Our friends at the Bespoke Investment Group issued a report last Tuesday that showed that the S&P 500 is off to a great start this year, with 27 up days (73%) in the first 37 trading days. Since 1961, only eight other years have begun this strongly. In those eight cases, the S&P 500 rose by an additional average of 10.35% for the remainder of the year, with the smallest increase (2012) being 4.43% and the largest gain (1995) being 26.5%, so let’s hope history repeats itself with an additional 10% or greater rise this year.
It is important to remember that the U.S. remains an oasis of safety. China’s GDP growth has slowed, while Britain and the European Union (EU) are teetering on a recession. This is one reason why the U.S. dollar remains strong. Big multinational companies are being paid in eroding foreign currencies, so their earnings are being impacted by a massive currency headwind. However, domestic companies, especially many small-to-mid-capitalization stocks, are largely immune to any significant currency headwind.
High-Flying “Fad” Stocks do not Reflect the Real Market
If you just focus on FAANG stocks, or other stocks that have been “hyped” by financial media, the stock market can look scary. Fortunately, the silver lining and critical path to follow in an “overbought” market (like this) is stock selection, focusing on domestic stocks, especially small-to-mid-capitalization stocks.
As an example of an over-hyped stock that is the now-struggling, Tesla (NASDAQ:TSLA) was definitely impacted by the SEC request in federal court to hold Elon Musk in contempt over recent tweets that were supposed to be pre-approved. Specifically, Musk’s February 19th tweet that “Tesla made 0 cars in 2011 but will make around 500k in 2019” conflicted with the official guidance the company provided in a January 30th shareholder letter, which said up to 400,000 vehicles would be delivered in 2019.
Hours later, Musk clarified his tweet by saying that he “meant to say annualized production rate at end of 2019 probably around 500k, i.e., 10k cars/week” and then added that “deliveries for year still estimated to be around 400k.” In response, the SEC said that Mr. Musk “did not seek or receive preapproval prior to publishing this tweet, which was inaccurate and disseminated to over 24 million people.”
Musk subsequently tweeted that “SEC forgot to read Tesla earnings transcript, which clearly states 350k to 500k” and then added, “How embarrassing ...” This will be an interesting case in federal court, since a defendant is normally not supposed to publicly mock a regulator, especially on Twitter. As a result, Tesla’s stock remains volatile, due to the probability of an unfavorable federal court ruling.
I do not want any investors to chase high-flyers or “fad” stocks, since my Quantitative grading algorithm looks at each stock’s unique fundamentals.
(Navellier & Associates does not own Tesla or Honda in managed accounts and a sub-advised mutual fund. Louis Navellier and his family do not own Tesla or Honda in personal accounts.)
The U.S. Remains the Oasis of the Investing World
Federal Reserve Chairman Jerome Powell appeared before Congress last week to explain how the Fed is striving to promote steady economic growth. I find it especially interesting that Powell is watching global events, as he said, “Growth has slowed in some major foreign economies, particularly China and Europe.”
Brexit is expected to be a major event, since many companies, like Honda (NYSE:HMC), are fleeing Britain due to uncertainty over tariffs and the underlying business environment. Despite this uncertainty, both Britain and the European Union (EU) are now seeking to delay the March 29th Brexit deadline. Specifically, Prime Minister Theresa May has said Parliament can vote to extend the Brexit deadline on March 12th.
However, Prime Minister May does not want to delay Brexit beyond March 29th. This vote seems to be more about appeasing rebellious lawmakers and ministers who believe a “no deal” exit would be a disaster. The EU is hoping for a Brexit extension, but remains divided on the timing. Overall, it is apparent that politicians are doing what they do best – they “kick the can down the road,” which could be a disaster for both Britain and the EU. The business community cannot plan amidst all this uncertainty, so both the British pound and euro remain weak, with recessions for Britain and the EU looking inevitable.
In the meantime, Venezuela remains a humanitarian disaster. The fact that the Venezuelan military has violently blocked trucks with food and medical aid on both the Brazilian and Colombian borders is expected to cause more army desertions. Colombia reported on Tuesday that 320 soldiers deserted in a span of four days. Since there are an estimated 200,000 troops in the Venezuelan military, this is a mere trickle. However, many soldiers are hungry due to acute food shortages, so it may be just a matter of time before the military sides with the Venezuelan people, defying the generals – who got rich under Maduro.
Last week, Vice President Mike Pence and Venezuelan opposition leader Juan Guaido agreed on a strategy to tighten the noose around President Maduro and his generals. Specifically, Pence announced more sanctions against Venezuela and $56 million in aid for neighboring countries with Venezuelan refugees. The detention of Univision’s Jorge Ramos and the seizure of his camera crews after Ramos asked Maduro about “young people eating out of a garbage truck,” has helped increase international pressure to oust Maduro. Ramos and his Univision crew were subsequently deported from Venezuela. Overall, Pence said that “we hope for a peaceful transition to democracy, but President Trump has made it clear: All options are on the table,” adding that Trump is “100%” in support of Juan Guaido.
Brexit and Venezuela are just two examples of why the U.S. remains an oasis in a troubled world.
The most exciting economic news last week came out on Tuesday, when the Conference Board announced that its consumer confidence index surged to 131.4 in February, up from a revised 121.7 in January. This was a huge surprise, since economists were expecting the index to come in at 124.7. The “expectations” component soared to 103.4 in February, up sharply from 89.4 in January.
There is no doubt that the end of the federal government shutdown boosted consumer confidence. After this week’s late winter storms, improving weather in the spring should also boost consumer confidence, so I expect that the consumer confidence index will hit an 18-year high in the upcoming months.
On Thursday, the Commerce Department announced that GDP rose at a 2.6% annual pace in the fourth quarter, substantially above analyst consensus estimates of a 2.2% annual pace. For all of 2018, U.S. GDP rose an impressive 3.1%. Overall, we remain in a “Goldilocks” environment characterized by a lack of inflation, moderate interest rates, a dovish Fed, and a strong U.S. dollar. There is no doubt that the U.S. remains an oasis amidst the impending Brexit chaos and concerns about global GDP growth.
The biggest challenge that investors have is identifying stocks that will sustain strong sales and earnings momentum in a decelerating environment.
Disclosure: *Navellier may hold securities in one or more investment strategies offered to its clients.
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Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.