Investors sold stocks, as bond yields reached new multi-year highs. Third-quarter earnings are almost an afterthought in this climate, and geopolitical events did not help either.

 

The 10-year, U.S. Treasury bond hit the 5 percent mark. The 30-year bond has already broken through that number and then some. The higher yields climb, the more investors fear that they will rise even further. As it stands now, the return you can get by putting your money in bonds is becoming more and more attractive versus stocks.

 

This is happening despite the cessation of long-term bond auctions by the U.S. Treasury this week. Short-term bills and notes have been auctioned instead. The next tranche of longer-dated securities won't begin again until November. You would think that with the pressure off yields, longer-term bonds would have rallied but they didn't.

 

The explanation is simple but also troubling. After years of ignoring the growing U.S. deficit, the financial markets are becoming worried that the government's continued spending is rocketing out of control. I have written about this in past columns, but it seems investors are starting to pay attention to the problem at long last.

 

A reader may wonder why it is so hard for politicians to corral their spending. The simple answer has nothing to do with whether we are talking about Democrats or Republicans. Two-thirds of U.S. spending is earmarked for just two programs: Social Security and Medicare. That's it, and no one in their right mind is going to cut back on those programs unless they want to lose their jobs.

 

That leaves a much smaller piece of the pie to squabble over. Liberals want spending to go to social programs and cut the rest. Conservatives insist it is spent on things like defense and investment instead. In a political landscape, where compromise has become a dirty word, the only answer is to keep spending more and more to satisfy the demands of both sides.

 

A great example of the conundrum we all face is President Biden's emergency funding request to Congress this week. The president is asking for $75 billion to aid Israel and Ukraine. There is another $30 billion he wants to fortify border security.

 

So, who among us is ready to say no to that kind of spending? Sure, some might, but most Americans and their representatives in the heat of the moment are going to want to approve those additional funds. But it was no accident, in my opinion, that when the president first announced this additional spending request on Oct. 18, the yield on the benchmark, ten-yield bond spiked even higher and hit a 16-year high.

 

The Chairman of the Federal Reserve Bank Jerome Powell gave little comfort to investors in a speech before the Economic Club of New York on Thursday. Some investors hoped that he might be willing to relax his monetary policies instead of the recent run-up in bond yields. Instead, Powell said inflation is still too high and warned that more interest rate increases are still possible if the economy stays strong, or if the tight labor market does not ease further.

 

The most he said about the recent surge in long-term bond yields was that "we remain attentive to these developments" acknowledging that if this situation persists "it can have implications for the path of monetary policy."

 

As for the continuing saga of failed governance among the Republicans in the House of Representatives, the facts speak for themselves. Rep. Jim Jordan, the radical politician and Trump lackey, has failed in his attempt to claim the position of speaker for a second time. His followers used social media to browbeat and threaten some Republicans into voting for him. That ruse backfired leaving him no choice but to try again on Friday. Once again, Jordan failed to convince his fellow legislators that, somehow, he had changed his stripes.

 

One hopes that he will accept the "three strikes you're out" verdict, but given his nature, he could very well claim the voting was fixed. He has done it before. The country remains in limbo as a result, with no progress in averting a government shutdown or aiding our allies around the world.

 

Last week, I said we were still in a bottoming process. I expected this period should have been over a week ago. It is still not done. I blame the Hamas terrorist attack in Israel for prolonging this process. I warned that we were going to test the low 4,300s on the S&P 500 Index. If the geopolitical events worsened (and they have) we could fall all the way down to the 4,200 area. That is just what we did. 

 

As of noon on Friday, we were trading 35 points above my low-end target. We bounced off the 200 Day Moving Average at 4,233, which was to be expected. Is it almost over, maybe? I still think we could go lower if the geopolitical news gets worse.

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.

As the market enters October, there is both good and bad news. The sell-off that started in September is continuing. The good news is that we should be close to the bottom.

 

Blame the waterfall decline in the price of the 10-year U.S. Treasury bonds, the continuing gains in the U.S. dollar, and the seasonal pattern in the equity market. Throw in the absolute mess in Washington and the market's free fall can be understood.

 

None of this should be new to readers because this is exactly what I predicted would happen back in August. I expected markets to correct into the second week of October and here we are with one week to go. The argument over government spending levels and the potential shutdown has forced investors to focus on not only the amount of our national debt but also the rising cost of servicing it.

 

The fiscal deficit this year is more than $1.5 trillion. Overall, the U.S. government debt is roughly $33 trillion with a debt-to-GDP ratio of 120 percent. Estimates are that we are now paying 8 percent of Gross Domestic Product (GDP) to holders of Treasury bonds worldwide just to service this debt. That number could easily rise to 9-10 percent, or more.

 

I suggest that you take a peek at my Thursday column. It will explain the background and risk to the markets caused by the dysfunction in Washington. Bottom line: we can expect Moody's credit agency to cut its rating of our government debt unless the country and its politicians can get their act together.

 

The Fed's policy of keeping short-term interest rates higher for longer doesn't help. But the bond market is now also bidding up the yields on the longer-end of the bond curve as well. The 30-year bond is almost 5 percent. This is shaking investors' confidence in the soft-landing scenario popular among many economists.

 

As such, all eyes are on the employment numbers. These are the keys some believe to what is happening to the economy. Stronger job numbers and wages mean more tightening from the Fed. Weaker data is okay, but if it is too weak, that would set off fears of a deeper recession. That leaves investors in an impossible situation where they are looking for a Goldilocks scenario where jobs are neither too hot nor too cold. Good luck with that.

 

This Friday's non-farm payroll numbers were almost double the 171,000 job gains expected. The U.S. economy added 336,000 jobs, which sent yields even higher, and stocks lower on the news. And yet, yields, the dollar and stocks all reversed during the day. That should tell readers that we are in the bottoming process.

 

Yield-wise, the benchmark 10-year, U.S. Treasury bond hit 4.83 percent, which was its highest level since 2007. And we all know what happened in 2008 (the financial crisis). Not that I am expecting something similar, but a lot of the investment community is freaking out at where interest rate yields can go from here.

 

I think we may be close to a short-term top in yields, at least in the short-term. That is one reason I am expecting a bottom in the equity markets. And where yields go, so does the U.S. dollar. The two asset classes have moved together over the last month. Friday's jobs number pushed the greenback up .65 percent on the news but it quickly gave all its gains back. The dollars’ gains have trashed just about everything from commodities, foreign markets, U.S. equities, and precious metals. That could be changing.

 

Underlying the rise in yields has been the avalanche of U.S. Treasury auctions that began in earnest this quarter. I'm guessing that yields have risen in anticipation of that event. Could we therefore see a "sell on the news" event where bond traders cover their shorts and buy back bonds at some point soon? Stanger things have happened.

 

Last week I targeted the 4,200 area on the S&P 500 Index, which is the 200-day Moving Average as a level we could look for in the bottoming process. I also said that looking for a perfect number like that is not usually the end of the story, since markets overshoot on the upside and the downside. We could easily slip below that number before all is said and done.

 

Keep an eye on the dollar and yields because they are the big dog wagging the tail of the equity markets. When they roll over, as they may be next week, stocks will have reached a bottom.

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.

September has been a story of higher-bond yields, a stronger dollar, and spiking oil prices. The higher these assets climbed, the lower the stock market fell. And now we enter October, a month that is notorious for providing negative returns at least in the first weeks of the month.

 

"Tread cautiously" was how I described September-October several weeks ago. History indicates that those are the two worst months for stocks. So far that advice has proven accurate. The stock market has had its worst decline all year and the prospects that this sell-off will continue are high despite the dead cat bounce we are enjoying right now.

 

While yields, the dollar, and oil are separate asset classes, they are interrelated when it comes to explaining the "why" of this present downturn. Let's start with the price of oil. As I explained last week, since oil is used worldwide in practically everything it is an important element in gauging future inflation.

 

 Oil is now trading above $90 a barrel and some expect it to hit $100 a barrel shortly. The spike in energy prices therefore has convinced many traders that the decline in inflation we have enjoyed may reverse and as it does bond yields need to rise to compensate for the real rate of return bond holders should demand.

 

In addition, readers may recall my warning that the U.S. Treasury needs to replenish the government's general account by auctioning more than a trillion dollars in various bonds. In anticipation of that auction program, bond traders had already pressured yields higher.

 

By the way, that avalanche of government bond issuance will begin in earnest during this quarter, so yields could continue to move higher. As it is, the U.S. 10-year Treasury is yielding 4.60 percent, its highest level since 2007 while mortgage rates have hit a 23-year high.

 

The U.S. dollar has strengthened to 10-month highs as yields have risen. Currency traders still expect that the U.S. economy will remain more resilient to higher interest rates than other economies. The combination of all three elements has conspired to pressure stocks downward.

 

By mid-week the markets were exhibiting extreme oversold readings. Sentiment as measured by the AAII Sentiment Survey gave the highest bearish reading and the lowest bullish score since May 2023. The "Fear" Index, according to CNN, was showing extreme fear.

 

These are all short-term contrarian indications that tell traders to expect a countertrend bounce. Yields fell slightly and the dollar followed suit which gave equities some breathing room to rally. Stocks could continue higher for a day or two, especially on the back of the latest Personal Consumption Expenditures Index (PCE), which is the Fed's preferred inflation measure. The PCE came in cooler than expected. The Algo traders took that to mean inflation was not as strong as the markets expect and pushed stocks higher.

 

I still think the markets have more to fall before this sell-off is said and done. The 200-Day Moving Average for the S&P 500 Index is about 125 points below at 4,200. However, stocks do not usually bounce off that line perfectly. Many times, the averages will overshoot to the downside, so that we could see 4,100 or maybe lower before we regain the 200 DMA.

 

It is a process that I am expecting to play out between now and the second week of October before we begin to rise once again. But to do so, we would need to see yields drop as well as the dollar. If things do develop the way I see it, I would be a big buyer of that pullback, but probably not in the same sectors that had been winners in the first half of the year. A declining dollar and lower yields would be beneficial to overseas markets, especially emerging market countries, as well as mines and metals, precious metals, and other sectors that have an inverse relationship with the dollar.  

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.

Stocks did remarkably well this week considering the macroeconomic data. That could be signaling further upside soon for the financial markets.

 

The decline in the inflation rate over the past six months has been encouraging. However, the recent climb in oil and gasoline prices threatens to put a crimp in the trend of declining inflation.

 

As I have written many times before, oil is the fuel that powers the global economy. It is involved in every stage of production and as such, its price has an enormous influence on the rate of inflation. Thanks to production cuts by OPEC-plus over the last few months, the price of oil has risen from roughly $65 a barrel to over $90 a barrel.

 

It was inevitable that this recent strength in oil would begin to show up in the macroeconomic data. It did. This week, the Consumer Price Index (CPI) and the Producer Price Index (PPI) for last month came in higher than expected. The culprit in both cases was the higher price of oil.

 

Producer prices in the U.S. increased by 0.7 percent in August, which was the highest level since June of last year.  Within the index, energy prices increased by 10.5 percent. The CPI also increased by 0.4 percent on the back of higher gasoline prices.

 

While that was bad news for inflation, the economic picture got a boost as retail sales jumped 0.6 percent. That was much higher than the estimate for a 0.2 percent gain. But much of that increase was due to higher gasoline prices. If you exclude auto and gas, sales increased by only 0.2 percent.

 

Jobless claims also came in lower than expected indicating that jobs are still plentiful in the overall economy.

 

From a global perspective, the U.S. remains the place to put your money and the U.S. dollar reflects that sentiment as the greenback continues to gather strength.

 

Next week (on Sept. 19-20), is the next Federal Open Market Committee meeting (FOMC), The markets are betting that the Fed will hold off on another interest rate hike. Despite the stronger August inflation data, the feeling is that the Fed will hold off and wait to see more data before deciding on a rate rise possibly in November.  

 

The risk for stocks next week is if the FOMC decides to raise rates again. That would throw the markets a real curve ball and likely send markets back on their heels. I give that a low probability given that the Fed would have already marched out several officials to disabuse investors' expectations of a pause.

 

As I have been writing, I expect a bounce shortly. It could take the S&P 500 Index up 1-2 percent or so. I am looking for the high end of this range, given that a pause by the Fed should be received favorably by world markets. It could also bring some relief to overseas markets that have been suffering under the weight of the strong dollar.

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.

Fed Chairman Jerome Powell indicated that he was "prepared to raise rates further" at the Jackson Hole Symposium this week. Investors who were hoping to hear a more dovish outlook were disappointed.

 

The market walked away with an understanding that interest rates had two paths forward. The best case was flat for a longer period, or higher if inflation persists. About last year's address, Powell said "The message is the same: It is the Fed's job to bring inflation down to our 2 percent goal, and we will do so."

 

Beyond Friday's event, it was a slow week with little volume and plenty of volatility. Second-quarter corporate earnings in the retail sector were lackluster for the most part with forward guidance indicating a slowing in retail spending on the margin.

 

On the economic front, data revealed further weakness in certain sectors, but the job market remained buoyant. The weakness in the U.S. Purchasing Managers Index (PMI) indicated that demand for new business in the services sector contracted. This followed a bigger-than-expected decline in Euro Zone PMIs as well as slowing growth in China. All this data indicates that inflation may continue to fall but most of the downward pressure could be due to a softening economic picture in Europe and China.

 

The most important event of the week, aside from Powell's comments, revolved around an individual company, Nvidia, the semiconductor giant. Nvidia is the world's leader in the manufacture of Artificial Intelligence (AI) microchips. It commands an 80 percent market share worldwide. Many Wall Street analysts believe we are just at the beginning of an enormous multi-year demand for AI chips that will benefit Nvidia enormously.

 

Following a blockbuster May earnings report that rocked Wall Street and sent the stock soaring up 200 percent this year, Thursday's second-quarter earnings announcement blew away what were already sky-high expectations. The company reported a 101 percent jump in sales from last year, while earnings were up 429 percent. They also guided higher revenues for the coming quarter that was $3.5 billion higher than the loftiest estimates.

 

However, sometimes there is a difference between a company's fortunes and what happens to its common stock. The stock price had been bid up relentlessly for weeks before the earnings results. The earnings did catapult the stock higher after the announcement in the pre-market hours by 7 percent.

 

It took most of the market higher with it and dragged the tech-heavy NASDAQ up over one percent.  And then boom, both the stock and the market tumbled shortly after the opening.

 

In hindsight, (as often happens in trading) all the good news was already discounted in the stock price. There was nothing left to do but sell on the news and that is exactly what traders did. Be aware, however, that this price decline has nothing to do with the fundamental value of the company and its prospects.

 

As for the markets overall, the S&P 500 index did give me the bounce I was looking for. It gained 2 percent this week before reversing back down. I believe we are in a topping process in the markets, which should continue into the second week of September. After that, I expect a bigger move down.

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.