Louis Navellier thinks markets are headed up … the weakening dollar is great for emerging market stocks … is it time to get back into gold? … troubling anecdotal news about U.S. consumers
Get ready for a rally.Platinum Growth Club subscribers in yesterday’s Special Market Podcast. Driving this bullish prediction are Louis’ expectations for cooling inflation data and dovish commentary from the Fed next week. Louis isn’t alone. The treasury market is pricing bonds for cooler inflation too. Let’s jump to Louis’ podcast for more details:That’s what legendary investor Louis Navellier just told his
The 10-year Treasury yield is 3.45%. Not that long ago, it was 4.2%.So, we’ve had a dramatic decline in treasury bond yields on the anticipation that both inflation is cooling and the economy is cooling.
On the inflation front, Louis says to be on the alert tomorrow when we’ll get the latest data on inflation at the wholesale level – the Producer Price Index.He also flags next Tuesday, when we’ll learn the latest Consumer Price Index figures. Finally, the most important day comes next Wednesday when the Fed concludes its December policy meeting. Louis expects a dovish statement from Fed Chairman Jerome Powell. Back to his podcast:
The Fed never fights market rates.I’m keenly aware the yield curve is severely inverted. But I’m also aware the Fed doesn’t want to invert the yield curve further and destroy the banking industry that it regulates.
For readers who are less familiar with the underlying dynamics here, banks make their money by paying depositors like you and me a low interest rate on our cash, while receiving a higher interest rate on the money they loan out to consumers and businesses.This spread between lower short-term rates and higher long-term rates, called the “net interest income” (NII), is their profit margin. The problem is that today, the yield curve is inverted. In other words, shorter-term debt offers higher interest rates than longer-term debt. This effectively means there’s little to no profit spread. The longer this inversion persists, the more economic pain for banks. For our economy to run smoothly, we need a well-functioning banking system. This unhealthy situation is part of the reason why Louis believes we’ll see greater dovishness from the Fed in the coming months. Overall, here’s Louis’ bottom line for what he sees coming:
This market is going to get much more decisive on Friday, Tuesday, and next Wednesday.the markets can launch. As far as I’m concerned, [next Wednesday] will be the last Fed rate-hike of 50 basis points. Good news is around the corner… as far as inflation and interest rates are concerned, it’s awesome. The good news should propel a lot of stocks higher.Then hopefully we’ll have all the good news out of the way, and then
If you’re looking to allocate money into stocks, don’t overlook foreign market stocks
There’s one big reason behind this recommendation…The falling U.S. dollar. Below, we look at the U.S. Dollar Index. This is a measure of the value of the U.S. dollar relative to the value of a basket of six major global currencies – the euro, Swiss franc, Japanese yen, Canadian dollar, British pound, and Swedish krona. The dollar has been on a tear all year along…until September. As you can see below, after topping out late that month, it traded sideways in October, and then fell off a cliff in November.
Momentum is sharply lower, which is a tailwind for foreign stocks, especially emerging market stocks. That’s because a weaker dollar takes pressure off exchange rate headwinds faced by foreign currencies.To get a sense for just how influential the U.S. dollar is on emerging market stocks, let’s look at the interplay between the U.S Dollar Index and the ETF, EEM, which is the iShares MSCI Emerging Markets ETF. Its top holdings are Taiwan Semiconductor, Tencent, Samsung, Alibaba, and Reliance Industries. Below, EEM is in black and the U.S. Dollar Index is in green. We compare their relative percentage change performance over the last 15 years. The inverse correlation is stark and consistent.
The “Bond King” Jeffrey Gundlach has emerging markets on his radar and is calling for their outperformance all next year.From Gundlach:
I do think the dollar has peaked out, … which does suggest that investments in emerging markets like emerging market equities are probably going to be a good winner in 2023.It’s time to buy emerging market equities if you have an annual allocation switch. … I really do think the time is right.
In his quant trading service, Breakout Trader, Luke Lango recently put on two new emerging market trades that are benefiting from a weaker dollar
For newer Digest readers, Breakout Trader is Luke’s short-term, algorithmic-based trading service. The heavy lifting of the trade analysis is accomplished by extremely powerful computers running sophisticated computations. They scan hundreds of millions of pieces of market data every week, searching for a specific combination of price action, moving averages, relative strength, and volume, among other criteria. The goal is to identify stocks that are currently breaking out and poised for a continued surge. As part of the service, Luke evaluates which sectors are outperforming each week. For several weeks in a row now, emerging markets have appeared high on the leaderboard. Given this, Luke pulled the trigger on a new emerging market trade on Tuesday. As I write Thursday morning, the stock has already climbed 6% since the opening bell Tuesday. To learn more about Breakout Trader, click here.
One other asset benefiting from the weaker dollar is gold
But let’s be clear…The yellow metal has consistently broken the hearts of gold bugs for quite a while now. So, let’s be measured with our ensuing cautious optimism. As you can see in the chart below, after setting an all-time-high in the summer of 2020, gold fell, rallied nearly to its previous high, and then crashed again. But beginning in September, the precious metal began carving out a bottom, which turned into a burst of gains last month as dollar weakness accelerated.
To get a sense of what might be coming, let’s look at the historical relationship between gold and the U.S. dollar.Similar to what we saw with EEM, there’s a clear inverse relationship. Gold is in black, the U.S. Dollar Index is in green.
Yes, gold has been a heartbreaker for many quarters now. But the big difference today is that the dollar is now a tailwind. That hasn’t been the case since the beginning of 2021.If you have zero gold exposure, consider a small position. If you own gold or gold miners, definitely don’t sell. We could finally be seeing a sustained bullish shift as the dollar continues falling.
Finally, in our “U.S. consumer” watch, we have two new stories of caution
Regular Digest readers know that we’re keenly focused on the health of U.S. consumers. After all, long-term, your wealth will rise or fall based on whether U.S. consumers continue opening their wallets for the goods and services of the companies in your portfolio.Yesterday, MarketWatch featured a troubling sign of the times:
Record-high inflation has pinched household budgets this year, and there’s evidence it’s leading more people to ask strangers to help pay their bills.The crowdfunding platform GoFundMe saw a growing number of users turning to the site to pay for basic expenses including gas, groceries and baby formula, GoFundMe said in its 2022 year-end report, released Tuesday… …The increased use of online fundraisers to pay for essentials appears to be the latest indication that some Americans’ finances have grown more precarious this year as the cost of living has shot up.
And this morning, there was a similar story of pinched consumers.From CNBC:
The share of retirement savers who withdrew money from a 401(k) plan to cover a financial hardship hit a record high in October, according to data from Vanguard Group.That dynamic — when coupled with other factors like fast-rising credit card balances and a declining personal savings rate — suggests households are having a tougher time making ends meet amid persistently high inflation and need ready cash, according to financial experts. Nearly 0.5% of workers participating in a 401(k) plan took a new “hardship distribution” in October, according to Vanguard, which tracks 5 million savers. That’s the largest share since Vanguard began tracking the data in 2004.
Yes, keep watching inflation. But just as important, if not more important, keep your eye on the health of U.S. consumers.Have a good evening, Jeff Remsburg