Navellier: Weekly Market Commentary
I think the best way to describe the stock market’s recovery this week is “normalization.” I was especially encouraged that many small capitalization stocks were “re-inflated” and “melted up” after suffering from liquidity woes in the fourth quarter. In fact, our average stock exhibited tremendous relative strength compared to the S&P 500 this week, so the crème de la crème has been rising as the fourth quarter announcement season approaches.
I am also encouraged that I have selected stocks responding to positive analyst comments. As an example, analyst upgrades from Raymond James and UBS for Netflix (NFLX) allowed the stock to steadily appreciate this week. The next big test will be the actual fourth quarter announcements, since it is crucial that my stocks respond positively to their fourth quarter results.
Another normalization factor that I continue to carefully monitor are ETF premium/discounts. Too many investors were blindly trading ETFs and fueling selling panics in 2018. During market hours, the largest and most liquid ETF, namely SPY, declined 20.4% in 2018 during market hours, but then rose 13.3% after market hours according to our friends at Bespoke. This 33.7% performance dispersion for the largest and most liquid ETF basically exposes how individual investors that panic during market hours got “fleeced.” The good news is that these excessive ETF premiums/discounts are finally moderating, which should help to restore investor confidence in the upcoming months.
Treasury yields have also “normalized” a bit in the wake of last week’s strong December payroll announcement. I am carefully watching the Treasury auctions and the bid-to-coverage ratio has tightened up a bit to 2.5 vs. 2.8 when yields were falling, so Treasury yields have meandered a bit higher. However, the big news on the Treasury front is that the Fed is “data dependent” again, so the fear of an imminent interest rate hike has diminished. Specifically, the Federal Open Market Committee (FOMC) minutes were released on Wednesday and revealed that “many participants expressed the view that, especially in the environment of muted inflation pressures, the FOMC could afford to be patient about further policy firming.” The FOMC minutes went on to state that they have “some latitude to wait and see” how the data develops.
I should add that on Wednesday, Boston Fed President Eric Rosengren said that the recent decline in asset values (e.g., the stock market, housing market, etc.) could cause economic growth to slow, which in that scenario, there might be no need for future interest rate hikes. Rosengren also added that financial market sentiment has been “unduly pessimistic.” I should add that Rosengren is one of three new voting members that have been added to the FOMC. The other new voting members are Chicago Fed President Charles Evans and St. Louis Fed President James Bullard, both of who are outspoken doves.
The other wild card is the partial government shutdown. After Tuesday’s night Presidential Oval Office Address, it is apparent that the partial shutdown will continue until President Trump and House Majority Leader Nancy Pelosi resolve their differences. Right now this rift has become a big game of chicken to see who will blink first. Majority Leader Pelosi is now arguing that the federal government should be reopened before negotiations continue. Despite the fact that many federal workers and contractors are not getting their paychecks, which may soon adversely impact retail sales, the stock market does not seem concerned. The federal government showdown is expected to spread to the federal court system next week, so it will be interesting how all this ends. In the meantime, the stock market remains oblivious to the federal government shutdown and has not yet been adversely impacted. Despite a delay in federal income tax refunds due to the shutdown, we still have to pay estimated quarterly taxes on Tuesday, January 15th.
Thanks to the partial government shutdown, there is not a lot of economic news this week. The Institute of Supply Management (ISM) reported that its non-manufacturing, service index slipped to 57.6 in December, down from a robust 60.7 in November, to the slowest pace in the past five months. This deceleration in the ISM service index was not a surprise, since economists were expecting a reading of 58.4. Any reading over 50 is still considered an expansion, so the service sector continues to expand at an impressive pace, just a bit slower. The new orders component actually rose slightly to 62.7 in December, which is a good sign that the service economy remains healthy.
Today, the Labor Department announced that its Consumer Price Index (CPI) declined 0.1% in December, which is the first decline in nine months. The core CPI, excluding food and energy, rose 0.2% in December when a 3.5% decline in energy prices is excluded. In the past 12 months, the CPI and core CPI have risen 1.9% and 2.2%, respectively. The fact that the CPI has fallen below the Fed’s 2% inflation target should allow the Fed to be “patient and flexible,” which Fed Chairman Jerome Powell said during an interview on Thursday at the Economic Club of Washington D.C.
Finally, the trade talks with China are apparently progressing well based on preliminary reports. The U.S. has tremendous leverage over China, which is in the midst of an abrupt economic slowdown. The latest casualty of the economic China slowdown are European automakers, like Jaguar Land Rover which announced layoffs for 4,500 workers that represent about 10% of its overall global workforce. Ford (F) also announced that it would also layoff European workers and shut down at least one manufacturing plant in France. In the midst of this global economic slowdown, I expect that China will be eager to resolve its trade dispute with the U.S. in the upcoming months.
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Navellier & Associates owns NFLX in managed accounts and or our sub-advised mutual fund. Louis Navellier and his family own NFLX, via the sub-advised mutual fund and in a personal account.