Oil Is Up But Could It Decline Again?

by: Louis Navellier

The big news last week was that the Fed “blinked” and cut their December interest rate forecast in half. Last Wednesday, the Federal Open Market Committee (FOMC) said that their consensus forecast for the federal funds rate at the end of 2016 has fallen to 0.875%, which implies that they might add only two 0.25% interest rate increases this year vs. the four such 0.25% rate increases they indicated in their December meeting. Naturally, these interest rate increases are still “data dependent,” meaning that the next interest rate increase (if any) would depend on “realized and expected economic conditions.”

Translated from Fedspeak, the doves on the Fed do not want to raise rates, but will do so only if inflation and market rates force their hand. The FOMC statement also said that recent market developments and the global outlook “continue to pose risks.” This is essentially an admission that the Fed is watching global events, such as the European Central Bank’s aggressive quantitative easing and negative interest rate policy. Not surprisingly, U.S. Treasury yields declined in the wake of the Fed’s latest guidance.

I think the Fed is usually overly optimistic with both its inflation and economic growth forecasts. Even though 2016 is not quite three months old, the FOMC has lowered its 2016 GDP forecast to an annual rate of 2.2%, down from its 2.4% forecast in December. The Fed also lowered its 2016 inflation forecast to 1.2%, down from its 1.6% forecast in December. In my experience, the Fed has been so bad at making its GDP and inflation forecasts that it cannot even find the barn, much less hit the broad side of that barn.

Frankly, I wish that the Fed would re-examine its inflation forecasts, since deflation is now the dominant trend – not inflation. Last Tuesday, the Labor Department reported that the Producer Price Index (PPI) declined 0.2% in February, the fifth monthly decline in the past seven months. Wholesale energy prices declined by 3.4% (gasoline prices declined 15.1%) and wholesale food costs declined 0.3%. The next day, the Labor Department reported that the Consumer Price Index (CPI) declined 0.2% in February, due largely to a 6% decline in energy prices (gasoline prices declined 13%). In the past 12 months, the CPI has risen just 1%, well below the Fed’s 2% target, so the Fed is under no pressure to raise interest rates.

May 2016 WTI crude oil futures closed at $41.14 per barrel on Friday. I was in Houston and New Orleans last week and even though oil prices were up and gasoline inventories have dipped a bit due to seasonal demand, there is still a lot of anxiety about what will happen next to crude oil prices, especially in the fall when seasonal demand drops. The consensus from energy experts in both Texas and Louisiana was that crude oil prices may have firmed up due to seasonal pressure and higher worldwide demand, but there remains tremendous anxiety about where to put all that crude oil, since most storage facilities are full.

The folks in Louisiana agreed that much of the excess oil should be put away in the Strategic Petroleum Reserve. We should also export more oil. They told me how the offshore docks are being changed to boost crude oil exports. Overall, there was tremendous concern about the long-term direction of crude oil prices, since the supply glut persists. There was no euphoria that I could notice in the U.S. oil patch, since they (and I) expect the price of oil to start declining again this fall, after the summer driving season.

The Folly of Settling for S&P Index Funds

Last week, Morgan Stanley lowered its 12-month target for the S&P 500 to 2,050, down from its previous target of 2,175. Since the S&P 500 closed at 2,049.58 on Friday, Morgan Stanley is not anticipating any net appreciation for the S&P 500 in the next nine months! This reinforces my argument that 2016 is not the year to ride index funds, simply because the S&P 500 is not properly structured for the strong U.S. dollar environment that has crushed so many commodity-based and multinational stocks since mid-2014.

Thanks to the algorithmic traders, what was once down is now up, so the “washing machine” market cycle continues. The stock market is now grossly overbought, near-term; so buckle up for a correction, which will hit the index funds and the former high-flyers the hardest, in my view. All this will be sorted out during the first quarter’s earnings announcement season, which will commence in early April.

In the meantime, dividend growth stocks remain good near-term buys as investment grade (BBB) bond yields continue to fall. Investors seem to be hungry for companies that are still boosting their dividends, despite the S&P 500’s ongoing sales and earnings woes.

Disclosure: *Navellier may hold securities in one or more investment strategies offered to its clients.

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