Very Tough Market Year

We Finally (Thankfully) End a Very Tough Market Year!

by Louis Navellier

January 2, 2019

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I hope everyone had a wonderful New Year’s Day.  From a market perspective, Christmas Day came as a relief after the annual lows set on Monday, Christmas Eve Day, when the S&P fell just two ticks (-19.8%) short of closing down 20% from its recent peak – the general definition of a “bear market.” After a lower opening last Wednesday, the major indexes gained about 6% in the three days after Christmas, but most indexes remain down about 7% for 2018 as a whole, as December wiped out all 2018’s hard-fought gains.

I did a podcast last Monday that explained why we are now grossly oversold, based on the S&P 500’s dividend yield of 2.22% vs. the 10-year Treasury bond yield of 2.72%.  Since most stock dividends are taxed at a maximum Federal rate of 23.8%, while Treasury interest is taxed at a maximum Federal rate of 40.8%, the stock market yields more (after taxes) than getting out of the stock market, for most investors.

The wild stock market gyrations last week may have been complicated by tax selling.  Specifically, last Monday’s dramatic sell-off seems to be largely attributable to record ETF redemptions, which adversely hit many stocks due to light holiday trading volume.  Then Wednesday’s record one-day surge seemed to be propelled by short covering and “smart money” that was bargain hunting.  Finally, Thursday’s intraday pullback was complicated by year-end tax selling, as well as quarter-end window dressing.

As I said in my Thursday podcast, these daily oscillations will likely persist into January, when trading volume typically picks up.  The analyst community was largely absent last week (many were out skiing), but when they get back later this week, I will be on the lookout for any analyst upgrades and downgrades.

After a rough 2018, I am expecting that we’ll see a more prosperous New Year!

In This Issue

The year ends with some volatility, so 2019 has to basically dig us out of last year’s December “hole” in the market. Bryan Perry discusses some of the technical hurdles the S&P 500 must face, along with the many unresolved political threats lingering over Washington, DC. Gary Alexander uses the year-end to review last year’s best books, not only on the market but on the major mega-trends of global growth. Ivan Martchev reviews the manic-depressive market, along with some advice for the rookie Fed Chair and President. Jason Bodner looks deeper into the ETF algo-traders and how they may be subverting this market. Until the government opens for business again, most economic statistics will not be released, but I look at the latest economic trends (and market rates) to argue that the Fed need not raise rates again.

Income Mail:
Shifting Winds of Sentiment Greet the New Year
by Bryan Perry
Reality Check for the Reality Show President

Growth Mail:
The Top 10 Books of 2018
by Gary Alexander
Give Good Books to the Next Generation – to Build Their IQ and Civilize Them

Global Mail:
2018 Was the Year of Manic Depression for the Stock Market
by Ivan Martchev
The Rookie Fed Chairman Faces the Rookie Politician

Sector Spotlight:
The ETFs are in Control Now
by Jason Bodner
Look for Today’s Hated Stuff to be the Bright Spots of 2019

A Look Ahead:
Why the Fed is Not Likely to Raise Rates in 2019
by Louis Navellier
The Stock Market Decline Has Hit Consumer Confidence Hard

Income Mail:

*All content of "Income Mail" represents the opinion of Bryan Perry*

Shifting Winds of Sentiment Greet the New Year

by Bryan Perry

The 2018 holiday season for investors has been anything but joyful, and just turning the calendar a page into 2019 doesn’t do anything meaningful to resolve the recent efforts by market participants to reduce their exposure to risk. Market anxiety is running high as upheaval led by macro events has had the upper hand against fundamentally sound micro events (economic data), of which most of us are keenly aware.

Nevertheless, the belief that the market had become deeply oversold, in conjunction with rebounding oil prices, strong holiday sales, and some short covering, helped drive the S&P 500 to its best one-day gain (+5.0%) since March 2009 last Wednesday. The following day was actually more impressive, as the reemergence of a buy-the-dip mentality carried stocks from steep losses to notable gains last Thursday.

Many attributed the reversal Thursday to pension-fund rebalancing activity, but short-covering and a rush of speculative buying interest likely played a big contributing role in turning things around in such a hurry. Since so much of today’s volatility is attributed to algorithmic program-trading off of technical levels, some chart analysis is appropriate, since we are all subject to its influence on market price swings.

By all accounts, the S&P 500 held critical support at 2,350 and can continue its snap-back rally (on no news momentum) by another 4.6% to 2,600, where there is a wall of overhead technical resistance. The 5-year chart (below), which I’ve been highlighting the past few weeks, lays out a clear situation for those wondering what levels are important to retake in order to restore confidence that the bull market is alive.

This chart should give investors hope that, despite the deep correction that shaved 20% off the S&P from its all-time high of 2,940 in early October, and the widespread proclamation that “we are now in a bear market,” the long-term uptrend is still intact until broken. Numbers don’t lie, and neither do the charts.

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

Without a doubt, those who got caught with too much “alpha” in their portfolios in late September may now be looking to rebalance risk if the S&P can achieve this short-term objective of 2,600 over the near term. And there is a good shot it will, within the next two weeks, with the scheduling of a U.S. delegation flying to China to talk trade the week of January 7. In lieu of potentially strong economic data, held back by the federal government shutdown, we’ll see the first wave of fourth-quarter earnings by January 15.

The coming earnings season, along with forward guidance, will be more important than any season I can remember. Currently, fourth-quarter estimated earnings for S&P 500 stocks are expected to climb by 12.4%, according to FactSet. Although that would mark a moderation from a stellar third quarter, it would still represent the fifth straight quarter of double-digit growth in corporate America’s bottom line.

However, because of the assumed slower growth rate of earnings (vs. last quarter), due to the diminishing effects of last year’s tax cuts, the focus will shift away from the bottom line to top-line growth, which will be watched for signs for strength in underlying demand. In 2018 U.S. imports accounted for about 14.7% of GDP while U.S. exports accounted for about 12.5% of GDP (source: www.statistica.com). With China and Europe definitely showing signs of slowing economic growth, how much of that combined 27.2% of GDP will be affected is a big unknown and a large area of concern for current investor sentiment.

Against this backdrop, trade talks and earnings reports may be enough to hoist the market back up to where it broke down – at around 2,600 for the S&P 500. From there, the climb back to 2,750 where the S&P’s 200-day moving average lies overhead, is another story. For the S&P to regain this technical threshold and resume its long-term upside bias, a lot of things have to go right – and this is where everyone that reads the charts would say the big challenge for this nearly-10-year bull market truly lies.

Reality Check for the Reality Show President

As fast as the stock market fell into deep trouble, so has the once-lofty Trump agenda fallen into limbo. The loss of General Kelly as Chief of Staff and General James Mattis as Defense Secretary was not good, in my view, as it sends a message that fewer steady hands are on the wheel of the Oval Office decision-making process. It is very important from a market optics viewpoint that Trump put in place supportive, yet strong and independent-minded replacements in those and other key positions.

Rest assured that when the Democrats take control of the House of Representatives, fresh headwinds will face President Trump. Aside from the remote possibility of a bipartisan infrastructure bill getting passed, it is highly likely that impeachment proceedings will be announced, along with the Mueller investigation finally ending, and the likelihood that trade talks with China will produce no tangible results. Any one or more of these events could neuter the President in moving forward on any of his further initiatives.

Good, bad, or indifferent – as to how these and other political scenarios play out – these unknowns are a net negative for market sentiment, as I see it. Mr. Trump is entering a more tenuous phase of his first term and he would be well advised to stop lashing out in his usual style of character assassination, which may have seemed previously effective. If he wants to “feel the market,” he could close his Twitter account, watch the Dow soar another 1,000 points, and speak more through his press secretary, Sarah Sanders.

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Current stock market sentiment is akin to a frayed sciatica nerve, where every Tweet from Trump is like a sharp iron prod to the damaged nerve endings. Trump needs, for lack of a better word, to become more Presidential now. But I’m afraid he loves the “lights, action, camera,” and the resulting antagonism to a fault, which could be his undoing at some point. Even some of his most ardent supporters are worn out by the daily dose of reactionary “Donnie Tweets,” where the bark seems much bigger than the bite lately.

Anyone who has ever had sciatica nerve damage will testify that their spine doctor has recommended sedentary activity, not deep-tissue massage or any other progressive form of physical therapy. The remedy is rest, so the nerves can calm down. As basic of an analogy as this might be, I find it relevant. Taking a sabbatical from slinging arrows and lobbing grenades would do much for stabilizing the market.

Growth Mail:

*All content of "Growth Mail" represents the opinion of Gary Alexander*

The Top 10 Books of 2018

by Gary Alexander

One of the keys to becoming a successful investor is to realize that the strongest long-term trends will always transcend the ebb and flow of daily market gyrations and scary headlines. The media will forever focus on the worst-case scenario, but the one thing I would counsel investors to remember is that seven billion people are working every day to make their life better and that will always be a bullish force.

Last year offered a bumper crop of books that can remind us of that fact. For decades, I’ve read 100 good books a year, since I know that the Internet and Cable TV are trying to trivialize my mind with minutiae. Of the 105 books I read in 2018, these are the best 10. As I scan the Top 10 book lists of the New York Times and other venerable sources, I don’t see these names listed. I see a lot of ephemera and opinion.

I was pessimistic for the first 25 years of my journalistic career (1965-89), but I wised up when the Berlin Wall fell. The world has made almost unbelievable progress since 1965. In fact, three of these 10 books (Pinker, Easterbrook, and especially Rosling) show that almost nobody believes this progress.

As you can see from these titles, I’m partial to books that cover a large historical canvas with a point of view that ties these great ideas together. I’ll profile them briefly here, in publication order:

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Niall Ferguson, “The Square and the Tower: Networks and Power, from the Freemasons to Facebook” (January 16) compares the old top-down method of government (the Tower), including both church and state, with the volunteer networking of people (the Square). America was mostly built with what Edmund Burke called “little platoons,” from private mutual insurance groups to volunteer firemen. Ferguson relies a bit too heavily on the Tower and the need for heavy regulation, but I think the Square will likely prevail.

Charles Mann, “The Wizard and the Prophet: Two Remarkable Scientists and Their Dueling Visions to Shape Tomorrow’s World” (January 23) compares the “Wizard,” biologist Norman Borlaug, who saved the lives of billions with his Green Revolution, to the “Prophet” of doom, William Vogt, the first modern Malthusian to predict that the world’s resources would soon run out due to over-population.

Steven Pinker, “Enlightenment Now! The Case for Reason, Science, Humanism, and Progress” (February 13) is a follow-up to his earlier book, “The Better Angels,” about how human achievement is making life much better – lower crime rates, far lower death rates from war, lower deaths from disease or child mortality, and other risks, which formerly led to a much lower global life expectancy. He credits the scientific method for these advances and bemoans the many barriers some still erect against this progress.

Gregg Easterbrook, “It’s Better than it Looks: Reasons for Optimism in an Age of Fear” (February 20) is similar to Pinker’s book, but it’s more political, opening with Donald Trump’s inaugural address about the rise in crime, joblessness, poverty, and other ills – all of which are demonstrably not rising. Politicians and the media tend to tap into our fears to make money (or earn votes) instead of educating or inspiring us with accurate reporting on the positive trends that make life better. Fear makes big money for its abusers.

Ed Yardeni, “Predicting the Markets: A Professional Autobiography” (March 23) is the most important book on this list for our goal of analyzing this manic-depressive stock market. In his memoir, Yardeni begins with his entry into the business 40 years ago, followed by detailed examinations of various economic statistics. Keep this book nearby as a reference work for market statistics as they are released.

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Hans Rosling, “Factfulness: Ten Reasons We’re Wrong About the World – and Why Things are Better than You Think” (April 3) quantifies the level of ignorance among the general population as well as the most highly educated elite about the state of the earth’s health, wealth, population, education, and other key issues. You may be shocked to see how much people have been programmed to believe the worst.

Jonah Goldberg, “The Suicide of the West: How the Rebirth of Tribalism, Populism, Nationalism, and Identity Politics is Destroying American Democracy” (April 24) is concerned that we are voluntarily dividing ourselves into warring camps, not listening to anyone else with different ideas. He is also concerned that we no longer believe the best about most of our fellow Americans. Jonah was a panelist with me in New Orleans this November, where we discussed several ideas emanating from this book.

Adam Tooze, “Crashed: How a Decade of Financial Crises Changed the World” (August 7) is the best book about the 2008 crash I’ve read. Though exhaustive in its research (to the point of statistical overkill at times), its main takeaway, to me, was how overloaded with U.S. subprime mortgage debt the leading European banks were, causing Europe to go into a second recession in 2011, followed by a new crisis in the euro-zone almost every year. Ironically, America came out of its own crisis healthier than Europe.

Greg Lukianoff & Jonathan Haidt, “The Coddling of the American Mind: How Good Intentions and Bad Ideas are Setting up a Generation for Failure” (September 4) identifies three great untruths prevalent on campuses for the iGen birth cohort (born 1996 and later, on campus since 2014): (1) “Fragility” or “That which doesn’t kill me makes me weaker.” (2) “Always trust your emotions” and (3) “The world is made up of good people vs. bad people.” These untruths create most of our biggest conflicts these days.

Alan Greenspan & Adrian Wooldridge, “Capitalism in America: A History” (October 16) covers the grand history of America’s risk-taking “creative destruction” over the last 400 years. The former Fed chairman and long-time columnist from The Economist are refreshingly non-academic, beginning with a “flight of fancy” about a version of the Davos World Economic Forum held in 1620, when empires from China, Turkey, and London dominated, while the settlers in America’s Colonies held the key to the future.

Give Good Books to the Next Generation – to Build Their IQ and Civilize Them

Books build minds better than Tweets or Instagrams, Internet memes, or – God forbid! – chat boards. Ever since I left college over 50 years ago, I was determined to keep on learning in a variety of fields, and I am convinced that books are the best way to learn. Long-simmered, edited, footnoted, and fiercely critiqued, they are a crucible of truth and a way to think the long game, not react to short-term bursts from one’s id.

We have lost the art of critical thinking, which comes from strict training but also from daily workouts, best found in reading 100 pages per day in well-reasoned books. I still read over 100 books a year, no matter how much magazines, the Internet, and Cable TV beckon. Most have surrendered to the screen.

Daniel Hannan, a British MP to the EU, has written much about the origin of civilization’s greatest ideas (see Inventing Freedom: How the English-Speaking Peoples Made the Modern World,” 2013). Lately, he has reported that the hard-won IQ gains in the 20th century are being reversed in the 21st Century:

“For most of the twentieth century, IQ rose by around three points per decade globally, probably because of better nutrition. But that trend has recently gone into reverse in developed countries. A new study from Norway, which examines IQ scores from 730,000 men (standardized tests are part of military service there) … shows IQ dropping within the same families. Men born in 1991 score, on average, five points lower than men born in 1975. There must, in other words, be an environmental explanation, and the chronology throws up a clear suspect: the rise in screen-time. Kids brought up with Facebook and Instagram are more politically bigoted, not because they don't hear alternative opinions, but because they don't learn the concentration necessary to listen to opponents — a difficult and unnatural skill.” -- from “Falling IQ scores may explain why politics has turned so nasty,” Washington Examiner, Oct. 22, 2018.

Pardon me for adding another book that fits that bill perfectly: Charles Krauthammer, “The Point of it All: A Lifetime of Great Loves and Endeavors” (December 4). I was on panels with Charles for eight years before he died last June. He is one of the greatest minds I have known. As his life was ebbing, his son Daniel helped his father assemble these writings into a coherent record of what he wanted to say in leaving this world. We will miss him, but this and Things That Matter, are how he left us, wanting more.

To repeat, these books will remind us of history’s most powerful mega-trend: Seven billion people are working every day to make their family’s life better, and that will always be a bullish force.

Global Mail:

*All content of "Global Mail" represents the opinion of Ivan Martchev*

2018 Was the Year of Manic Depression for the Stock Market

by Ivan Martchev

January 2018 started with an unsustainable surge that was driven by $103 billion of record inflows into stocks. February 2018 was a sharp down month driven by the record air pocket created by those same record inflows that caused January to be a big up month. The reason why such air pockets exist in February is because the guidelines for major asset managers are to put new money to work almost immediately. That new money comes from pension funds and other institutional investors which, for various reasons, tends to come in January, creating positive seasonality.

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The record air pocket in February was exacerbated by imploding volatility and inverse volatility ETFs and ETNs (dubbed ETPs) that self-destructed. The more the index goes down, the more the VIX futures rally, the more the VIX futures rally the more the leveraged inverse ETPs short the S&P futures which in response creates a surge in VIX futures, which wipes out the inverse leveraged VIX ETPs. That's the hellish cycle that creates 80%-90% declines in inverse leveraged VIX ETPs – all in a single session of after-hours trading!

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

We got the tax cut in December 2017, which in economic terms can only be described as poorly-timed fiscal stimulus. While I am in favor of lower taxes, I am not in favor of exploding budget deficits. It would have been significantly better to cut spending along with cutting taxes so the deficit won't explode in a good economy. While in principle I am all for “draining the swamp” and “making America great again,” exploding deficits are not the way to get there, in my professional opinion.

While fiscal policy has to be independent of monetary policy, the last time we had this momentous friction between fiscal expansion and monetary tightening was during the Ronald Reagan years, when the legendary President No. 40 (and his Democratic Congress) spent like drunken sailors and in the process bankrupted the Soviet Union, in effect winning the Cold War. He was of course helped greatly by Mikhail Gorbachev’s policy of perestroika, which undermined the grip of the totalitarian state on the economy and political life and helped communism crumble.

Spending like a drunken sailor without a Cold War is the last thing President Trump wants to do, as well as creating enemies with the Chairman of the Federal Reserve, even though Reagan was not fond of either Paul Volcker or Alan Greenspan. It is President Trump’s poorly-timed fiscal stimulus that caused the Federal Reserve to press harder on the monetary brakes for fear that the economy is running too hot. This caused multiple Twitter attacks against the Fed Chairman, which backfired in the stock market.

The Rookie Fed Chairman Faces the Rookie Politician

If quantitative easing was done in fits and starts and the Federal Reserve felt its way through the twists and turns of the unorthodox monetary policy, how can quantitative tightening be done on “autopilot”? I am sure Fed Chairman Jerome Powell will regret his words from his latest FOMC press conference, if he does not already. The autopilot remarks and the impression that he was more hawkish than he was expected to be caused another leg lower in the stock market creating the worst December since the Great Depression up until Christmas Eve, which was a day of a record decline for a half-trading session.

Treasury Secretary Mnuchin calling banks over the weekend to check on liquidity certainly did not help, nor did the President’s continued Twitter attacks on the Fed Chairman.

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

The reason why central bank balance sheet reduction can't be on autopilot is that the Federal Reserve doesn't fully know how disruptive such policy could be on the economy, the stock market, and other financial markets for that matter. When the Fed balance sheet monthly runoff rate went from $20 billion in January 2018 to $50 billion at present, the stock market began to flip like a fish out of water. There are certainly other factors for the volatility in the stock market, many which emanate from the White House, but such unconventional monetary tightening could be equally disruptive.

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

Quantitative easing created a lot of excess reserves in order to force-feed credit on a financial system that was going to naturally de-leverage after the implosion of bank balance sheets in 2008. In that regard it was a success. In order for QE to a be a complete success, quantitative tightening needs to be success too, as they are the opposite sides of the same coin.

The reason why QT may be disruptive is that it results in a lot of repurchase agreement activity between the Fed and its primary dealers. Repurchase agreements and reverse repurchase agreements have been part of monetary policy for a long time, but never on the scale that we have seen in 2018. Repurchase agreements suck excess reserves out of the financial system, which is the same as sucking electronic cash out of the financial system. It is entirely possible that this record electronic cash suction rate is contributing in great degree to a weak stock market in an otherwise good economy.

Sector Spotlight:

*All content of "Sector Spotlight" represents the opinion of Jason Bodner*

The ETFs are in Control Now

by Jason Bodner

Saddam Hussein used an Arabic version of Whitney Houston’s “I Will Always Love You” as his campaign theme. That may be as unexpected a fact as 2018’s negative finish in the U.S. equity markets.

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I have been openly bullish on U.S. stocks – and rightfully so – for a long-time, citing fundamentals and data. Approaching December, I was feeling bullish but with less intensity. The data still suggested U.S. equities were the best place to be. Yet now, as we conclude the worst December for U.S. stocks since 1931, I can say I was wrong, at least for now. Feeling wrong is a tough thing to say, but the beauty of my method is I look at data. If the price action doesn’t jive with the data, negative emotions can carry the day.

Let’s revisit the data. I’ve been committed to a bullish stance because of sales and earnings growth (regardless of whether or not earnings have peaked), record low taxation, record profits, record buy-backs (over $800 billion), and the hard-to-dispute view that the U.S. is best-in-show for global equity markets.

All that was not enough to fend off the naysayers. They cited peak earnings momentum and a potential for a global growth slowdown. I guess just a plain old “really healthy economy” seems awful compared to a “very-strong economy.” Along with fears of growing trade-wars, fed tightening, and a never-ending Mueller investigation, this seemingly-average “healthy economy” invoked the market’s boogey-man.

As I wrote last week, the preliminary findings of our study of the equity downturn points the finger of blame to ETFs. The theory goes something like this: Wealth managers are compensated by the size of assets gathered. Since the early 2000s, ETFs benefitted from huge asset growth. Passive investing became all the rage as “hedge funds are dead.” Outperformance wasn’t necessarily the goal anymore, especially in the wake of the 2008 financial crisis. Trying to outperform the bull market we’ve seen for almost 10 years seemed almost a waste of fees: just slap your money in an ETF, track your benchmark, and call it a day.

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

No offense to wealth managers, but they became focused on gathering more assets and diverting them to passive vehicles, especially those with big incentive fees. As assets ballooned, a tipping point eventually came. Stocks stopped moving ETFs, and it turned the other way around: ETFs moving stocks. As time passed and more ETFs emerged with more assets flowing into them, we arrived at a crossroads in 2018. 

The data I see paints a clear picture of the tail now wagging the dog: The ETFs are in control now.

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

Complicating matters, human traders became old-school. The new masters-of-the-universe are quant-finance or math PhDs who program increasingly efficient algorithms to trade the market on their own. Free from human emotion, their machines plumb the markets, hoovering up profits when conditions are favorable and reducing risk when they aren’t. This became a storm cloud gathering on the horizon that people would often think about, but less-often talk about, and hardly ever take action on.

As 2018 began, we got our first inklings of what could happen. Late January’s correction looks trivial compared with December, but it felt colossal at the time. The sudden drop seemed like a mad-scientist-designed roller coaster ride. When the dust settled, inverse ETFs bore the blame for the market meltdown, and some bore the shame of blowups. Some funds lost 90% or more of their value, triggering liquidations.

Once the bodies were carried away and the blood was mopped up last February, we rallied to new highs within six months.  “Buy the dip” continued to be the chant of the winners. That strategy was undeniably profitable for nine years, but as the years wore on, ETFs took up more space on the highway, and the overall traffic flow was being driven by more and more computers, not human drivers.

As the summer delivered new highs, financial advisors heard whispers of a growth slowdown. Using my neighbor as an example, he and I would rejoice in touting strong economic numbers, yet we began to diverge as he heard speakers discuss recessionary forces brewing. These speakers had few supporting metrics but they caused anxiety, nonetheless. Multiply my neighbor times the many thousands of advisors in the many thousands of branches across America. When August and early September came, we saw a notable slowing of buying.  As assets stopped flowing into ETFs, they also stopped flowing into stocks.

As stocks lost their underlying bid, the algo-traders went to work. They thrive on volatility and blown-out spreads.  When there was no bid for stocks, and no confidence left to “buy-the-dip,” the markets started to crack. When technical levels were depressed enough, model-ETF managers reached for their exit triggers and the dominos came cascading down. October was brutal for many funds. When November offered no positive respite, December brought liquidations.  Record assets flew out of ETFs, and as they were sold, the underlying stocks were also sold as hedges by dealers supplying liquidity.

Look for Today’s Hated Stuff to be the Bright Spots of 2019

As 2018 ends, it will certainly go down as a year of immense volatility. So, what does it mean for the future? Markets have a way of becoming lopsided in terms of how they trade. In the roaring 1920s, stocks were speculative instruments that toppled with extreme valuations. The 1990’s brought the dot.coms, with unrealistic valuations that eventually imploded; then housing valuations became unsustainable in 2007.

Today’s main difference is that companies are making money, the U.S. is prospering, and the economy is expanding, so this sell-off does not fit the speculative “bubble” narrative. Maybe some bomb in the system will emerge in the months to come, but my data says this was a technically-driven tipping point. Fear of a potential slowdown took the fire out of the eyes of the buyers, so the sellers dominated the day.

In past crashes, the further down prices went, the less investors wanted to buy.  Levels slipped below ETF comfort levels and the redemption deluge began. Unfortunately, market volatility may become the norm. Lulls speckled with stomach-churning “unprecedented” moves may become more commonplace.

In late October, I warned of an oversold market and expected a bounce. Markets rallied sharply thereafter. It wasn’t enough, however, and last week I highlighted extremely oversold conditions and said to expect another bounce. Last week saw the S&P 500 rally, so we finally have some green for the week just past.

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

As the year ends, everyone I talk to is bearish. Traders are net long $1.2 billion of VIX futures and options (close to all-time highs). Both indicators seem to be a bullish setup for 2019.  Funds must deploy capital into equities in the New Year.  This should lift equity prices.  So, where should we focus?

As market yields head lower, dividend growth equities should be desirable.  New leadership may come from strong companies that grow their dividends.  I believe China will outperform as well, and Financials should also catch a bid.  In short, look for today’s hated stuff to be the bright spots of 2019.

As Rilke said: “And now we welcome the new year, full of things that have never been.”

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 the Fed is Not Likely to Raise Rates in 2019

by Louis Navellier

Before Christmas, President Trump effectively declared the Federal Reserve as the #1 enemy of the stock market.  The Wall Street Journal reported that President Trump said that the Federal Reserve is “the only problem our economy has,” adding that the Fed doesn’t “have a feel for the stock market.”

In his Christmas message, the President was more conciliatory when he said the Fed is “raising rates too fast because they think the economy is so good.  But I think they will get it pretty soon.  I really do.”  Trump added that “I mean, the fact is that the economy is doing so well that they raised interest rates and President Obama had a very low-interest rate. We have a normalized interest rate, a normalized rate, it’s good for a lot of people. They have money in the bank, they get interest on their money.”

Although President Trump seemed to be rambling a bit in his Christmas message, the good news is that the Fed Funds futures market is not (as of now) expecting another key interest rate hike by the Fed in 2019.  As I have said multiple times, the Fed does not like to fight market interest rates and does not want to invert the yield curve, so for all practical purposes, the Fed may be done raising key interest rates.

As I mentioned on last Monday’s podcast, the Fed can no longer raise key interest rates, no matter what their official Federal Open Market Committee (FOMC) statement said, since market rates have fallen significantly, and the Fed never fights market rates.  Here is a sampling of the falling Treasury yields:

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Complicating matters, Treasury Secretary Steven Mnuchin summoned a call with the top officials at the Federal Reserve, the Securities & Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), the Comptroller of the Currency, and the Federal Deposit Insurance Corporation (FDIC) to discuss coordination efforts to assure normal market operations. Secretary Mnuchin also called the heads of six major banks to reassure them that there are no liquidity problems and, specifically, no “clearance or margin” issues, and then he issued a press release.  Unfortunately, Secretary Mnuchin’s efforts were grossly misinterpreted by the financial media to imply that the U.S. might be on the verge of another financial crisis, which just exacerbated the situation and likely triggered more selling pressure.

Interestingly, there was also a Treasury Department statement that said, “With the government shutdown, Treasury will have critical employees to maintain its core operations at fiscal services, IRS, and other critical functions.”  In other words, we still have to pay taxes for government services we’re not getting.

Treasury yields should remain under pressure as a strong U.S. dollar continues to attract international capital and push Treasury yields lower. Based on recent Treasury auctions, the bid-to-cover ratios remain healthy around 2.8 to 1 as yields meander lower.  In other words, there is no “debt bomb” about to go off. The U.S. remains an oasis for international investors fleeing low interest rates and weak currencies.

As a result, I remain optimistic for 2019, despite the fact that the financial media refuses to report any good news, such as falling market interest rates, as well as record corporate earnings and stock buy-backs.

The Stock Market Decline Has Hit Consumer Confidence Hard

Last Thursday, the Conference Board announced that consumer confidence declined sharply to 128.1 in December, down from a robust 136.4 in November.  Previously, consumer confidence peaked at 137.9 in October.  There is an amazing diversion between super-high “present situation” beliefs and sharply lower “future expectations.” Specifically, the present situation component remained high at 171.6 (down a bit from 172.7 in November), while future expectations declined sharply to 99.1 (down from 112.3).  The resulting 72.5-point spread between the “present situation” and “future expectations” is second only to the all-time high set in 2001, right before a recession, so this is a statistical anomaly we should watch closely.

Christmas Shopper Image

The best economic news last week was that the consumer kept spending in the holiday season, despite the stock market’s decline. According to MasterCard SpendingPulse, consumer spending between November 1 and December 24 reached $850 billion, up 5.1% vs. a year ago.  During this period, MasterCard SpendingPulse said that online sales surged 19.1%, apparel sales rose 7.9%, and sales at brick & mortar stores rose 3.3%.  Interestingly, department store sales declined 1.3% due largely to store closings.  Clearly, consumers were in a good mood this holiday shopping season, despite the wild stock market!

The demand for bigger ticket items – like homes and cars – remains lower. On Friday, the National Association of Realtors announced that pending home sales declined 0.7% in November to a 4-month low.  In the past 12 months, pending home sales have declined 7.7%.  Interestingly, the federal government shutdown has temporarily shut down Federal flood insurance, which is estimated to reduce pending home sales by 40,000 per month, so I expect this decline in pending home sales to continue.

Speaking of the federal government shutdown, the U.S. Bureau of Economic Analysis is suspending all its data releases!  In the meantime, during his Christmas message, President Trump said that the recent decline in U.S. stock markets is a buying opportunity for investors.  As usual, the stock market does not seem too upset over the federal government partial shutdown over the border wall funding issue.  In his Christmas message, President Trump said that the government is going to remain partially shut down “until we have a wall (or) fence.”  Overall, it looks like the federal government shutdown will continue well into January, especially since most of the Congressional leadership is on vacation.

Interestingly, I should add that the crude oil market is actually more volatile than the stock market lately.  On Wednesday, crude oil prices surged over 8% for the biggest daily gain in more than two years, based on speculation that worldwide demand would remain strong in 2019.  Even with the surge in crude oil prices on Wednesday, crude oil prices ended the week approximately 40% lower than in October, when oversupply concerns caused crude oil prices to plunge.  The truth of the matter is that crude oil is seasonal because worldwide demand declines in the fall and rises in the spring.  As a result, much of the decline in crude oil prices could be attributable to weak seasonal demand.  When worldwide demand picks up in the spring, hopefully crude oil prices will find equilibrium and settle into a much tighter trading range.


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