The global banking sector took center stage as three U.S. banks bit the dust and a fourth large bank in Europe floundered. This puts the Fed between a rock and a hard place.

 

The Federal Open Market Committee meets this coming Wednesday and, before the collapse of the Silicon Valley Bank, was expected to raise interest rates by 25 to 50 basis points. Today, expectations are split between no rate hikes at all, and maybe one more hike of 25 basis points and then a pause.

 

Investors large and small held their breath last weekend in the wake of three bank failures. Fears of financial contagion swept the country throughout the week. Regulators acted on several fronts to contain the potential fallout. The FDIC announced that they would fully protect all depositors, while President Biden assured the nation that U.S. banks were solid.

 

The Federal Reserve bank also announced a new $25 billion bank term funding program that offers one-year loans to banks under easier terms than it typically provides.

 

Investors on Monday responded positively to the news, but the near collapse of yet another bank later in the week, this one a large European bank, Credit Suisse, had traders once again running for the hills. Banking stocks tumbled again.

 

Most Wall Street pundits blamed the Fed's rapid rate hikes over the last year for the banking fallout. As such, a rising chorus of alarmists is insisting that the Fed, needs to back off from any more rate hikes immediately. Over in the bond market, the vigilantes are betting that the new scenario is a "one and done" 25 basis point hike in March and then a pause. Some strategists are even expecting the Fed to begin easing its tight money policies by the middle of the year if not sooner.

 

The easing argument is that regulators (because of the bank failures) will soon be increasing the number of banking regulations in the financial sector, which will reduce their ability to lend money. If so, that would slow the economy, reduce inflation, and therefore do the Fed's job for them. In that environment, there would be no need to raise interest rates further.

 

As it stands, both the Consumer Price Index (CPI) and the Producer Price Index (PPI) for last month indicated some small progress toward slowing inflation. However, the data is not enough to dissuade the Fed from backing off its program. The economy is still growing, and employment is still much stronger than the Fed would like to see.

 

The question on many investors' minds is whether the Fed will back off at next week's meeting or risk further financial contagion and continue its interest rate hikes.

 

One indication that they will continue their program was the actions of the European Central bank (ECB) on Thursday. Beleaguered Credit Suisse was given a $54 billion liquidity lifeline by the Swiss National Bank. It may not solve the Swiss bank's problems, but for now, it appears sufficient.  investors still expected that the ECB's planned interest rate hike of 50 basis points would be delayed or even canceled.

 

Instead, the ECB hiked rates a half point and assured investors that the eurozone banking sector was resilient, adding that they stood ready to supply liquidity to banks if needed.

 

It was no accident, in my opinion, that U.S. Treasury Secretary Janet Yellen told members of the Senate Finance Committee almost the same thing assuring them that the U.S. banking system remains sound.

 

I am sure the Fed and the Treasury discussed the ECB's intended actions. In times of turmoil in the global banking system, central bankers confer with each other regularly, as do their counterparts in the Treasury. It seems to me that the odds favor Chairman Jerome Powell and the Fed following the ECB's lead and continuing with their tightening program.

 

Stocks have had a mountain of bad news this week and tested the 3,800 level on the S&P 500 Index, which was my downside target. From there, we bounced more than 160 points before falling back again. I expect markets will continue to trade in these wide swings until the Fed meeting in the middle of next week. From there, the market’s direction will be Powell-dependent. I am betting it is up.

 

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 fell this week as investors turned more bearish. You can blame Fed Chairman Jerome Powell for that as well as troubles in the banking sector.

 

"Higher for Longer" may be finally sinking in. Powell's two-day testimony in front of the House and the Senate this week was decidedly hawkish. In retrospect, there was nothing new in his statements, but for some reason the financial markets were willing to listen. Congress heard his message as well: inflation is still a problem, the jobs market needs to weaken, and if higher interest rates mean a recession, then so be it.

 

Those who had been confident that the Fed would raise the Fed funds rate by only 25 basis points at the March FOMC meeting are having to rethink that stance. Chairman Powell would not commit to a specific increase. He insisted the Fed would remain data dependent in determining the next rate move. Over in the bond market, indications are that a 50-basis point hike is just as likely now as a 25-basis point hike.

 

However, the Fed is not the only concern of the markets. Two regional banks, one a noted small crypto bank, Silvergate Capital Corp., announced that they would be "winding down" operations. On Thursday, a second bank, SVB Financial Group, which owns Silicon Valley Bank and focuses on lending money to start-up companies, announced they are being forced to sell assets and raise $1.75 billion in a stock offering. This is the 16th largest U.S. bank. Management admitted that higher interest rates are hurting their bond holdings, which is weighing on the company's flow of cash. On Friday, banking regulators closed the bank and the FDIC has taken over.

 

These announcements triggered a wholesale round of selling in the banking sector. Silvergate's stock price was down almost 42 percent, while Silicon Valley Bank's shares lost more than 60 percent of their value and another 40 percent in after-hours trading. The global mega-banks fell along with the rest of the sector. Those big banks suffered 5 percent-plus losses, while the regional bank's exchange-traded fund also fell by over 8 percent.

 

On Friday, the much-awaited U.S. jobs report for February came in stronger than expected with the nation gaining 311,000 new jobs, versus an expected gain of 225,000. However, the unemployment rate ticked higher to 3.6 percent on a rise in labor force participation. Average hourly earnings ticked down to plus-0.2 percent from plus-0.3 percent, which was a small positive on the disinflation front. 

 

As you might expect, the troubles in the banking sector spilled over into the overall markets. The three main averages — the S&P 500, the Dow, and NASDAQ — lost 1.5 percent-2 percent on Thursday and continued down on Friday. It seems to me that the market's direction is going to be dependent on what happens on Tuesday. That is when we will receive the next all-important Consumer Price Index release for February. Investors, like the Fed, remain data dependent.

 

A cooler CPI number would be an excuse for markets to rally and climb out of this hole we have dug for ourselves. A hotter number would mean the rate of inflation remains stubbornly higher than the Fed would like. That would almost certainly mean we decline with the S&P 500 Index testing 3,800 or lower as a result. 

 

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.

There is a discrepancy growing between bond and stock markets. The bond vigilantes are betting the Fed is nowhere near done hiking rates. Stock jockeys disagree. Which camp will prove correct?

 

A look at the government's U.S. Treasury bond auctions this week resulted in most yields going higher. Buyers insisted on higher returns to purchase the billions of dollars in U.S. Treasury notes, bills, and bonds that are a weekly occurrence in the financial markets.

 

Overall sentiment in the markets has turned cautious and, for some, downright bearish once again after the January rally in stocks. Recession fears are once again taking center stage for many although there is still not enough evidence to prove it definitively.

 

Fourth-quarter Gross Domestic Product (GDP), for example, increased by a downwardly revised 2.7 percent annualized rate from the 2.9 percent pace reported last month. Slightly lower, yes, but the point is that GDP was still growing. And once again, the number of Americans filing new claims for unemployment benefits fell last week. The week-after-week decline continues to point to a persistently tight labor market in a growing economy.

 

The Personal Consumption Expenditures Price Index (PCE) for last month came in hotter than expected. PCE rose 0.6 percent and 5.4 percent year-over-year. Even after you strip out food and energy, core PCE rose 0.6 percent from 4.7 percent last year. The Commerce Department also showed that consumer spending rose 1.8 percent last month after falling the previous month and personal income rose by almost 1 percent.

 

Given the most recent macroeconomic data, it is hard to dispute that the economy is still growing, the decline in inflation is at least pausing, and that leads to the fear that the Fed may be at least thinking about increasing the amount of their next rate hike. 

 

This data is telling the bond market that the Fed may still have a long row to hoe before inflation gets back to the 2 percent target. They are certain that the central bank's tough interest rate regime will continue for much longer than the equity markets believe. Many analysts are beginning to think that the Fed funds terminal rate of interest could rise from its present range of 5.00 percent -- 5.25 percent to as high as 6 percent. It is the main reason that yields are rising, and bond auctions are suddenly problematic.

 

Over in the equity markets, these data points have taken some of the wind out of the sails of the bulls. The S&P 500 Index had a bad week, as did the Dow, NASDAQ, and the small-cap Russell Indexes. If the S&P 500 drops below the 3,950 level then we may see a decline into the mid-3,850 area.

 

As I wrote in my column this week, short-term, U.S. Treasuries are looking interesting for those who are sitting on a large amount of cash. In a down equity market, a 5.09 percent yield on a six-month Treasury note, or a 5.13 percent yield on a one-year Treasury bill is nothing to sneeze at. Investors are now receiving a yield equivalent to what equity investors can receive from the S&P 500 Index.  Granted, there is some interest rate risk if the terminal rate on Fed funds does rise to 6 percent. 

 

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.

It has been a week of consolidation. A string of downside negative surprises has kept the markets in check but has failed to break anything. Given the macroeconomic data, that has been impressive.

 

Both the monthly Consumer Price Index (CPI) and the Producer Price Index (PPI) came in hotter than expected. The monthly CPI rose 0.5 percent, and the PPI came in at 0.7 percent. That spooked investors since higher inflation means the Fed will likely keep interest rates higher for longer. Yet, dip buyers took advantage of the declines and bid markets back up.

 

In addition, retail sales for January were almost double the average estimate, coming in at a 3 percent gain month over month versus the 1.7 percent expected. This was great news for consumers, who are benefiting from a hike in their disposable income. That is understandable, given that the job market remains strong. The number of Americans filing new unemployment claims, for example, fell to 194,000 this week, which was again less than expected.

 

The consumer's resiliency was impressive enough to convince economists at JPMorgan to raise their first quarter 2023 outlook for Gross Domestic Product to 2 percent from 1 percent. That economic strength must have also troubled at least some Fed members. St. Louis Fed President, James Bullard, one of the most hawkish, non-voting members of the central bank, along with Cleveland Fed President Loretta Mester, are not advocating for a 50-basis point interest rate hike at the bank’s next meeting in March.

 

Readers need to remember that good news on the economy is normally bad news for the stock market. Why? Because continued strong growth on the macro level will keep inflation from coming down and give the Fed a reason to continue to tighten.

 

Yields on most interest rates have climbed higher as well this week. The yield on the benchmark 10-year, U.S. Treasury note rose to 3.843 percent. Six-month and one-year U.S. Treasury yields hit 5 percent. At the same time, the U.S. dollar Index also moved higher. Normally, this would provide added pressure on the stock market.

 

Up until now, every dip has been met with buying. Leading the charge, as I have written before, are the junkiest, most bombed-out areas of the stock market. What the markets are telling me is that fundamentals don't matter and neither does any of the macro data. However, that may be changing.

 

 Right now, investors are convinced that the Fed is just about finished tightening. And then most expect the Fed to either pause or to even begin loosening policy. If we do have a recession (and many are beginning to doubt it), then it will be a rolling one. Some sectors will still grow, while others decline a little, leaving the overall economy flat to slightly down. This is the ultimate Goldilocks scenario where even the ricketiest of beds will do just fine.

 

If fundamentals and macroeconomic data continue to be ignored, we are left with few guideposts to determine the direction of the markets. That is where technical and behavioral analysis comes in. The charts are telling me markets are in a consolidation phase. Stocks have had more than enough excuses to have declined a lot this week, but they haven't done so, which is impressive. The 4,100 level on the S&P 500 was broken on Friday but the 4,050 is fairly strong support and resistance is up at 4,200.

 

Equity markets have been consolidating for 11 days. Why is that significant? Normally, 13 days is about the maximum markets trade sideways before a break to the upside or downside occurs. Given that the markets are closed on Monday for Presidents Day, Tuesday should be interesting. While it is anyone’s guess which way it will go, I am betting the next move will be higher. I am using 4,340 as my guesstimate for an upside target. Wish me luck. 

 

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.

 

They say you can't keep a good market down. That is proving to be the case thus far in 2023. Every dip continues to be bought and the technical charts indicate there may be more upside ahead.

 

I was expecting that January's bounce in the averages would reverse in February. So far, I have been wrong. I did provide some caveats. For example, I recognized that my forecast had become the consensus view, and that made me uncomfortable. I also wrote back at the end of January that if the Fed moved into a more dovish stance "my prediction fails to materialize, and the market continues to grind higher, we could ultimately see 4,370 on the S&P 500 Index, which is another 300 points higher from here, before all is said and done."

 

The S&P 500 this month climbed as high as 4,195. Presently, profit-taking is relieving some of the overbought conditions in the short term. However, profit-taking becomes something more serious if we break 4,070. So far, we have held that level. 

 

The practice of buying dips is also back in vogue. In case after case during this earnings season, companies that reported disappointing results have seen their stocks fall at first, only to be bid up within hours or days. Markets overall are doing the same thing. Short, sharp selloffs are almost immediately followed by gains. The technology index is leading, while the largest gains in stocks are from those companies with little to no fundamentals.

 

For those who like to follow the technical charts of the markets, most technicians would say the indexes remain bullish. Targets for the S&P 500 Index vary, but in the short-term 4,200-4,300-plus seems to be entirely possible.  

 

In past columns, I have written that the options market is now the main mover of stocks. Investors can buy one option which gives the owner the right to buy or sell 100 shares of a stock for a limited period. Over the past several weeks, one-day options represent more than 60 percent of all options trades. In short, welcome to the casino.

 

Each day, speculators buy zero-day-to-expiration call (or put) options and profit from fast moves in a stock like Tesla. They then cash in by the end of trading on the same day. It has little to do with fundamental things like earnings and prospects for a company and it is certainly not an investment. How long can this practice continue — until something changes? Remember also that the implied leverage in options works both ways. Stocks can move down just as rapidly as they have moved up.

 

One of the chief macroeconomic drivers for the equity markets has been the decline in the U.S. dollar this year. Higher interest rates normally mean a strengthening currency. If interest rate yields remain stable or decline in the U.S. (as they have been doing lately), while other countries continue to raise their interest rates, then the dollar weakens. That is what has been happening now for several weeks.

 

Global currency traders are betting that the U.S. Central Bank is closer to pausing interest rate hikes in their program of tighter monetary policy. If the Fed doesn't cooperate with that assumption, the dollar could resume its rise. That would be bad for stocks. 

 

I still think the markets are getting ahead of themselves. If we do hit 4,300 or more on the S&P 500, we would be up 12 percent for the year. If you add in dividends, it is probably closer to 15 percent. The market would then be trading at 19.5 times earnings. That appears a little too expensive for me unless the bulls are right — the Fed pivots and begins to cut rates by this summer.

 

I am hearing just the opposite. Some Fed watchers are upping their target for the terminal interest rate the Fed is targeting from 5 percent to 6 percent. Some Fed officials are now hinting that might be necessary to get inflation down to their target 2 percent rate. If so, that flies in the face of investors' expectations that the fed won't be raising interest rates after their March meeting. No one knows for sure, which gives the markets a window of opportunity to continue to rally.  

 

My take is that if the technical charts are right, and the markets continue to rise, I am happy to go along for the ride, but I wouldn't be chasing stocks at this point.

 

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.