We’re Due for a Correction

We’re Due for a Correction, Followed by New Market Leaders

by Louis Navellier

December 27, 2016

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

Last week, the S&P 500 inched up by only 0.25% while 20,000 on the Dow Industrials continues to look like a temporary ceiling. Fortunately, the expected quarter-ending window dressing season – when institutional managers realign their portfolios – sets up what could be a new rally during fourth-quarter earnings announcement season, beginning in mid-January. If selected earnings come in as positively as I expect, The Dow at 20,000 may become a new floor following the next (and inevitable) overall stock market correction.

Confidence has risen since the election. Going into the New Year, Gallup reported (on December 20th) that its U.S. Economic Confidence Index hit its highest level in nine years, as the election of Donald Trump as President-elect pushed the U.S. Economic Confidence Index into positive territory for the first time since March 2015.

Stars and Stripes United States Graphic Image

Clearly, expectations are high for President-elect Trump, but I pointed out on CNBC last Wednesday that we have been in the midst of a short squeeze in low-quality stocks, as stocks with weaker earnings and sales have outpaced top-quality, fundamentally strong stocks, which should re-emerge as market leaders during the upcoming earnings announcement season. I also said that small-cap domestic stocks are poised to lead the next surge, since a strong U.S. dollar is likely to hinder earnings of large multinational stocks.

In This Issue

Bryan Perry opens this holiday edition with some timely warnings against repealing bank regulations in 2017.  Next up, Gary Alexander explains how many manufacturing and service regulations have become silly, counter-productive, and ripe for reform. Meanwhile, Ivan Martchev compares last December’s Fed rate increase (and promises of more) to this year’s similar promises by the Fed.  Jason Bodner says we should take any sector movements in this transition week with a grain of salt – or cup of egg nog. Then, I examine the trade-off between tax reform and deficit spending, given the fragility of our GDP outlook.

Income Mail:
The “Same Old Same Old” Gives Way to a Trump Transition
by Bryan Perry
Not So Fast on Banking De-Regulation

Growth Mail:
America’s Growth Engine May Be Unleashed in 2017
by Gary Alexander
A Review of 2016…and 1992

Global Mail:
The Fed’s Trumpian Conundrum
by Ivan Martchev
How About Those Q4 Earnings?

Sector Spotlight:
Corporate America Created Many Holiday Icons
by Jason Bodner
Sector Swings Slow Down as 2016 Ends

A Look Ahead:
The Coming Race Between Tax Cuts and Pro-Growth Spending
by Louis Navellier
The Latest GDP Projections

Income Mail:

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

The “Same Old Same Old” Gives Way to a Trump Transition

by Bryan Perry

Heading into the end of 2016, it’s always interesting to look in the rear-view mirror and see how the investing landscape has surprised us. Up until November 8th, most investors would agree that, with the exception of a few improving economic data points, the economy and the stock market were expected to just plod along at a tepid rate of growth next year. A Hillary Clinton-led economy was expected to be defined by more regulations, higher taxes and the furthering of global trade. She was generally viewed as a more hopped-up version of President Obama’s tenure. Then, along came The Donald.

The election of Donald Trump and his populist agenda altered the investing landscape more radically than any previous Presidential election I can remember. The magnitude with which the market has embraced the likelihood of his sweeping changes wouldn’t be so strong without the majority of the House and the Senate being Republican, along with the conversion of previous Trump-haters in the Republican establishment suddenly finding a change of heart. This is what the stock market has bought into – either you are on board with Trump’s agenda or you won’t last the next re-election campaign as a Republican.

However, it’s my view that at least one of Trump’s “bucket list” items will not materialize as planned. Financial deregulation, including the repeal of Sarbanes-Oxley, passed in 2002 to protect investors from fraudulent accounting activities by corporations, and the 2010 Dodd-Frank Act (the Wall Street Reform and Consumer Protection Act), places regulation of the financial industry in the hands of government.

Not So Fast on Banking De-Regulation

Donald Trump has vowed to either eliminate Dodd-Frank or defang it greatly, including a major overhaul of its many components, saying it crimps business as usual and has been a large drag on economic growth. Unchecked, the banks and Wall Street sorely lack the Boy Scout character traits to operate freely, much less in a self-policing manner that can be trusted – or taken seriously at all.

In 2016, we saw leading Wall Street firms pay out $5 billion in a mortgage settlement, and $2.6 billion in connection with misleading investors regarding mortgage securities. We also saw two of Europe’s leading banks agree to pay $7.2 billion and $5.3 billion to settle similar charges in recent high-profile cases. The numbers related to banking corruption are simply staggering.

According to an in-depth report from The Wall Street Journal, bankers were fined roughly $110 billion for their misdeeds in the mortgage market during the run-up to the financial crisis. About $50 billion of those $110 billion in fines from 30 settlements ended up with the entity that levied it: the U.S. government. About $49 billion of fines ended up at the Treasury Department. Treasury, which manages the country's budget and taxes, usually puts fines in its general fund (where federal taxes usually land as well), which can be used for any item in the budget, including employee salaries, Medicare and military costs. It's not exactly clear, though, what Treasury is doing with its portion of the bank's mortgage fines. A spokesman for the Treasury told The Wall Street Journal that it is being spent “as Congress authorizes.” (“Big Banks Paid $110 Billion in Mortgage-Related Fines. Where Did the Money Go?” Wall Street Journal,  March 9, 2016)

Where Did Bank Fines Go Bubble Chart

Here's the full breakdown of where the $110+ billion went, according to the Wall Street Journal study:

  • The Treasury initially received $14.5 billion, although funds from other government agencies – including $34 billion from Fannie Mae and Freddie Mac – later went to the Treasury.
  • $44.7 billion was put aside for consumer relief.
  • $10 billion was set aside to be used for housing-related federal agencies and to whistleblowers who called banks out. Some of these funds were also went back to the Treasury.
  • $5.3 billion went to states, which appeared to use the money as they saw fit, including directing the money to pension plans which were hit hard by the fallout from mortgage-backed securities.
  • $447 million was given to the Justice Department, which had a role negotiating with the banks.
  • Some $1.2 billion could not be tracked down or was unaccounted for.

CNBC reported that banking fines and settlements amounted to much more ($204 billion), most of it related to mortgage fraud prior to the passing of Dodd-Frank in 2010. In September 2016, one of America’s biggest banks and a major holding of Warren Buffett was fined $185 million for falsely creating two million fee-generating accounts without customer knowledge or approval, with most of this activity condoned by upper management up until the allegations were made public a few months ago.  (Source: “Misbehaving Banks Have Now Paid out $204 Billion in Fines” CNBC, October 15, 2015)

It’s a culture of misconduct. Whistleblower defense firm Labaton Sucharow, conducted a survey within the banking community and published quite a revelation: Almost half of the senior-level bankers they polled refused to say they wouldn’t break the law. One in four said they “had observed or had firsthand knowledge of wrongdoing in the workplace.” Only 41% of them said that colleagues in their own firm had “definitely not” committed crimes to get ahead. And nearly one-fourth “believed that financial services professionals may need to engage in unethical or illegal conduct in order to be successful” (“The Street, The Bull and The Crisis.” University of Notre Dame and Labonton Sucharow LLP, May 2015).

These numbers are probably low. Admitting one’s criminal inclinations to a total stranger isn’t easy. But even if taken at face value, the poll is an eye-opener: One in six bankers said they were “fairly likely” to commit a banking crime if they could get away with it and 45% refused to rule it out if the payoff were big enough. And it’s not just a matter of personal morality: “Nearly one-third of all financial services professionals reported feeling pressured by bonus or compensation plans to violate the law or engage in unethical conduct.” In other words, the system is vulnerable to law breaking in many banking functions.

Banks' Fines and Penalties, Ten Largest Categories Bar Chart

Looking back on this highly-visible pattern of fraud and deceit within the banking industry, it seems that as long as a big bank can write a big check, nobody goes to jail. I wonder about the nature of Mr. Trump’s eagerness to abandon what may be the only guardrail against letting the fox reign inside the hen house. Sure, elements of Dodd-Frank can be modified to advance business at the community bank level, but history is not on the side of allowing big banks to operate freely. Our banking system has a design flaw, because its incentives are broken. The systemic threat posed by our biggest banks can endanger our economy, but the nature of their crimes has made them immune from real (personal) punishment.

William Dudley, President of the Federal Reserve Bank of New York, spoke before the Global Economic Policy Forum (“Ending Too Big to Fail,” November 7, 2013), citing “deep-seated cultural and ethical failures” and “the apparent lack of respect for law, regulation and the public trust” in the culture of our biggest banks. The Labaton Sucharow study suggests that banker ethics have gotten worse since 2013.

The old saying of ‘be careful what you wish for’ might be appropriate in the case of a drastic reduction in big bank regulation. If Mr. Trump expects to win the trust of the very people that voted him into office, I think it would serve him well to keep a strong and well-funded pack of watch dogs eyeing America’s big banks.

Growth Mail:

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

America’s Growth Engine May Be Unleashed in 2017

by Gary Alexander

Several small stocks have performed exceptionally well since the surprise election results of November 8th.  The Russell 2000 is up 17.9% since November 4th, the Friday before the election. This small-stock revival may be an early sign of a turnaround in new business formation in 2017.  In the last 10 years – under both Bush and Obama – the start-up rate for new businesses has declined as the barriers to entry have risen.

United States Businesses Created Each Year Chart

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

Seven months ago (in “Why is the Number of U.S. Startups Failing?” Washington Post, May 19, 2016), Fareed Zakaria reported that “ever-multiplying regulation” has hampered business start-ups.  He quoted The Economist, which explained: “After a wave of deregulation in the 1980s, red tape has proliferated, licensing requirements have expanded and legal costs have risen dramatically. Large, entrenched firms — armed with lawyers and lobbyists — are able to navigate this regulatory landscape better than new ones.”

Big government tends to favor big business over start-ups, partly because the big boys can buy political favors or send an army of lobbyists to Washington to help write laws and regulations favoring them and hobbling their competitors. This regulatory briar patch has grown consistently under Obama’s watch.

According to Bret Stephens (in “Doomed to Stagnate?” in last Monday’s Wall Street Journal), the latest World Bank survey on the “ease of doing business” shows that the U.S. ranked #3 in the world in 2009, when President Obama took office, but we are now #8. “Eight years ago,” Stephens writes, “40 days were needed to get a construction permit. Now it’s 81. When President Bush left office, it took 300 days to enforce a contract. Today: 420. As for registering property, the cost has nearly quintupled since 2009.”

Today’s snail-paced economic growth, he argues, is “the result of the never-ending accretion of ever more costly and time-consuming regulations, all of which could, in theory, be overturned at a stroke. These regulations go largely unnoticed by coastal elites because we’re mostly in the business of producing and manipulating words—as politicians, lawyers, bureaucrats, academics, consultants, pundits and so on. But regulations (and those who profit from them) are the bane of anyone who produces or delivers things: jet engines, burgers, pool supplies, you name it.”  Lawyers and politicians have become prolific rule-writers.

What’s encouraging (to me) is that President-elect Trump is appointing an army of can-do business leaders who specialize in cutting costs and minimizing the senseless kinds of regulations that threaten to choke small businesses with make-do work.  Some regulations are healthy and necessary, of course, but those whose passion it is to meddle can’t seem to draw the line between common sense and overkill.

Over-regulation drives business owners crazy, but most politicians and pundits are blissfully unaware of their impact on the ground.  Bret Stephens names a few of the more senseless regulations businesses face:

  • “Did you know that a company that is a contractor or subcontractor with the government must, according to recent Labor Department regulations, establish a goal of having 7% of its workforce be disabled? Did you know that, to achieve this goal, ‘Contractors must conduct an annual utilization analysis and assessment of problem areas, and establish specific action-oriented programs to address any identified problems.’?”
  • “Did you know that the Occupational Safety and Health Administration [OSHA] recently banned blanket policies on post-accident drug testing because they may be discriminatory?”
  • “Did you know that a driver who makes a delivery within Seattle’s city limits must earn a minimum of $15 an hour, irrespective of whether his company has a branch in the city?”
  • “Did you know that San Francisco’s Fair Chance Ordinance forbids employers from asking about convictions or arrests on a job application? The list goes on endlessly.”

--From “Doomed to Stagnate?” by Bret Stephens, Wall Street Journal, December 19, 2016

The Mercatus Center at George Mason University recently estimated that regulations have subtracted 0.8% from our average annual GDP growth since 1980 for a cumulative total of $4 trillion in lost GDP.

By repealing the low-hanging fruit of stupid regulations, maybe Trump can revive 3%+ growth rates.

A Review of 2016…and 1992

Before we enter 2017, let’s review the most important game-changing events in the year just past:

On February 11th, oil hit a 12-year low of $26.21 and the stock market hit its lows of the year: The Dow Jones Industrials reached 15,660, while the S&P 500 hit 1810.  They’re both up over 25% since then.

On June 23rd, the surprise Brexit vote to exit the European Union (EU) shocked global markets, sending the British pound and euro down. The U.S. 10-year Treasury rates hit an all-time low yield of 1.366% on July 8th. Then, the S&P 500 hit its first new all-time high in over a year (285 trading days) on Monday, July 11th.

2016: A Year of Surprises Chart

The S&P hit 10 new all-time highs during July and August, just after Brexit, and it hit 11 more new all-time highs in November and December, after Donald Trump defeated Hillary Clinton, 30 states to 20, launching a stock market rally and gold market collapse – the opposite of the feared post-Trump outcome.

What will 2017 bring?  What if business and GDP growth pick up due to lower taxes and repealing stupid regulations? We could see another decade-long surge – as we saw start a quarter-century ago, in 1991.

The Soviet Union died 25 years ago – Christmas 1991 – just short of 75 years after it was born in 1917.  Surely, the world will not “celebrate” the centennial of that misbegotten dream next year, but perhaps we can celebrate what came in the wake of its death.  Here were three positive steps that surfaced in 1992:

  • On January 15, 1992, Tim Berners Lee, the main inventor of the World Wide Web, released a simple line-mode Web browser.  By the end of 1992, CERN, the European particle physics lab in Geneva where he worked, released the code to anyone, with no fees: The Internet was born.
  • On February 7, 1992, the Maastricht Treaty was signed by leaders of the European Community in Maastricht, the Netherlands. This treaty laid the groundwork for the birth of the European Union (EU) in 1993, and the Exchange Rate Mechanism (ERM) which led to the euro, in 1999.
  • On August 12, 1992, representatives of the U.S, Mexico, and Canada agreed to form a free-trade zone that would eclipse all other trading blocs in size and capital. The North American Free Trade Agreement (NAFTA) eliminated most North American tariffs and trade restrictions.  The three trading nations signed the treaty in their respective capital cities on December 17, 1992.

In 2016, British voters rejected the EU for the same reason U.S. voters rejected more regulations (under Hillary Clinton).  They were sick of too many senseless but binding regulations coming out of Brussels.

Going into 2017, let’s hope President-elect Trump treats NAFTA better than European voters are treating the EU.  Under a President Trump, Mexico and American can both prosper if Trump’s team engineers some “great deals” with our domestic manufacturers to match the tax-free carpet Mexico laid out for U.S. companies operating there. By slashing our overall corporate tax rates, we can encourage more companies to stay home, and then our 50 states can compete among themselves by offering local tax breaks to lure more companies back home to their state. Or, as Carrier folks now sing: “Back home again, in Indiana.”

Let’s make it a Happy New Year!

Global Mail:

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

The Fed’s Trumpian Conundrum

by Ivan Martchev

At the beginning of 2016 there were at least two Fed rate hikes priced into the fed funds futures markets. The December 2016 fed fund futures contract (ZQZ16, green line below) started the year below where it expired, meaning more fed funds rate hikes were priced in at the time. But instead of “at least two” rate hikes in 2016, we got only one.

Thirty Day Fed Funds - Daily Line Chart

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

The December 2018 fed funds futures (red line) started trading in January 2016. Until the November 8th Presidential election, the 2018 contract very closely paralleled the December 2017 fed funds futures contract (black line). Before the Presidential election, the fed funds futures market was calling for just one fed rate hike in 2017 and one in 2018. (The way we know this is by subtracting the contract price from 100, yielding the expected fed funds rate). Keep in mind that the contract price predicts the weighted average of the actual fed funds rate in the month of expiration, which can deviate a little from the fed funds target rate, but for our purposes they tend to be rather close.

Clearly, the election of Donald Trump is turning out to be a watershed event for the interest rate markets, ranging from the short-term fed funds rate (pictured above) to the 10-year Treasury market (pictured below). The 10-year Treasury yield has doubled since its intraday low of 1.31% in July 2016, while December 2017 fed funds futures now call for two more fed rate hikes in 2017, on top of the one fed rate hike predicted before the election. The December 2018 fed fund futures (red line, above) call for even more fed rate hikes as it shows a steeper sell-off than the December 2017 contract (black line).

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.

As was the case in 2016, the fact that the fed fund futures markets predict more rate hikes in 2017 does not mean that such a prediction will materialize. Many market observers expected two to four rate hikes in 2016 and we got only one. The same may happen in 2017.

As I elaborated last week, there has never been an expansion in the U.S. economy longer than 10 years (March 1991 to March 2001), while every other previous expansion has been shorter in magnitude. As of June 2017, five months into Trump’s first term, we’ll see the conclusion of year #8 in the present economic expansion that began in June 2009. History suggests that President Trump is likely to have a recession in his first term, with 100% certainly based on the statistical data available since the U.S. stopped being a British colony and became an independent country. It is not impossible that President Trump would prolong the U.S. economic growth cycle past the historical parallels with his policies of tax cuts and infrastructure spending. But based on hard facts, that would seem improbable at the moment.

German Government Ten Year Bonds Versus United States Ten Year Bonds Chart

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

Leaving aside the historical pattern of U.S. recessions, I do not believe that interest rates can go up dramatically from here, as long as bond yields in the rest of the developed world stay depressed and most central banks outside of the U.S. remain in accommodative mode. This type of rate divergence means a stronger U.S. dollar, which is bound to bite the earnings growth of multinationals and the S&P 500 in general.

For the time being, until the Trump agenda becomes more clear, it looks like the 3% area is more or less a ceiling for long-term U.S. interest rates. At present levels, the U.S. has the highest rates in the developed world, which suggests strong demand from international investors for U.S. risk-free assets. U.S. credit spreads have also dramatically shrunk since the election and it looks unrealistic that they will shrink past the present depressed levels. In other words, the sell-off in the U.S. Treasury market seems overdone.

How About Those Q4 Earnings?

I have fielded many questions recently as to how high I think the stock market will go. My answer is that the stock market can go much higher if the election outcome helps produce future earnings growth.

Theory aside, we have seen a very sharp move higher since early November. November and December are seasonally positive months, so I am not surprised that there has been no meaningful pullback. January is also seasonally a strong month, when one looks at historical distributions (charted below). Then again, January 2016 was the weakest opening month since 2009 and yet we turned out to be having a pretty good year. So much for the old rule that “as goes January, so goes the year”.

Average Percent Change of Standard and Poor's 500 Index Chart

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

I can see the stock market rising into the Inauguration (January 20, 2017) on the theory, “buy the election, sell the inauguration.” Then, after the 4Q earnings reporting period we may see the necessary correction. A little correction would not be unhealthy after the strongest rally ever after any U.S. Presidential election.

The estimated earnings growth rate for the S&P 500 this quarter is 3.2%. If earnings come in as expected, Q4 will mark the first time S&P 500 earnings have seen year-over-year growth for two consecutive quarters since Q4 2014 and Q1 2015.

Seven sectors are predicted to report year-over-year earnings growth (led by the Utilities and Financials), while four sectors are projected to report year-over-year declines in earnings (led by the Telecom Services and Industrials). Since the present rally in the stock market has been led by Industrials and Financials, Industrials may be one sector primed for disappointment when those earnings roll in in late January.

Because a rising tide lifts all boats, the peak Q4 reporting period in late January may be the time to look for a correction in the stock market, led by companies that have poor earnings and guidance. That also lines up with poor seasonality as February (since 1928) has a negative return expectation on average. September and May are the only other months trending down over such a long period of observations.

History may not repeat itself in 2017, but it sure may rhyme.

Sector Spotlight:

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

Corporate America Created Many Holiday Icons

by Jason Bodner

Merry Christmas, Happy Hanukah, and a Happy New Year – and all the other festivals I have failed to mention.  It may interest you to know that Christmas had its roots in a pagan celebration called Saturnalia. In fact, evergreen trees were originally used in the winter solstice as a reminder that green plants would grow when the sun gods returned in the spring. Because Christmas was rooted in paganism, it was not immediately accepted.  In fact, if you were a Bostonian from 1659 to 1681, it was illegal to celebrate Christmas (punishable by fine). As with all things, legends evolve over time.  It may irk or please you depending your viewpoint, to know that Coca Cola actually helped create the modern image of Santa Claus.  Saint Nick was often portrayed wearing blue or other-colored outfits, but in 1931, Coca Cola introduced advertising depicting Santa in his now well-known red suit and fluffy white beard.

Darn you corporate America! And Santa’s flying sleigh? That was an image conjured up by Washington Irving of Headless Horseman fame. Rudolph the Red-Nosed Reindeer was also a corporate invention: Montgomery Ward created Rudolph to help sell coloring books to kids.

Holiday Icons - Santa Claus and Rudolph the Red-Nosed Reindeer Image

New Year’s was first celebrated by Babylonians over 4,000 years ago. In ancient Rome, New Year’s was March 1st. Sadly New Year’s Day also holds the dubious distinction of being the holiday during which the most cars are stolen, according to the National Insurance Crime Bureau. And for those who thought that 2016 ranked high in terms of your least favorite years, you may enjoy celebrating in Colombian, Cuban, or Puerto Rican style. Some families there stuff a large doll with memories from the past year, dress it in clothes for the New Year, and at midnight set it ablaze to burn away bad memories.  Sounds good to me!

Colombian, Cuban, or Puerto Rican New Year's Eve Celebration Image

Sector Swings Slow Down as 2016 Ends

My sector commentary will be shorter than usual this week, since the holiday-shortened weeks at year’s end are usually characterized by an understandably sharp drop-off in trading volumes.  The times when sector movements really count is either when volumes are outliers, in terms of swollen volumes, or they are long protracted moves over time with consistent volumes. Taking a look at last week, we some fairly muted performances, other than a 2.4% surge in Telecom, mostly taking place last Monday and Thursday.

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

At the end of each year, it’s a good time to reflect on sector activity over the past 12 months. Unsurprisingly we see Energy and Financials as market winners for 2016 with only a few days left. As Energy sought to recover lost ground from 2015 and 2014, we also saw a resurgence of Telecom, Industrials, and Materials. Again, much of these gains have occurred post-election as President-Elect Donald Trump and his cabinet selections seem to please investors who have an eye on growth.

Materials and construction stand to benefit from domestic infrastructure improvements that were a part of Trump’s campaign platform. Financials have seen previously-discussed large inflows with the angle that some deregulation – including the removal of Dodd-Frank – will significantly improve the landscape.  Coupled with imminently higher rates, these trends have dominated the landscape, helping Banks and  Information Technology, despite their recent profit taking, became major performers this year.

Standard and Poor's 500 Yearly Sector Indices Changes Table

In reality, as we count down the waning moments of 2016, it seems clear that we should expect some shifts ahead. Until Trump takes office, all campaign talk can only be labelled as rhetoric. Until he begins administering policy that can be translated into action, we can’t translate his rhetoric into sound investment decisions. When we finally see large institutions taking action based on more knowns, a more predictable path will emerge in terms of which sectors may push up or drag down the market in 2017.

I suspect that when things settle down in the White House and everyone has a chance to digest Donald Trump as the President of the United States of America, the market may see some return to fundamentals.  The large sweeping moves in the market of late have been almost exclusively technical.  Earnings growth and sales growth have still been largely unimpressive, and I believe that the long-term uptrends are set by technical catalysts on strong, sustainable fundamentals. When the market volatility has less unknowns to feed off of, we will see more of a focus on traditional fundamental measuring sticks.

Enjoy this holiday season. Eat, drink, and be merry. Stop worrying about the market’s every little move until 2017, for the tides may soon turn.  And as you struggle with the choice of whether or not to have that extra piece of cake, allow yourself the free-pass on the holidays. Maybe apply this anonymous quote going forward: “People are so worried about what they eat between Christmas and the New Year, when they really should be worried about what they eat between New Year’s and Christmas.”

Will This Matter a Year From Now Image

A Look Ahead:

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

The Coming Race Between Tax Cuts and Pro-Growth Spending

by Louis Navellier

After a strong post-election rally, a bit of reality is settling in as investors realize that President-elect Trump may not be able to push much of his agenda forward without running up huge budget deficits.  The Democrats are asking how he intends to pay for massive infrastructure programs with “revenue-neutral” financing. On Tuesday, outgoing Treasury Secretary Jacob Lew warned the Republican Congress that they should not ignore how their proposed tax cuts would impact the federal budget deficit.

Perhaps Treasury Secretary Lew should look at his own record first, as the U.S. budget deficit widened 34% to $587 billion in fiscal 2016, under his watch, after declining for five straight years. The budget grew last year particularly due to rising costs of Obamacare, Medicare, and Medicaid.  Treasury Secretary Lew diverted attention from these Obama-era deficits to warn that popular programs like Social Security, Medicare, and Medicaid would limit the ability of the incoming Trump administration to cut tax rates.

Fortunately, we know from the record of historical tax cuts in the 1920s, 1960s, 1980s, and the 2003 tax cut that rate cuts can generate rising economic growth which can generate even more tax revenues, which could give the incoming Trump Administration more room to implement their economic growth plans.

The Latest GDP Projections

Last Thursday, the Commerce Department announced that third-quarter GDP growth was revised up to a 3.5% annual rate (from a previous estimate of 3.2%) due largely to higher consumer and business spending than previously estimated.  Specifically, consumer spending was revised up to a 3% annual rate (from 2.8%) and business spending was revised dramatically higher to a 1.4% annual rate (from 0.1%).

The bad news is that since record soybean exports significantly boosted third-quarter GDP growth, economists are estimating that fourth quarter GDP may grow at a much slower annual rate of 2.4%.

As we end the year, there are some storm clouds emerging that may cause economists to revise their fourth-quarter GDP estimates lower.  On Thursday, the Conference Board announced that the Leading Economic Indicators (LEI) were unchanged in November. Ataman Ozyildirim, director of business cycles and growth research at The Conference Board, said that “the underlying trends in the LEI suggest that the economy will continue expanding into the first half of 2017, but it’s unlikely to considerably accelerate.”

Turning to the details of the LEI report, Bespoke said last Thursday (in “Leading vs. Coincident Indicator Ratio Drifts Lower,” December 22, 2016) that the November Leading Indicators “came in slightly weaker” while ratio of leading vs. coincident indicators is a warning sign: “prior to just about every recession since 1959 this ratio was in free-fall right ahead of the onset of recessions.”  However, the recent decline “has been slight to say the least.” Bespoke had to expand it to four decimal places to demonstrate the decline.

In conclusion, Bespoke said, “what we have seen with this ratio over the last year is more characteristic of a mid-cycle economy (like we have seen in several other prior expansions) than the type of decline that has been common leading up to a recession,” so you can file this dip under “much ado about very little.”

There was also plenty of other evidence last week that economic growth may be slowing a bit. On Thursday, the Commerce Department announced that Personal Income rose only 0.2% in November. The Commerce Department also reported on Thursday that Durable Goods orders declined 4.6% in November for the first time in five months due largely to a 73.5% decline in civilian aircraft orders!  Excluding transportation orders, however, Durable Goods rose 0.5% for the fifth straight monthly increase.  Also encouraging is that “core” orders for Durable Goods rose 0.9% in November, which is the largest monthly increase since August.  Overall, our GDP appears to be still growing, but at a slightly slower place.

The best economic news last week was that National Association of Realtors on Thursday announced that existing home sales rose to an annual rate of 5.61 million in November, up 0.7% from October’s revised number and the highest level since February of 2007. In the past 12 months, existing home sales have risen by 15.4%.  Median home prices have risen 6.8% to $234,900 in the past 12 months.  Overall, the housing market does not appear to be adversely impacted by the significant increase in mortgage rates.


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 Trade Summary

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