The long-awaited downturn in the U.S. economy may be nigh. A litany of weakening macroeconomic data this week is pointing to a slowdown in growth over the next few quarters.

 

Many in the financial markets, including me, have been anticipating this decline. I have predicted a moderate recession beginning sometime this year for many months now.  I am not alone. Many expect a much harder landing.

 

That will depend on the Fed. If the U.S. central bank continues to raise interest rates and is willing to forge ahead with further quantitative tightening, then Gross Domestic Product will fall further. The decline will only stop when the Fed stops. 

 

This week, the economic data has been uninformedly negative. The Manufacturing Purchasing Management Index PMI), the Institute for Supply Management (ISM) manufacturing data, February factory orders, the JOLT data (job openings), jobless claims, ADP employment, etc. — all indicated a downturn is coming.

 

The only data point that did not decline was Friday's non-farm payroll report jobs for March, which came in at 236,000 job gains (versus expectations of 238,000). That was basically in line, although the headline unemployment rate declined from 3.6 percent to 3.5 percent. The Fed will likely interpret that number to mean that their work is not done yet. They are hoping to see unemployment rise, although they dare not say so. Can you just imagine the response in Congress to a Fed statement stating they want more Americans to lose their jobs? 

 

The typical recession indicators are performing as they should. The dollar continued its decline, and yields on interest rates fell across the board.  Many growth sectors in the stock market sold off, while defensive areas such as health care and utilities climbed.

 

And then there was the performance of precious metals. Gold broke above $2,000 or ounce and June futures in gold reached $2,037. The all-time high in gold is $2,070, which was reached back in August 2020. I believe it is simply a question of time before that barrier is breached. Silver gained as well but has a long way to go before reaching its historical high.

 

Readers may want to revisit my explanation for gold's recent performance in my March 23, 2023, column "Gold as a haven." I wrote "…unlike bonds and stocks, gold has one redeeming factor in times of economic slowdown, financial instability, and geopolitical tension. It does not carry the risk of an issuing entity collapsing, such as a bank or a government."

 

In my experience, most investors focus exclusively on gold as an inflation hedge. They fail to understand that the price of gold is influenced by several factors such as inflation, interest rates, the direction of the dollar, demand from central banks and commercial jewelry, as well as safety. While I continue to be bullish on gold this year, I do not subscribe to the "up, up, and away" optimism of many gold bugs.

 

I could easily see gold, falling back to $1,950/ounce in the short term if the dollar were to bounce higher. That said, the momentum that drove it higher this week should continue but it will be a wild ride and not for the faint of heart. The point is that a 2-3 percent position in gold for aggressive investors makes sense, but don't bet the farm on it.

 

As for the overall markets, expect the trading range that we have been experiencing for months to continue. We hit 4,100 on the S&P 500 Index, a big resistance level, and chopped up and down without making any real progress. This coming week, I expect more of the same until Wednesday's Consumer Price Index for March is released. A cooler number will bolster markets, a hotter print will not be taken kindly. A Happy Easter and Passover to all.   

 

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The NASDAQ 100 index jumped more than 20 percent from its December 2022 lows. The textbook definition indicates that when a market does that, it officially leaves a bear market and enters the bull market territory.

 

A handful of stocks can be credited with not only pushing the tech sector higher but also dragging the rest of the market up with it. I'm sure you can guess the names — Meta, Apple, Netflix, Google, and Microsoft — they all did yeoman's work in the first quarter.

 

In my opinion, the motivation for crowding into these stocks can be explained with a single word — fear. Fear of financial contagion. Fear of a gathering recession. Fear of a Fed that may have overstayed its role as an inflation fighter. All these companies represent a place to hide out. They have little debt, strong cash flows, and solid business models.

Fear is also the reason investors have flocked to gold and precious metal miners.

 

Throughout history, whenever there has been a question of financial stability in the banking system, gold seems to shine. The fact that the government and the private sector have rushed to assure all of us that the system is stable, and a few bank failures are nothing to get upset about was commendable and expected. But has it assuaged the market';s worries that we have yet to see another foot to fall in this sector? No, depositors are still moving money out of smaller banks

into larger banks and into U.S. Treasury bills, money market funds, and out of checking and saving accounts.

 

On the positive side, the recent banking crisis has forced the Fed to pump money into the credit markets. That has caused the equity markets to rise as the liquidity in the financial system increased. The flow of billions of dollars from the central bank into the banking sector has effectively put the Fed's quantitative tightening program on hold for now.

 

In addition, many investors are convinced that the regime of interest rate hikes is over.

 

They point to the impact the Fed's rapid rate rise over the last year has had on the banking system. Further hikes could translate into even more bank failures, which is something the Fed will need to avoid. As such, the next move by the Fed will be to cut interest rates and do so before the end of the year.

 

Quarterly window dressing by large institutions has also been a factor in the market's rise.

 

Every quarter, money managers try to present their clients with a list of equities and funds they own. It never hurts to have a lot of last quarter's winners on the list even if the securities were just purchased. It is what it is.

 

I am still thinking we have room to run here on the S&P 500 Index. In the next few weeks, my upside target of 4,370 could be achieved but it won't be a smooth ride. Near-term resistance on the benchmark index is right here, around 4,100. Investors for behavioral reasons are attracted to or repelled by round numbers. The 200-day moving average (DMA) has held like a champ throughout this period, which is an encouraging sign.

 

All the averages, however, are fairly stretched, so a stalling out and a bit of selling should be expected in the near term. One area that has shown exceptional strength is the precious metals area, especially gold, and silver. Aggressive investors in the short-term might want to dapple in these commodities if there is a pullback in price next week. It would not surprise me to see gold hit a new high in the next month or so.

 

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.

In the face of uncertainty over the fate of regional banks, the U.S. central bank hiked interest rates and said they would continue with their program of quantitative tightening.

 

Stocks fell and bonds rose after the FOMC meeting on Wednesday, however, the real drama was elsewhere. U.S. Treasury Secretary Janet Yellen was testifying before a Senate Appropriations subcommittee at the same time as the Fed meeting. She told lawmakers that she has not considered or discussed "blanket insurance" for U.S. banking deposits without approval by Congress.

 

Many traders in the markets had just assumed that since the government had made all depositors whole in both Silicon Valley Bank and Signature Bank, all depositors would be bailed out. Yellen made it clear that was not the case. That statement shook investors' confidence once again, given that there has been a continued outflow of deposits from smaller regional banks to the large money center banks.

 

Readers should know that the FDIC insures those with deposits of $250,000 or less, but that's the limit. To change that regulation, Congress would have to act. That would take time and in the hyper-partisan atmosphere of the present Congress, it is doubtful that the limit would be changed.  

 

Interestingly, those who listened to Fed Chairman Jerome Powell's answers in the Q&A after the FOMC meeting took away what they wanted to hear. Many in the bond market, for example, now believe that there will be no more interest rate hikes and that the Fed will begin to cut rates before the end of the year.

 

The financial issues that are plaguing the banks, they believe, will result in less loan growth across the entire financial sector. That will in turn slow the economy and put added pressure on the inflation rate. In other words, the regional bank crisis will do much of the work for the Fed going forward.

 

On the other hand, more and more economists are convinced that we are on the verge of an economic slowdown that will result in at least a mild recession. The Fed's continued tightening, which has already caused some breakage (regional banks) will go too far and risk a hard economic landing.  That in turn will cause corporate earnings to decline and with them the stock market.

 

My take is that nothing has changed after the FOMC meeting. Jerome Powell said he could pause further rate hikes, if necessary, but "rate cuts are not in our base case." He did not say we won't see further interest rate hikes in May and June. He did say that the issues in the banking sector were real, however, and triggered a credit crunch with significant implications for the economy and the markets.

 

To be clear, no one, not even the Fed, knows which scenarios will turn out to be correct, or maybe some of each will occur in some form or another. The point is that we are in an environment where every headline has the power to move markets up or down by more than one percent or more daily.

 

I said that will result in a choppy market, which will keep the major averages in a trading range. This week, the 200-day moving average (DMA) trendline of 3,934 on the S&P 500 Index was tested once again and bounced. Upside resistance is hovering around 4,012. That range will ultimately be broken when enough data points give the market a new direction.  

 

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.

 

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.