Navellier: Weekly Market Commentary
Happy New Year!
By far the biggest news this year is the recent collapse of Treasury bond yields. Currently, the 10-year Treasury bond yields only 2.62%, which effectively prohibits the Fed from further raising key interest rates. The financial media is citing slow economic growth in Asia and Europe for falling Treasury bond yields, but the answer is much more simple, namely a strong U.S. dollar.
Specifically, international capital prefers to hide in strong reserve currencies with relatively high interest rates. U.S. Treasury bonds yield substantially more than equivalent securities in Japan, Britain and the euro-zone. China’s interest rates yield more that the U.S., but the yuan has been weak due to the ongoing trade spat as well as slowing GDP growth, so international investors are less inclined to park their capital in the Chinese yuan. As a result, the U.S. dollar continues to be the preferred reserve currency around the world, which should help to keep Treasury bond yields relatively low for the foreseeable future.
Naturally, lower Treasury bond yields also make the stock market much more attractive, especially since it is very easy to pick high dividend stocks that yield more than the 10-year Treasury bond. Since most dividends are taxed at a maximum federal rate of 23.8%, while Treasury interest is taxed at a maximum federal rate of 40.8%, the stock market has an strong foundation under it with a S&P dividend yield of 2.14% and remains grossly undervalued relative to interest rates.
Trading volume has been gradually improving this week now that the holidays are over. I was encouraged that when the stock market initially sold off on Wednesday that “smart money” materialized and helped the overall stock market to stabilize. This “smart money” has been appearing during down trading days for the past three weeks and is certainly helping the overall stock market to firm up.
Unfortunately, after the market close on Wednesday, Apple (AAPL) lowered its fourth quarter sales forecast and blamed China for its lower than expected trade growth. As a bellwether stock, Apple’s lower guidance naturally spooked many technology stocks. The truth of the matter is that approximately half of the S&P 500’s sales are outside the U.S., so investors are increasingly concerned that other multi-international companies that may also lower their fourth quarter sales guidance due to slowing global GDP growth and eroding foreign currencies. Here is a link to my Thursday podcast that discussed all these topics:
Another factor that I am still waiting to stabilize are ETF Premiums/Discounts relative to Net Asset Value (or Intraday Indicative Value in Morningstar). Unfortunately, as volatility soared in the fourth quarter, ETF Premiums/Discounts rose dramatically and have not fully subsided to where they were in the third quarter. Algorithmic traders have been increasingly utilizing ETFs to trade big blocks of stocks. So, it is crucial that ETF Premiums/Discounts subside to boost investor confidence, especially for nervous investors that may want to trade in and out of financial markets in the upcoming months.
The most volatile sector remains the energy patch after crude oil prices plunged almost 40% in the fourth quarter. On Wednesday, The Wall Street Journal reported that shale oil wells drilled in the past five years are pumping less crude oil than forecasted, so crude oil prices subsequently firmed up this week. Despite overly optimistic forecasts for crude oil production, U.S. crude oil production continues to steadily rise. Seasonal demand is expected to rise as spring approaches, so some of the volatility in the energy patch may subside in the upcoming months as worldwide demand rises as the weather improves in the Northern Hemisphere.
On Thursday, the Institute of Supply Management (ISM) announced that its manufacturing index decelerated to a 2-year low of 54.1 in December, which was substantially below economists’ consensus estimate of 57.5. In November, the ISM manufacturing index was a robust 59.3 and almost all industries surveyed reported an expansion. However, only 11 of the 18 industries surveyed expanded in December, which was a shocking development. Some components of the ISM survey were disturbing, especially new orders that decelerated sharply to 51.1 in December, down sharply from 62.2 in November. The ISM production component is at 54.3, which is also at the lowest level in over two years. Overall, any reading over 50 still signals an expansion, but the abrupt deceleration in the ISM manufacturing index was truly shocking.
The other big news this week were the December payroll reports. On Thursday’s ADP private payroll report, which rose a robust 271,000 in December, was substantially higher than economists’ consensus estimate of 178,000 and the highest monthly private job gain in almost two years. ADP also revised down November’s private payroll increase to 157,000, down from 178,000 previously estimated.
Today, the Labor Department announced that a whopping 312,000 payroll jobs were created in December, which was substantially higher than economists’ consensus estimate of 182,000. Interestingly, the unemployment rate actually rose to 3.9% up from 3.7%, due to more people entering the labor force as the labor participation rate rose to 63.1% in December, up from 62.9% in November. Average hourly earnings rose 0.4%, or 11 cents per hour to $27.48 per hour, in December. In the past 12 months, average hourly earnings have risen 3.2% and are now running at the highest pace in a decade. The average workweek also rose 0.1% to 34.5 hours per week. The other positive detail was that October payroll report was revised to 274,000, up from 237,000 previously estimated. Overall, the December payroll data was an incredibly bullish for continued strong consumer spending!
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Navellier & Associates owns AAPL, NFLX, and LULU and does not own Ford in managed accounts and or our sub-advised mutual fund. Louis Navellier and his family own AAPL, NFLX, and LULU and does not own Ford via the sub-advised mutual fund. Louie Navellier & his family own AAPL and NFLX in a personal account.