FOMC Statement Will Be Closely Scrutinized

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In his Daily Market Notes report to investors, while commenting on the FOMC statement, Louis Navellier wrote:


Q3 2021 hedge fund letters, conferences and more

MIA Leaders

The G20 meeting was held in Rome last weekend, but China’s President Xi Jinping, Russia’s President Vladimir Putin, and Japan’s Prime Minister Fumio Kishida were all absent.  The fact that Chinese President Xi was absent signals that China’s domestic problems are very serious – and China does not like to be criticized by any other nation.

Before leaving for Italy, President Joe Biden thought he had the framework on a new spending plan for infrastructure and social priorities, but his spending plan of new taxes on folks earning over $10 million will fail after his plan on taxing billionaires failed. Trust me, if Congress cannot tax billionaires, they will likely fail to tax medium-sized business owners who earn over $10 million. As a result, I expect that the proposed infrastructure and social spending plans will fail over raising taxes in a softening economy.

No Brakes for ECB

Before the G20 met, the European Central Bank (ECB) met on Thursday and endlessly debated inflation, which is running at a 4.1% annual pace in the eurozone. However, the ECB has no intention of curtailing its negative interest rate policy and is not very specific on exactly how much it is willing to curtail its quantitative easing. Due to softening economic growth, the ECB does not want to “tap the brakes” and will likely continue its easy-money policies.

The U.S. will avoid a recession this year and in 2022.  Overall, due to the fact that big order backlogs still persist, I do not anticipate that the U.S. will slip into an “official” recession any time soon. Instead, I expect that Americans will do what they always do, namely innovate and learn how to prosper, regardless of the underlying environment. I, for one, am excited and expect that the stock market will get increasingly narrow and more fundamentally focused.

The S&P CoreLogic Case-Shiller National Home Price Index was released on Tuesday, and, through August, home prices in 20 major metropolitan areas rose 19.7% in the previous 12 months.  Fortunately, when both housing prices and stock prices are rising, consumers feel more confident. For example, the Conference Board on Tuesday announced that its consumer confidence index rose to 113.8 in October, up from 109.8 in September.  This bodes well for retail sales in the upcoming holiday shopping season!

Earnings calls dwell on supply and labor shortages and the cost increases they bring. While supply shortages are likely to be solved in the mid-term and might even swing to oversupply when they do, labor cost increases are historically “sticky” and continue to be a concern.

Sticky Wages

In the bigger picture, however, labor costs have been subdued on a multi-year basis.  The US federal minimum wage was last increased in 2009 ($6.65 > $7.25) and before that had been stuck at $5.15 for 10 years.  Consider that a full-time minimum wage job pays less than $15K a year or less than $285 a week.  Rising wages are long overdue and not necessarily a bad thing for the economy.

At the lower end of the economy, virtually all of the additional wages will be spent on consumption and stimulate the economy organically. Beyond that, already the largest employers like Wal-Mart and Amazon pay over double the minimum wage, so the official minimum understates what many employers are ready and willing to pay.  While inflationary trends remain a concern and are a leading topic of earnings calls this season, many factors are transitory as the Fed likes to quote, such as commodity and energy costs, labor is one that is truly overdue and probably good for the economy in the long run.

In addition to the shipping stocks that I recommend, some other companies that prosper in the current environment include Expeditors International of Washington (NASDAQ:EXPD) in logistics coordination and TFI International (TSE:TFII) in trucking, as port bottlenecks cause more uncertainty and help fuel inflation.

Since much of the current wave of inflation is related to food and energy, the poor are hurt the most. Despite a 25% increase in food stamps and a 5.9% increase for Social Security, Americans are not used to seeing empty store shelves, gasoline prices doubling, or the prices of most food staples rising rapidly.

The same is true worldwide. The economic problems now enveloping the world could fuel a major recession in China, Europe, and most emerging economies. The reason that emerging market economies are so vulnerable is that as they spend more on food and energy as those prices for staples soar, these poor consumers have less money in their pockets for other items, so other economic activity naturally stalls.

Tomorrow’s FOMC Statement

The November 3rd Federal Open Market Committee (FOMC) statement will be closely scrutinized. Wall Street expects guidance on both tapering its $120 billion per month in quantitative easing as well as its dot plot of forecasted interest rate increases in 2022.

The reason the Fed will likely raise key interest rates is that market rates have already risen, especially intermediate rates, as inflation has spun out of control. The Fed cannot fight market rates, so this week’s FOMC statement will likely clarify the Fed’s next moves. Complicating matters further, Fed Chairman Jerome Powell is up for nomination for a possible second term. He is backed by Treasury Secretary Janet Yellen. Powell is known as a consensus builder, but it is possible that President Biden would ignore Secretary Yellen’s advice and not reappoint Chairman Powell, especially if the Biden Administration needs a scapegoat for the stagflation that is systematically destroying U.S. economic momentum.

Concerned about inflation? Everyone is, but growth stocks (especially dividend growth stocks) and real estate are historically your best defense against rising inflation. As interest rates rise, residential real estate can lose its “mojo,” so as you look around the world for a place to seek inflation protection, your best bet continues to be predominantly growth stocks, with a focus on dividend growth stocks!

Navellier & Associates owns Expeditors International of Washington (EXPD) and TFI International (TFII) in managed accounts.  Louis Navellier and his family personally own Expeditors International of Washington (EXPD) and TFI International (TFII) via a Navellier managed account.

Heard & Notable

Tropical tree cover loss led to average estimated annual CO2 equivalent emissions of 5.3 gigatons between 2001 and 2019. If tropical deforestation was a country, it would have the third-largest carbon footprint in the world, second only to China and the U.S. with 12.4 and 6.0 gigatons per year of CO2 emissions, respectively. Source: Statista