Ouch! The S&P 500 declined 3.1% last week, including 1.8% on Friday; but the big story was the panic selling in high price-to-earnings (P/E ratio) stocks, especially on NASDAQ last Friday. This is a clear signal that Wall Street will no longer tolerate high P/E stocks. I have been warning investors that the bubble in Netflix (NASDAQ:NFLX) (the #1 performer in the S&P 500 in 2015) and Amazon.com (NASDAQ:AMZN) (#2) would be pricked.
Netflix and Amazon.com are down 27.6% and 25.7%, respectively, year-to-date, and are now trading at 295 and 401 times trailing earnings, respectively. Looking forward, Netflix and Amazon are trading at 331 and 109 times 2016 forecasted earnings, respectively. So the question remains: Just how many more of these valuation bubbles will be pricked? I would argue that all pricey NASDAQ stocks with erratic earnings and a poor earnings surprise history, including Tesla (NASDAQ:TSLA), remain vulnerable to more selling pressure until they trade at more reasonable forecasted price-to-earnings ratios and overall volatility subsides.
The problems in the energy patch are not going away, so more dividends are being slashed. Ouch again! Last Tuesday, in the wake of poor fourth-quarter results, Standard & Poor's cut its credit rating for 10 energy companies. This all means that the big dividend ETFs with significant exposure to the energy patch, like iShares Select Dividend (NYSEARCA:DVY), will likely continue to decline steadily as they have over the past year. Another bad omen for big dividend ETFs is that Bespoke Investment Group showed on Friday ("Dividend Cuts in 2015 Surpass 2008") that 394 companies cut their dividends in 2015, the most since 2009. So far, 2016 is shaping up to have even more dividend cuts than 2015 so the case for many dividend stocks is crumbling.
Complicating matters further, crude oil fell back below $30 per barrel on Tuesday after the American Petroleum Institute announced that inventories rose by 3.8 million barrels in the latest week. What I feared is now unfolding faster than I had anticipated, namely that the dividends of many energy-related companies are now threatened, since energy companies have to shore up their respective cash flow by (1) suspending stock buy-backs, (2) announcing layoffs, and (3) eventually cutting their dividends to preserve their credit ratings. Although crude oil surged on Wednesday, crude oil prices will likely remain under persistent pressure.
(Please note: Navellier & Associates, Inc. does not currently hold positions in NFLX, AMZN, TSLA or DVY for client portfolios).
Last Friday, the Labor Department announced that payrolls rose by 151,000 in January, substantially below economists' consensus estimate of 185,000. The unemployment rate declined to 4.9% from 5%, and is now at the lowest level in eight years. Due to minimum wages rising across the country in January, average hourly earnings rose 0.5% (12 cents) to $25.39 per hour.
In the past 12 months, average hourly earnings have risen 2.5%. Another positive sign was that the average workweek rose to 34.6 hours, and the labor force participation rate rose slightly to 62.7%. In addition, December's robust payroll growth was revised down 30,000 to +262,000, while November's payroll was revised up 28,000 to +280,000.
I should add that on Wednesday, ADP reported that 205,000 private payroll jobs were created in January, down from a revised 267,000 in December. Most of the one-month deceleration in ADP job growth was in large companies, but the growth at small- to mid-size companies remained strong. Overall, the January payroll data was encouraging, but not enough for the Fed to continue raising key interest rates in March.
Trade & Manufacturing Statistics Remain Weak
The other big news on Friday was that the Commerce Department announced that the trade deficit rose 2.7% in December as exports declined 0.3% to $181.5 billion and imports rose 0.3% to $224.6 billion. Since trade is a major component of GDP calculations, the December trade data will likely result in a downward GDP revision. A strong U.S. dollar is having a negative impact on exports, since overall exports declined 4.8% in 2015, the first year that exports declined since 2009. The fact that the manufacturing and farming sectors are struggling will be another reason why the "data dependent" Fed will not likely raise key interest rates in March.
The news on the manufacturing front remains weak, which puts downward pressure on crude oil and other commodities. China announced last Monday that its official (government-compiled) Purchasing Managers Index (PMI) declined to 49.4 in January, down from 49.7 in December.
This represents the sixth straight monthly decline in the China PMI. Since any reading below 50 signals a contraction, China's mighty manufacturing sector is clearly struggling. It was also announced that in 2015, profits at Chinese state-owned companies fell 6.7%, railway freight fell 6.7%, and construction of new floor space plunged 14%. China's government continues to lower borrowing costs for businesses. They have implemented six interest-rate cuts, stepped up fiscal spending, and made several reductions in required bank reserves over the past 15 months.
Interestingly, China's corporate debt has soared in the past several years and is now equivalent to 160% of GDP, up from 98% in 2007, according to Standard & Poor's. Until, China's economic growth improves, most economists expect that the People's Bank of China will continue to cut its key interest rates.
On Tuesday, the Institute of Supply Management (ISM) announced that its manufacturing PMI rose to 48.2 in January, up from 48 in December. Despite this slight improvement, this was the fourth straight month that the ISM manufacturing PMI was below 50, which signals a contraction. Additionally, only eight of the 18 industries tracked by ISM reported growth in January, so manufacturing remains weak.
The Commerce Department reported on Tuesday that consumer spending was flat in December. Clearly, growth remains weak and further downward revisions remain possible. Then, on Wednesday, ISM reported that its service sector index declined to 53.5 in January, down from 55.8 in February, which is the slowest pace in two years. So the service sector is still growing, but at a significantly slower pace.
Due to sputtering worldwide economic growth and concerns about central bank policies, gold is re-emerging as a safe haven. Gold has risen almost 10% so far in 2016 vs. the Reuters-Jefferies CRB commodity index, which is down 8.13% year-to-date, with oil and natural gas down more than that. The other safe haven is Treasury bonds, but the 10-year Treasury bond now yields just 1.86%, a 9-month low.
There was also a very interesting development on Wednesday when the Japanese finance ministry cancelled its 10-year government bond auction for retail investors on the apparent fear that there would be no buyers. Previously, 2-year and 5-year note auctions have been cancelled for retail investors, but this is the first time the 10-year bond auction has ever been cancelled. Currently, interest rates are negative in Japan going out eight years, and the 10-year Japanese government bonds currently yield a scant 0.02%.
Disclosure: *Navellier may hold securities in one or more investment strategies offered to its clients.
Disclaimer: Please click here for important disclosures located in the "About" section of the Navellier & Associates profile that accompany this article.