The precision air strikes by Britain, France, and the U.S. early Saturday morning in Syria appear to be designed to avoid any escalation from an Iranian or Russian response, but Russia has vowed that there will be "consequences." So far, it appears there is minimal risk of a major escalation.
Meanwhile, the S&P 500 rose 2% last week as trade war fears faded after Chinese President Xi Jinping adopted a conciliatory tone. That threw cold water on the overblown trade war fears that the financial media had so relentlessly propagated over the last few weeks. Specifically, President Xi said, "In a world aspiring for peace and development, the Cold War and zero-sum mentality look even more out of place."
Xi also implied that China's 25% tariffs on U.S.-made vehicles would be slashed. More importantly, President Xi said that China would respect U.S. intellectual property rights and work for a meaningful solution. President Trump promptly thanked President Xi in a tweet, so a serious trade war was averted.
Fantasies and Fake News are More Entertaining Than Facts
Despite the fact that tariffs are now expected to diminish and no trade war has broken out between the U.S. and China, CNBC was in Iowa last Thursday talking about China imposing tariffs on U.S. pork!
Let me say this clearly: Any new Chinese tariffs on pork, soybeans, and other major U.S. exports to China is a fantasy, just like the CNBC statements that "no one will drink Mexican beer" under President Trump, just after the 2016 Presidential election. What is really going on is that since President Trump won in the states that produce most of the pork and much of the soybeans grown in the U.S., some pundits on CNBC are propagating scary forecasts in swing states to try to help sway the November mid-term elections.
Naturally, this "fake" financial news allows unscrupulous short-sellers and traders to manipulate selected stocks. I remain amazed that these fantasies of what "might" happen (which I call fake news) are allowed on the air, thereby aiding and abetting unscrupulous Wall Street operatives. Since Wall Street is really a manic crowd that reacts rather than thinks, it is imperative that investors recognize when the financial media is making up news to stir up fears designed to make financial markets unnecessarily volatile.
Speaking of volatility, now that the S&P 500 has retested its February 8th low four separate times, with trading volume drying up on the last retest, it appears that most of the selling pressure has been exhausted. My head trader pointed out that many of our favorite stocks have been "melting up" on light trading volume, which raises the question of what will happen when trading volume picks up. My answer is that they could explode to the upside with higher trading volume if they report stunning first-quarter sales and earnings! So please fasten your seat belts. Hang on and enjoy some potential "explosions" to the upside.
PPI and CPI Inflation are Rising, But the Fed's Favorite Indicator is Flat
The economic news last week was mostly about inflation. On Tuesday, the Labor Department reported that its Producer Price Index (PPI) rose 0.3% in March, substantially higher than economists' consensus of a 0.1% increase. The core PPI, excluding food, energy, and trade, rose 0.4%. This marks the third month in a row that the core PPI has risen 0.4%, fueling inflation fears. In the past 12 months, the PPI and core PPI have risen by 3% and 2.9%, respectively, so it definitely appears that inflation is brewing.
On Wednesday, the Labor Department reported that the Consumer Price Index (CPI) declined by 0.1% in March, substantially below economists' consensus for a 0.2% increase, but the core CPI, excluding food and energy, rose 0.2% in March, which was in line with economists' expectations. A 4.9% decline in gasoline prices in March was largely responsible for the CPI's decline. In the past 12 months, however, the CPI and core CPI have risen 2.4% and 2.1%, placing them above the Fed's 2% inflation target.
Despite the PPI and CPI rising above 2%, the Fed's favorite inflation index, the Personal Consumption Expenditure (PCE) index, is at 1.6% and has not hit the Fed's 2% target since 2011, so the Fed may not raise rates again until the PCE hits 2% and market rates also rise. Last week, the FOMC minutes were released, revealing that inflationary pressures softened in late 2017, which bolstered the argument that the Fed may delay raising key interest rates. The FOMC minutes also discussed the costs and benefits of allowing the U.S. economy to run "hot," and discussed how the Fed might raise rates to slow growth.
Speaking of inflation, I should add that crude oil prices rose last week on President Trump's tweet that there would be a U.S. military action in Syria that could impact crude oil prices. Still, the recent rise in crude oil prices seems to be predominantly related to seasonal demand and tightening inventories. At current price levels, many crude oil companies and refiners are poised to make steady, predictable profits, so I expect that the energy sector is now on the verge of delivering its most profitable year since 2014.
Disclosure: *Navellier may hold securities in one or more investment strategies offered to its clients.
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