The stock market got off to a strong start last week after China and the U.S. agreed not to impose tariffs on each other. Specifically, China’s Vice-Premier Liu He said the two sides “reached a consensus, will not fight a trade war, and will stop increasing tariffs on each other.” A joint statement issued in China and Washington said China would “significantly” increase its purchases of American goods, so in the end, the financial media overreacted to trade war talk, since these tariffs were used merely as negotiating tactics.
Later on, the stock market sold off on Thursday due to news that the North Korean nuclear summit in Singapore in June had been cancelled (temporarily, as it turns out). The stock market usually rallies going into holiday weekends and last week was no exception, with the S&P rising 0.3% and Nasdaq up 1.1%. People are usually happy leading up to holiday weekends and that tends to rub off on investor sentiment.
We have a lot to be thankful for, such as the fact that the 10-year Treasury bond yield has fallen under 3% and the Fed’s FOMC minutes revealed that any inflation fears are just “temporary.” Furthermore, the fact that small-capitalization stocks in the Russell 2000 continue to exhibit tremendous relative strength is a good sign, since the breadth and power of the overall stock market is expanding. Traditionally, when the Russell 2000 leads, it is very bullish for the market, so June and July are shaping up to be very positive!
More Reasons Why the Market is Likely to Rise in June
On Tuesday, Trim Tabs Investment Research reported that the stock buy-back boom continues at a relentless pace with U.S. companies announcing a whopping $6.1 billion per day in buy-backs after their first-quarter earnings announcements. When the fourth-quarter announcements were released in January and February, Trim Tabs pointed out that stock buy-backs hit an amazing $6.6 billion daily pace. Trim Tabs concluded by saying, “The buyback boom early this year confirms our view that the main use of corporate America’s tax savings will be takeovers and stock buybacks rather than capital investment or hiring.”
I should add that one of my largest stock holdings, Micron Technology (NASDAQ:MU), announced last week that it would expand its buy-back program by another $10 billion, so the stock surged in the wake of this announcement. Another large stock holding, Align Technologies (NASDAQ:ALGN), announced that it is increasing its buy-back program by $600 million, so the stock surged in the wake of this announcement. (Please note: Louis Navellier does currently hold a position in MU and ALGN. Navellier & Associates does currently own a position in MU and ALGN for client portfolios and mutual funds).
Another reason why June should be favorable is the rise in small-cap stocks combined with the annual realignment of the Russell indexes. The Russell 2000 hit another new high last week. The recent small-to-mid capitalization stock melt up is being caused by a strong U.S. dollar that diverts investors from large multinationals to domestic stocks. Even without the strong dollar as a tailwind, the annual Russell realignment in June often propels many small-capitalization stocks significantly higher.
The “melt up” in small-capitalization stocks is the strongest in at least two decades and is expected to accelerate in June as institutional investors (including our company) position their portfolios ahead of the stocks that they expect to be added to the Russell 2000 and 3000 indices. Several years ago, I remember that some of the small stocks that Russell added surged over 19% during the week of the realignment. These oversized surges were possible due to the fact that the liquidity in many small-cap stocks is so thin.
I should also add that the MSCI indices are also expected to add some Chinese blue-chip stocks in June, so I expect a surge in many of those stocks as well. The flow of funds into international and emerging market stocks in 2017 was simply incredible. However, crude oil prices often cause investors to flee emerging markets, so that exodus is clearly underway. Furthermore, considering that there is a growing currency crisis in several emerging markets – including Argentina, Burma, Cambodia, Indonesian, Iran, Paraguay, Turkey, Uzbekistan, Vietnam, and others – is also accelerating the exodus from emerging market investments. When there is an international currency crisis, the oasis currencies are the British pound, the Chinese yuan, the euro, Japanese yen, and the U.S. dollar, simply since these currencies have tremendous liquidity, so this capital flight is also good news for the many blue-chip Chinese ADRs.
10-Year Treasury Bond Yields Retreat Back Below 3%
Another reason for strong markets in June is that Treasury bond yields have suddenly stopped rising. The 10-year Treasury rate fell from 3.06% on Tuesday to 2.93% on Friday, mostly due to the Wednesday release of the minutes from the latest Federal Open Market Committee (FOMC). Rates fell because the FOMC comments about inflation were dovish, as the Fed made it clear that inflation has been subdued and if inflation perks up above its 2% target rate in the upcoming months, it may be temporary.
The FOMC said that only a “few” FOMC members expected inflation to rise above its 2% target. Translated from Fedspeak, this means they expect to see inflation fizzle out in the upcoming months. The bottom line is that the FOMC is not worried about runaway inflation, which means that further interest rate hikes beyond June may not be as certain as many Wall Street analysts fear. That change in expectations caused market rates like the 10-year Treasury bond to decline after the FOMC minutes were released.
The other news that may have helped put downward pressure on Treasury bonds was that the Commerce Department on Wednesday announced that new home sales declined 1.5% in April to an annual pace of 662,000. The average price of new homes rose to $407,300 in April, an all-time high. The supply of new homes for sale declined to a 5.4-month supply in April, down from a 6-month supply in March, so as inventories tighten up, prices tend to rise. Affordability remains a long-term concern, but as long as inventories remain tight, median prices are expected to rise. Zillow also reported on Thursday that median home sale prices rose 8.7% in the past year, which is the fastest pace in 12 years, to $215,600.
On Friday, the Commerce Department announced that durable goods orders declined 1.7% in April, due largely to a 29% decline in commercial aircraft orders (after a 61% surge in March). Excluding volatile transportation orders, durable goods orders rose 0.9% in April. Also notable is that vehicle sales rose a robust 1.8% in April. Overall, U.S. manufacturing remains healthy, which bodes well for GDP growth.
Disclosure: *Navellier may hold securities in one or more investment strategies offered to its clients.
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