Fundamental Growth Commentary - 10/1/2018

below is a republished weekly commentary; originally published by Louis Navellier, of Navellier & Associates; Sub-Advisor to the Cavalier Fundamental Growth Fund…

Hi everybody,

Our Fundamental Growth stocks, on average, exhibited tremendous relative strength last week and rose an average of 1.44%, while the S&P 500 declined by 0.51%.  Some of our top holdings, like Abiomed (ABMD) and Nvidia (NVDA) were especially strong, as were many of our energy-related companies.  There is no doubt that our Fundamental Growth stocks also benefited from quarter-end window dressing as well as the 90-day smart Beta ETF realignment. 

The Wall Street Journal featured a great article last week about stock buybacks in the S&P 500.  In the first quarter, there was $189 billion in stock buybacks in the S&P 500, which was substantially higher than the previous six quarters, where the biggest quarter for stock buybacks was $137 billion.  The WSJ pointed out that the aggressive stock buyback activity is significantly boosting the underlying earnings per share. 

The attached chart illustrates that the record stock buyback pace picked up in second quarter.  I should add that according to TrimTabs, $827 billion in stock buybacks have been announced so far this year.  Furthermore, if the stock buyback activity continues to rise in third and fourth quarters, it is possible that possible $1 trillion in stock buybacks will occur in 2018.  The fact that the S&P 500 has not risen as much as its underlying earnings has caused price-to-earnings ratios to plummet, which just encourages more aggressive stock buyback activity. 

To learn more about how the stock market is physically shrinking via stock buybacks, I recommend that your read our latest white paper, Honey, I Shrunk The Stock Market … see link:

https://navellier.com/files/7915/3446/2919/ShrunkTheMarket_Aug2018.pdf

There was a lot of important economic news last week.  On Tuesday, The Conference Board announced that consumer confidence soared to 138.4 in September, up from 134.7 in August.  Interestingly, economists were expecting consumer confidence to decline a bit to 132 in September, so this was truly a surprise that may cause some economists to revise their GDP estimates higher.  One of the catalysts behind consumer confidence rising to the highest level in 18-years was optimism about short-term business conditions over the nest six months, plus improving conditions in labor markets as jobless claims hit their lowest level in 49 years.  Since consumer spending accounts for approximately 70% of GDP growth, third quarter GDP is expected to be well over 4% and the upcoming holiday shopping season should be spectacular.

On Thursday, the Commerce Department reported that orders for durable goods soared 4.5% in August, which is the biggest monthly increase since February and substantially higher than economists’ consensus estimate of a 2.2% increase.  July’s durable goods report was revised to a 1.2% decline, up from a 1.7% decline that was previously estimated.  Commercial aircraft orders soared 69% in August, which helped cause overall transportation orders to rise 13%.  Naturally, surging durable goods orders is good news for Boeing (BA) and aviation suppliers like HEICO Corporation (HEI), as well as third quarter GDP estimates, which may now be revised higher by some economists.

One of the primary factors holding back third quarter GDP growth is the trade deficit.  The Commerce Department on Thursday reported that the trade deficit rose 5.3% in July to $75.8 billion as exports declined by 1.6% to $137.9 billion and imports rose by 0.7% to $213.7 billion.  A big drop in soybean exports to China was the primary reason that exports declined as the trade spat with China escalates.

Crude oil prices were soaring last week over concerns that Russian, Saudi Arabian and other crude oil producers may not be able to make up the lost production from Iran and Venezuela.  At an OPEC meeting in Algiers, Russia reiterated that they should adhere to current production quotas, which helped to propel Brent crude oil prices over $80 per barrel.  At the United Nations (UN), President Trump on Tuesday said that OPEC is “ripping off the rest of the world by pushing crude oil prices higher.”  

The U.S. sanctions on Iran will be imposed on November 4th and are expected to cause a temporary global supply crunch.  During his UN speech, President Trump also said “everything about Iran is failing right now” and added that Iran is in the “worst economic trouble of any country in the world.”  President Trump concluded that Iran would eventually want to negotiate a deal with him because the country is basically “failing.”

Further adding to the tension in the crude oil market was that President Trump in his UN speech said that the chaos in Venezuela is “unacceptable,” which raised concern that the U.S. might aggressively intervene in Venezuela.  President Trump also met with Columbia’s President on Tuesday and it is widely viewed that the U.S. is formulating its policy on Venezuela by coordinating any action with Columbia, which is Venezuela’s much more affluent neighbor.  The probability of military intervention in Venezuela is rising, especially since some Venezuelan military leaders (who were also on the U.S. sanction list) reportedly met a few months ago with the Trump Administration, but again, the U.S. apparently wants to coordinate any action with Columbia.

As anticipated, on Wednesday, the Fed removed the word “accommodative” from its Federal Open Market Committee (FOMC) statement.  The Fed signaled that a fourth key interest rate hike in 2018 is likely in December, but it all depends on both inflation and market interest rates.  In the past several days, Treasury bond yields have meandered higher after the bid-to-cover ratios on recent Treasury auctions declined to 2.4 from 2.8 just a month ago.  Typically, the smaller the bid-to-cover ratio, the more likely that Treasury yields will meander higher. 

The FOMC also forecasted that the Personal Consumption Expenditure (PCE) index would remain at a 2.1% rate over the next several months, so the Fed is not forecasting that inflation will accelerate.  I have to add that Fed Chairman Jerome Powell was very calm, transparent and exuded confidence in his Wednesday press conference, which helped to reassure financial markets that the U.S. economy would continue to grow without excessive inflation.

Overall, now that the Fed has painted a picture of steady economic growth in sync with its 2% inflation target, Wall Street can now refocus on booming GDP growth and another round of record earnings announcements.  We remain in a Goldilocks environment of stable interest rates and reasonable stock valuations, so the overall stock market is poised to finish 2018 on a strong note, especially since the seasonably strong time of year is fast approaching.  

According to the attached Bespoke report, October has been a very strong month in the past 20 years and will likely benefit from wave after wave of record quarterly announcements.  November should be an even stronger month and I expect that the stock market will surge after the uncertainty surrounding the mid-term elections are over and rally into Thanksgiving, which is seasonally a very strong time of year when an early “January effect” typically commences.  Finally, due to the highest consumer confidence in 18 years, I am expecting a record holiday shopping season, so it appears that 4+% GDP growth will persist for the remainder of 2018.

 This is what I like to call “lock and load” time, all investors should be fully invested, since I expect a strong year-end rally!


Louie

  Source: Bespoke Research  Graphs are for discussion purposes only. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. Information may be incomplete or condensed. This is not to be construed as an offer to buy or sell any financial instruments and should not be relied upon as the sole factor in an investment making decision. The views and opinions expressed are those of Navellier at the time of publication and are subject to change. There is no guarantee that these views will come to pass. As with all investments there are associated inherent risks. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. Please obtain and review all financial material carefully before investing. Past performance does not guarantee future results.


Source: Bespoke Research

Graphs are for discussion purposes only. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. Information may be incomplete or condensed. This is not to be construed as an offer to buy or sell any financial instruments and should not be relied upon as the sole factor in an investment making decision. The views and opinions expressed are those of Navellier at the time of publication and are subject to change. There is no guarantee that these views will come to pass. As with all investments there are associated inherent risks. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. Please obtain and review all financial material carefully before investing. Past performance does not guarantee future results.