which may not please Yellen, since she wants to see more robust wage inflation before raising interest rates much further.

The price of crude oil may rise in March, contributing to higher inflation and retail sales figures in March. Last  Tuesday, OPEC reported that the cartel’s February crude oil production declined by 140,000 barrel a day vs. January’s production.  However, Iran’s February production was excluded from the OPEC totals and Saudi Arabia boosted its crude oil production significantly, according to OPEC, to 10.011 million barrels per day in February vs. 9.745 million barrels per day in January.  Furthermore, industry observers reported that Saudi Arabia was not curtailing its crude oil production.  So, to clarify matters, it appears that OPEC is not sticking to its production quotas and its incomplete reports have no credibility. As a result, the inventory reports on crude oil are now more likely to influence prices than the confusing OPEC reports.

On the positive side, the Conference Board announced on Friday that its index of leading economic indicators (LEI) rose 0.6% in February, significantly better than economists’ consensus estimate of 0.4%.  This was the sixth straight monthly rise and LEI is now at its highest level in a decade.  Fully nine of 10 LEI components rose, with only building permits declining.  The Conference Board said, “Widespread gains across a majority of the leading indicators points to an improving economic outlook for 2017.”


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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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.

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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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