Louis Navellier’s Market Roadmap

The market implodes on “too strong” labor data … treasury yields push north again … say goodbye to the “Fed Pivot” … where to find relief from the market bloodbath

Well, last Friday was a bloodbath, and the pain continues as I write Monday early-afternoon.

Behind Friday’s heavy selling was a labor report that came in too strong for Wall Street’s taste.

Here’s legendary investor Louis Navellier from his Platinum Growth Club market update podcast:

The payroll report that came out for September was actually the weakest since April 2021, but it wasn’t weak enough for many observers on Wall Street.

What they were hoping was for a lackluster jobs report so the Fed might change its behavior.

They didn’t get what they wanted although the unemployment rate did fall to 3.5% from 3.7%. And that’s because the labor force is actually shrinking. Labor force participation fell slightly and there are just fewer people looking for work.

We’re still creating jobs but at the slowest pace since April 2021.

So, the hope that Wall Street had that the Fed would slow down and stop raising rates is over.

Commentary from the various Fed presidents support Louis’ conclusion.

Last Friday, we highlighted Minneapolis Fed President Neel Kashkari saying:

We have more work to do.

Until I see some evidence that underlying inflation has solidly peaked and is hopefully headed back down, I’m not ready to declare a pause.

I think we’re quite a ways away from a pause.

There was also Atlanta Fed President Raphael Bostic saying that despite “glimmers of hope” from recent data, “the overarching message I’m drawing…is that we are still decidedly in the inflationary woods, not out of them.”

Bostic said he wants to see the fed funds rates at 4.5% by the end of the year.

Given that the fed funds target rate currently sits at 3.0% to 3.25%, that means we’re nowhere near a slowdown if Bostic gets his way.

Then there’s Federal Reserve Bank of San Francisco President Mary Daly. In an interview last week, she responded to Wall Street’s projection that the Fed will cut rates by 30 basis points by the end of 2023.

Daly simply said, “I don’t see that happening at all.”

Bottom line: The Fed appears 100% resolute on taming inflation at any cost. The longer that Wall Street chooses not to believe this, the greater the likelihood of painful selloffs when the Fed disappoints Wall Street.

Meanwhile, Louis has his eye on another problem area that’s flaring up after a brief reprieve

Back to Louis:

The big thing that’s going on is treasury yields are rising again.

[On Friday], the 10-year yield [was] at 3.9%. A few days ago, it was just 3.6% intraday.

What’s happening is as the Fed reduces its balance sheet, they’re shoving rates higher.

For any readers who need a refresher, as of June 1, the Fed began shrinking its $8.9 trillion balance sheet at a pace of $47.5 billion per month.

Specifically, the Fed was running-off $30 billion of Treasuries and $17.5 billion of mortgage-backed securities each month.

When September hit, the amount of this run-off doubled to a combined $95 billion.

As we covered here in the Digest, this was a huge deal that wasn’t getting enough spotlight in the headlines. This is because the outcome of such a roll-off is completely unknown, bringing with it the potential for vast consequences.

Here’s the Financial Times providing some context:

The Fed staged a dress rehearsal for QT beginning in 2017, gradually shrinking its balance sheets in a process then Fed chair Janet Yellen said would be so predictable it would be like “watching paint dry”.

In fact, it ended up having to be abandoned after September 2019 when the plumbing of the financial system gummed up and overnight borrowing costs skyrocketed. 

More directly relevant to your portfolio, the 2017 roll-off campaign, combined with rate hikes from the Fed, resulted in the Christmas 2018 stock market meltdown.

From October through Christmas, it was a peak-to-trough collapse of 20% in the S&P, punctuated by a drop of nearly 3% on Christmas Eve.

Now, consider that the peak bond runoff amount from the Fed at that time was $50 billion a month.

The Fed has been doubling that amount since September – with elevated interest rates…that are headed higher…during a period of historic inflation.

Back to Louis:

A lot of people think the Fed’s doing the wrong thing.

Other central banks are stepping in and doing quantitative easing and controlling bond yields. But our Fed is not doing that.

It’s certainly not doing that – and as a result, treasury yields are up and stocks are down.

If your portfolio wants relief from all this pain, load up on this sector

If you’re a regular Digest reader, you know what’s coming. We’ve highlighted Louis’ favorite market sector countless times in recent months…

Energy.

The reason why is because the energy sector is the only place where you can count on great earnings.

On this note, let’s return to Louis:

This market is getting to be really, really simple. Either you have earnings or you don’t.

And the stocks that are going to have the best earnings are going to be energy for the next two quarters.

Just [last] week alone, crude oil is up – literally – $10 a barrel.

Why? Because the Biden administration cannot keep pumping the Strategic Petroleum Reserve much longer.

They were purposely manipulating gas prices by releasing extra oil into the market. They have to pull back now because they’re draining the reserve. That’s going to happen in November.

Again, to make sure we’re all on the same page, at the beginning of the summer, the Biden administration began releasing millions of barrels of oil per day from the Strategic Petroleum Reserve. They did this in an effort to take pressure off drivers’ wallets.

The releases were set to end this month. But Biden pushed it back, saying he’ll release another 10 million barrels in November.

Because of these releases, the nation’s oil reserves now sit at their lowest level since 1984.

But keep in mind, these releases cut both ways

The Strategic Petroleum Reserve was created for emergency use. As such, it needs to be replenished for future emergencies.

So, if releasing all of this oil has the power to drive prices down, what do you think is going to happen when the Biden administration attempts to refill the reserves?

Last month, we referenced this as the “Biden oil put” – ironic since Biden’s track record is one of the most “anti-oil” in presidential history.

Meanwhile, there are other influences on oil that are driving up prices today. Back to Louis on this:

The other thing that’s going on is Saudi Arabia and other OPEC members are cutting production. And the threat of that cut is sending crude oil prices higher.

So, you’re looking at $100 to $125 a barrel of oil in the spring. And the energy stocks are going to lead the way. It’s as simple as that.

Last Wednesday, OPEC+ decided to slash crude production by two million barrels per day. That was twice the amount analysts had predicted. That helped boost the recent rally in oil prices.

Below we look at the price of West Texas Intermediate crude between Friday 9/30 and last Friday 10/7. During a period in which the S&P has been flat, oil has exploded 14%.

Source: StockCharts.com

As I write, WTI trades at $92.50. Pretty amazing given how it was trading for $78.50 about two weeks ago.

Putting all of this together, here’s Louis’ takeaway, which will take us out for the day:

You want to have inflation hedges in your portfolio. Your best defense is a strong offense of fundamentally superior stocks.

The bottom line is: Energy is the most important sector.

Have a good evening,

Jeff Remsburg

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