Markets roll over then bounce … two big fears weighing on investors … why Louis urges investors to stay the course … last chance to check out Louis’ income-based market system
Yesterday, the markets were a sea of red.
Leading the declines was the Dow, shedding 2.1%. Meanwhile, the S&P 500 and the Nasdaq fell 1.6% and 1.1%, respectively.
As I write Tuesday morning, markets are rebounding strongly, with the Dow again leading the way, up 1.9%.
While today’s buying is a welcomed relief, the recent trend in the market has been down. As evidence, last Friday, the S&P 500 posted its first weekly loss in four weeks…followed up by yesterday’s steep selloff.
So, what’s behind this downward pressure?
That’s what famed investor, Louis Navellier, answered for his Accelerated Profits subscribers in yesterday’s Weekly Profit Guide podcast.
Today, let’s find out how he’s is sizing up the recent weakness, and why he’s urging a level-headed perspective if we see more selling later this week.
In short, yes, there are legitimate challenges out there, but if you’re invested in fundamentally superior stocks, hang tight. This is not the time to sell.
Let’s jump in.
***Inflationary fears edge out good earnings numbers
For newer Digest readers, Louis is an investing legend.
MarketWatch called him “the advisor who recommended Google before anyone else.” And Forbes gave him the title “King of Quants.”
“Quant” simply means he uses numbers and algorithmic-rules to guide his investment decisions.
The approach has been highly-effective, as Louis has amassed one of the most respected track records in the investment community.
Circling back to the selling pressure weighing on markets recently, here’s Louis from yesterday’s Weekly Profit Guide:
There’s no doubt that the market was starting to lose its mojo last week.
Small-cap stocks were unusually weak. And then of course, those FANG stocks became an oasis again. So, we had a bit of a divergence and a concentration in leadership.
But the institutional buying pressure definitely disappeared last week as the inflation data came out. I think a lot of people are just trying to process the inflation data.
Louis goes on to say that he was very disappointed with the recent producer price index report. That’s because it was up 7.3% in the last 12 months, and 60% of that increase is attributed to service costs which are unlikely to fall.
This is an important distinction to note…
It’s one thing for inflation to push product prices higher. In that case, you could blame supply-chain issues, which will eventually be resolved.
But when the cost of services climbs, that’s reflective of stickier inflation, or as Louis says “(inflation that is) not as transitory as the Fed is painting it out to be.”
However, we are seeing some moderation in inflation. Back to Louis on that note:
That said, OPEC just boosted its production, and a lot of parts of the world are slowing down because of concerns over the Delta variant of Covid-19. And I do expect energy prices to fall in September when worldwide demand peaks.
So, there will be some transitory issues associated with inflation. You can see lumbar prices have moderated, even though we’re still in a building boom.
And some of the inflation hedges and commodity-related stocks aren’t as strong as you might think, even though most of them are going to have great earnings. So, that’s one thing Wall Street is trying to grasp.
As we’ve noted here in the Digest, many investors fear that if transitory inflation becomes sustained inflation, it will force the Fed to raise rates. And as the logic goes, higher rates would snuff out earnings growth, which would hurt stock prices.
But here’s Louis, speaking to that fear:
The U.S. cannot afford higher interest rates because we have a big deficit. It’s as simple as that…
So, this low interest rate environment…is very good for the stock market long-term. All these people that say markets are overvalued aren’t looking at it versus interest rates…
I just think we have to let earnings come out, and we’ll sort everything out.
I plead with everyone – don’t get flushed out just before earnings come out.
***The resurgence of Covid-19 is rattling markets
Inflationary fears are just one of the concerns hanging over the investment markets.
Back to Louis on the second big fear:
The other (thing Wall Street is worrying about) is the world paranoia about Covid-19’s Delta variant.
Now, this paranoia is so bad that Toyota – a major sponsor of the Olympic games, which are in Japan, of course – they don’t want their name to be used, and they don’t want to have any ads out there. They’re embarrassed.
Because in Japan, there’s a huge debate about whether they should have the Olympic games or not. And, of course, there will be no fans or spectators.
Closer to home, USA Today reports that new coronavirus cases rose in all 50 states on Sunday for the fourth day in a row on a rolling seven-day average.
Overall, the weekly rolling average for U.S. cases has nearly tripled in the last month.
Wall Street is watching this, fearing the reintroduction of restrictions and slower economic growth. That’s behind much of the weakness we saw yesterday.
***Stay the course, despite these reasons to be concerned
So, we have waning institutional buying pressure, stickier services-related inflation, and rising Covid-19 cases. These are legitimate concerns.
Louis is urging a level-headed response to all this:
The truth of the matter is the Atlanta Fed has our economy growing at 7.5% right now. But a lot of economists think we’re going to be growing at 9% or 9.1% in the second quarter. So, that’s pretty good.
And the order backlogs are so big the third-quarter growth is going to be pushing 6%, and the fourth quarter growth – it’s hard to estimate that – but they think about 2.8%. So, we’re looking at one of the strongest years ever for economic growth…
Don’t let the world’s paranoia scare you. The market is a manic crowd. If we behave like a manic crowd, we’ll always be last in and last out.
So, let the crowd freak out and do its thing, and then we’ll just step in and go bargain hunting, and prosper when everyone else is worried.
Again, the world might be worried about Covid-19, but the U.S. is going to be a lot more resilient…
So, let’s not let the paranoia around the world scare us. The bottom line is that the U.S. is an oasis, the stock market is an oasis, and residential real estate is an oasis.
***Though Louis sees gains coming for fundamentally superior stocks, income investors are still facing major headwinds
While quality stocks might be headed higher, we can’t say the same thing for yields on income investments.
Several weeks ago, here in the Digest, we highlighted the pathetic shape of traditional income investments in today’s market:
According to the FDIC, the national average interest rate on savings accounts is 0.06%.
It improves only marginally if we look at CDs. Whereas in 1984 the average one-year CD paid over 10%, today, it’s 0.17%.
For a five-year CD, the rate climbs only to 0.31%.
As I write Monday morning, the 10-year Treasury bond – which has soared higher this year – still only clocks in at 1.48%.
Since then, the 10-Year Treasury bond yield has further eroded. It’s at 1.20% as I write Tuesday.
Louis has been focusing his quantitative approach on helping address this problem. The result is something he calls the Accelerated Income Project – it’s a powerful system for generating income in a zero-rate world.
Louis put together the results of this project in a free video that you can watch by clicking here. If you’re worried about inflation and its impact on your retirement, don’t miss this one. It could make a major difference in the shape of your retirement finances. But if you’re interested, please watch it today as we’ll be limiting the screening beginning later this evening.
And as to recent market weakness and the potential for declines later this week, hang in there. As today shows, there’s still plenty of strength in this market.
Have a good evening,