The market indexes started to bounce today. While I am bullish long-term, I don’t think we’re out of the woods just yet. In the meantime, I’d like to share a few specific things to watch in the near term. Before you make any decisions – and staying put is a decision, too – it helps to understand what’s been happening…and what’s likely to come next.
1. Saudi Arabia tanked oil prices – on purpose.
Oil futures kicked off the week by touching $27 per barrel for the West Texas Intermediate April contracts. As recently as last Thursday, they were closer to $50 per barrel. Friday, they dropped to the $40 level. Then they got to $30 per barrel in two days.
OPEC doesn’t really work anymore, in controlling these prices. So really we’re talking about Saudi Arabia and Russia being able to control oil markets worldwide. They’re the biggest producers, along with the United States, and the Saudis are trying to convince Russia to cut production, as they have. Well, Russia has been selling a lot of crude oil to China…and that apparently ticked off Saudi Arabia. To undercut them, the Saudis dramatically lowered oil prices to a discount that would allow them to recapture market share.
Gas prices look like they’re going to head below $2 per gallon now. That’s a good development for consumers, but it is a mechanical thing that hit the market this week. And here’s the other one:
2. Treasury yields got below 1%…even on the 30-year.
The 10-year Treasury note, which yielded nearly 2% as recently as December, cracked 0.4% yesterday. It’s back to the 0.75% level as I write this. (Even the 30-year Treasury bond got to 0.84%, and after getting back up, it’s still flirting with the 1% level.)
These low rates are going to fuel a housing boom, which is one reason why PennyMac Financial Services (PFSI), a mortgage company, is among my favorite Breakthrough Stocks. So, it is very exciting from that standpoint.
3. Other global bonds yield even less.
Rates around the world continue to collapse. German bonds right now are “yielding” -0.8%, 10 years out. In fact, much of Europe, as well as Japan, are negative. Besides the United States, the only country right now that I would recommend investing in that has positive rates is the UK, which is 0.23% for the 10-year.
I could argue that Italy and Spain are positive, but you know, I would rather invest in us or Britain. We have the most dynamic economies out there. That’s where you’re going to find great growth plays like the ones I recommend for Breakthrough Stocks, where you can invest early – with, actually, less risk than the broad market indexes.
4. Mechanical selling, also known as capitulation, ensued.
Obviously markets made new lows this week. The indexes broke down a good 7% yesterday before the circuit breakers kicked in. Once they took them back off, some bargain hunting came in. But we’re still making our way through this mechanical correction triggered by the oil crash, bond yields and, of course, the COVID-19 coronavirus.
Now, even when the circuit breakers are on, you can still place orders on the exchange-traded funds (ETFs). But be very, very careful if it happens again.
Yesterday morning, for example, you’d have gotten hit $0.90 per share on the iShares Select Dividend ETF (DVY), which is almost another percent. Once the circuit breakers came off, you’d pay a premium of $0.30 per share to buy it. And this is a very big, liquid ETF, which is why I watch it in volatile times. I’ve seen ETFs in the past have 35% spreads for 90 minutes and by the end of the day, the spreads are fine.
If you’re going to place an ETF order, at least check the fund’s “intraday indicative value” on Morningstar.com and place your order at or near that price. (That’s how you can track the ETF’s net asset value during the trading session.) Better yet, stick with a stock-picking system like my Portfolio Grader and ONLY own the best stocks the market has to offer.
What we want to see now is real buying pressure emerge, and to see a decent balance – but when you make a new low, you have to try and retest it. With that in mind, here’s the other thing I want to see happen before I’d tell conservative investors to come off the sidelines:
5. The Federal Reserve has to make further cuts.
Right now, based on market rates, the Fed is going to have to cut key interest rates 0.75%.
The Fed injected liquidity this week, but they can’t fight market rates, because they don’t want an inverted yield curve. There’s too much economic risk when you squeeze banks’ profit margins like that.
So, as much as the Federal Reserve wants to be the responsible central bank and tried to leave a cushion so it could cut rates in the future, it is running out of tools and options.
At the end of the day, the Fed’s job is to fight deflation and stimulate the economy. In turn, the falling rates are going to put money in American consumers’ pockets. Hopefully they are going to spend it.
6. The United States remains the oasis in multiple ways.
All this was caused by the European Central Bank (ECB). The outgoing head of the ECB, Mario Draghi, experimented with this thing called modern monetary theory, where he thought he could pump all the money he wanted as long as there’s no inflation. And basically, he’s the one who created the negative interest rates.
But, not only does the United States offer positive yields – we’re also better off than most countries with the coronavirus. Major cities and states like Seattle, New York and California are operating in a state of emergency. Hopefully the outbreaks can be contained, now that everyone is on high alert around the world.
It’s getting interesting here, folks. But the good news is that the United States is the oasis, as much as ever. We’ve got low interest rates, low gas prices, consumers are going to have more money in their pockets. All the yield is in the stock market. So, as investors, we have a lot to look forward to.
That’s going to be especially true of high-quality stocks – and, naturally, you want to make sure that your stocks are on that list going forward:
Check the weekly list of notable upgrades/downgrades I publish on NavellierGrowth.com, after running my weekly Portfolio Grader scan of the markets on Saturdays.
In fact, check Portfolio Grader yourself if you don’t see your stocks on that list. One of the grades you’ll see on a stock’s Report Card is its Cash Flow; keep an eye on that, especially, if it’s a dividend stock. Certain stocks will be at risk of a dividend cut, especially in sectors like energy and subprime lending, for auto loans and things like that. My Dividend Grader, in fact, is specifically designed to pick up any warning signs.
And, of course, I’ll keep updating you on market conditions. Take care and hang in there.
Note: Right now, I’m assessing a potential addition to my Breakthrough Stocks line-up. It’s in a sector that has proved very successful before: semiconductors. Most importantly, this particular stock shows all the signs of continued growth and dividends. Click here to watch my recent Breakthrough Stocks Summit and consider joining us in my next compelling growth play.