It appears the Federal Reserve Bank's long battle against inflation is showing some progress. This week, two key inflation measures indicated inflation rose at its slowest pace since March 2021. Investors celebrated the news.

 

The Consumer Price Index (CPI) for June rose a mere 0.2 percent and only 3 percent over the prior year. Both measures were a bit better than economists were forecasting. If you strip out food and gas prices, the core CPI climbed 0.2 percent month over month and 4.8 percent over last year; again, slightly better than expectations. The Producer Price Index (PPI) also saw some encouraging news. June's wholesale prices followed the CPI data lower. PPI rose 0.1 percent, less than the consensus estimate of 0.2 percent

 

All week, in anticipation of these expected cooler inflation numbers, market bulls were buying stocks. That gamble has paid off. The U.S. dollar dropped on the news. Bond yields also gave up recent gains.

 

That set up the perfect environment to rise for those sectors that have an inverse relationship with declining dollars and yields. Commodities, basic materials, and precious metals exploded higher. In another interesting turnabout, the small-cap Russell 2000 Index outpaced NASDAQ and the S&P 500 Index for the week.

 

As for the Magnificent Seven stocks and Nasdaq in general, prices took a back seat for once. An explanation for exactly why that should have occurred lies with a decision by the management of the NASDAQ 100. Last Friday, Nasdaq announced that the index will undergo a Special Rebalance effective before the market opens on Monday, July 24.

 

The intent is to reduce the concentration of heavyweight companies that now account for nearly half the weighting of the index. Microsoft, Apple, Nvidia, Amazon, and Tesla combined, account for 43.8 percent weight in the index. As part of the rebalance, that number will come down to 38.5 percent.

 

For portfolio managers and investment funds that track the index, it will mean selling some of the shares of these overweighted companies and increasing their share of other companies in the index. Since the announcement, the Magnificent Seven stocks have been volatile as has the index overall.

 

There is some speculation that the S&P 500 Index could follow suit. That would have a much more serious impact on stock prices overall because of the importance of this benchmark index. Rebalancing the S&P 500, as I understand it, would occur when the aggregate of companies, with each having a weight greater than 4.8 percent, exceeds 50 percent of the total index.

 

As of today, only Apple and Microsoft exceed that 4.5 percent weight.  In total, these two stocks plus Amazon, Nvidia, and Tesla have a combined market value of the S&P 500 index of 22.2 percent. Fortunately, we have a long way to go before a rebalancing of that index is in the offing. 

 

Last week, I mentioned that although the markets were stretched, I was hoping for a little more upside in the averages. That is exactly what occurred with a 100-point (2 percent) gain in the S&P 500 Index. At this point, don't be surprised if a bout of profit-taking were to occur. I am not expecting anything serious, just a pause as the market once again catches its breath.

 

As for me, I will be on vacation next week so do not expect my usual columns. I will be back the following week, ready to go.

 

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 July 4th shortened week was one where volatility claimed the markets. Interest rates and the dollar rose, sending stocks lower. The job data was the culprit.

 

The media blamed the setback on higher interest rates, as Fed heads cluttered the airways with warnings that the pause is over and higher interest should be expected by financial markets. The point hit home when the most recent data on job growth indicated further strength. On Thursday, the payroll processing firm, ADP, reported 497,000 jobs added in June; the most in over a year. At this point, there are more than 50 percent more job openings than people unemployed.

 

The latest reading on the Supply Chain Management Services Index also ticked up to 53.9 in June, which was higher than the expected reading of 51.2. That led the Atlanta Fed to push up its second-quarter GDP expectations from 1.9 to 2.1 percent.  

 

Even though the manufacturing side of the economy appears to be weakening, the services side of the economic ledger appears to be buoying economic expansion. That could lead to even more job growth as the services sector continues to hire workers to fill the continued demand.

 

On Friday, however, the non-farm payroll data for June came in far lower than expected. It came in at 209,000 job gains versus 240,000 expected, and the unemployment rate was unchanged at 3.6 percent, but average hourly earnings went up 0.4 percent versus a gain of 0.3 percent 

 

None of this is going to make the Fed happy. The difference between the two labor reports was contradictory at best. The wage gains were not. It likely means inflation and the Fed will keep interest rates higher for longer. There is even talk that we may face several more rate hikes instead of just one or two more in the coming months.

 

The debt market has responded by selling U.S. Treasuries in anticipation of that possibility, which has sent the ten-year U.S. Treasury bond above 4 percent for the first time in months. Mortgage rates also hit the highest point of the year with a 30-year fixed rate mortgage at 6.71 percent. That has hurt housing activity this summer as homeowners pulled back from listing homes and rate-sensitive buyers reigned in their purchase plans.

 

There is no question that stocks are extended. This week saw some of the air escape from the bullish balloon that has sent stocks higher since the beginning of the year. Those stocks that were most overbought, like the Magnificent Seven, were not immune from the selloff. I suspect that we face a period of consolidation ahead, which will delay somewhat my expectations for more market gains.

 

The summer months, on average, are usually more volatile since there are fewer players on their computers. Vacations and shorter work weeks leave markets vulnerable to larger moves both up and down. I plan to be on vacation myself in the week starting July 17 so no columns that week, unfortunately.

 

Many strategists are looking for a temporary peak in the markets this month. I agree. I am hoping stocks can move a little higher and they still may, but we are stretched at this point. Corporate earnings are right around the corner. Valuations are stretched and many companies are going to have to show stellar results to support prices. 

 

Inflation data in the form of the Consumer Price Index and the Produce Price Index are due out next week as well. That should offer a chance for stocks to move higher if the numbers are cooler. Hotter results would give traders an excuse to sell. The bottom line, however, is that I believe markets will climb higher in the months ahead, so stay invested. 

 

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.

What goes up, must come down — at least in the stock market. That doesn't mean that the bull market is over. More upside ahead in equities is a strong possibility, but first, we need to bottom.

 

"Stocks are stretched at this point; the rubber band could stretch further, but not right now. I believe next week we might see some downside in the averages (maybe 100 points give or take on the S&P 500), but then up again too as high as 4,600."

 

That was my take on where stocks were going in last week's column. Thus far, we seem to be right on target. Artificial intelligence stocks are leading this bout of profit-taking. Many smaller AI stocks have given back almost half their recent gains. That is as it should be given the extraordinary gains investors have enjoyed in some of these names. The technology area in general led the market's decline, but few areas were safe from this round of profit-taking.

 

A bout of central bank hikes in interest rates around the world contributed to the malaise in stocks, at least according to the news media. The Bank of England increased rates by 50 basis points, and Norway, Switzerland, Turkey, and New Zealand joined in as well. Sweden is expected to do the same next week, and both Canada and Australia did so last week. Over the last six months, almost four dozen countries have done the same.

 

In addition, while the U.S. Federal Reserve Bank announced a pause last week in its rate hikes, this week Fed officials made it clear that their rate tightening regime is not over. Fed Chair Jerome Powell testified for two days before Congress this week. In his testimony before congressional lawmakers, he went to great pains to notify the financial markets that he fully expected at least two more rate hikes in the months ahead.

 

He maintained that inflation was still running too hot and that, yes, there was "certainly a possibility" of a recession. Achieving a "soft landing" in which policy tightens without severe economic circumstances such as a recession, will be difficult, he cautioned.

 

While his remarks were no different than his statements last week after the FOMC meeting, the markets reacted quite differently. Last week it was up, up, and away on Thursday and Friday. This week, it was the opposite. My own belief is that bullish momentum traders had hit their targets in the indexes by Friday (as did I), and central bankers merely gave them an excuse to lock in some great profits.

 

Since the NASDAQ 100 has led the markets higher and is leading them lower now, I would watch that index for clues on what will happen next. The QQQ, an exchange-traded fund, represents that index and is trading around 362. I see a downside risk to 352 on the QQQs, or another 2-3 percent pullback from here. At that point, we will determine if the profit-taking is over or not.

 

As for the S&P 500 Index, I am watching the 4,320-4,350 area. On Friday, the bulls were attempting to defend that 4,350 level. We are down 66 points from last Friday with possibly another 34 points to go for my expected 100-point decline. After that, we should see some upside.

 

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 bull market has been a story of eight to 10 stocks for most of the year. The frenzied trade in AI stocks has fueled those gains in that elite group of mega-stocks. But investors need to expand their focus to other areas for the stock market to continue to climb.

 

Artificial Intelligence (AI) has become this year's buzz words. Even though it has been around for well over a decade, investors have suddenly recognized the potential of this technological advancement. The benefits to productivity and economic growth in the years ahead may be as important, if not more important, as the internet revolution.

 

As in the dot.com boom, any company that can wag the flag of AI in front of the bull's face has seen its stock price soar. Investors should be warned, however, that there are a lot of companies that are claiming to be in the forefront of AI when they are not. As such, many investors are sticking with the leaders, which they know are leaders in AI. Companies like Google, Meta, Amazon, Microsoft, Tesla, and Nvidia have seen their stocks explode higher as a result.

 

All this excitement has narrowed the number of stocks that are pushing the markets higher, leaving other sectors in the dust. This works until it doesn't. The dot.com boom and bust comes to mind when looking at the present situation.

 

Back in the early 2000s, that mania saw investors bid up dot.com stocks to crazy levels only to see the whole thing collapse, cutting the NASDAQ in half or more over two years. That index only recovered its dot.com peak this year. One way for investors to avoid this danger would be to see an expansion of the number of stocks that are participating in this rally.

 

In the past week or so, I am starting to see this begin to happen. Small-cap stocks, as represented by the Russel 2000 Index, have been languishing for months and months until recently. This week it has outperformed the S&P 500 Index and even NASDAQ. I have also noticed that financials, industrials, basic materials, mining and metals, and precious metals were also seeing some interest. That is encouraging.

 

Many investors, wary of adding even more money to the "Mega-Cap 8," seem to be searching for alternative equity investments, especially if the Fed engineers a soft landing in the economy. All the above sectors would benefit under that scenario, as would the energy patch. A continuation of this rally is dependent upon good news next week.

 

We have three important events coming up--the Consumer Price Index (CPI), the Producer Price Index (PPI), and the Federal Open Market Committee (FOMC). The consensus view is that the CPI and the PPI will both come in lower for May. The FOMC meeting is expected to result in a pause in interest rate hikes. Skipping one month of increases will also be read as a positive by the markets.

 

Higher inflation numbers might cause the Fed to change its mind and raise interest rates again, which, as you might guess, would be taken negatively by the market and precipitate a sell-off. I don't think that will occur. However, we have already reached my low-end target on the S&P 500 Index at 4,325 (intraday). I said we could hit 4,410 or so if the stars are aligned and the data cooperate. Nonetheless, I suspect we will see some pullback in the markets in the weeks ahead once we climb a little higher.

 

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.

Now that the debt ceiling fiasco is out of the way, markets are returning their focus to monetary policy. The burning question on investors' minds is whether the Fed will skip a rate hike in their upcoming June meeting.

 

The betting by traders on such a move is vacillating around the 50/50 mark, depending on which Fed Head is talking. In recent days, the market had expected the Fed would lift interest rates once again at its June 13-14 FOMC meeting. This week, however, two policymakers, Fed Governor Philip Jefferson, and Philadelphia Fed President Patrick Harker, expressed their opinions that a pause may be in order unless Friday's jobs report came in stronger than expected.

 

Their words carry even more authority since Harker is a voting member of the FOMC and Jefferson has been nominated by President Biden to serve as the Fed's vice chair. In that position, he would be expected to aid Chair Jerome Powell in developing his policy decisions before FOMC meetings.

 

On Friday, the non-farm payroll report showed the economy remained strong with 339,000 jobs created last month, which was way above the expected gain of 195,000 jobs. However, at the same time, the unemployment rate rose from 3.5 percent to 3.7 percent, while hourly earnings month over month were unchanged at 0.3 percent and hourly earnings on a year-over-year basis dropped to 4.3 percent versus 4.4 percent.

 

The problem with a pause in their program of combating inflation by raising interest rates is that traders will immediately assume that a Fed pause signals an end to further rate hikes. As such, FOMC members are taking great pains to tell markets not to count on that scenario. They say that if they do pause, it is simply a period where policymakers can assess how the economy and the financial sector are weathering past rate hikes.

 

This "hawkish pause," as the market is dubbing it, should not by itself mean much to the equity markets. And the strong labor gains might also convince the Fed that a pause might be premature. But those risks only come into play in two weeks. However, stock players are so short-term that algo and options traders will likely push markets higher in the meantime. They will anticipate the skip until they are proven wrong.

 

Over the last several months, government bond auctions have dwindled somewhat as the limit on borrowing crept closer and closer. Now that Congress is extending the ceiling higher, the government will need to raise more money to continue spending on things like social security payments.

 

In the weeks ahead, I will be monitoring a potential counter-veiling development that could put a damper on equities and a spike in bond yields. The U.S. Treasury needs to raise about a trillion dollars in debt fairly soon. As this supply of bonds hit the markets, yields on debt instruments would rise to accommodate all this extra borrowing. That would be bad for stocks.

 

I should mention the farce that has occupied all our attention over the last few weeks. The debt ceiling agreement is a travesty. Spending cuts amounted to $1 trillion, but far less than that if one reads the fine print in the actual document. As I expected, the June 1 deadline came and went but not by much. It really didn’t matter because the supposed deadline was extended (at the eleventh hour), which magically has given the politicians the extra time needed for the Senate to pass the bill and the president to sign it. 

 

President Biden, House Speaker Kevin McCarthy, and a host of politicians got their hours of airtime at our expense. The country is no better off, and in two years we will probably have to put up with these same clowns doing the same thing yet again.

 

Marketwise, I expect the S&P 500 Index to continue to climb, hitting my target of 4,320 or even higher (maybe 4,400 maximum) as traders chase the market up in anticipation of the Skip.  Monday and possibly Tuesday could be down days (buy the dip) and then most of the week the S&P should continue to gain. Gold and silver also appear to be ending their period of consolidation. Watch the dollar; if it weakens, precious metals and bitcoin should climb higher from here. 

 

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.