The ‘Trump Rally’ Pauses

The ‘Trump Rally’ Pauses after a Series of Analyst Downgrades

by Louis Navellier

January 17, 2017

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

The S&P 500, with half its sales outside the U.S., continues to be hindered by a strong U.S. dollar.  Last week, that benchmark index declined by 0.1%, while the Dow Industrials – also dominated by large exporters – fell 0.4%.  The analyst downgrades that I had feared for multinational stocks are hitting some big Dow stocks as well as some large multinational S&P 500 stocks.  Looking forward, it is possible that more multinational stocks might also be hit with downgrades in the upcoming weeks due to concerns that a strong U.S. dollar will continue to impede overall sales and earnings.  Specifically, Goldman Sachs downgraded two of the largest Dow stocks last week, so breaking through 20,000 may take a little longer.

Donkey Head Pump Jack Image

Some of the weakness in the Dow Industrials seems to involve concerns about OPEC members like Iraq and Iran not sticking to any production quota.  Crude oil inventories in the U.S. have resumed rising as U.S. production ramps up.  For example, the Energy Information Administration (EIA) is forecasting that the crude oil output in the Gulf of Mexico will increase by 400,000 barrels per day in 2017 due to new offshore fields coming online.  As an example of the growing glut, the EIA reported that crude oil inventories rose 4.1 million barrels in the latest week, well above analyst consensus estimates of a 1.2 million rise in crude oil inventories.  Overall, it appears that high inventories, increasing production, more OPEC cheating, and a strong U.S. dollar will help to keep crude oil prices relatively stable for now.

In This Issue

The new Congress is already in session and the new President takes office this Friday, but there are also some fresh faces joining the Fed’s voting roster.  Bryan Perry dissects their views and expected votes.  Gary Alexander looks at some of the hidden impediments to GDP growth and what the new gang in DC might do to remove some of those barriers.  Ivan Martchev writes about the S&P volatility squeeze and the likely peak (and low) for 10-year Treasury rates.  Jason Bodner wonders what sector will be ambushed by executive tweets, and how to ignore the noise and concentrate on long-term trends.  I’ll close with a look at the latest market outlook in light of Trump’s policies, Fed policies, and the latest economic statistics.

Income Mail:
The New Year Delivers New Faces at the Fed
by Bryan Perry
Is Inflation the “New Normal”?

Growth Mail:
Will We Ever See 4% GDP Growth Again?
by Gary Alexander
Insanity on the Ice: Outdoor Rituals Falling on the Coldest Days of the Year

Global Mail:
Another S&P 500 Volatility Squeeze
by Ivan Martchev
Is the 2.6% or the 3% Level on the 10-year Treasury More Important?

Sector Spotlight:
Trump’s Comments Can Hurt Stocks or Sectors
by Jason Bodner
Long-Term Trends Emerge from Short-Term “Noise”

A Look Ahead:
What the New Trump Policies Might Deliver
by Louis Navellier
Sentiment is Up but Other Indicators are Mixed

Income Mail:

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

The New Year Delivers New Faces at the Fed

by Bryan Perry

January 2017 will not only bring us a new President, a new administration, and a new Congress. It will also usher in some fresh faces at the Federal Reserve. The next meeting of the Federal Open Market Committee (FOMC) will take place on January 31st and February 1st. That meeting will mark a change in the FOMC as a new set of regional presidents rotates into voting position while some veterans rotate out.

The new voting members will be Chicago Fed President Charles Evans, Dallas Fed President Robert Kaplan, Minneapolis Fed President Neel Kashkari, and Philadelphia Fed President Patrick Harker.

Mr. Evans is widely regarded as the most dovish Fed president. He has been a voting member of the FOMC before. Mr. Kaplan, Mr. Kashkari, and Mr. Harker will all be first-timers to the FOMC.

This rotation to a new FOMC comes at an interesting time. The economic data on the home front has been improving, as evidenced by the 3.2% real GDP growth rate for the third quarter and the upward revision from 2.5% to 2.8% for the fourth quarter 2016 GDP, as reported by the Atlanta Fed on January 13th.

Gross Domestic Product NOW Image

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

Meanwhile, the Trump administration is aiming to introduce legislation on tax reform, deregulation, and infrastructure spending during his first 100 days in office. Many market participants, including me, expect these initiatives to lead to stronger economic growth in 2017, which could also be accompanied by higher inflation. Accordingly, the market has been working to get its mind around the possibility that the FOMC could be more active in raising the fed funds rate in 2017 than it has been during the last decade.

To be sure, it wouldn't take much for that to be the case. Two rate hikes in a single year would qualify! Time and new incoming data will tell, but the views expressed by the incoming FOMC presidents to this point make it sound like they are open to a rate hike soon, even though they think the pace of policy rate normalization should be gradual. This sounds like a page out of the Fed’s 2016 playbook, and may be construed as the new Fed being more reactive than proactive, which could incite more market volatility.

Treasury yields declined last week as investors took advantage of relatively attractive yields to do some bargain hunting at the start of the year. While the gains were not that large, the decline in the benchmark 10-year Treasury Note was actually quite dramatic with the 10-year yield falling by 24 basis points during the past four weeks. The month-long rally in Treasuries came to a halt after the December jobs report showed average hourly earnings up 0.4% (month-over month), sending bond bulls running for the exits.

Apart from the jobs report, which came in close to expectations (except for the acceleration in wage growth), most U.S. data surprises were positive. The ISM Manufacturing Index jumped to 54.7 (vs. a consensus 53.6) and the ISM Non-Manufacturing Index remained at 57.2 (consensus: 56.6). Auto sales were strong in December, capping a record-setting year. Even as the U.S. economic expansion keeps humming along, it seems that the FOMC is virtually assured of staying put on rates at its upcoming January 31st meeting. By the March 15th meeting, the Fed and investors could have some more clarity on the outlines of major fiscal stimulus bills moving through (or having already been passed by) Congress.

Is Inflation the “New Normal”?

This time last year, the stock market was in a nose dive as the S&P 500 opened 2016 by tumbling 240 points (-11.7%), with the 10-year Treasury plunging to about 1.8% out of widespread fear of a global deflationary death spiral. Exactly one year later, stocks are up but it seems like bond investors have yelled “fire” in a crowded theatre that had only one exit. Long-dated securities endured something akin to an earthquake. Last week, I wrote about a narrow window opening to alleviate the pain from this seismic shift out of long-dated bonds and bond equivalents. But it’s my view that that window is about to close.

The expectation for “five-year, five-year forward inflation” (chart, below) rose two basis points to 2.07%, remaining much higher than its pre-election level. The upward momentum in inflation expectations has ebbed in recent weeks. It may take fiscal action from the new Congress and Trump to push expectations significantly higher. The average hourly earnings growth of 2.9% (year-over-year) does indicate that upstream prices are rising, and that should eventually filter down into the prices for goods and services.

Five Year Forward Inflation Break Even Chart

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

Five-year, Five-year Forward Inflation Breakeven Rates have attracted considerable attention by investors given that they are one of the measures of longer-term inflation expectations that the Fed tracks. The Fed views this measure of inflation expectations as less affected by cyclical factors, such as energy prices, and thus providing a better measure of how well the market thinks it is meeting its goal of longer-term price stability. The latest reading implies what market participants expect inflation to be in the next five years.

I spent some time on the topic of inflation last week, highlighting how fast it can crop up and the extent of pain it can render on holders of bonds and other bond-equivalent asset classes. With this new team of Fed officials taking the field early in 2017, the once-prevalent dovish tone of Fed-speak may reveal some not-seen-before talons in their forward policy statements. Wage-push inflation showed up in the most recent employment data and now we have this chart showing a big “Trump bump” in inflation expectations.

They say on Wall Street that “perception is reality.” Translation: The reason the financial sector vaulted 20% higher after the election wasn’t because the big banks would suddenly post decent fourth-quarter earnings. It’s because Mr. Market sees an inflationary landscape where higher interest rates are coming.

Growth Mail:

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

Will We Ever See 4% GDP Growth Again?

by Gary Alexander

“Our economy has been sluggish since this century began, and not only during the economic crisis and recession of 2008-09. The country’s strongest year of economic performance in the 21st century so far, 2004, saw a level of growth (3.8%) that barely reached the average of any of the prior four decades.”

--Yuval Levin, “The Fractured Republic” (2016), page 13

Will we ever see 4% growth again? It’s hard to believe but in fully half of the years from 1950 to 1999, the U.S. economy grew by over 4%, yet there has not been a single year of 4% GDP growth since Y2K.

Years of four percent or Greater Growth Table

From 1950 to 1999, the average growth rate was 3.68%, almost twice the average since 2000.

Average Annual Real Gross Domestic Product Growth by Decade Bar Chart

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

Slow growth came under both Republican (Bush) and Democrat (Obama) Presidencies. There are many contributing causes to this chronic decline in growth since the 1990s, but I’d say the primary reason is the dearth of new small businesses growing into large businesses. That’s a two-part equation. Three weeks ago, I discussed the decline in new business launches. This week, I’ll address the decline in initial public offerings (IPOs), which represent the “birth rate” of new securities available in the U.S. stock markets.

Back in 2001, America was justifiably outraged about corporate excesses in such companies as Enron and Worldcom, so our legislators created complex new regulations for financial accountability of companies.  The resulting Sarbanes-Oxley (“SOX”) law was signed by President George W. Bush into law in July of 2002. As with many such laws, the unintended consequences have outweighed the intended outcome – which was preventing corporate fraud. One unintended consequence was an impenetrable jungle of rules and regulations that intimidated small-to-medium-sized private companies from going public. SOX’s large array of internal controls is costly and cumbersome, putting small firms at a disadvantage to big firms.

The chart below demonstrates the problem. In the nine years before SOX, there were an average 528 initial public offerings (IPOs) per year. After SOX, the average was only 135 IPOs, a decline of 75% per year.

 Sarbanes-Oxley Act Decreases Initial Public Offerings and Small Business Expansion Bar Chart

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

This chart helps to explain why the total number of securities has been shrinking so fast in the last 15 to 20 years. Large companies can afford lobbyists and lawyers to navigate these complex regulations or to push Congress into protecting their corporate moats in the name of “saving jobs,” but shutting out small businesses also kills millions of potential new jobs, which come more from small businesses than large.

It should come as no shock that big businesses want to shut out their smaller, hungrier brethren. It’s self-interest. It’s a rare big-time CEO that admits this fact, but I was glad to see Charles Koch, CEO of Koch Industries tell ABC’s This Week last April that regulations are rigged in favor of large firms. “Corporate welfare,” he said, “benefits established companies and makes it difficult for somebody to get started.”

The new Trump administration has discussed a potential roll-back of some of the most counter-productive financial regulations. This has tended to make business owners feel more confident. A Business Journals survey taken on November 9th, the day after the election, found that 82% of businesses felt confident that their prospects would improve over the next 12 months. That’s the highest reading in nearly a decade.

Small to Mid-Sized Business Owners Most Optimistic in Nearly a Decade Bar Chart

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

We don’t know yet if the Trump team can repeal or reform onerous regulations, but with a repatriation of overseas corporate cash, I think a return to a more sensible level of regulation could deliver 4% growth by 2018.

Insanity on the Ice: Outdoor Rituals Falling on the Coldest Days of the Year

America’s coldest weather falls in late January. Here are America’s coldest single dates in history:

  • On January 20, 1954, the mercury hit -70°F (-57°F) at Rogers Pass, Montana (a lower-48 state low).
  • On January 23, 1971, the mercury hit -80°F (-62°F) in Prospect Creek, Alaska (a 50-state record).

The coldest time of the year migrates from the West (late December) to the North and East (late January).

Coldest Day of the Year United States Map Image

The coldest time of the year in the Northeast and Midwest is the second half of January – around now.  According to NOAA, the lowest average dates for Northeastern cities comes this week: January 15-23:

Coldest Time of the Year in the Midwest and Northeast Table

Out West, our coldest days are earlier: December 15-20 (Denver), December 18th (Seattle), December 20-25 (Portland), and December 23-31 (Montana). The west is now warming, but as we near Inauguration Day (January 20th), I’ve got to ask why we force our aging Chief Justice of the Supreme Court; our outgoing and incoming Presidents and Vice Presidents; and a variety of fragile, often-infirm national elders to sit out in the cold for an hour or two, listening to speeches and music from frozen mouths and fingers.

The 20th Amendment moved Inauguration Day from March 4th back to January 20th. Then this happened:

  • On January 20, 1937, the first Inauguration Day held in January, the mercury hit state lows on the other side of the nation, reaching all-time state lows of -45°F in California.
  • On January 20, 1985, a killer cold front hit on Inauguration Day, as 73-year-old Ronald Reagan took his second oath. The mercury hit -19°F in South Carolina, -30°F in Virginia, and -34°F in North Carolina (all are state records). Windy Chicago hit -27°F. That week’s storm killed at least 40.

In the last 45 years, we’ve also asked leading politicians to hazard the freezing terrain in small towns in Iowa and New Hampshire in late January. During President Clinton’s re-election campaign of 1996, Iowa set its all-time low of -47°F. (I’m sure candidates Dole and Clinton remember that day quite well.)  Last January, some candidates over age 68 (Sanders, Clinton, and Trump) and voters braved blizzards.

It seems like the Iowa caucus (circus?) has gone on forever, but the “primary process” was born after the 1968 election, when Hubert Humphrey became the Democratic nominee without participating in a single state primary. After that, “the Democratic Party decided to make changes to their presidential nominating process by spreading out the schedule in each state. Since Iowa had a complex process of precinct caucuses, county conventions, district conventions, and a state convention, they chose to start early. In 1972, Iowa was the first state to hold their Democratic caucus” (see Wikipedia entry, “Iowa Caucuses”).

The third insanity we enjoy this time of year is asking our prospective Super Bowl teams to earn a ticket to some warm Sun Belt city (Houston this time around) by playing their qualifying rounds on the Frozen Tundra of places like Green Bay, Wisconsin. Green Bay won the first Super Bowl 50 years ago this week (January 15, 1967) in sunny Los Angeles; but to qualify to play in Super Bowl II in sunny Miami, Green Bay had to beat Dallas in the famous “Ice Bowl” game in Green Bay, with wind chills averaging -48 °F. 

The coldest NFL playoff game was on January 10, 1982 in Cincinnati with wind chill factors of -59°F. Last Sunday’s playoff game in Kansas City was postponed seven hours due to a crippling daytime ice storm. Next week, the AFC Super team will be decided on the frozen field of the New England Patriots. 

Football players are tough, but why do we force aging politicians into the icebox every fourth January?

Global Mail:

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

Another S&P 500 Volatility Squeeze

by Ivan Martchev

Back in September of 2016 I noted that the S&P 500 was trading in one of its tightest ranges in 20 years. This is visible in the Bollinger Bands, which basically denote two standard deviations around a 20-day moving average. That September volatility squeeze in the S&P is noted by the arrows in this chart:

Standard and Poor's 500 Large Cap Index Chart

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

Back in September, I noted: “What does such a tight squeeze mean? Such squeezes tend to precede moves higher in the direction of the overall trend in the market, which is now up. While such squeezes are not a guarantee that the market will break out to the upside, they certainly suggest it. I know the overall news backdrop is not that positive but this move in the stock market could simply be a function of long-term interest rates continuing to fall – possibly to as low as 1% on the 10-year Treasury note, which by definition should push the stock market higher, due to the much higher dividend yield in stocks.”

Looking back on my read of the volatility squeeze at the time, the market did indeed deliver the most explosive rally after any Presidential election in history. But as markets often do, it tested our nerves by diving sharply at first, tagging its upward sloping 200-day moving average.

As to the 10-year Treasury going to 1%, that is likely to happen sometime before Trump’s first term runs out. Due to the large deficit spending that he is planning to promote in order to “juice up” the economy, long-term interest rates likely won't decline in 2017, even though stranger things have happened.

Will stocks go higher after the present volatility squeeze?

My answer is “most likely.” Corrections can happen at any time but to get a real bear market we need a recession and no recession is in sight for the U.S. economy in 2017. A recession may very well happen during the first term of the Trump presidency, since the present economic expansion will be eight years long (or 96 months) this June. After that point, there would have been only two expansions longer than 96 months – March 1991 to March 2001 (120 months) and February 1961 to December 1969 (106 months).

It is always possible that president Trump breaks the record and manages to engineer the longest economic expansion in history, surpassing 120 months. It is also possible that his policies misfire – like starting a trade war with China – cutting the present economic expansion short. Donald Trump is the least predictable U.S. President in history, so we just don’t know what might happen, but we have to be mindful of the statistical distribution of recessions listed in the table below. Based on all the historical data (below), I think the probability of a recession during Trump’s first term as U.S. President is close to 100%.

Business Cycle Durations Table

This long list of economic cycles implies concerns for 2018 and 2019. In 2017 we are likely to see a stock market rally. Stocks are likely to break out – hopefully without a dive first – as earnings growth for the S&P 500 will resume after six quarters of flat-to-slightly declining earnings. If earnings go up, stocks usually go up too, even though this situation is never a linear relationship.

Nasdaq 100 Index Chart

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

Taking a cue from market sectors, the Nasdaq 100 made an all-time high last week. This suggests that investors’ appetite for risk is alive and well. This time the move in the Nasdaq 100 is very different than the move that culminated in the technology bust of 2000 as right now it is driven by earnings. While the technology sector did initially underperform when the Trumpnado hit the stock market right after the election (denoted in the dip at the end in the chart below) that appears to have ended as the relative action of the Nasdaq 100 compared to the Dow Jones Industrial index has now turned up (end of chart below).

Nasdaq 100 Dow Jones Industrial Average Ratio Chart

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

The technology sector – when it’s not crashing 2000-style – tends to outperform the Dow Jones Industrial Average over time as those companies grow faster; so the present renewed leadership of the Nasdaq 100 is a positive sign for the stock market, and I would certainly be looking for the broad market (as represented by the S&P 500) to make new highs, too.

On a different note, even though I expect 2017 to be an up year for stocks, I think it may turn out to be a more volatile year overall – with bigger swings up and down. The President-elect is hell-bent on making many rapid and abrupt changes, which are likely to rock share prices. He is also the first President to utilize his Twitter account as a major policy tool. There is only so much one can say with a 140-character limit.

Is the 2.6% or the 3% Level on the 10-year Treasury More Important?

Last week, Bill Gross noted that if the 10-year Treasury crosses 2.6% a new bear market in Treasuries has started. He suggested that 2.6% on the 10-year Treasury bond was more important than Dow 20,000.

Ten Year United States Government Bond Chart

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

His competitor, Jeff Gundlach of DoubleLine Capital, suggested that 2.6% was not as meaningful (as we already hit 2.63% in December 2016) and that 3% was the more important level to watch, implying that 3% would indicate that a new bear market in Treasuries has started. I think both gentlemen are wrong.

Ten Year Treasury Note - Monthly OHLC Chart

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

A logarithmic chart of the 10-year Treasury yield shows that a long-term downtrend could include 3% rates in 2017. That same logarithmic chart shows that we had one spectacular “false breakout” in the 10-year Treasury yield above 5% in 2007, before making a fresh all-time low in late 2008. So I think that the 10-year Treasury may rise above 3% and still drop to 1%, since it has had such false breakouts before.

The statistical distribution of recessions since 1854, according to the National Bureau of Economic Research, suggests that a recession during Trump’s first term as President is likely. In a recession, long-term interest rates tend to decline. I have gone back further in time and examined anecdotal evidence before the NBER statistical data, which suggests that we have not had an economic recovery longer than 120 months in the 240-year history of the United States. This suggests to me that both Gross and Gundlach may be reading a breakout in the 10-year Treasury yield, if it comes, the wrong way. I think that any move above 3% is likely to be a false breakout, just like the move above 5% in 2007.

Sector Spotlight:

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

Trump’s Comments Can Hurt Stocks or Sectors

by Jason Bodner

The world we live in is ever-changing and what we call “the norm” may just be a mental construct or an illusion. For instance, the newest weapon of market-sector mass destruction may actually be something as simple as the President Elect’s Twitter account, which has all the potential of being a sector “Death Star,” firing destructive beams at will out of the blue (or out of the gold, as it may be). While Twitter is Mr. Trump's preferred method of mass communication, we also saw drug stocks sink last week after he called out Big Pharma for “getting away with murder” during his first press conference in months.

Twitter Death Star Image

Speaking of sectors, there is a phenomenon that takes place in space when two pieces of the same metal touch each other in a certain way. They will bond permanently into one continuous piece of metal. This astonishing process has been replicated on earth in a process known as “cold welding,” in which we can fuse two like pieces of metal here on earth with no heat and nothing more than force.

There's a trick to it, of course. Here on earth, the very gas we breathe, namely oxygen, is a great metallic neutralizer. Oxygen causes oxidation, which forms a coating on all metals. This coating, while thin, is enough to prevent binding here on earth. In the vacuum of space, where there is no oxygen, there is nothing preventing the metal from fusing. In effect, the metal doesn't “know” that it’s two different pieces and may fuse together with nothing more than proper alignment and some pressure.

Metal Fusing in Space Image

This is yet another example of relativity in the sense that what seems perfectly normal on earth is actually quite abnormal in the universe. We humans continually fool ourselves into believing that what we observe on earth should be normal everywhere else. Naturally we do this for so many things, such as our views on culture, law, behavior, and social acceptability. Even our modern conception of “aliens” in movies and literature is based largely on our size and shape. Notice the little grey men remarkably resemble humans!

Markets can also exhibit this effect. For quite a while, we may observe market behavior that seems like it is the norm. Investors might delude themselves into believing that this is how markets will behave from now on, even though that makes no sense. Look at the Financials since November. That sector has been on fire, posting a three-month rally of over 20%. The problem, of course, is that sales and earnings are not quite strong enough to properly justify the performance we have seen. Still, many investors are hopping on board simply because the sector is rising after having been so significantly beat up. More on this later.

Last week, Real Estate was the biggest loser with a -2.25% drop. Telecom, Consumer Staples, and Energy all posted greater than -1% drops for the week. Despite Trump’s widely publicized lashing out against HealthCare on Wednesday, the sector finished nearly flat for the week. InfoTech saw a bump with a +0.77% surge, second only to Consumer Discretionary with a +0.83% pop. While the daily and weekly fluctuations resemble noise in many cases, the 3-month trend is still clear as day. Financials, Industrials, and Materials are all enjoying big surges. These stocks, of course, are likely benefitting from Trump’s proposed infrastructure plans, and the assumed relaxation of financial regulation. The solid sales and earnings may indeed come to follow, but for now the rallies in these sectors are macro-based.

Standard and Poor's 500 Daily Sector Indices Table

Standard and Poor's 500 Weekly and Quarterly Sector Indices Tables

Long-Term Trends Emerge from Short-Term “Noise”

Let’s take a moment and look into the details of fourth-quarter 2016 corporate earnings and revenues as they pertain to sectors. According to FactSet, as of January 13, out of the S&P 500 companies that have reported, 100% of Information Technology, Health Care, and Materials companies have reported earnings above estimates. Financials and Consumer Discretionary beat estimates by 80% and 71%, respectively. Consumer Staples saw 60% beating earnings while Industrials saw 75% of companies reporting earnings below estimates. This may be problematic for a sector which has rallied more than 10% in three months.

But it is when we get to revenue estimates that we see the real potential problem with the Financials rally. As of January 13th 100% of the Financials companies have disappointed in their revenues estimates, sharing this dubious distinction with Consumer Staples. Clearly, .000 is not a great batting average.

Standard and Poor's 500 Earnings Above or Below Estimates Bar Charts

The norm of stock market prices can be observed over long periods of time as trends make themselves clear. Simply looking at a chart of the S&P 500 Index over 50 years (below), short-term trends can be frustrating – especially in times of frequent rotation, like recently – but eventually the short-term swings settle down and the leading and lagging sectors emerge, as do leading and lagging stocks within sectors.

Sixty-seven Years of the Standard and Poor's 500 Index Chart

For now, though, we live in a world where the pen is mightier than the sword and the tweet is mightier than the pen. The fact that the next 140 characters that come out and rattle stock markets may actually be official White House communications just underscores what unusual times we live in. But perhaps the reality is that the times were always unusual, while humans seek comfort and stability in an inherently chaotic and unstable world. On earth metals can’t easily fuse without heat, while in space it’s natural. We humans crave stability and order, yet we live in a chaotic time of uncertainty – and that won’t change.

Henry Adams comes to mind when he said, “Chaos often breeds life, when order breeds habit.”

A Look Ahead:

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

Earnings Seasons Should Start Strong and then Get Better

by Louis Navellier

I appeared on CNBC last Monday to discuss the impact of corporate tax reform and its potential impact on stock buy-backs.  Specifically, I discussed the earnings surprises and stock buy-backs that I expect will be forthcoming from corporate tax reform.  Co-host Michelle Caruso-Cabrera pointed out that some bond interest may not be deductible if corporate tax reform is implemented.

On Thursday my favorite economist, Ed Yardeni, also discussed the impact of the corporate interest rate deduction disappearing and concluded that there would then be fewer corporate bond offerings – although municipal and Treasury bond offerings would continue – resulting in a possible collapse in corporate bond yields.  Overall, the gossip about corporate tax reform is a complex subject – since we don’t know the specific rates corporations will pay – but the net impact should be very positive for corporate earnings.

Interestingly, St. Louis Fed President James Bullard said on Thursday on CNBC that economic growth won’t suddenly surge because, he said, 2017 growth is already pretty much “baked in the cake.”  Bullard pointed out that the U.S. economy remains in a low interest rate, slow growth environment that is not going to change by “snapping fingers.”  Interestingly, Bullard only expects one key interest rate hike this year because the Fed has to wait and see what develops.  These statements from Bullard run counter to the Fed’s official statement back in December, but they are consistent with the dovish Federal Open Market Committee (FOMC) minutes that were recently released.  Due to both the FOMC and Bullard’s dovish comments, the bid-to-cover ratio for new Treasury securities approached 3-to-1 last week, so it appears that Treasury yields will continue to meander lower until some more positive economic news develops.

Sentiment is Up but Other Indicators are Mixed

Speaking of economic news, Bloomberg reported on Tuesday that the National Federation of Independent Business’s Small Business Optimist Index soared to 105.8 in December, up from 98.4 in November and reaching its highest level since 1980.  Seven of the 10 components rose in December in the survey of 619 small business owners.  Juanita Duggan, President of the National Federation of Independent Business, concluded by saying, “Small business is ready for a breakout, and that can only mean very good things for the U.S. economy.  Business owners are feeling better about taking risks and making investments.”

CarHauler.jpg

Before breaking for the long holiday weekend, we heard on Friday that the Commerce Department reported that retail sales rose 0.6% in December and 3.3% for all of 2016.  Auto sales surged 2.4% and gas station sales rose 2% in December, due largely to higher fuel prices.  But excluding auto and gas station sales, retail sales were unchanged in December.  The Commerce Department reported that online sales rose 1.3% in December, but many observers think that online sales may not be properly measured.  The details in the December retail sales report were especially disappointing to economists.  Overall, the December retail sales report was positive, but when you dig into the details, it was mostly disappointing.

The other news on Friday was that the Labor Department reported that the Producer Price Index (PPI) rose 0.3% in December, in line with economists’ consensus estimate.  Excluding food (up 0.7%) and energy (up 2.6%), the core PPI rose 0.3% in December.  However, excluding food, energy, and trade, the adjusted PPI rose only 0.1% in December and signaled minimal inflation.  For all of 2016, the PPI rose 1.6% and the adjusted PPI excluding food, energy, and trade rose 1.7%.  Overall, it appears the Fed should be in no hurry to raise rates, since most wholesale inflation seems to be related to higher energy prices.

In the upcoming months, the big global news will likely be the French Presidential election.  Currently, according to a new poll from Ifop-Fiducial, right-wing populist Marine Le Pen is in first place with 26.5%, while moderate center-right rival Francois Fillon is at 24%.  Clearly, it appears that France will have a major political shift to the right, especially if Le Pen wins more than 50% in an inevitable run-off election.  What is happening in France is that the center-right and right wing are fighting for leadership.  It looks like the populist and nationalist Le Pen is likely to become France’s next President, as the populist revolution that has embraced Britain, Italy, and the U.S. is expected to also envelop France.


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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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