By Gary Alexander
Spring this year has got me feeling like a horse that never left the post.
I lie in my room staring up at the ceiling. Spring can really hang you up the most!
- The opening of "Spring Can Really Hang You Up the Most," by Fran Landesman and Tommy Wolf
You would think that songs about Spring would be all about love and flowers and hope and all that jazz, but as a part-time musician and jazz DJ, I can tell you that's "square," man. Every March 21, I play about a dozen songs with Spring in the title, and most of them are downers, like this hip 1955 torch song by Fran Landesman (words) and Tommy Wolf (music) based on T.S. Eliot's 1922 poem, "The Waste Land," which begins with this famous line, "April is the cruelest month, breeding lilacs out of the dead land..."
Rodgers & Hart's "Spring is Here (I Hear)" is also a wrist-slasher, as is Frank Loesser's "Spring Will be a Little Late This Year" ("... a little late arriving in my lonely world over here... Where is our April of old? For you have left me, and winter continues cold.") I could quote more Spring songs, but you get the point.
Well, this is a financial newsletter, so I'll switch gears. The financial pundits are singing the same kind of sad songs. The main investing article in the April Money magazine is "The Bull Market's Last Leg," by Paul J. Lim, along with a companion sidebar, "This is the Market Tumble You Should Really Worry About: The downturn in bonds is even more troublesome than the stock slide." Another Spring downer!
Put in context, you must understand that most of the other articles in Money were about securing the best travel deals and finding new careers in retirement. In effect, the authors and editors were telling older, passive investors to basically be fearful of stocks as they travel the world and indulge in their hobbies.
Meanwhile, I have been consistently trying to do the opposite here for the last nine years - trying to keep investors in the market, counteracting the fears that the talking heads keep throwing at you each week. In this particular Money magazine article, the author posed fears of a return of inflation. These fears were fairly common in January and February, when inflation indicators were running high. Knowing that most magazines have six-week lead times, this article was probably written in late February, when those fears were running high, but inflation indicators have trended down since then and aren't such a big worry now.
The sidebar article in Money magazine was concerned with the rapid rise in bond rates, signaling a bear market in bonds at just the time when stocks were turning south. While it's true that the 10-year Treasury rate rose from 2.06% last September (and 2.40% at the start of 2018) to a peak of 2.94% on February 21, the benchmark 10-year rate has since declined to 2.74% as of March 31, at quarter's end. This probably reflects, once again, that this article may have been written in late February, timed to outdated concerns.
Another dismal article last week was titled "April May Be Even Worse for U.S. Stocks as Demand Dries Up" (MarketWatch, March 29, by Thomas H. Kee, Jr.). The author, a former Morgan Stanley broker and founder of Stock Traders Daily, basically tells us that demand has dried up. He is referring to two kinds of demand. One is "natural demand," which is "based on population growth, natural inflation levels and natural economic cycles." A second source is demand from central banks, mostly the Federal Reserve and the European Central Bank (ECB), which over the past six years were buying assets. But the Fed has now reversed roles and is selling assets. He says the Fed is scheduled to remove $420 billion from its balance sheet this year, while "the buyer at the other end of the table is not buying..."
I'm not sure that's a major concern. The Fed's balance sheet is primarily made up of Treasury securities and mortgage-backed securities, not common stocks. And when it comes to public demand, you have to ask yourself, "Where else are you going to go?" Let's look at that middle-aged or retired couple reading a popular financial magazine. Are they going to invest more of their money in gold, which is in a narrow trading range? Or in cash, which yields under 1%? Or bonds, which yield little, are in danger of losing principle if rates rise, and are taxed at high rates? What are the options for passive investors if not stocks?
Watch for the Emergence of Spring Shoots
Just as a tree is sure its leaves will reappear
(It knows its emptiness is just a time of year)
The frozen mountain's dreams of April's melting streams
How crystal clear it seems, 'You must believe in spring'
- From "You Must Believe in Spring" by Michel Legrand (music), Alan & Marilyn Bergman (words)
Those living in the northeast know this was a tough winter with recurrent storms - even into late March. The south and west were also hard hit. A tough winter followed three killer hurricanes and California fires in the fall. Retail sales were surprisingly weak this winter. That doesn't make sense given the pay raises and bonuses from tax cuts plus the new hires, but it does make sense when you consider people couldn't shovel out the snow to get to the malls or restaurants. Even sales were slow, since deliveries were delayed by the weather. This cut into retail and restaurant sales, but Americans should begin to thaw during April.
The GDPNow model began the year anticipating 5.4% growth in Q1, then they retreated to 1.8% but their current estimate for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2018 is 2.4%, which isn't bad for a quarter which saw such weak retail sales in the consumer sector.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Also in the first quarter, the dollar declined despite rising interest rates. Gold was up 2% and Bitcoin was down 47%. The Wall Street Journal Dollar Index declined 2.5% in the first quarter, and more versus some key trading partners: -7.5% to the Mexican Peso, -5.6% to the Japanese yen, -3.6% to the British pound, and -3.3% to the Chinese yuan. This should help boost U.S. exports and reduce the trade deficit later on.
In short, look for some spring shoots to emerge - and don't believe all those downbeat Spring songs.
Disclosure: *Navellier may hold securities in one or more investment strategies offered to its clients.
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