World-Changing Events

Despite a Week of World-Changing Events, the Market Barely Budged

by Louis Navellier

June 19, 2018

Container Ships Image

Last week was a massive one for big news, but the S&P barely budged all week – closing up 0.01%.

The aftermath of the G7 meeting was intense. First, President Trump offered to drop all tariffs as soon as other G7 members did the same. This would be an amazing outcome. If the G7 nations had agreed, these tariff and trade spats would no longer disrupt the stock market; but G7 leaders did not agree, so President Trump refused to sign the agreement as he flew to Singapore, which caused German Chancellor Angela Merkel to say that it was “sobering and a little depressing” to see the U.S. refuse to sign the agreement.

The “G6” countries in the G7 have a smaller combined economy than the U.S., so when President Trump taunted them for being hypocrites on trade, they did not have a good response, since they have multiple tariffs on U.S. goods and a massive surplus. For instance, the U.S. imposes a 2.5% tariff on German vehicles, while Germany imposes a 10% tariff on U.S. vehicles. This is why Mr. Trump is confronting our allies. Germany has a lot more to lose, so I feel they will likely work with us on an amicable solution.

President Trump now has a very outspoken core of economic advisors in his inner circle, so I expect more confrontations with major trade partners in the upcoming months. However, since Trump’s ultimate goal is the removal of all tariffs, I don’t think the stock market will react negatively to these escalating trade spats. The bottom line is that if U.S. trade deficits continue to decline, then annual U.S. economic growth in the 3% range is much more sustainable, and that will be good for the stock market and the economy.

The historic summit with North Korea and the U.S. in Singapore also dominated the news last week. The primary achievement at the summit was that a document was signed to eliminate nuclear arms from the Korean peninsula. Peace and prosperity won’t suddenly break out in North Korea, but it was a step in the right direction and the more such steps we see the more financial markets are expected to react positively. The world seemed to breathe a sigh of relief that there is a serious ongoing dialogue now between North Korea and the U.S. since just a year ago, missiles were flying over Japan and the world was on edge.

P.S. Our best wishes are with Larry Kudlow, who is recovering well from a mild heart attack suffered on the Monday after the G7 meeting. He was released from Walter Reed Hospital after just two days there.

In This Issue

As we enter the summer months this week, the market is filled with dangers and opportunities, as always, and our authors cover both angles. Bryan Perry covers opportunities in the Energy sector and some new speed bumps to watch for. Gary Alexander looks at the positive side of Asian and American growth and some dangers in Europe, while Ivan Martchev continues his warnings on China’s credit bubble in light of the new tariffs and Jason Bodner checks out a new sector leader, Consumer Discretionary, in light of the multiple pendulum swings we’ve seen lately. In the end, I’ll return to look at the overlooked Fed meeting!

Income Mail:
Looking for an Entry Point in the Energy Sector
by Bryan Perry
Keeping a Sharp Eye Out for Speed Bumps

Growth Mail:
Adam Smith Conquers (and Enriches) Asia
by Gary Alexander
U.S. GDP Growth Now Threatens to Double Europe’s Growth Rate

Global Mail:
The Kerosene Truck Speeding for the Chinese Bonfire
by Ivan Martchev
Other Market-Driven Indicators

Sector Spotlight:
A Swinging Pendulum Never Stops in the Middle
by Jason Bodner
Consumer Discretionary Rises to the Top of the List

A Look Ahead:
The FOMC Sees Little or No Long-term Inflation Threat
by Louis Navellier
Consumers and Small Business Owners are Buoyant

Income Mail:

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

Looking for an Entry Point in the Energy Sector

by Bryan Perry

It has been an impressive week for the Nasdaq Composite as the technology-weighted index soared to a new all-time high last Thursday, touching 7,768 before pulling back slightly in Friday’s tariff-related sell-off. Most tech stocks behaved well on Friday, even though it would seem only natural that traders would be inclined to lock in gains going into the weekend. A modest pullback only refreshes the powerful breakout for the Nasdaq as the second quarter ends in two weeks. Fund managers are sure to window-dress their portfolios by adding plenty of winning tech stocks in the days ahead.

On Friday, the White House announced an array of various tariffs on Chinese goods amounting to $50 billion that could escalate to $150 billion by some estimates. As expected, the Chinese government said they would retaliate by the same dollar amount. The market’s reaction for the most part was muted as there is an undertone of bias that is betting that both the U.S. and China will come to terms on fairer trade at some point. Since there has been no negative reaction to the steel and aluminum tariffs placed on the E.U., Canada, and Mexico, the market seems to be supportive of efforts to reduce the U.S. trade deficit.

Oil prices continue to pull back to near-term support at $65 per barrel for West Texas Intermediate crude. Russia and Saudi Arabia, leaders of the deal that curbed crude output and boosted prices to three-year highs, will discuss their next move in Moscow on Thursday. They face growing pressure, not least from President Donald Trump, to increase supply to offset disruptions caused by the economic crisis in Venezuela and renewed American sanctions on Iran.

OPEC and its allies could consider an increase of as much as 1.5 million barrels a day, Russian Energy Minister Alexander Novak told reporters in Moscow last week. That would help offset the supply losses from Venezuela and Iran foreseen by the International Energy Agency. Saudi Arabia has been discussing different scenarios that would raise production by between 500,000 and 1 million barrels a day.

United States Crude Oil Production Chart

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

With daily oil production now well above 10 million barrels per day, the U.S. will surpass both Russia and Saudi Arabia this year as the biggest producer of oil in the world, which will lower the risk of oil prices spiking too high due to geopolitical events. Domestic energy independence is a welcome long-term trend for the U.S. economy. It’s my take that fund managers want to see WTI crude hold the $65 price level and establish a new support level first before increasing exposure to an equal weighting to that of other sectors that have outperformed, namely technology and consumer discretionary.

If the price of WTI crude does in fact hold at $65, it will behoove income investors to start buying into some of the big integrated oil stocks where they benefit from not just higher oil prices and rising demand for gasoline, diesel, jet fuel, chemicals, and lubricants, but from big refining operations where profits are soaring and the exorbitantly wide spread between Brent and WTI crude prices can pad profits as well.

Dividend yields for the biggest global integrated oil stocks are juicy, ranging from Chevron’s 3.6% to Royal Dutch Shell at 5.6%.)If these stocks witness strong institutional money flows, investors will be able to lock in fantastic inflation-sensitive income in what I believe would be a very attractive entry point. Being that oil prices have come well off their highs, we might see some end-of-the-quarter selling in these stocks as institutional money reduces exposure to their holdings.

Finding higher yielding blue-chip assets that appreciate when inflation and interest rates are on the rise can be a real challenge. Seeing the damage done in the REIT, telecom, MLP, and utility sectors, the tide might still be moving out with the Fed bent on raising short-term rates further. Sure, the dividend yields in these sold-off sectors look very tempting at current levels, but at this time, it feels like one would still be “fighting the Fed” by buying into these sectors aggressively.

Keeping a Sharp Eye Out for Speed Bumps

I noted last week two potential scenarios that could raise market volatility – the future of Deutsche Bank, which incidentally is trading within 50 cents of its all-time low, and the Italian bond market, which has a cold that could turn into the flu, depending on a number of factors. But there are a few other potential speed bumps that could slow the expected second-half rally for the U.S. market. These concerns include:

  • If the Dollar Index spikes to 100-105, it could exact a heavy toll on earnings of America’s biggest multinational companies, most of which make up the S&P 500. This past week saw the Dollar Index trade to a new high for 2018, at 94.79.

United States Dollar Index Chart

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

  • If the Fed executes two more rate hikes in 2018, this risks an inverted yield curve. The current spread between the 10-year and 2-year Treasury Notes shrank to a new 10-year low this past week, 35 basis points, the flattest curve since 2007. It’s interesting to note how the current flat yield curve is not only the product of short-term rates moving up. In fact, the yield on the 10-year and 30-year Treasuries have both declined for the past month off their 2018 highs.

Yield Curve Chart

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

And who knows what happens if these events turn south in unexpected ways:

  • If unforeseen events result from the termination of the Iranian nuclear deal…
  • If the current U.S./China mutually-imposed tariffs on $50 billion of goods escalates…
  • If the Republicans lose one or both chambers of Congress at the midterm elections…

(Please note: Bryan Perry does not currently hold a position in DB, CHV or RD. Navellier & Associates does not currently own a position in DB, CHV or RD for client portfolios).

These outlying concerns are currently considered “noise” by the market, and separately they probably are. Collectively, it might be a different story as to how the market prices in these fluid scenarios. Then again, Goldilocks has had her way with defusing any and all threats to the bull market for the past nine years. With second-quarter GDP growth set to possibly surpass 4%, the “noise” level may rise, but the market is looking very constructive from a sales and earnings standpoint as we close the first half of the year.

Growth Mail:

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

Adam Smith Conquers (and Enriches) Asia

by Gary Alexander

The three most influential economists were born in the late spring. All wrote their works in Great Britain, but their ideas spread sequentially around the world. Adam Smith was born 295 years ago last weekend, June 16, 1723 in Scotland. Karl Marx was born 200 years ago (May 5, 1818) in Trier, Germany, but he wrote his most influential works in London; and John Maynard Keynes was born 135 years ago (June 5, 1883) in Cambridge, England. They are considered the godfathers of the right (Smith), left (Marx), and the “mixed up middle” of a democratically elected government and centrally controlled economy (Keynes).

Three Influential Economists Image

At this year’s Freedom Fest (July 11-14 in Las Vegas), I will be moderating a panel which includes economist Deirdre McCloskey, who has a lot to say about all three; so I have been reading her masterful trilogy on “Bourgeois” Economics, with a special emphasis on the latest tome, “Bourgeois Equality: How Ideas, Not Capital or Institutions, Enriched the World” (2016). In particular, I’m curious as to how Adam Smith's economic ideas suddenly conquered Asia after 1960, beginning with Four Tigers – Hong Kong, Singapore, South Korea, and Taiwan – four small nations with few natural resources which became super-rich simply by trading. Then two giants turned from no-growth communism (China in 1978) and slow-growth socialism (India in 1991) to become high-growth global leaders in exporting goods and services.

In “Bourgeois Dignity: Why Economics Can’t Explain the Modern World” (2010), McCloskey opens the book by saying, “The Big Economic Story of our times is that the Chinese in 1978 and then the Indians in 1991 adopted liberal ideas in the economy and came to attribute a dignity and liberty to the bourgeoisie formerly denied. And then China and India exploded in economic growth.” (By bourgeoisie, she means “the hiring or owning or professional or educated class," the entrepreneur, or the middle class in general.)

India and China certainly had no help from the British, who ruled India from 1858 to 1947 and hooked China on opium. Instead of exporting the ideas of Adam Smith, Britain inculcated Fabian socialism into the future leaders of India. Jawaharlal Nehru, the first leader of independent India, learned socialism in England. He told his country’s businessmen, “Don’t talk to me about profit. Profit is a dirty word.” India’s spiritual leader, Mahatma Gandhi, agreed, declaring that “there is nothing more disgraceful to man than the principle ‘buy in the cheapest market and sell in the dearest.’” As a result, Indians referred to a 1% rate of growth in the first 40 years of Indian independence as the “Hindu rate of growth.” Since 1991, however, after economic liberalization took root there, India has been growing at about 7% per year.

These changes are also reflected in India’s culture. Economist Nimish Adhia has shown that India’s leading “Bollywood” films have changed their heroes from government bureaucrats to business people and changed their villains from factory owners to corrupt policemen. The same shift is evident in the editorial pages of the Times of India in how they cover businesses more fairly now than in the past.

U.S. GDP Growth Now Threatens to Double Europe’s Growth Rate

While Asian growth keeps eclipsing the rest of the world, the U.S. is now pulling away from Europe as the second-fastest-growing region. The Atlanta Fed’s GDPNow model’s estimate for real GDP growth in the second quarter of 2018 has stayed above 4.5% during the first half of June. At last count (on Friday, June 15), it stands at 4.8%, boosted by Thursday’s bullish retail sales report from the U.S. Census Bureau.

The GDP Now model is created from 13 subcomponents of the GDP. As each key piece of the GDP puzzle is released each month, the economists at the Atlanta Fed update their GDP forecast. They do not pretend that this is an accurate forecast but that it is a “nowcast” of where growth stands at the moment.

The U.S. economy is doing well, which is bullish for growth stocks. As a result, the S&P 500 Growth Index has been outperforming the Value Index for the last decade – and that gap has widened lately:

Standard and Poor's 500 Growth Index versus Value Index Chart

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

Meanwhile, the Eurozone economy is losing steam. Last Thursday, the euro lost 1.88% to the dollar, reflecting the new turmoil in Europe, including labor strikes in France, political turmoil in Italy and Spain, and a sudden slowdown in the mighty German economy. Last week, Germany reported that factory orders fell 2.5% in April. Eurozone growth was only 0.4% in the first quarter and the IMF thinks that growth in the euro region will slow to a 1.4% annual rate this year, about one-half to one-third the U.S. growth rate.

The problem in Europe is that they have high wages, strong unions, long vacations, early retirement, and a costlier social safety net than the U.S. Therefore, they have slapped on high tariffs to protect their workers. If a trade war with the U.S. escalated, the U.S. would survive but the euro region could easily fall back into recession. That’s why the politicians in Europe may huff and puff but they don’t want to let their visceral distaste for President Trump’s lack of diplomatic finesse push them into a third recession within a decade.

The businessman author of “The Art of the Deal” realizes that he is dealing from a strong hand right now. This may be the perfect time to get tough and get rid of some of the more onerous foreign trade barriers.

Global Mail:

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

The Kerosene Truck Speeding for the Chinese Bonfire

by Ivan Martchev

While the sell-off in currencies of emerging markets with insufficient foreign exchange (forex) reserves and wide current account deficits – like the Argentine peso and the Turkish lira – is still picking up steam, there is relative calm in China, where the yuan is trading well off its recent multi-year lows. On the surface, the yuan has plenty of forex reserves (over $3 trillion) and its current account has been in surplus for over 20 years; but under the surface, it very well may have some more serious issues.

China Foreign Exchange Reserves versus Current Account Chart

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

The natural question is: If there is no need for external financing, why did China lose $1 trillion in forex reserves between mid-2014 and mid-2016 before briefly arresting that decline (which has now resumed)?

I think America’s escalating trade war with China is more dangerous for China than it is for the U.S. Still, in a bad trade war there are no real winners, just various degrees of losers. While I agree with President Trump that the U.S. has been taken advantage of by China in bilateral trade, I am not sure the Chinese are the kind of people to be slapped on the front page of the Wall Street Journal with $50 billion worth of tariff packages. This is as far from the “saving face” modus operandi of Chinese diplomacy as it gets.

United States China Trade Gap Chart

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

The point is: Trade war could escalate dramatically, which neither Mr. Trump nor Mr. Xi should want.

In 2002, Ben Bernanke, then a Governor of the Federal Reserve, helped celebrate the 90th birthday of Milton Friedman. Here is a notable line from his prepared comments:

“Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton … Regarding the Great Depression. You’re right, we did it. We're very sorry. But thanks to you, we won't do it again.”

I doubt Ben Bernanke was referring only to the monetary policy mistakes of the Federal Reserve in 1929 and subsequent years, when the central bank tightened monetary policy at a time when they should have been doing the opposite. He most likely was referring as well to the Smoot Hawley Tariff Act of 1930, which collapsed global trade. At the time of the enactment of the tariff, U.S. unemployment was only 8%. At the time of its repeal a couple of years later, the unemployment rate was 25%.

I doubt that a sitting U.S. President who wants to “Make America Great Again” wants to repeat that Great Depression’s economic record, but neither did Senator Reed Smoot or Congressman Willis Hawley who sponsored the tariff act. The point is: Unintended consequences happen and given the precarious situation in China, they may happen again in the latest tariff imbroglio. President Trump is like the man at the wheel of a kerosene truck, whose brakes are not entirely in order, speeding towards the bonfire burning in the Chinese financial system. While it is possible that he would be able to stop at the very moment before reaching the point of no return, it is also possible that he has underestimated the momentum of his payload of $375.2 billion in bilateral trade imbalance that is likely to hit another record high in 2018.

President Trump in Truck Image

There is a bonfire burning in the Chinese financial system because the bulk of rampant dollar borrowing in emerging markets in the last 10 years has come from China, due to the sheer size of the Chinese economy, which was $11.94 trillion in 2017, and as such the second largest in the world. Furthermore, unlike in India where GDP growth is driven by self-sustainable internal domestic demand, in China GDP growth is driven by accelerating borrowing (see chart below) and aggressive mercantilist tactics.

Non-financial Sector Total Debt Chart

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

If a trade war were to escalate, the fragile balance in the Chinese economy could be tipped and we may very well experience a second Asian Crisis. The important difference here would be that China’s GDP is many times larger than the total GDP of all countries involved in the first Asian Crisis in 1997-1998 (when China’s GDP was barely above $1 trillion).

While the sell-off in the Turkish lira and Argentine peso is certainly gathering headlines at the moment, it is hard for the Chinese yuan to get the same attention as there are still plenty of forex reserves to maintain the dirty yuan peg and stop the yuan from depreciating further. One could say that because of the bigger war chest of the People’s Bank of China, the yuan is not necessarily the same timely market indicator as other emerging markets currencies whose central banks are in considerably less fortunate positions.

The key here remains forex reserve outflows, in which a pick up similar to what we saw in 2015 after the crash of the Shanghai Composite (and faster than the present pace) would be the major red flag.

Other Market-Driven Indicators

The Shanghai Composite Index closed last week at 3022. It sure looks to have experienced a bad “crack” in 2018. I have previously referred to the rally off the January 2016 lows of 2650 as “the mother of all dead cat bounces,” or MOADCB, a bear market rally that could not recover in two years what it lost in a single month (January 2016). The index is now unwinding that MOADCB rather expeditiously.

China Shanghai Composite Stock Market Index versus India Sensex Stock Market Index Chart

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

I am aware that the Shanghai Composite is not as good a reflection of the Chinese economy as India’s SENSEX is for the economy of India, as China’s economic growth does not necessarily translate into profit growth due to the much bigger government intervention in the economy in the best interest of “social stability,” as the Chinese like to say. Still, the troubling developments in the Shanghai Composite cannot be ignored when forex reserve flows have resumed and there is a rather unconventional man at the wheel of a kerosene truck headed for the blazing bonfire of the Chinese financial system.

This year promises to be a more different year for financial markets than 2017, as it is driven by unilateralist “Make America Great Again” policies that frankly have resulted from the failure of the multilateralist approach of several previous administrations.

Sector Spotlight:

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

A Swinging Pendulum Never Stops in the Middle

by Jason Bodner

In 1588, a man was in a cathedral. He looked up and saw a chandelier swinging back and forth. At first, he thought that it demonstrated continuous perpetual motion. This launched an extensive investigation. Although this man, named Galileo, tried to integrate pendulum motion into timekeeping machinery, it was Christian Huygens, a physicist and mathematician, who used Galileo’s findings to produce the first clock in 1657. This pendulum motion was later used to develop the Clock Tower in Westminster, London, England, commonly known as “Big Ben,” an efficient timekeeper for the last 159 years.

Swinging Pendulum and Galileo Image

Pendulums are cool because they work by converting energy back and forth, like a roller-coaster. When the pendulum is at its highest and looks like it has stopped, it has the highest potential energy. When it swings to its lowest point, that potential energy is now kinetic energy, which then swings up and converts back to potential energy. This happens repeatedly. If there were no friction or drag, which steals potential energy, the pendulum would swing forever. But even as a pendulum swings in shorter and shorter arcs, the time it takes to cover a smaller distance is the same. This is what Galileo figured out and this is why he thought that a pendulum would serve as a perfect timekeeper.

Pendulums are based on motion and momentum. I see the market as a huge pendulum. There is price momentum and momentum of emotion, trends, thoughts, feelings, money, everything. These individual swings can be observed, of course, but the big show is where the broad market measures, such as the S&P 500, reach their breaking points, low or high. Then we see the pendulum swing the other way.

You are Getting Sleepy Image

In late January, the market pendulum reached its height and swung wildly backwards. Fear and anxiety took the helm and drove market prices lower. Here we are in June and the pendulum has swung significantly in the other direction. Cheer, optimism, and satisfied stock owners rule the roost now. The question is, how close are we to the top? That answer comes in a few parts.

The first part is the market itself. The broad indexes are at or near all-time highs. The Russell 2000, laden with small cap and growth stocks, is the clear leader now. This is followed closely by the tech-heavy NASDAQ Composite. The S&P 500 is not too far behind, near its highs, with the DJIA last in tow.

If we look under the hood at the sectors, we can see what is powering those indexes higher. Looking at last week’s performance, and other recent time periods, we can see leaders and laggards. What do we see?

Standard and Poor's 500 Sector Indices Changes Tables Image

Consumer Discretionary Rises to the Top of the List

The past week saw a surge in Utilities, perhaps boosted in part by dovish tones from the Fed. But notice which sector was second: Consumer Discretionary. That’s interesting, because there has been much talk about Energy and Tech lately. But the Consumer Discretionary sector has been a less obvious powerhouse of the market in the past few months. Naturally, I have been talking about it here for a while and now the CD sector has quietly edged out Information Technology in all time periods in the tables above.

For my money, this is a great thing. This means consumers have more money to spend and are feeling more prosperous. They are flooding their money into the economy and buying discretionary goods. This is a sign of a strong economy. With tech running neck-and-neck, we see two major growth forces driving markets higher. This is bullish and strong.

Energy quickly fell back after going heavily overbought a few weeks ago. Despite that stumble, the Energy sector is still the strongest in the past three months. But what is clear as day is this: In the past time periods, Consumer Staples, Telecom, and Utilities are the weakest sectors. These defensive sectors are dragging on the market while the growth heavy sectors are pushing it higher.

Naturally, the end game is to find the biggest winning stocks. If we look further down within the sectors, we can see what has curried favor. Currently, in Consumer Discretionary we are seeing restaurants, discount retailers, apparel, and footwear companies getting bought by institutions. If we look within these groups for companies growing sales and earnings and profit margins, while managing debt and remaining priced at reasonable multiples, it is here you will find the big winners right now.

Don’t forget, while the breathless financial media encourages the viewer to think moment-to-moment and day-to-day, the earnings cycle runs roughly three months. These stocks attracting capital now are being bet on for more than just a day. I would expect to see some continued strength in these areas based on solid growing fundamentals coupled with technical strength and institutional support.

As we climb higher, approaching dizzying heights, the pragmatic investor asks, “How close to the top are we?” In other words, “How far are we from the next fall?” Well, according to the metrics I look at, we are not quite yet overbought, but we are rapidly approaching those levels. In short, the pendulum is swinging closer to its apex. It’s worth stressing that I believe any correction that comes near-term will be technical in nature. The fundamentals are solid for the backdrop of consumer market strength mid- to longer-term.

Near-term, we want to be careful of a market that gets out ahead of its skis. We are not there yet, but we are closer this week than we were last week. In any event, should there be a market slip in the upcoming weeks, I would view this as a buying opportunity. Pendulums swing back and forth, exhibiting the laws of nature and physics. We keep time and rhythm based on them. Look for these pendulums in the market.

In any event, remember: “You’ve got to keep moving, keep moving.” - Lady Miss Kier.

Lady Miss Kier Quote 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 FOMC Sees Little or No Long-term Inflation Threat

by Louis Navellier

On Wednesday, the Federal Open Market Committee (FOMC) raised key interest rates a quarter-point, which was widely telegraphed and anticipated. The FOMC statement, as I expected, was decidedly dovish, which helped to excite financial markets. Specifically, Fed Chairman Jerome Powell said, “If you raise rates too quickly, you are just increasing the likelihood of recession.” He added that “we’ve been very, very careful not to tighten too quickly … We had a lot of encouragement to go much faster and I’m really glad we didn’t.” This refreshingly clear statement caused the 10-year Treasury bond yields to decline significantly, signaling that the bond market does not expect too many additional rate hikes.

The FOMC remains divided on whether the Fed should raise key interest rates one or two more times in the rest of 2018 due to a lack of consensus on how high inflation will rise and how high the Fed can raise rates before hindering economic growth. I must add that Fed Chairman Powell is very direct, pragmatic, and does not use confusing “Fedspeak” like his predecessors, which is very good for market confidence.

The news on the inflation front last week was mixed. On Tuesday, the Labor Department reported that the Consumer Price Index (CPI) rose 0.2% in May, in line with the economists’ consensus estimate. The core CPI, excluding food and energy, also rose 0.2%. Gasoline prices rose 1.6% and medical commodities rose 1.3% but excluding those items, there was scant evidence of any significant inflation in May.

On Wednesday, however, the Labor Department reported that the Producer Price Index (PPI) rose 0.5% in May, due predominantly to soaring crude oil prices. Economists were expecting 0.3%, so this was a big surprise; but excluding food, energy, and trade, the core PPI rose only 0.1% in May, significantly lower than economists’ consensus expectation of a 0.2% rise, so the bottom line is that wholesale inflation is tied predominantly to crude oil prices, which have moderated in June due to rising crude oil inventories.

It is important to note that the recent energy-related inflation is merely seasonal in nature, since crude oil demand rises in the spring and ebbs in the fall simply because there are more people in the Northern Hemisphere than the Southern Hemisphere. Both Saudi Arabia and Russia have recently boosted their crude oil production ahead of this month’s OPEC meeting. Furthermore, now that the U.S. is the largest producer of crude oil, thanks to the fracking boom, the incremental U.S. production has offset the supply disruptions caused by Venezuela. There is now a growing surplus of crude oil being stored in oil tankers around the world so, if anything, the worldwide crude oil supply seems to be finding equilibrium and stabilizing at a high enough price level to be favorable for most major energy producers.

I should add that all that fracking in West Texas has resulted in a natural gas glut. The natural gas market remains very weather-sensitive, so only a hot and miserable summer or a freezing cold winter can reduce the current natural gas glut. The other glut in the energy patch is in heavy-to-intermediate (WTI) crude oil grades compared to light sweet (Brent) crude oil, which means that the refiners are poised to continue to post very strong earnings as long as the spreads remain wide. Energy prices should decline in the coming months, which will help inflation to moderate and cause the Fed to raise rates at a slower pace.

Consumers and Small Business Owners are Buoyant

Back in 1984, Ronald Reagan campaigned on the slogan, “It’s Morning in America,” and he was re-elected in a landslide. Small business owners have never felt better than they did that year – until now.

On Tuesday, the National Federation of Independent Business announced that their small business optimism index surged to 107.8 in May, up from 104.8 in April, reaching its highest level in 34 years. Since small businesses create most jobs in the U.S., this bodes well for second-quarter GDP growth.

Consumers feel just as good. On Thursday, the Commerce Department announced that retail sales soared 0.8% in May, substantially higher (double) the economists’ consensus estimate of a 0.4% increase. Retail sales for March and April were also revised substantially higher to increases of 0.7% (from unchanged) and 0.4% (from 0.2%), respectively. Excluding autos, gasoline, building materials, and food services, core retail sales rose an impressive 0.5% in May. In the past 12 months, retail sales have risen by 5.9%. Due to May’s strong retail sales as well as strong upward revisions, GDP growth in the second quarter is on track to grow at over a 4% annual pace, perhaps up to the 4.8% rate predicted by the Atlanta Fed.

Finally, on Friday, we learned that the University of Michigan’s preliminary consumer sentiment index rose to 99.3 in June, substantially higher than the economists’ consensus estimate of 98.5. The current conditions component soared to 117.9 in June, up from 111.8 in May, which is a good omen for continued strong retail sales and second-quarter GDP growth, which will be released in late July.


It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities in this list. Click here to see the preceding 12 month trade report.

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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 Blue Chip Growth, Louis Navellier’s Emerging Growth, Louis Navellier’s Ultimate Growth, and Louis Navellier’s Family Trust, 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. 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. Navellier & Associates, Inc. does not have any relation to or affiliation with the owner of these newsletters. As noted above, there are material differences between Navellier Investment Products’ portfolios and the InvestorPlace Media, LLC, newsletter portfolios. In most cases, Navellier’s Investment Products have materially lower performance results than the InvestorPlace Media, LLC newsletter portfolios and advertising materials claim to have. The InvestorPlace Media, LLC newsletters and advertising materials typically contain performance claims that can significantly overstate the performance results compared to actual results for similar Navellier Products.

Navellier claims compliance with Global Investment Performance Standards (GIPS). To receive a complete list and descriptions of Navellier's composites and/or a presentation that adheres to the GIPS standards, please contact Navellier or click here. It should not be assumed that any securities recommendations made by Navellier & Associates, Inc. in the future will be profitable or equal the performance of securities made in this report. Request here a list of recommendations made by Navellier & Associates, Inc. for the preceding twelve months, please contact Tim Hope at (775) 785-9416.

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