In his podcast addressing the markets today, Louis Navellier offered the following commentary.
If you wish to listen to this commentary, please click here.
Waning Consumer Confidence
The Fed’s favorite inflation indicator is the Personal Consumption Expenditure (PCE) index. The Commerce Department on Friday announced that the PCE is running at an annual pace of 6.1% through September, which is unchanged from the August annual pace.
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However, the core PCE, excluding food and energy, rose to a 5.1% annual pace in September, up from a 4.9% annual pace in August. This is the third month in a row that the core PCE has risen.
Economists were expecting the core PCE to rise to an annual pace of 5.2%, so some market observers breathed a sigh of relief after the September PCE report was announced. It technically rose less than expected, but the Fed is still likely to keep raising rates since they want the core PCE to cool off.
The Commerce Department also announced that personal spending rose 0.6% in September, while personal income rose 0.4%. Anytime personal spending exceeds personal income, it is good for GDP growth, so the third quarter GDP estimate might be revised higher.
The Commerce Department on Thursday announced that its preliminary estimate for third-quarter GDP growth is a 2.6% annual pace.
Although consumers remain resilient, consumer confidence has been waning and higher interest rates are hindering home sales as well as other interest rate-sensitive parts of the U.S. economy. Consumer spending only rose 1.4% in the third quarter, down from a 2% pace in the second quarter.
What I find most amazing is that virtually all the third-quarter GDP growth was attributable to a lower trade deficit that added 2.77% to GDP growth from higher petroleum exports, due largely to a 1 million per barrel day release from the Strategic Petroleum Reserve (SPR).
You can argue that the third quarter GDP was artificially manipulated by the SPR release. And obviously, the Biden administration won't be able to keep that up much longer because the reserve is being depleted. Right now, they have said they are going to be releasing oil through December.
Energy Stocks Up, Tech Stocks Down
This has been a great week for stocks’ earnings announcements, with stocks like Archer Daniels Midland (NYSE:ADM) and Enphase Energy (NASDAQ:ENPH) beating on sales, earnings and guiding higher.
However, Amazon.com (NASDAQ:AMZN), Google (NASDAQ:GOOG) and Meta Platforms (NASDAQ:META) all reported disappointing sales and earnings. Additionally, Microsoft (NASDAQ:MSFT) and Texas Instruments (NASDAQ:TXN) both beat on their sales and earnings, but lowered their respective guidance.
As a result, technology stocks remain very nervous, and a leadership change is underway. It is every stock for itself and the stock market is expected to get more narrow in the upcoming weeks.
I have one last comment. Wall Street is dominated by “tracking managers” that must not over-allocate too much to the industries in the S&P 500, since most money managers must have a high correlation (R2) relative to their respective benchmarks.
I had an interesting call this week with a prospective client where I had to explain that I could not qualify for most investment platforms, since my 60% weight in energy stocks is literally 10 times that of the S&P 500.
Most money management platforms do not allow managers to be overweighted by more than 2 to 1, so the maximum energy weight in a tracking portfolio would be restricted to 12%.
The reason that I am so confident that energy stocks will be a 30% weight in the S&P 500, up from approximately 6% currently, is because the tracking manager crowd will be “systematically” forced to buy more energy stocks as leading technology stocks falter (e.g., Amazon.com, Google, Meta Platforms, Microsoft, etc.), while leading energy stocks announce great earnings and continue to steadily rise.
Just to put everything into perspective, energy was less than 2% a year ago, while technology was approximately 48%. I predict that in early 2025, energy stocks will be 30% of the S&P 500 and technology stocks will fall to about only 32%.
In other words, the tracking managers will be systematically buying energy stocks and a net seller of technology stocks as the sector weights in the S&P 500 change for at least the next couple of years.
The Labor Department on Thursday announced that unemployment claims in the latest week rose to 217,000, up from 214,000 in the previous week. Continuing unemployment claims in the latest week rose to 1.438 million, up from a revised 1.383 million.
The 4-week average of weekly and continuing unemployment claims are now rising and if this persists, it will eventually cause the Fed to curtail raising key interest rates in 2023.
Speaking of key interest rates, the European Central Bank (ECB) on Thursday raised it key interest rate by 0.75%, so its key interest rate of 1.5% is now the highest since 2009.
Both French President Emmanuel Macron and Italian Prime Minister Giorgia Meloni were critical of the ECB raising key interest rates.
The ECB remains behind other central banks, but in the wake of a weak eurozone PMI in the past four months, the eurozone is almost certainly now in a recession, so the ECB criticism from Macron and Meloni may escalate.
The inflation statistics in Europe are truly shocking, so the ECB has its hands full, especially as political criticism mounts.
After the economy, the topic of abortion is the second most cited concern among U.S. voters, followed by gun policy, education and immigration. The topic of Russia’s invasion of Ukraine is very important to 47% of Democrats versus only 25% of Republicans.
While 66% of Republican voters considered immigration an important issue as of this month, only 38% of Democrats thought the same. Source: Statista. See the full story here.