Navallier: Weekly Market Commentary
Our dividend growth and conservative growth stocks resurged this week on improving trading volume as a “melt up” ensued and short sellers ran for cover. The Dow Industrials have surged almost 1,000 points this week on the hope that the Fed will soon tap the brakes on raising key interest rates. Officially, Wall Street is now expecting a December Fed rate hike and another key interest rate hike in 2019.
On Wednesday, Fed Chairman Jerome Powell got both bond and stock markets excited by appearing to be more dovish in a speech before the Economic Club of New York. Specifically, Chairman Powell said “Interest rates are still low by historical standards, and they remain just below the broad range of estimates of the level that would be neutral for the economy … that is, neither speeding up nor slowing down growth.” By saying the Fed is just below neutral, Powell basically implied that the Fed would be raising key interest rates at the upcoming Federal Open Market Committee (FOMC) meeting. However, in his best Fedspeak, Powell also implied that the U.S. economy is close to meeting the Fed’s mandate of promoting maximum employment and price stability, which implies that the Fed may soon pause raising key interest rates.
Interestingly, Fed Chairman Powell also discussed the Fed’s first ever “Financial Stability Report” to warn primarily of the dangers lurking in the corporate debt market. Powell went on to discuss that debt relative to GDP remains elevated and there are signs of deteriorating credit standards. The Fed Chairman pointed out that household debt has risen merely with income and that banks remain well capitalized. If anything, Powell seemed to warn of “risk debt” that has risen 5% in the past year, like leveraged loans and sub-prime lending. I should add that sub-prime vehicle loans might now be on the verge of hindering the automotive industry. Powell concluded by saying, “My own assessment is that, while risks are above normal in some areas and below normal in others, overall financial stability vulnerabilities are at a moderate level.”
Amazon.com (AMZN) announced that Cyber Monday was its biggest shopping day ever. From Thanksgiving through Cyber Monday, Amazon.com said that over 180 million items were orders during this 5-day shopping period. Clearly, the holiday shopping season is off to a strong start. Furthermore, since Amazon.com is a market leader, there is now much more hope for a stock market recovery. Clearly, consumers are doing their part to insure strong fourth quarter GDP growth.
Speaking of consumers, the Conference Board announced that consumer confidence declined to 135.7 in November, down from 137.9 in October, which was an 18-year high. The present situation component in consumer confidence actually rose to 172.7 in November, up from 171.9 in October, which is a good sign and should be indicative of continued strong consumer spending. The outlook component for the next six months, declined to 111 in November, down from 115.1 in October, so clearly many consumers expect a slowdown in the upcoming months. Overall, consumer confidence remains high and hopefully lower gasoline prices will put more money in consumers’ pockets and further boost confidence in the upcoming months.
The shocking economic news this week was the sudden deceleration of existing and new home sales. Specifically, on Wednesday, the Commerce Department announced that new home sales plunged 8.9% on October to an annual rate of 544,000, which was substantially below economists’ consensus estimate of 589,000. In the past 12 months, new home sales have declined 12%. The supply of new homes for sale surged to a 7.4-month supply, so median home prices are expected to peak soon.
Then the National Association of Realtors on Thursday announced that existing home sales declined 2.6% in October to the lowest level in over four years (since June 2014). A dramatic 8.9% decline in the West, plus a 1.8% decline in the Midwest and 1.1% decline in the South accounted for vast majority of the decline, since the existing sales in the Northeast rose 0.7%. Interestingly, the National Association of Realtors is now forecasting existing home sales to decline 3.1% in 2018 and for median home prices to decline 2.5% in 2019.
Case-Shiller on Tuesday reported that its 20-city index on home prices was flat in September, which was well below economists’ consensus estimate of a 0.3% increase. In the past 12 months, the Case-Shiller 20-city index on home prices have risen 5.1%, which is the slowest pace of home appreciation since 2016. Furthermore, now that previously hot markets, like Dallas and Denver are cooling off, home prices appreciation is expected to continue to slow. Interestingly, of the 20 cities that Case-Shiller surveyed, eight reported home price declines, led by Seattle, San Diego, Los Angeles and Washington D.C. Chicago, Denver, New York and Portland also had home price declines in the Case-Shiller survey. So if the Fed is looking for an excuse to stop raising key interest rates, they have to look no further than new home sales.
The Commerce Department on Thursday reported that personal income rose by 0.5% in October, which represents the largely monthly gain since January and bodes well for continued strong consumer spending. The savings rate slowed to 6.2%, which is the lowest in almost a year, because consumers are clearly spending more. The Commerce Department also reported that the Fed’s favorite inflation indicator, namely the Personal Consumption Expenditure (PCE) index rose to 2% annual pace, due largely to increases for prescription drugs, electricity and natural gas. Excluding food and energy, the core PCE rose at a 1.8% annual pace, which is below the Fed’s 2% inflation target. If the PCE decelerates in the upcoming months due to lower crude oil prices, the Fed will be more inclined to stop raising key interest rates.
Regarding GDP growth, the Commerce Department on Wednesday reaffirmed that third quarter GDP rose at a 3.5% annual pace in the third quarter and also confirmed that corporate profits hit a 6-year high. In the past 12 months, corporate profits have risen 10.3%. The Commerce Department also reported that business spending in the third quarter was a bit stronger than previously estimates, so that was a positive development. In fact, investment in equipment rose to 3.5% in the third quarter, up from no increase previously estimated. Consumer spending was revised down to a 3.6% annual pace in the third quarter, down from 4% previously estimated due to slower spending on vehicles than was previously estimated. The amount of unsold inventories in the third quarter rose to $86.6 billion up from $76.3 billion previously estimated, so inventory growth as well as consumer spending accounted for the bulk of third quarter GDP growth. The only glitch is that when there is a big inventory build, then the next quarter’s GDP growth all too often decelerates, so fourth quarter GDP is currently estimated at only a 2.5% annual pace by the Atlanta Fed.
Speaking of the automotive industry, GM’s announcement this week to cut up to 14,800 jobs in Canada and the U.S. infuriated President Trump. On Wednesday, President Trump tweeted “If GM doesn’t want to keep their jobs in the United States, they should pay back the $11.2 billion bailout that was funded by the American taxpayer.” GM is essentially following Ford and shutting down less profitable cars to focus on its much more profitable truck business. President Trump also tweeted that “We are now looking at cutting all @GM subsidies, including for electric cars.” Ironically, the Chevy Volt plug-in hybrid, was one of the cars on the chopping block, although the all electric Chevy Bolt will survive. Obviously, politicians in Maryland, Michigan and Ohio where jobs will be lost were also furious. It will be interesting what plays out moving forward, but since GM is not cutting jobs in China and Mexico, President Trump many get even more furious and higher tariffs on imported cars may also be forthcoming.
I should also add that President Trump provided the Washington Post on Tuesday with a scathing interview where he expressed his dissatisfaction with both General Motors and Fed Chairman Powell. Specifically, President Trump said that he blames Fed Chairman Powell for Wall Street’s recent selloff and GM’s decision to close a number of plants and slash jobs. Trump said that rising interest rates were hurting the U.S. economy and added that he regretting appointing Powell as Fed Chairman and added that “I’m not even a little bit happy with my selection of Jay. Not even a little bit.” Interestingly, President Trump also said that “I’m not blaming anybody, but I’m just telling you I think the Fed is way off-base with what they’re doing.” Clearly, if the FOMC raises key interest rates at it December FOMC meeting as many economists anticipate, President Trump’s reaction is guaranteed to be even more colorful that he expressed this week!
All eyes will now be on President Trump at the G20 meeting in Argentina later this week. On Saturday, President Trump and Chinese President Xi Jinping are scheduled to meet for dinner in what is expected to be a pivotal moment in the escalating trade war. National Economic Advisor, Larry Kudlow, said on Tuesday that “there is a good possibility that we can make a deal” and he “is open to it.” I should also add that President Trump may also have a private meeting with Russian President Putin, since the President of Ukraine asked President Trump to deliver a personal message after the Russian Navy seized three Ukrainian military vessels and captured approximately two dozen sailors (6 of which were injured).
Overall, this was an exciting week. I am happy to see short sellers get squeezed and for the stock market to resume “melting up” on improving trading volume. Despite this week’s strength, financial markets still have to deal with (1) Brexit, (2) the eventual resolution of the trade spat with China, (3) the upcoming FOMC statement, and (4) likely another vicious tweet from President Trump blaming the Fed for causing vehicle and home sales to peak by raising key interest rates too fast. The Fed loves to raise key interest rates in December, since it expects to get less grief when we are all distracted during the holidays. However, President Trump is almost guaranteed to belittle the Fed in a vicious tweet in the upcoming weeks if the FOMC raises key interest rates as most economists now expect. So expect more daily gyrations in the stock market, but it appears that we are finally on the road to recovery.
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Navellier & Associates owns VIRT in managed accounts and a sub-advised mutual fund. Louis Navellier and his family own VIRT via the sub-advised mutual fund.