All eyes will be focused on May's Federal Open Market Committee meeting (FOMC) this week. Most investors are expecting another quarter-point interest rate increase, and there is an ongoing debate over the possibility of another one in June.

 

Some strategists believe that may be overkill. The fear is that the Fed could break something else if they do. Many already blame the Fed's rapid hiking of interest rates for the troubles within the regional bank area. The value of Silicon Valley Bank's U.S. Treasury bond holdings, for example, fell by billions of dollars as the Fed tightened monetary policy over the last year.

 

And the banking worries continue. This week, a large San Francisco-based bank, First Republic Bank, saw its stock lose 95 percent of its value. In announcing first-quarter earnings results, First Republic admitted that it had lost more than $100 billion in deposits in the first quarter.

 

The collapse of SVP and Signature Bank had prompted a run on its deposits as well. Last month, in a bid to stabilize the bank, a group of 11 big banks deposited $30 billion with the beleaguered institution hoping it would solve the problem. Those hopes have been dashed.

 

First Republic's main business is making large mortgages at low rates to well-heeled borrowers. As such, the bank is buried under a mountain of mispriced loans as interest rates have spiked higher over the last 12 months. To raise cash, they would have to sell off those loans to others at substantial losses, which would only hasten its collapse. U.S. officials are coordinating urgent talks with private-sector banks to come to the rescue. If a deal isn't struck soon the fate of First Republic seems dire at best.

 

In any case, it is not hard to understand why the fear of breaking something else is quite real right now. This week, the Fed will likely raise rates again. As interest rates continue to rise, no one knows how exposed other entities in the financial sector might be. It has put the Fed in between a rock and a hard place.

 

Inflation has not come down far enough to convince the Fed to ease its monetary stance. The most recent Personal Consumption Expenditures Index (PCE), which is the Fed's favorite inflation measure, came in as expected, just a bit cooler. In the past, the Fed has made the mistake of easing prematurely, only to raise rates again as inflation reversed and climbed higher. Better be sure, than sorry would about sum up the Fed's policy right now. 

 

But being sure raises the risks of breaking something, which could have a severe impact on the economy or parts of it like the financial sector. The U.S. economy grew at only a 1.1 percent rate in the first quarter. That was far below the consensus forecasts of 1.9 percent. In the previous two quarters, the economy grew at 2.9 percent and 3.2 percent respectively. It seems clear that the Fed's actions are having the desired effect but is it enough to even pause their rate hikes? That is the question investors are asking.

 

So far, the Fed has assured us that they have the tools to handle both the problems in the regional bank area, as well as the inflation threat. Some think that kind of thinking smacks of overconfidence. One additional issue that is raising its ugly head is the potential summer debt crisis in Washington.

 

The Republican-ruled House has passed a debt reduction package that, if passed, would make deep inroads into the Biden Administration's spending programs. That is their price for increasing the debt limit. The proposal is deemed dead on arrival by the Democrat-held Senate, however. As I have written in the past, in my opinion, the entire issue is simply political theater, with the fate of the nation's credit at risk.

 

If history is any guide, the closer we come to the cliff of default, the more both the bond and equity markets will come unglued. It might require actions by the Fed to calm markets and ensure orderly markets. That could disrupt the central bank’s tightening plans in the months ahead.

 

Marketwise, the volatility I expected last week has kept the indexes in a trading range. We ended the week a little above where we started. First quarter earnings results so far were better than expected. A handful of large-cap companies (Microsoft, Meta, Google, and Amazon) delivered more positive results than negative. The coming week will be all about the FOMC meeting on Wednesday and Apple results on Thursday. The chop should continue, but I am still looking for higher in the short term.

 

First-quarter corporate earnings are pouring in, and the results have been mixed. So far, the numbers have been good enough to keep the market from falling significantly, but not good enough to warrant further gains.

 

It is still early days, with only 15 percent of companies reported, but so far, the best I can say is mixed. The multicenter banks continued to surprise to the upside this week, while the regionals have been so-so but not as bad as some expected. Of course, the Silicon Valley Bank debacle did not occur until toward the end of the quarter, so much of the impact won't be known until the second quarter results are announced.

 

Tesla, one of the cult favorites of many in the markets, was disappointed. That threw the markets into a funk, at least on Thursday and Friday. The electric vehicle market is in the throes of a price-cutting war globally, which Tesla started. The EV leader has cut prices 5 times on its vehicles since the beginning of the year. They did so as the global economy slowed. The company wants to not only maintain its worldwide market share but expand it as well.

 

In China, the price war is particularly ferocious where competitors such as Nio Inc, XPeng Inc. and BYD Co. Ltd. are selling some EV models at a 50 percent discount to prices in the U.S. and Europe. This, as you may imagine, is having an impact on Tesla's profit margins and thus the disappointing earnings results.

 

The prevailing sentiment right now is that while the economy may be slowing, the Fed is still hell-bent on raising rates another 25 basis points at their May meeting. After that, some expect a pause, while others disagree. It will depend on the data, in my opinion.

 

We will be getting another reading on inflation in the coming week (April 28) when the Personal Consumption Expenditures Price Index (PCE) is reported. The PCE measures the prices paid for goods and services and it is a data point that the Fed watches carefully.

 

Economists and the Fed will be paying special attention to the services side of the report where inflation has been sticky. A hotter number may convince the Fed that a pause in their tightening program may be premature. As such, investors will likely assign great importance to the PCE print. 

 

What many investors fail to realize is that even as the Fed continues to tighten, liquidity in the financial markets is rising. The contradiction can be explained by the U.S. Treasury's actions in the face of the nation's fast-approaching debt limit. The government can no longer sell Treasury bonds as it has in the past without triggering that limit prematurely.

 

Instead, the Treasury has been spending down its checking account, called the Treasury General Account. That adds money to the system in two ways. With fewer bonds able to be purchased there is more cash looking around for a home. Second, the cash disbursements from the Treasury General account also inject additional liquidity directly into the system.

 

In addition, the recent regional bank issues (Silicon Valley Bank, etc.) have forced the Fed to also increase liquidity to the banking system. Taken together, there is now more money sloshing around the system than many realize.

 

A lot of that money flows into other assets in the financial markets (like the stock markets), at least in the short term. At some point this summer, when the new debt limit is finally passed in Congress, that situation will reverse but, in the meantime, it helps explain why the stock market has been resilient in the face of rising interest rates, a slowing economy, and inflation. I look for the stock market to continue to fluctuate in the week ahead.

 

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.

Last month's inflation data came in the cooler. The dollar continued to decline, while stocks eked out some gains. Next up, first-quarter earnings results.

 

The money-center banks kicked off results on Friday. The first four banks to report — JP Morgan Chase, Citigroup, PNC, and Wells Fargo — were surprised by the upside. Next week, we will see how hard the beleaguered regional banks were impacted by the rush to move deposits to the bigger banks. Investors will be watching two key factors (deposits and loan demand) to determine if these banks are investible going forward. 

 

On the macroeconomic front, the Consumer Price Index (CPI) came in line. Prices rose just 5 percent in the year through March. That is down from 6 percent in February. Inflation showed the slowest pickup in prices in almost two years. The Producer Price Index (PPI) came in lower than expected as well. The top line number month over month was -0.5 percent versus an expected 0 percent. Year over year, the PPI was up 2.7 percent (3.0 percent expected), which was down from February's 4.9 percent (revised).

 

Those numbers heartened investors, but the bottom line is that it doesn't change the central bank's stance on monetary policy. They know their policies are working, but we are a long way off from their stated target of a 2 percent inflation rate. Therein lies the rub.

 

The disconnect I see is between what the market expects and what the Fed will do. Just about everyone is expecting a 25-basis point hike in the Fed funds rate when the FOMC meets again in May. It is what happens from there that could get us in trouble. The bulls are certain that the Fed will pause its hiking cycle after that. Many believe that the Fed will then turn around and start cutting interest rates (3 rate cuts by the Fall) almost immediately after that.

 

The impetus for that event would be that the economic data suddenly falls off the cliff. Others say it will be a combination of weak data, and continued contagion risk coming out of the financial sector. That will convince the Fed to abandon their stated 2 percent inflation target (and their credibility) before they break something else in the economy. If you believe that scenario, I have a bridge I would like to sell you as well.

 

My take is that we will see a moderate recession. The chance of experiencing a harsher economic decline depends on whether the Fed pauses its' interest rate hikes. But even if they do, a pause does not mean the Fed is through hiking, and it certainly does not mean they will be cutting interest rates. Inflation is falling, however, and while the labor market is hanging tough, there are signs that around the edges employment is cooling a little. U.S. jobless claims applications are at the highest level in more than a year, but the Fed still needs to see a reversal in the employment data.

 

In the meantime, gold continued to climb, hitting $2,063,40 an ounce, which is just a smidge below its all-time high of $2,074.88. Silver gained as well ($26.11 an ounce), but it is a long way from its high of $48.70 at the end of the 1970s. And then there is Bitcoin, which rose above $30,000, and has doubled in price since the beginning of the year. All three have benefited from the decline and the U.S. dollar and the contagion concerns of the banking industry. You can read my thoughts on cryptocurrencies in this week's column "The Bitcoin Bounce." 

 

I am guessing that next week we have a dip and bounce scenario where the S&P 500 Index could pull back 70 points or so and then bounce to the 4,230 area. At that point, I get a lot more cautious.

 

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 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.   

 

Anyone seeking individualized investment advice should contact a qualified investment adviser. None of the information presented in this article is intended to be and should not be construed as an endorsement of OPI, Inc. or a solicitation to become a client of OPI. The reader should not assume that any strategies or specific investments discussed are employed, bought, sold, or held by OPI. Investments in securities are not insured, protected, or guaranteed and may result in loss of income and/or principal. This communication may include opinions and forward-looking statements, and we can give no assurance that such beliefs and expectations will prove to be correct. Investments in securities are not insured, protected, or guaranteed and may result in loss of income and/or principal. This communication may include opinions and forward-looking statements, and we can give no assurance that such beliefs and expectations will prove to be correct.          

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.