Even though the S&P 500 is off to its strongest start in almost a decade, Lipper reported that stock mutual funds had outflows of $39.1 billion in the first quarter. Some of these outflows could have been attributable to ETFs capturing more market share, but another major reason for the market's strength seems to be the fact that companies in the S&P 500 repurchased $227 billion of their outstanding shares in the first quarter, according to FactSet. In the first quarter of 2018, S&P 500 companies repurchased $143 billion, so stock buybacks soared 59% last quarter, due in part to extremely low interest rates.
In this ultra-low interest rate environment, the S&P 500's dividend yield of approximately 1.85% remains super-attractive. The S&P 500 is up strongly this year despite low earnings projections, but my favorite economist, Ed Yardeni, pointed out last week that many institutional investors may be looking beyond the first quarter's lackluster earnings forecasts, since first-quarter sales growth is expected to be strong and earnings growth for the second-half of this year and into next year is anticipated to be relatively strong.
Frankly, the analyst community has been so aggressive in cutting their first-quarter earnings estimates that we could be on the verge of another round of positive operating earnings surprises in the coming weeks.
Negative rates in Europe and Japan causing capital flight
There were virtually no surprises from the European Central Bank (ECB) meeting and the release of the Federal Open Market Committee (FOMC) minutes on Wednesday. Both the ECB and the FOMC have reaffirmed that they will hold interest rates steady in 2019 and both acknowledged that growth has slowed. Interestingly, the ECB refuses to admit that negative GDP growth may be forthcoming, despite the fact that Italy has already slipped into a recession and mighty Germany is teetering on the brink.
There is no doubt that the negative interest rates in Europe are causing international capital flight. Thanks to the ongoing Brexit chaos, which is now delayed until October 31st, interest rates continue to fall around the world and the prevailing negative interest rates in Europe continue to spread. Last week, Germany's Federal Statistical Office reported that exports declined by 1.3% in February and imports declined 1.6%.
China's exports dropped 20.7% in February, but the Lunar New Year distorted the numbers that month. The General Administration of Customs announced last Friday that Chinese exports soared 14.2% in March. Still, in the past 12 months, China's imports have declined 7.6% through March. There is no doubt that lackluster domestic spending continues to hinder China's GDP growth. Overall, it appears that the Lunar New Year artificially inflated the March export report, so China will have to report both export and import growth in the upcoming few months to alleviate ongoing concerns about economic growth.
The U.S. Commerce Department also reported last week that factory orders declined 0.5% in February, the fourth decline in the past five months, so between the economic slowdown in China and Europe, orders for goods remain soft around the world, which will likely promote even lower interest rates!
When key interest rates approach 0% or become negative, like they are in the Eurozone and Japan, then quantitative easing is a sign of desperation by a central bank seeking to stimulate economic growth. The fact that the European Central Bank (ECB) is gearing up for more quantitative easing is very ominous.
President Trump's recent call for the Fed to re-commence quantitative easing also seems like a desperate move, especially since the Fed is doing the opposite by continuing to reduce its balance sheet. There is no doubt that President Trump has been setting up the Fed and especially Chairman Jerome Powell to be a scapegoat for the current economic slowdown. In the meantime, all the quantitative easing in Europe and Japan just fuels more stock buy-backs, since interest rates remain so low around the globe.
The most significant development that I noticed last week was that the bid-to-cover ratio for the Treasury auctions last week rose to a healthy 2.55, so I am not anticipating a significant increase in Treasury yields.
Inflation rates seem high but are skewed by an energy price surge
The news on the inflation front last week was misleading on the headline numbers due to rising energy prices. On Wednesday, the Labor Department announced that its Consumer Price Index (CPI) rose 0.4% in March due largely to the fact that retail gasoline prices rose almost 10%. Food prices also rose 0.3% in March. However, excluding food and energy, the core CPI rose only 0.1% and has risen 2% in the past 12 months. The headline CPI rose a similar 1.9% in the past 12 months. The March CPI increase was the largest in 14 months, but since almost all the increase was due to volatile food and energy components, the Fed will likely continue to be "patient" on its inflation assessment.
On Thursday, the Labor Department announced that its Producer Price Index (PPI) surged 0.6% in March, which was substantially higher than the economists' consensus estimate of a 0.3% increase. Wholesale gasoline prices surged 16% in March, which caused energy prices to rise 5.6%. Wholesale food prices rose 0.3% in March and the devastating floods in the Midwest put upward pressure on beef prices. The core PPI, excluding food, energy, and trade services, was unchanged and slowed to a 2% annual pace in the past 12 months. As long as the core rate of inflation is around 2%, the Fed will likely remain patient.
The rising cost of fossil fuels has made electric cars more attractive, but Tesla (NASDAQ:TSLA) is now facing increasing competition from VW Group (OTCPK:VWAGY) (Audi, Bentley, Lamborghini, Porsche & VW), which will be making more electric vehicles in 2020. The Audi e-tron arrives at U.S. dealers in May and the Porsche Taycan is expected to be a major success due to all the orders that have been placed. Although the Audi and Porsche electric vehicles are not cheap, they are competitively priced with equivalent Tesla models and are anticipated to systematically capture substantial market share from Tesla. Furthermore, with BMW (OTCPK:BMWYY), GM (NYSE:GM), Jaguar (NYSE:TTM), Polestar (Volvo (OTCPK:VOLVY)), and Mercedes (OTCPK:DDAIF) all now making quality electric vehicles to compete with Tesla, the outlook for Tesla remains bleak in the upcoming years as these new competitors materialize.
(Navellier & Associates does not own Tesla or Volkswagen in managed accounts or our sub-advised mutual fund. Louis Navellier and his family do not own Tesla or Volkswagen in personal accounts.)
On top of this competitive landscape, there was disturbing news from Panasonic and Tesla last week that the expansion of the Gigafactory just outside of Reno, Nevada is now "on hold." The decision to stop expanding the Gigafactory in Reno is a clear signal of slumping sales of the Model 3 in the U.S., so Tesla's new priority seems to be to focus on its second Gigafactory in China, in part to avoid tariffs on U.S.-made Tesla vehicles in China, so that Tesla can sell more vehicles in China without the high tariffs.
Disclosure: *Navellier may hold securities in one or more investment strategies offered to its clients.
Disclaimer: Please click here for important disclosures located in the "About" section of the Navellier & Associates profile that accompany this article.
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.