Watch Out for “Window Dressing”

Watch Out for Quarter-Ending “Window Dressing” This Week

by Louis Navellier

March 26, 2019

We’re closing out a wonderful quarter this week, but, as last Friday’s action demonstrated, we must watch out for any quarter-ending “window dressing” this week, as well as 90-day smart Beta ETF rebalancing.

Factory Orders Image

The catalyst for the Friday sell-off was the U.S. Treasury yield curve inverting on Friday, as the 10-year U.S. Treasury bond yield declined to 2.44%, while the 1-month Treasury yield remained relatively steady at 2.49% after U.S. factory orders fell to the slowest growth rate in two years. This 5-basis point Treasury yield “curve inversion” spooked the stock market, since yield curves tend to precede recessions.

At the same time, over in Europe German 10-year bund yields fell below 0% after the weakest purchasing managers’ index in six years was released for the Eurozone, so bond rates have been falling worldwide.

In This Issue

There is a lot of drama unfolding in global markets “under the radar” of U.S. political news, centered on the Mueller report. First, Brian Perry covers the embarrassing “flip flops” of central bankers in the U.S. and Europe, as they are forced belatedly to admit the impotence of their policy tools. Gary Alexander examines the strange case of stock prices moving in inverse patterns to earnings growth (or shrinkage). Ivan Martchev looks at the revival of negative-yielding global debt, after a brief hiatus, indicating global deflation returning. Jason Bodner looks deeper into the evidence of unusual institutional buying and selling, indicating signs of more growth ahead. Then I’ll wrap up with a look at this narrowing market. We all agree that in this stage of the bull market, a far more selective stock-screening process is required.

Income Mail:
Central Bankers “Flip Flop” Once Again
by Bryan Perry
Money is Moving into Quality Dividend Stocks

Growth Mail:
The Yin and Yang of Stock Prices vs. Earnings Growth
by Gary Alexander
After Last Friday – Should You “Catch a Falling Knife”?

Global Mail:
$10 Trillion in Negative-Yielding Global Debt…and Rising
by Ivan Martchev
Fed “On-Hold” Beneficiaries

Sector Spotlight:
Does Friday’s Decline Spell the End of this Bull Market?
by Jason Bodner
What Unusual Institutional Buy/Sell Activity is Telling Us Now

A Look Ahead:
The Stock Market Narrows into a “Funnel” of a Few Good Stocks
by Louis Navellier
The Fed Signals “All Clear” on Rate Increases This Year

Income Mail:

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

Central Bankers “Flip Flop” Once Again

by Bryan Perry

Two weeks ago, my concerns over “Recession Inertia Building in Europe” were summarily ignored by the raging bulls, who seemed hell bent on taking the S&P 500 up and through major technical resistance at 2,815 on the notion that regardless of how dysfunctional the socialist European Union was operating, the European Central Bank (ECB) would provide the juice necessary to rescue their already-failed economic model with enough funds to advance the socialist democratic utopian society they envision.

Well, the raging euro-bulls seem to be twisting in the wind. Not only did ECB President Mario Draghi provide point blank a 50% lower growth forecast – of only 1.1% from the 2.2% estimate laid out earlier in 2018 – this past week, we have U.S. Fed Chairman Jerome Powell taking his “we’re a long way from normalizing rates” statement in early October to saying the Fed will now leave rates unchanged for 2019.

This is a bold departure from what was a robust forward economic outlook to one with the full appearance of a man back-peddling at a breakneck pace. I find this kind of 180-degree pivot by those with their fingers on the pulse of the largest and most magnificent economy in the world transparently arrogant.

This is what happens when you let academics with no real-world private sector experience run the entire banking system. They are so out of touch with reality – relying instead on their textbook historical models – that they are blinded by backward-looking data. But when reality hits, as it did in last week’s Fed policy statement, we witness a complete about face on Fed policy that is, quite frankly, now too late.

Every quarter-point increase in interest rates takes nine to 12 months to be fully absorbed into the economy. Under this assumption, the effects of the last four interest rate hikes have yet to be fully felt by the economy. Bear in mind that while China, Europe, and Japan have exhibited slower growth in GDP for the past year and a half, the Federal Reserve has raised interest rates nine times in the last three years.

I have written about the effects of sky-high taxes on the EU economy. I have also laid out the global 10-year sovereign bond yields, showing rates tumbling lower. That means inflation is not a threat. Deflation on a global scale is the 800-pound gorilla in the room. When one considers that central banks for the past decade have pumped more than $12 trillion into the global financial system to counter the deepest financial crisis since the Great Depression, you’d think that inflation would be at least a talking point.

Instead, the big picture is eerily deflationary. The widely-followed Reuters/Jefferies CRB Index shows that the next big leg for commodities may be lower to challenge levels not seen since the first quarter of 2016. Last Friday’s trap door sell-off was a telltale sign of exactly what big institutional clients are skeptical of, while recent data from Europe, Japan, and China support a case for a likely global recession.

Commodities Research Bureau Index Chart

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

I wish I could spin the evidence any other way, but based on the breakdown of trade negotiations with China, the delay and likelihood of a hard Brexit, the contraction of the export-reliant economy of Japan, and the rise of socialism in the U.S., I’m of the view that investors should pivot hard into the safety of dividend-paying and growth-dividend strategies going forward for 2019. The second-half earnings recovery story all sounds good, and I wrote about it last week as that case was building momentum, but the data simply doesn’t support it after the release of EU and German PMI numbers hitting six-year lows.

Money is Moving into Quality Dividend Stocks

So, here’s the deal. The world is awash in money – over $12 trillion more than 10 years ago – and it has to go somewhere. When global bond yields are crashing to levels well below those of qualified dividend yields of blue-chip U.S. companies with pristine balance sheets, there is only one thing to do – buy them!

Global Quantitative Easing Chart

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

For starters, look at PepsiCo Inc. (PEP) which pays a dividend yield of 3.07% and owns brands like Diet Pepsi, Aquafina, Doritos, Lays, Lipton, Gatorade, Fritos, and Mountain Dew. Kimberley Clark (KMB) pays 3.38% and is gapping higher against the global deflation trade, as are Dominion Energy (D) paying 4.86% and PPL Corp. (PPL) paying 5.13%. and Verizon (VZ) paying 4.06%.

(Navellier & Associates does not own PPL, VZ or KMB in managed accounts but does own D, and Pep in some managed accounts. Navellier & Associates does not own PEP, PPL, D, VZ or KMB in our sub-advised mutual fund.  Bryan Perry does not own PEP, PPL, D, VZ or KMB in personal accounts.)

Ladies and gentlemen…the shift to bullet-proof, all-weather, best-of-breed dividend stocks is underway. Yes, there are phenomenal growth stocks in the cloud, big data, 5G, media streaming, mobile ecommerce, and biotech/medical device spaces that offer outsized opportunities. There is a bull market somewhere in some ‘stealth’ company, but it’s my view that the smooth ride of 2019 is about to get much more volatile.

This volatility is part and parcel of a capitalist system, the system that is attacked daily by the likes of Bernie Sanders, Alexandria Ocasio-Cortez (AOC), and other soak-the-rich candidates. It’s reported now that AOC’s mother moved from New York to Florida because she didn’t want to pay the eye-popping property tax on her home. I guess Bernie, AOC, and their friends haven’t figured out that, on a global scale, when you were born in America, you already hit the lottery. But hey, this is just one man’s opinion.

Growth Mail:

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

The Yin and Yang of Stock Prices vs. Earnings Growth

by Gary Alexander

Last year was a great year for earnings (up almost 23%), but it was also the worst year in this entire 10-year bull market for stock performance (down over 6% in the S&P 500). By contrast, 2019 is great for stocks so far, despite negative earnings growth projected for the first quarter. Why this disconnect?

The basic theory is that the stock market looks forward, but I’m not buying it. I see too many examples of wild emotional herd behavior. Investors are primarily creatures of emotion, driven by the herd. I can’t imagine a typical investor musing, “Yes, I know that earnings are down this quarter, but they might go up next year, so I’m buying stocks today in anticipation that they will go up nine months from now!”

The historical record shows that investors didn’t have the foggiest idea of next year’s earnings in advance. Did investors in 2017 stage a bonanza 30% gain because they saw 24% earnings coming in 2017?  No. Earnings weren’t forecast to be anywhere near that robust at the start of 2018. Then, did investors sell off stocks in late 2018 since they saw an “earnings recession” coming then? No, surveys at the time (shown below) showed that consensus earnings for the first half of 2019 were around +6% as of last December.

Consensus Quarterly Earnings Survey Chart

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

Specifically, earnings estimates for the first quarter of 2019 dropped from +5.5% at the end of 2018 to -1.5% during the week of March 14 – a 7% drop in just over 10 weeks (the blue line in the chart above). All the time these earnings estimates were declining, the S&P 500 was soaring by about 20%.

Earnings growth for the S&P 500 last year was (by quarter) +23.2%, +25.8%, +27.5%, and +14.2%, for a blended annual growth rate of +22.7%. The market declined sharply during the fourth quarter, but that was when the highest (third-quarter) reports of +27.5% were being released. The slower growth reports for the fourth quarter (+14.2%) were reported from mid-January through the end of February, when the stock market was roaring back, despite a constant lowering of corporate earnings estimates for early 2019.

Maybe the “earnings recession” reports are about to bottom out, with earnings forecasts inching up. There are some early indications that profit margins might start inching back up. The corporate tax cuts are starting to pay dividends, quite literally, in improved corporate profit margins, raised dividends, increased share buy-backs, and more tax collections, due to repatriated cash from overseas now taxed at a lower rate.

You can see the bump in S&P 500 corporate profit levels at the end of 2017 in the chart below for the three S&P indexes. Corporate profit margins made an immediate jump after implementation of the late-2017 tax bill. S&P 500 forward margins leaped from under 11% to over 12% (now 12.1%). All three margins have dipped lately, due to global growth slowdown, but they have held on to most of their gains.

Standard and Poor's 500 Forward Profit Margins Chart

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

Also, the Congressional Budget Office (CBO) just reported a 10% year-over-year (y/y) increase in tax collections in February. This is significant because we are just now starting to see comparative y/y results for months in which tax reform has been fully implemented. The 10% increase in February tax collections was greater than the 7.3% spending increase, so the federal government deficit declined by $12 billion in February. It's still vital for the government to cut spending, but an increase in tax revenue is still welcome.

After Last Friday – Should You “Catch a Falling Knife”?

As of the first full day of Spring, last Thursday, the S&P 500 was up 21.43% from its Christmas Eve lows, so Thursday marked the end of “the Winter of our Least Discontent,” a huge market surge, despite the terribly frosty weather throughout much of the nation, ever-sinking earnings expectations (see above), and the threat of a Mueller probe that could have ended the Trump presidency – but instead turned out to be a dud with no recommended indictments (that news came out after the market closed on Friday).

Investors hate to grab for a “falling knife.” They hate to invest in stocks as they are falling, as they did last December – or last Friday, for that matter. They are even more averse to investing after a 55% crash in 17 months (March 2009) or a 22% crash in one day (1987) or a 45% crash in 21 months (1973-74) or a double-dip inflationary recession (1980-82). But the recoveries in the following decades are phenomenal.

In the 10 years since this bull market began in March 2009, the annualized return on the S&P 500 stock index has been 17.8%. That’s better than the three previous 10-year recoveries from similar bear market lows. Following the bear market that ended August 1982, the 10-year annualized return for the S&P 500 was +17.6%. Over the 10 years following the October 1987 crash, the S&P 500 returned an annualized +17.2%, and after the disaster that ended in October 1974, the 10-year annualized return was +15.6%.

Was Friday the end of this rise? Probably not. After each of the previous 10-year leaps (1974-84, 1982-92, 1987-97), there were at least two more good years. Bull markets don’t die on specific timetables.

The message of history is that bull markets die in a state of euphoria with sky-high P/E ratios in a bubble market mania in which nearly everyone is invested, with expectations of 20% or more annual gains. None of those earmarks identify this market, which remains the most “unloved” bull market of our lifetimes.

Global Mail:

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

$10 Trillion in Negative-Yielding Global Debt…and Rising

by Ivan Martchev

With the German 10-year bunds closing last week with a yield of negative 0.03%, talk of yield curve inversion and a global recession is rampant as some short-term interest rates in the U.S. are now drifting above the 10-year Treasury yield. Still, the classic 2-10 spread, or the difference in yield between the 2-year and the 10-year Treasury notes has not inverted yet and – until it does – the jury is still out on the possibility of the present U.S. economic expansion ending.

German Government Ten Year Bond versus United States Ten Year Bond Chart

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

The issue may very well be that international demand for Treasuries in a year of record supply is rather strong. There simply isn't any significantly positive yield in any key global government bond market, so bond buyers end up piling into the U.S. Treasury market. German 2-year federal notes, which go by the tongue-twisting name bundesschatzanweisungen, have been in negative territory for five years and closed last week at -0.55%. That means that the German 2-10 spread is a positive 52 basis points as subtracting one negative number from another results in a positive interest rate differential. Japan faces a similar situation, where the 10-year JGBs closed the week at -0.07% while the 2-year notes closed at -0.17%.

United States Inflation Rate versus United States Fed Funds Rate Chart

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

Negative yielding 10-year government bonds in major world economies are a clear sign of global deflation where overly-indebted developed economies are struggling to grow, while the overly-indebted Chinese economy has trouble picking up the slack. The headline inflation rate in both the U.S. and Germany is 1.5%, while the German economic data, such as industrial production, is noticeably weaker.

It is no wonder that the Fed has removed itself from the picture by clearly saying that they will be on the sidelines for a while when it comes to the fed funds rate. When it comes to the ongoing quantitative tightening via the run-off of bonds from the Fed’s balance sheet, it looks like it will stop by the end of this year, as per Chairman Jerome Powell’s statements. It is amazing how $1.3 trillion in Treasury supply, courtesy of the Trump tax cuts combined with $500 billion run-off cap from the Fed’s balance sheet, cannot get the 10-year Treasury yield to even 3%. Long-term interest rates feel very heavy and if they cross 2% to the downside and the 2-10 spread finally inverts, they may not see 3% for many years.

United States Ten Year Government Bond versus United States Fed Funds Rate Chart

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

There appears to be a “head-and-shoulders” top in the 10-year Treasury yield, to use trading terminology, which “broke” at 2.6%. The “head” is 3.25% so the gap measures 0.65%, or 65 bps. If the fascinating world of chartology is any indication, this chart says the 10-year note yield is headed to 1.95%, which is a heck of a lot weaker than most investors, including myself, expected at the beginning of the year.

Personally, I do not make decisions based on charts alone, but I have never met a futures trader that does not know how to read a chart. And there is a lot of futures trading going on in the Treasury market and the euro-dollar and fed funds market for that matter. They all say that the Fed is done. In my view this decline in 10-year note yields is much more due to a weak global economy than any issue with the United States.

The next time there is recession, I think the 10-year Treasury yield will likely break 1%, given the willingness of the U.S. central bank to engage in such unorthodox monetary policies. Based on the low level of unemployment in the U.S. and largely pro-growth White House economic policies, there is not going to be a recession in the U.S. this year, but when it comes to 2020 and 2021, a lot can change.

Fed “On-Hold” Beneficiaries

In theory, this sharp decline in global bond yields catalyzed by the Fed being “on hold” and weak data in Europe and China should be bullish for gold bullion and emerging markets, as is often the case when Fed tightening cycles end. In theory an end of Fed tightening should be bearish for the dollar but not this time.

I think the dollar has more upside because the euro and the Chinese yuan have more downside. The ECB is proceeding with more QE, which is euro-bearish, and coupled with the epic Brexit disaster is bound to push the euro lower. By the end of the euro weakening cycle, it is conceivable that the euro falls below parity (1:1) to the dollar. The interest rate differentials are dramatically in favor of the U.S. dollar, and while the Fed is in QT mode, the ECB is in QE mode. Parity is only a matter of time in such a scenario.

The Chinese yuan, on the other hand, is not part of the U.S. Dollar Index. Still, China is in a very sharp slowdown, which is catalyzed (but not caused) by tariffs and trade friction. Because of the deflationary nature of too much debt in the Chinese financial system, it is entirely plausible that the People’s Bank of China (PBOC) decides to devalue the yuan, as it did in December 1993, when they did so to the tune of -34%. At the time, there was a sharp recession in China that was not officially acknowledged, but it showed up in secondary (i.e., undoctored) banking loan-loss data.

In the year 2019, there is much more at stake as the Chinese economy is nearly 20 times larger than it was in 1993 and its level of indebtedness is at least four-fold higher, causing a sharp economic slowdown to carry the high likelihood of a hard economic landing. The jury is still out if the present sharp slowdown ends up like a Second Asian Crisis, but there is no doubt in my mind that this is where China is headed.

The loan quotas and injections of more liquidity in the Chinese financial system are tools that have allowed the Chinese government to prolong their economic expansion for over 25 years. Those same tools will be the very reasons that make the hard landing a lot worse, since they have resulted in a massive credit bubble. So if someone is waiting to see the emerging markets outperform – or for the U.S. dollar to go down – it could be a very long wait.

Sector Spotlight:

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

Does Friday’s Decline Spell the End of this Bull Market?

by Jason Bodner

Did you know that you can lead a cow up a set of stairs but not down? In fact, students at West Virginia University once directed a purple-painted cow into the clocktower at Woodburn Hall. Unable to descend the stairs, the cow supposedly died there from lead poisoning. Tragic as that story may be, if you care for innocent animals, I can’t fully substantiate it. But the ghost of Woodburn Hall is a tall tale associated with WVU lore. And apparently, there are those who can still hear the poor beast bellow from up there…

Mooooooooooo

Why Was the Cow Afraid - He Was a Cow-Herd Image

This week I’ll liken the market to a cow that can climb stairs but can only stay put – or fall rapidly down.

In fact, this is what I wrote as of last Thursday’s close, when the S&P was up over 21% in three months:

This week has seen a strong surge in the broad markets. What we have seen the past weeks, as the market has built the right slant of the “V” shaped recovery, is growth leading the pack. As of last week, the Russell 2000 had been the top performer since the December 24th low. This week has seen excellent strength in the NASDAQ, up 2.73% for the week. Its pop has caused the NASDAQ to become the top performer since Christmas, up an eye-popping +26.58%. This can be seen clearly in the Information Technology Sector index, powering forward +4.06%. It’s up +30.3% since Christmas. The sector is quickly catching up to the PHLX Semiconductor index – which is up nearly +35% in the same period.

Sector strength has also been seen in Energy, Consumer Discretionary, and Industrials. These sectors have a strong growth concentration. This is reinforced by the Russell 2000 Growth index, surging 28% since Christmas. The S&P 500 Growth index is also the clear winner from the S&P indexes. The laggards are the Dow Jones Industrial Average, S&P 500 Value, Dow Jones Utilities, S&P 500 Utilities…. You get the picture. The big buying has been a clear redeployment into growth. This is decidedly un-bearish.

Standard and Poor's 500 Sector Indices Through Thursday Tables Changes

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

Then Friday happened. The broad sell-off was triggered by the spooky inverted yield curve: Short-term interest rates were slightly higher than long-term rates. Germany’s awful manufacturing data caused the country’s short-term rates to go momentarily negative. When it costs you money to lend to a government, that’s not usually a good sign. So that stirred up fear over here in the U.S. and re-stoked the “growth is in trouble” fears. That equals recession fears, which significantly altered the picture in just one day:

Standard and Poor's 500 Sector Indices Changes Through Friday Tables

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

What’s more interesting (to me) is an uptick in ETF activity. I have seen a lift in ETF buying in the past few sessions, so I thought I would take a look at any “trips” in ETFs and stocks lately.

What I found was quite interesting…

What Unusual Institutional Buy/Sell Activity is Telling Us Now

The first chart shows us the number of trips each day. These “trips” merely measure the number of stocks and ETFs that trade in unusual volume and volatility. Notice the surge in trips coinciding with the trough of the market in late December. But also notice the steady trips since then, as the market has recovered. Also notice the spike in trips as the market hit new four-month highs in the last two weeks.

Standard and Poor's 500 Trips per Day Chart

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

Now let’s look at unusual buy and sell signals. First, we see a monstrous spike in ETF sells at the late December lows. Then we see an immediate shift, albeit with less intensity, of ETF buys, as the market rallied. This past week has shown us the highest ETF buy signal totals since June.

Unusual Buy and Sell Signals Chart

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

This sets up to be quite bullish. To reinforce what I mean – and what these charts are telling us – there was monster selling in December, coinciding with peak ETF selling. Then the buy signals started in early January and have been growing slowly and steadily since. Again, this is quite bullish for the mid-to long-term, however, big ETF buying can also indicate intermediate peaks, as they have done in the past.

Standard and Poor's 500 Stock Buy and Sell Signals Chart

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

Now let’s just recall where the buying has been focused. It’s been in the Growth sectors: Infotech and Consumer Discretionary. In fact, 20% of all buy signals since the market lows have been in Software and Semiconductors. The bears calling for the bounce before the next leg down may be missing the picture. If the investment community were poised for a fall, it would be positioning long in defense: Utilities, Staples, and Real Estate. Growth-heavy sectors would be out of favor, but we observe the exact opposite.

Remember a while back, when I talked about how some big stocks were in so many ETFs? (FB is present in nearly 200 ETFs.) Capital is flowing into these names in a big way. As the FAANG stocks are now making unusual buy signals, it stands to reason that we are beginning to see ETFs buying more FAANGs.

(Navellier & Associates does not own any of the FAANG stocks except Netflix and Apple in managed accounts or our sub-advised mutual fund.  Jason Bodner does not own any FAANG stocks in personal accounts with the exception of Google.)

This Friday we saw regional banks (lenders) get pounded and Utilities (yield instruments) get bought. All this means is that the market has been grossly overbought. I’ve been saying this since our ratio of buying to selling went overbought on February 6th. NASDAQ has risen by more than 26% since Christmas. The market obviously needs to vent some steam. An inverted yield curve is a great catalyst to consolidate a little. It’s worth noting that, should a recession be headed our way (inverted yield curves are touted as a recessionary red flag), they typically come 12-18 months later. That’s a long lag time in a bull market…

All of this just reinforces my belief of what caused the market action of the past months: First, ETF forced selling caused massive pressure on stocks and broad equity markets. As soon as the flush was complete, the reversal was swift and intense. Unusual buying focused in growth-heavy sectors kicked into high gear.

The “Big Bad Bear Market” (that never came) after late 2018’s technically-driven drop won’t likely come for a long time. I like bears – the cute and cuddly kind that my kid sleeps with. Those are likely the only bears I’ll see for a while. The truth is that bears are good and necessary for the market. When the bulls are right, they need to “seem wrong” to others, so they’ll take the other side of the trade. And when the bears are right (as they eventually will be), the bull will fall down a few flights of stairs from the tower – only to dust himself off and climb back up again. A century of rising equity prices says so.

A Century of Rising Equity Prices Chart

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

Humans are herd-mentality animals. We are easily swayed by emotions. So, when fear gets whipped up like a dust-devil out of nowhere, it’s not long before many start selling. The emotion gets amplified, and suddenly it’s unpopular to go against the grain. Nixon-era economist Edgar Fielder was onto something when he said: “The herd instinct among forecasters makes sheep look like independent thinkers.”

A Look Ahead

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

The Stock Market Narrows into a “Funnel” of a Few Good Stocks

by Louis Navellier

In our highly rated ETF portfolios, we sold a major position in the iShares 7-10 Year Treasury Bond (IEF) at a near-term high after the disappointing Brexit delay was announced that pushed the 10-year Treasury yields lower. I find that the ETF market is being influenced predominantly by index buying pressure, primarily from the S&P 500 (SPY) and the NASDAQ 100 (QQQ), so there are only three or four sectors where we can move now, depending on the ETF family. As a result, 2019 is shaping up to be more of a stock picking year than a sector year, because the stock market is getting increasingly narrow.

Essentially, we are now entering a “funnel.”  I fully expect that I will be holding 30% fewer stock names in the upcoming months as the stock market’s breadth and power decays after the 2019 pension funding season draws to a close and the first-quarter announcement season commences. This funnel should cause more money to flow into the stocks that post strong sales and earnings, while the overall stock market is struggling with more difficult year-over-year comparisons. My quantitative grades for stocks in both my Dividend Grader and Stock Grader lock in on institutional buying pressure, so as certain stocks fall in rank, they will be replaced by stocks rising in rank that are benefitting from institutional buying pressure.

Currently, the S&P 500 yields about 1.93% and most of those dividends are taxed at a maximum federal rate of 23.8%. Investors can get out of the stock market, but ironically, they may earn less, since interest income is taxed at a maximum federal rate of 40.8%. As a result, money continues to pour into index funds, despite the fact that earnings will likely remain lackluster during the first three quarters of 2019.

In my opinion, an investor’s best “defense” is a strong offense of fundamentally superior stocks that are characterized by rising dividends, stock buy-backs, and a track record of strong sales and earnings momentum. These fundamentally superior stocks are becoming increasingly scarce. That’s why I say the stock market is entering a “funnel” that will likely become much more narrow in the upcoming months.

The stocks that I expect to emerge as market leaders and the biggest winners will be our fundamentally superior dividend growth and conservative growth stocks. The relative strength that our stocks have exhibited bodes well for this week’s quarter-end window dressing as well as 90-day smart Beta ETF rebalancing. Overall, we are entering a stock picker’s market at which I expect our firm to excel.

The Fed Signals “All Clear” on Rate Increases This Year

Interestingly, so far this year, the stock market seems to be taking its cue more from an accommodative Fed, especially as other central banks, especially the European Central Bank (ECB), prepare to offer more stimulus to member banks. Speaking of the Fed, its Federal Open Market Committee (FOMC) announcement on Wednesday was incredibly dovish. Specifically, the FOMC announcement said that due to slower economic growth that no key interest rate increase is anticipated this year.

Chinese Dragon Image

The FOMC also remains very sensitive to global events, like slowing growth in China and Europe, so the Fed clearly does not want to change its interest rate policy at the present time. I should add that the Fed is anticipating slower (2.1%) GDP growth in 2019, so it can afford to be “patient” moving forward.

As far as unwinding its balance sheet is concerned, the FOMC implied that it would reduce the monthly Treasury securities it sells from $30 billion per month to $15 billion per month, beginning in May. Furthermore, the Fed will have completed its selling of mortgage back securities by September 2019. Eventually, the Fed plans to shrink its balance sheet to approximately $3.5 trillion in 2019.

Overall, the dovish FOMC statement caused Treasury bond yields to decline to their lowest level in the past 12 months, which is very bullish for higher stock prices, especially dividend growth stocks. The Fed has also been blessed by a lack of inflation in recent months, but that may change due to rising oil prices.

Specifically, crude oil prices hit a four-month high last week after the Energy Information Administration (EIA) on Wednesday reported a 9.6 million barrel drop in domestic inventories in the latest week. This drawdown is normal in the spring, when demand naturally rises as the weather improves. Additionally, the “crack spread” between sour and sweet crude oil has tightened, due to the fact that the U.S. will no longer pay for Venezuela’s sour crude oil as long as President Maduro remains in power. This is expected to squeeze the earnings of many refiners. Overall, the U.S. is producing more crude oil than ever before and is now in control of worldwide crude oil prices, so I would be surprised if crude oil rises too much.

In summary, we remain in a “Goldilocks” environment with an accommodative Fed that has no intention of raising key interest rates any time soon. Brexit has caused chaos in Europe and now many countries have negative interest rates. Furthermore, the European Central Bank (ECB) is planning to provide even more stimulus, since negative interest rates are apparently not enough stimulus. 


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.

Marketmail Archives