The financial markets were expecting a lot of good news out of the Federal Open Market Committee meeting this week. Investors were betting that not only would the Fed pause, but possibly announce an end of interest rate hikes altogether. Some even expected a timetable for future rate cuts that would be sooner than later.

 

The market was right on the pause in interest rate hikes. The U.S. central bank decided not to hike the Fed funds rate but that was about the extent of the good news. In his Q&A session after the meeting, Chair Jerome Powell reiterated his message that further rate hikes were still on the table, but they would proceed "carefully." They have already raised rates 12 times over 17 months. He also left the audience with an expectation that there would be at least one more interest rate hike, if not two, this year.

 

In addition, the dot plot chart, which represents Fed members' expectations for future changes in interest rates indicated that most members had backed off from a prospective four cuts next year to only two, maybe. Most thought an interest cut would not occur until sometime in the latter part of 2024 — if then. Part of the problem, Powell said, was the continuing strength in the U.S. economy, which is performing far better than fed officials expected.

 

When everyone is on one side of the boat (as they were before the meeting), the risk is that a disappointment could capsize the boat. That was what exactly happened as Powell came out much more hawkish than anyone expected. Traders pulled the plug on bullish trades driving the main averages down by more than 1 percent and followed through on Thursday with similar losses.

 

In the bond market, the thinking was just as dire. If interest rates were going to stay higher for longer than yields needed to adjust to reflect that new reality. 

 

Traders sold bonds across the board sending yields to 15-year highs. The yield on the 10-year, U.S. Treasury bond spiked to 4.6 percent, which sent the dollar higher and equities lower.

 

Technology was the hardest hit, but few sectors escaped the selling. Sectors that have an inverse correlation with the dollar, such as precious metals, and materials. etc., were dumped and speculative stocks took it on the chin.  Energy was one of the few bright spots with oil prices holding up in the $90/bb. range. However, higher oil prices only complicate the Fed's work. As I wrote last week, higher energy prices fuel higher inflation and the longer it stays at this level, the harder the Fed's job becomes in reducing inflation.

 

Several negative short-term events are adding to the pessimistic attitude of investors. The UAW strike, which threatens to expand, could dent economic growth. The looming government shutdown, caused by the chaotic atmosphere within the Republican party, does not inspire buyers either. The sharp climb in bond yields has also tempted more investors to seek safety.

 

The Fed's hawkish stance ruined my hopes for a bounce this week, and we are still in a weak seasonal period. I warned readers this is historically a negative time for the markets. I had expected that the SP 500 Index would at least re-test the August lows and that did occur this week (the intra-day low for that index was 4,335). Right now, the S&P 500 Index is oversold, more so than at any other time this year.

 

A relief rally on Friday was to be expected. It seemed anemic to me but could continue into next week. I advise readers to remain cautious for now and most likely into mid-October. There could be further downside, especially if we see yields and the dollar move 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.

Over the last month, pot stocks have spiked higher. Some have doubled in price. The news that the U.S. Drug Enforcement Agency may reclassify marijuana from Schedule I of the Controlled Substances Act to Schedule III has given new hope to this beleaguered industry and investors.

 

The effort to reclassify started 10 months ago when the Biden administration directed the Department of Health and Human Services to review the scheduling of cannabis under federal law. As a result of that review, HHS sent a letter to the DEA recommending a proposed schedule change.

 

Currently, marijuana is listed as a Schedule I drug with no accepted medical use and a high potential for abuse similar to heroin or LSD. If the DEA were to reduce cannabis to a Schedule III drug, it would have the same profile as drugs such as Tylenol with codeine, anabolic steroids, or ketamine. That could be good news for pot companies selling medical marijuana. However, the new classification would only be available by prescription, and still be regulated by the federal government including possibly the FDA. And while medical marijuana might become broadly legal, most states would need to overhaul their legal and tax systems to align with the federal Schedule III restrictions.

 

It would not make marijuana legal. In addition, rescheduling the drug would do nothing to close the policy gap between state and federal cannabis laws. The reclassification is also completely different from the SAFE Banking Act, which would allow banks to provide financial services to the industry. That is still held up in Congress. Given the facts, why therefore would the stocks of some marijuana companies double in price in less than a month? The simple answer is taxes.

 

As a Schedule I substance, marijuana and the companies that produce and sell it are prohibited (by IRC Section 280E) from claiming deductions and credits for trade or business expenses that other legal businesses can claim. A rescheduling to Schedule III would be a large, and for some companies, a huge boost to their bottom lines. Expenses like rent, payroll, interest, depreciation, advertising, and so much more would be allowed to be deducted from taxes. For normal companies, these are all standard tax deductions.

 

Depending on the company, some players in the industry could see a 20-30 percent boost in their bottom-line after-tax profits, which explains why so many pot stocks have moved up in price. However, Canadian companies are not affected by these U.S. tax benefits. A potential buyer should understand that if interested in this sector.

 

Rescheduling would also allow cannabis companies to advertise in newspapers, magazines, and other media without worrying about crossing state lines. It would allow mailing advertisements as well. Research on the impact of marijuana and its many forms becomes easier and more widespread as well without the restrictions associated with a Schedule I drug.

 

On the state level, 20 states have already approved laws that exempt, or at least decouple, businesses from Section 280E of the federal tax code. These state exemptions have already saved millions for some large operators in state taxes. However, as it stands, the state-level exemptions do not affect the federal taxes owed by marijuana companies, and businesses are still not allowed to deduct these expenses toward their federal income taxes. 

 

For many states that still follow federal guidelines and therefore enforce Section 280E, a change of the federal level in scheduling would result in a cascade of changes at the state level, at least for the medical marijuana business. It is not known how, or if, a rescheduling will impact recreational marijuana use.  

 

A Schedule III designation does not need to go through Congress to become law. That is a good thing, but reclassifying marijuana would not broadly legalize, or even decriminalize the drug. The next obvious step toward those goals would be the passage of the SAFE Banking Act, which was introduced in 2017 and passed the House seven times with bipartisan support since 2019.

 

The Senate has been the holdup, but that may be changing. The Senate Banking, Housing, and Urban Affairs Committee is expected to hold a markup session for the bill sometime next week. This markup process is a key step in advancing the bill. It allows senators to debate and consider amendments to the bill. Scuttlebutt says both sides of the aisle on the committee support the bill and, if so, that would give the Senate at large a sign that progress toward passage is in the works.

 

One caveat to these positive developments is that we are dealing with the government here. Hopes have been dashed too many times in the past for investors to blindly step into these stocks with fingers crossed only to have them broken. The nation might see a full vote on the Senate floor by this fall, or it may not, and even then, there is no guarantee it will pass, so buyers beware.

 

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.

Oct. 1, 2023, is the deadline to avert yet another government shutdown. At this point, the chances are high that partisan politics will once again disappoint the country and most voters.

 

The truth is that the U.S. has a long history of dysfunctional shutdowns. There have been 20 such incidents since 1976. The longest single shut down in history occurred from Dec. 22, 2018, until Jan. 25, 2019.

 

The credit or blame for that debacle goes to former President Donald Trump. Trump held government workers and the nation hostage to fund his pet folly, a border wall between the U.S. and Mexico. How important was that issue? The subject has disappeared entirely from the political realm with even the most radically conservative right-wingers dropping the issue as an embarrassment.

 

As the House of Congress returns to business this week, far-right Republicans have made it clear to Speaker Kevin McCarthy that there is no way they will support legislation to keep the government open unless they see substantial spending cuts, including less aid to Ukraine, tough new border policies, and in the case of Rep. Marjorie Taylor Greene and others, an impeachment inquiry against President Biden.

 

Behind the scenes presidential candidate Trump has been orchestrating a Biden impeachment effort among members of the Freedom Caucus and just had dinner this past weekend with his henchwoman Greene on the subject. Speaker McCarthy caved in to the impeachment demand on Tuesday, hoping to appease his opponents, but that was not enough to satisfy their demands. 

 

Readers may recall that this same group of dissidents sabotaged the debt-ceiling talks and were largely responsible for the subsequent downgrading of the nation's debt by the credit agencies. Americans will pay for their actions in the form of higher interest rates for U.S. government debt for decades to come.

 

On Tuesday, Rep. Matt Gaetz, the Florida Republican, delivered a floor speech that outlined the conservative case for ousting the speaker. He and others in his group, the "Freedom Caucus," believe McCarthy failed to honor the promises he made to win the speakership. They are disappointed with his handling of the budget process and his reluctance to investigate President Biden and his family. Gaetz, by the way, is the guy the Department of Justice refused to prosecute for sex trafficking with underage women (although a Gaetz associate was sentenced to 11 years in prison for the crime).

 

Economists believe that a shutdown normally reduces economic growth by 0.15 percent for each week it lasts. Why? Federal government spending amounts to roughly one-quarter of Gross Domestic Product. A shutdown will immediately reduce that spending. If a shutdown is short, whatever loss of spending that occurs is usually made up once the government is back in action. "Short" is the key word here.

 

A Moody's economist, Mark Zandi, estimates that if for some reason this shutdown were to last a lot longer, for example, a full quarter, the impact would be a 1.2 percent hit to fourth-quarter economic growth. How likely is such a historically unprecedented event to occur?

 

The House would need to pass 12 appropriations bills in the next nine working days to fund the government before the deadline. It has not passed a single one thus far. The U.S. Senate is already preparing to pass a short-term funding bill (called a continuing resolution) to give legislators time to hammer out a full-year agreement. The thinking is that unless that happens a shutdown is almost guaranteed. Unfortunately, there is no guarantee that the hard-liners will even agree to that.  Gaetz made it clear that any attempt to pass a resolution by McCarthy would trigger a move to remove him from office immediately. The hard-liners suspect that a short-term resolution would only lead to a bigger spending bill that would thwart their objectives. 

 

Lending credence to that suspicion is the fact that several Biden administration priorities including an additional $24 billion for Kyiv, $4 billion for his border security program, and $12 billion for a FEMA disaster relief fund are already part of the resolution that would be passed by the Senate.

 

Further complicating the problem is the position of the speaker, himself. Many of the Freedom Caucus are threatening to depose the speaker if he does not give in to their demands or attempts to turn to Democrats for the votes, he may need to avoid a shutdown. If McCarthy were ousted, it would almost guarantee a protracted shutdown in my opinion.

 

Normally, government shutdowns do not have much of an impact on financial markets, however. There have been exceptions such as the 4 percent decline in stocks during the Trump debacle. That could happen again if the antics in Congress were to escalate further.

 

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 we enter the second week of the month, September is living up to its reputation as a bad time for stocks. No matter the reasons, stocks should see further declines in the week ahead.

 

There are several villains in this sell-off besides seasonal factors, however. Bond yields continue to climb with the Ten-year, U.S. Treasury bonds hitting 4.30 percent at one point this week. Place the blame on Treasury Secretary Janet Yellen and the government. She continues to auction billions in Treasury bills and bonds to replenish the Treasury's general account. That avalanche of new issues is driving up yields and squashing bond prices.

 

Then there are oil prices. A barrel of West Texas crude was closing in on $90 a barrel this week. That has re-ignited fears that the rate of inflation is going to start climbing once again. Remember, oil is still the fuel that runs the world's economy. OPEC-plus seems bound and determined to keep the price as high as it can to balance its budget. All the cartel members, (even Russia) have agreed to extend production cuts until the end of this year.

 

And let's not forget China's faltering economy and its rocky relationship with the U.S. After months and months of blacklisting Chinese companies like Huawei, the Chinese chip maker, and mobile phone company, China is striking back. And what better target for payback than Apple?

 

This week China announced that they have banned the use of iPhones for central government officials as well as employees of state-run companies. To put that in perspective, Apple generates about 17 percent of iPhone sales from China.

 

The Chinese are not stupid. They know Apple is the No. 1 company in the world and is held in countless mutual funds, exchange-traded funds, and individual portfolios throughout the U.S. How better to play tit-for-tat than to hurt American investors in their pocketbooks?

 

Apple shares plummeted on the news, taking the tech sector and the market down with it. At the same time, Huawei has built an advanced 7-nanometer processor to power its latest smartphone. It is in direct competition with Apple to win back Chinese consumers and so far, it is succeeding.

 

In the meantime, the U.S. dollar continued its eight-week climb to its highest level since March. The continued strength in the U.S. economy, while other nations like Europe and China experience faltering growth, has kept the greenback strong. This is hurting overseas trade. A stronger dollar makes it tough for U.S. exporters to compete overseas.

 

Last week, I warned investors to tread carefully in September. Thus far, I have been proven right. I do expect this shallow sell-off to continue into next week, but then we should see a bounce. We may re-test the August lows (around 4,330 or so on the S&P 500 index), but that remains to be seen. Holding that level would be positive. If not, we could face another 5 percent decline before bouncing back. 

 

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.

Women with young children have hit their stride in America's workforce. The ability to work remotely has given these women the flexibility to make money while raising children.

 

A new report in June 2023 by the Hamilton Project at the Brookings Institution indicated that prime-age women (ages 25 through 54) had a labor force participation rate of 77.8 percent.

 

What was even more surprising was that women whose youngest child is under the age of 5 are the main locomotive behind this upward trend. Prepandemic, this group's participation in the workforce peaked at 68.9 percent but has now jumped to 70.4 percent. No other category of women has surpassed their prepandemic level thus far.

 

This is a far cry from the predicament women faced during the pandemic-induced shutdown of schools and the inability to find day-care services. At that time, working women were forced to choose between taking care of the kids or employment. Those who tried to do both, like my daughter, were under enormous pressure on both ends.

 

How bad did it get? In 2020, about 113 million women aged 25-54 with partners and small children were out of the workforce, according to the International Labor Federation. In that year, more than 2 million mothers left the labor force. That compares to 13 million males out of work.

 

Two factors conspired to get these women back in the workforce. The supply/demand imbalance of workers in the U.S. has resulted in the present-day historically tight labor market. Possibly even more important was the introduction of remote work. More research needs to be done, but one idea is that women who were highly educated and allowed more flexibility to work remotely rejoined the labor force. For those like my daughter who works in a high-level, high-demand management job in the retail sector, adding remote flexibility allowed her to retain her stressful job and care for her 8- and 11-year-old children.

 

The ability to tend to a child's needs, whether to pick up or drop off from school, make a doctor's appointment during work hours, or handle playdates during the summer allows mothers to juggle both jobs. If that is not possible, many moms are forced to throw in the towel on jobs like my daughter's and either quit or go part time. 

 

There does seem to be a cut-off point where women with very young children remain less likely to work than women with older kids or no kids. Normally, childbirth is when a woman's career path changes in the U.S., which impacts the rest of their economic life. It usually limits income, job selection, promotions, and fringe benefits.

 

For decades, women advocates have lobbied for more flexibility in the workplace that would allow women with children to remain in the workforce. COVID-19 and the subsequent remote work policies could have major implications for women and their future ability to hold careers and all that comes with it.

 

But there are still bumps in the road for working women. Indeed, the job search company, surveyed more than 1,000 stay-at-home moms, who re-entered the workforce only to find a good deal of bias in their job search. About 73 percent reported some bias due to the employment gap on their resumes. Many found difficulty in obtaining a flexible position.

 

Unfortunately, as the risk of contagion recedes, an increasing number of employers (mostly males) are clamping down on remote work. Many large companies are insisting on at least three days in the office per week. Employees are pushing back, but if the labor market weakens, workers may not have the leverage to resist the curtailment of remote work, at least for now. Longer-term, however, the aging of American workers should mean that labor shortages will continue and with it, remote work. That would be a big plus for women.

 

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.