Market Outlook Letter

Transcription

1 October 30, 2017 Market Outlook Letter 3 0 YEARS NAVELLIER Our growth portfolios in the third quarter posted their strongest relative performance in several years and our international portfolios remain exceptionally strong. Our friends at Bespoke pointed out that through the third quarter this year, the top 10% of stocks in the S&P 500 with the most international revenues rose a stunning 28.41%! Additionally, the flow of funds into international stocks, especially ADRs, remains relentless. A weaker U.S. dollar for most of 2017 as well as strong global GDP growth is helping to boost the parade into international stocks. We expect that Chinese ADRs will remain especially strong, simply because the flagship Chinese stocks are being added to the MSCI indices in June and September of 2018, so the institutional buying pressure is expected to remain relentless for the next several months, especially since indexing is very popular via the MSCI indices. We do have to add that China remains a country of many contradictions, where there are many negative macro factors but also many fast-growing companies to buy. So we plan to remain vigilant in 2018 as to how the top-down and the bottom-up approaches square themselves out. The second most import factor to selecting stocks this year according to Bespoke is positive analyst earnings revisions. Fortunately, our growth portfolios are characterized by extremely strong analyst earnings revisions, which typically precede big earnings surprises. Here is a link to our website that shows our most recent earnings surprises: Here is another link to our website that shows analyst consensus forecasted sales and earnings estimates: As always, we are especially excited about the third-quarter announcement season, since we expect better than expected sales, earnings and positive guidance to propel our respective stocks higher. That is the good news. The bad news is that three months ago, the analyst community expected that the S&P 500 would post 8.6% annual third-quarter earnings growth, but those estimates have now been slashed to only 4.3% annual earnings growth. The deceleration of the S&P 500 s third-quarter earnings momentum is largely attributable to the energy sector, which is facing more challenging year-over-year comparisons. Fortunately, our growth portfolios are still characterized by accelerating third-quarter sales and earnings momentum, so I expect that many of our stocks will continue to emerge as market leaders. We will openly admit that there is a lot of melt up talk on Wall Street as we head into the heart of the thirdquarter earnings announcement season. Ironically, while ETF inflows remain strong, ETF trading volume is declining, signaling that investors are increasingly complacent. Specifically, The Wall Street Journal reported recently that daily trading in exchange traded funds and notes averaged $66 billion in September which was near the lowest level in three years. All too often, it gets quiet before the storm, so the eerie silence in ETF trading is even giving Louis Navellier a bit of the heebie-jeebies. Even though we are entering the seasonally strong time of year for stocks, investor expectations are very high, so it is crucial that our growth stocks live up to analyst expectations and provide positive guidance. Fortunately, while the S&P 500 s third-quarter earnings estimates have been slashed, in the past three months, our average growth stock portfolio has had their consensus earnings estimates revised significantly higher, so we are especially optimistic about the third-quarter earnings announcement season. NCD

2 According to Bespoke in the past 20 years, October has been a good month, especially in bull markets. Even better, November is even stronger and often a big rally commences just before Thanksgiving. If the stock market was going to correct, it would have happened during August and September, which are seasonally weak months. So looking forward, we expect that our growth stock portfolios will have a stunning third-quarter earnings announcement season. We expect that November will be even better, since it is a seasonally strong time of year. As a result, we are expecting a strong finish to 2017, especially for our growth stocks portfolios. The wild card remains North Korea, which may spoil what is otherwise a pretty positive outlook. Since it is impossible to predict what Kim Jong-un will test-fire next and what President Trump will do in response, it is not possible to factor that into our analysis other than to say that it remains a big unknown. FOCUS ON THE FED Recently, the Fed released the minutes from its last Federal Open Market Committee (FOMC) meeting. The most revealing tidbit was that several FOMC officials were wondering whether or not another key interest rate hike is necessary in December due to the lack of inflation. As a result, these dovish FOMC officials noted that some patience was warranted before hiking key interest rates until the Fed can better assess inflation trends. The lead hawk on the FOMC is Kansas City Fed President Esther George, who called for a December key interest rate hike. The big dove on the FOMC was Minnesota Fed President Neel Kashkari who is vocally arguing that no additional key interest rate hikes are needed until inflation re-approaches the 2% level. Another big dove, Chicago Fed President Charles Evans said on Wednesday that he wanted an open debate in December about a potential key interest rate hike. Finally, I should add that if Janet Yellen wants to be re-nominated by President Trump as the Fed Chairman for a second term, I suspect that Yellen should also be dovish, since it would spur more robust economic growth that President Trump is actively seeking. We still expect that the FOMC will raise key interest rates in December by 0.25%, since many Fed members are fighting a mythical inflation monster that is currently hiding. The truth of the matter is that inflation tends to cool in the fall (due largely to slumping energy demand) and then rise in the spring (due to rising energy demand), so December rate hikes have become very popular for the Fed in recent years. Furthermore, since many of us tend to be distracted during the holidays, the Fed also gets less grief and criticism when they raise key interest rates at their December FOMC meeting. Regardless, of whether or not the Fed raises key interest rates in December, we remain in a Goldilocks environment of low long-term bond yields and steady earnings growth. Furthermore, the U.S. economy is now growing at a 3% annual pace without any meaningful signs of inflation. There is no doubt that after three devastating hurricanes and the horrific fires in California that GDP growth is being aided by strong vehicle and home improvement sales. The Institute of Supply Management (ISM) manufacturing index is now at the highest level in 13 years, while its service index is at its highest level in over 12 years. In other words, pinch yourself, this is as good as its gets with robust economic growth and no signs of meaningful long-term inflation. SUMMARY Our growth stock portfolios continue to have especially strong sales and earnings, so we expect to finish the year on a very strong note due largely to the fact that the S&P 500 s earnings are decelerating, while our stocks are still characterized by strong sales and earnings momentum. In the past three months, our average growth stock has had its consensus earnings revised significantly higher, while the S&P 500 is characterized by analyst earnings estimate cuts and decelerating earnings momentum. Since the stock market tends to get more narrow as it climbs higher, there is no doubt in our minds that many of the new market leaders will continue to emerge from our powerful growth stock portfolios.

3 Interestingly, the vast majority of our Large Cap Growth stocks have net after-tax operating margins of 8% to 33%, which means that they are monopolistic companies dominating their respective businesses. Typically, companies that are monopolies have pricing power and economies of scale to keep competitors out of their respective businesses. As a result, many of our Large Cap Growth stocks have predictable sales, earnings and consistent earnings surprises. Due to the fact that these monopolistic companies have an average Return on Equity (ROE), many of our Large Cap Growth stocks continue to buy back their outstanding stock and boost their underlying earnings per share. The biggest problem that we have with our Large Cap Growth stocks is that they are scheduled to disappear within 17 years at the current stock buy-back pace. Stock buy-back activity also persists for the overall stock market and the S&P 500 will disappear within 27 years at the current stock buy-back pace. The disappearing stock market largely explains the persistent melt up this year. Due to a shrinking U.S. stock market, the foreign invasion of our growth stock portfolios will likely continue. With over 3,000 domestic stocks disappearing in recent decades, the flow of funds into international companies is expected to persist, especially since flagship Chinese stocks are being added to the MSCI indices in June and September of This institutional buying pressure is expected to remain relentless for the next several months since the International Monetary Fund (IMF) is forecasting 3.6% annual global GDP growth in 2017 and even stronger GDP growth in Overall, we hope you feel good about our growth stock portfolios that are characterized by strong sales, continued strong earnings momentum, positive analyst earnings revisions, and trade at reasonable forecasted market multiples. So far, 2017 has been the easiest year to beat the S&P 500 since 2007 for our Large Cap Growth portfolio due to the fact that key fundamental factors, like strong international sales and positive analyst revisions are attracting persistent institutional buying pressure. The fact that so many of our Large Cap Growth stocks are monopolies with high operating margins that dominate their respective businesses, is even better. We strongly recommend that you hold a high proportion of our growth stock portfolios in your overall investment allocation and enjoy the ride! LOUIS G. NAVELLIER CEO/Chief Investment Officer MICHAEL J. BORGEN Senior Portfolio Manager MICHAEL GARAVENTA Portfolio Manager TIM HOPE Portfolio Manager P.S. Try out our DIVIDEND GRADER rating system at Over 1,500 dividend-paying stocks are rated WEEKLY. It s a free service and complements our existing Stock and ETF Graders. Important Disclosures: The views and opinions expressed are those of Navellier & Associates at the time of publication and are subject to change. There is no guarantee that these views will come to pass. Investment in equity securities involves substantial risk and has the potential for partial or complete loss of funds invested. Although the information in this communication is believed to be materially correct, no representation or warranty is given as to the accuracy of any of the information provided. Certain information included in this communication is based

4 on information obtained from sources considered to be reliable. However, any projections or analysis provided to assist the recipient of this communication in evaluating the matters described herein may be based on subjective assessments and assumptions and may use one among alternative methodologies that produce different results. Accordingly, any projections or analysis should not be viewed as factual and should not be relied upon as an accurate prediction of future results. Furthermore, to the extent permitted by law, neither Navellier nor any of its affiliates, agents, or service providers assumes any liability or responsibility nor owes any duty of care for any consequences of any person acting or refraining to act in reliance on the information contained in this communication or for any decision based on it. Please obtain and review all financial material carefully before investing. This communication has been provided to you for informational purposes only and may not be relied upon by you in evaluating the merits of investing in any Navellier investment strategy or composites. Past performance is not indicative of future results, and there can be no guarantee as to the accuracy of market forecasts. Opinions, estimates, and forecasts may be changed without notice. This material is not an offer, or a solicitation of an offer, to purchase any securities, including shares of any investment company. The views and opinions expressed are provided for general information only. The views and opinions expressed are those of Navellier at the time of publication and are subject to change. There is no guarantee that these views will come to pass. The holdings identified do not represent all of the securities purchased, sold, or recommended for advisory clients and it should not be assumed that investments in securities identified and described were or would be profitable. 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ETFs are subject to additional risks: 1) ETF shares may trade above or below their net asset value; 2) The value of an ETF may be more volatile than the underlying portfolio of securities the ETF is designed to track; 3) The cost of owning shares of the ETF may exceed those a client would incur by directly Investing in the underlying securities; and 4) Trading of an ETF s shares may be halted if the listing exchange s officials deem it appropriate, the shares are delisted from the exchange, or the activiation of market-wide circuit breakers (which are tied to large decreases in stock prices) halts stock trading generally, Grader Disclosure: The Navellier stock ratings, Grades, data, company information and portfolio grades are general information that do not take into account your individual circumstances, financial situation or needs, nor does it present a personalized recommendation to you. Individual stocks presented may not be suitable for you. The sample portfolios and any accompanying charts are for informational purposes only and are not to be construed as an offer to buy or sell any financial instrument and should not be relied upon as the sole factor in an investment making decision. The performance presented is not based on any actual securities trading, portfolio, or accounts, and the reported performance of the A, B, C, D, and F portfolios (collectively the model portfolios ) should be considered mere paper or pro forma performance results based on Navellier s research. 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(4) The results portrayed reflect the reinvestment of dividends and other income. (5) The net performance results portrayed include the reinvestment of all dividends and other earnings. Net results also include our estimation of investment advisory fees, administrative fees, transaction expenses, or other expenses that a client would have paid or actually paid. A 3.00% annualized advisory fee is built into the net return calculations although that fee is higher than any actual advisory fee currently clients are paying to Navellier & Associates, Inc. for investment advisory services. (6) LIMITATIONS INHERENT IN MODEL RESULTS: The performance results presented are from a model portfolio, not an actually funded portfolio, and may not reflect the impact that material economic and market factors might have had on the adviser s decision making if the adviser were actually managing clients money, and thus present returns which are greater than what a potential investor would have experienced for the time period. The results are presented for informational purposes only. No real money has been invested in this model portfolio. The model performance results should be considered mere paper or pro forma performance results. The model results do not represent actual funded trades and may not reflect actual prices paid or received for actual funded trades. (7) The model results may or may not relate, or only partially relate, to the type of advisory services currently offered by Navellier & Associates, Inc. (8) In most cases, the adviser s clients had investment results materially lower than the results portrayed in the model.

5 Index Disclosures: The Russell 3000 Index measures the performance of the 3,000 largest U.S.companies based on total market capitalization, which represents approximately 98% of the total investable U.S. equity market. This index is considered a reasonable measure of the general performance of the broad U.S. equity market. The returns for the Russell 3000 Growth Index include the reinvestment of any dividends. The asset mix of equity accounts may not be precisely comparable to the presented indices. Presentation of index data does not reflect a belief by the Firm that the Russell 3000 Growth, or any other index, constitutes an investment alternative to any investment strategy presented in these materials or is necessarily comparable to such strategies. The Russell 1000 Growth Index measures the performance of the Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values. This index is considered a reasonable measure of the performance of the large cap, growth oriented U.S. companies. The returns for the Russell 1000 Growth Index include the reinvestment of any dividends. The asset mix of large cap growth equity accounts may not be precisely comparable to the presented indices. Presentation of index data does not reflect a belief by the Firm that the Russell 1000 Growth, or any other index, constitutes an investment alternative to any investment strategy presented in these materials or is necessarily comparable to such strategies. The Russell Mid Cap Growth Index measures the performance of those Russell Mid Cap companies with higher price-to-book ratios and higher forecasted growth values. The index is considered a reasonable measure of the performance of the mid cap, growth oriented companies. The returns for the Russell Mid Cap Growth Index include the reinvestment of any dividends. The asset mix of mid cap growth equity accounts may not be precisely comparable to the presented index. Presentation of index data does not reflect a belief by the Firm that the Russell Mid Cap Growth Index, or any other index, constitutes an investment alternative to any strategy presented in these materials or is necessarily comparable to such strategies. The Russell 2000 Growth Index measures the performance of those Russell 2000 companies with higher price-to-book ratios and higher forecasted growth values. This index is considered a reasonable measure of the performance of the small cap, growth oriented U.S. companies. The returns for the Russell 2000 Growth Index include the reinvestment of any dividends. The asset mix of equity accounts may not be precisely comparable to the presented indices. Presentation of index data does not reflect a belief by the Firm that the Russell 2000 Growth, or any other index, constitutes an investment alternative to any investment strategy presented in these materials or is necessarily comparable to such strategies. The S&P 500 Index consists of 500 stocks chosen for market size, liquidity and industry group representation. It is a market value weighted index with each stock s weight in the index proportionate to its market value. The reported returns reflect a total return for each quarter inclusive of dividends. Presentation of index data does not reflect a belief by Navellier that any stock index constitutes an investment alternative to any Navellier equity strategy presented in these materials, or is necessarily comparable to such strategies and an investor cannot invest directly in an index. Among the most important differences between the indexes and Navellier strategies are that the Navellier equity strategies may (1) incur material management fees, (2) concentrate investments in relatively few ETFs, industries, or sectors, (3) have significantly greater trading activity and related costs, and (4) be significantly more or less volatile than the indexes. All indexes are unmanaged and performance of the indices includes reinvestment of dividends and interest income, unless otherwise noted, are not illustrative of any particular investment and an investment cannot be made in any index. FactSet Disclosure: Navellier does not independently calculate the statistical information included in the attached report. The calculation and the information are provided by FactSet, a company not related to Navellier & Associates, Inc. Although information contained in the report has been obtained from FactSet and is based on sources Navellier believes to be reliable, Navellier does not guarantee its accuracy, and it may be incomplete or condensed. The report and the related FactSet sourced information are provided on an as is basis. The user assumes the entire risk of any use made of this information. Investors should consider the report as only a single factor in making their investment decision. The report is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security. FactSet sourced information is the exclusive property of FactSet. Without prior written permission of FactSet, this information may not be reproduced, disseminated or used to create any financial products. All indices are unmanaged and performance of the indices include reinvestment of dividends and interest income, unless otherwise noted, are not illustrative of any particular investment and an investment cannot be made in any index. Past performance is no guarantee of future results. No Financial Advice: The views and opinions expressed do not constitute specific tax, legal, or investment or financial advice to, or recommendations for, any person, and the material is not intended to provide financial or investment advice and does not take into account the particular financial circumstances of individual investors. Before investing in any investment product, investors should consult their financial or tax advisor, accountant, or attorney with regard to their specific situation. 1 East Liberty Suite 504 Reno Nevada