Third-quarter earnings have cheered investors, sending markets to new highs. The bullish wave of buying was so strong that investors ignored the disappointing third quarter read on the nation's Gross Domestic Product (GDP).

 

Economists were looking for the economy to grow by 2.6 percent, but instead, GDP gained a mere 2 percent, which was the slowest rate in over a year. Economic activity was damaged by the Delta variant as well as continuing supply-side constraints. The market's reaction indicates that investors are looking through the weak number and expecting the economy to continue to grow.

 

It seems to be a question of demand versus supply. Yes, the economy slowed, but it wasn't because demand is slowing. It was simply a matter of supply chain bottlenecks that are forcing pent-up demand further into the future.

 

As we close out this week of earnings the "beat" rate of corporations is more than 80 percent. Most of the big mega-cap technology companies (with some exceptions) have once again delivered good results, which has kept the markets buoyed. Managements continue to complain about supply constraints and higher prices, which are compressing profit margins in some sectors, but not enough to really hurt overall results.

 

As for the Fed, next week on Nov. 3, the long-awaited FOMC meeting will occur and with it the expected start date of the tapering of asset purchases. It seems to me that the Federal Reserve Bank and its Chairman Jerome Powell have done everything in their power to prepare the markets for the onset of tapering. It remains to be seen how the markets will react to the actual implementation of tapering. We could see some nervousness leading up to the meeting.

 

But the new topic of conversation — a rise in interest rates. When will the Fed start raising interest rates from the near-zero levels at present? Some traders believe that interest rates will be hiked faster than most investors are expecting. Rising inflation is the impetus behind that conviction. Persistent and accelerating inflation is the biggest risk to the market right now, in my opinion. If the inflation rate continues to gain, investors would worry that the Fed might be forced to raise interest rates by as many as two hikes next year, and three in 2023. That would most likely create severe negative repercussions for the stock market. 

 

Democrats are struggling to compromise on some version of an infrastructure bill with President Joe Biden urging House Democrats to accept a scaled-down version of his Build Back Better proposal. This week, the package would amount to $1.75 trillion versus the $3.5 trillion he originally requested. Progressive Democrats would have to agree to jettison pet projects such as paid family leave and expanded Medicare coverage of vision and dental for elders. Both of which were popular with voters and a priority for several woman lawmakers. A 15 percent minimum corporate tax, a 50 percent minimum tax on foreign profits of U.S. corporations, tax hikes on the highest income Americans, and possibly a surtax on multimillionaires and billionaires are still on the revenue raiser list.   

 

As for stocks, most markets are extended. That may mean we see some profit-taking during the next week. I am not looking for anything serious, maybe a 2-3 percent spate of selling (at most) that might take us into next Wednesday's FOMC meeting on November 3, 2021.

 

My own bet is that investors will like what Chair Powell will say, and if so, we could see another leg higher for the markets. If Congress does come through with an infrastructure compromise bill, the markets would get a lift. As such, I would use any dip to add to equities. After that, I think we have smooth sailing into the end of November.

 

The S&P 500 Index and the Dow have managed to pierce overhead resistance. This week, both hit record highs. It seems only a matter of time before the NASDAQ will follow but probably not before we have a minor pullback.

 

As of Friday morning, equities have managed to string together seven days of continuous gains. Do I hear eight? That is a tall order, because stocks are now overextended by just about every measure I follow. We could do with a minor pullback, or pause, before extending this rally higher.

 

Credit for the gains can be attributed to third quarter earnings results. The results have been much better than expected. The big fear was that supply chain disruptions and rising prices would crater corporate results. Not happening.

 

Company managements are acknowledging that disruptions are hurting results, but despite them, business is still growing. And at the same time, companies have been able (for the most part) to pass on rising prices to consumers and getting little-to-no pushback from the public thus far. Guidance is good, and if this goldilocks kind of environment lasts, it's up, up and away.

 

And while fear of inflation does not seem to phase equity investors, it is another story over in the bond market. The benchmark, U.S. Ten-Year bond yield is climbing, reaching its highest level in months at 1.67 percent. The high this year so far has been about 1.76 percent and the bond vigilantes seem determined to keep selling bonds until we hit that level. The last time that occurred equities did fall by almost 5 percent. The question is what will happen this time around.

 

In the meantime, both yields and stock prices are heading in the same direction, which has been great if you own financials, but not so good if you are overweight technology. It is one reason why NASDAQ has yet to recover all their losses from the September-October declines.

 

The Democrats continue to behave like their own worst enemies, failing day after day to come to a compromise that would move President Biden's "Build Back Better" legislation forward. As it is, the proposed $3.5 trillion plan has been whittled down to somewhere between $1-2 trillion. It appears that the corporate tax hike has also fallen by the wayside, although individual taxes are still on the table. As I have counseled, readers should expect more delay and more compromise before some watered-down plan will finally be passed, hopefully this year.

 

My own explanation, however, on why investors and the markets have become more optimistic over the last two weeks is the pandemic. Every week over the last 18 months, I have been writing that the Coronavirus was the over-riding issue for the economy and the stock market. And yet, I realized over the weekend that I have not mentioned the Coronavirus once in the last two weeks. Does that mean the pandemic is over? No, not by a long shot, but I think we are over the hump barring some new and vaccine-resistant variant.

 

Thanks to the government's vaccination and booster efforts, we may be turning the corner, which could usher in a further spurt of growth in the economy. As such, I believe we could see further gains in the stock market as the year progresses. In the short, short-term, I am expecting a pullback in the markets as early as next week. On the S&P 500 Index I could see risk down to 4,450 or so, but 50 points at a minimum. That would be a dip to buy.

 

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 appears that we have established a range in the stock market over the last few weeks. The bears have not seen their worst predictions come true. My hope is that we leave this month where we entered it.

 

September 2021 was treacherous. Bears were calling for a 10 percent correction at a minimum. Bulls, already on the back foot after witnessing a 5 percent pullback in the indexes, insisted we had seen the lows. Since then, we had been bouncing back and forth in a range. This week, however, appears to be a game changer.

 

We have not re-tested the lows on the S&P 500 Index, which we hit on Oct. 1, 2021, at 4,288 (intraday), nor have we come close to the highs made on September 24, 2021, at 4,555. But we did regain the 50-day moving average (DMA), which is a good sign for the bulls.

 

Stocks daily have been opening higher in the mornings but giving back their gains and closing lower by the end of the day. Bulls argue that the markets are simply consolidating after more than a year of fantastic gains with few corrections. The bulls could be right.

 

On the other hand, the bears point to the imminent removal of the Fed's punch bowl in November 2021 (the beginning of asset purchases tapering) as a reason to remain cautious into that event. If we then throw in all the other worries that are creating angst among investors — supply chain issues, inflation, political chaos in Washington — the October volatility we have been experiencing thus far should come as no surprise.

 

If I could, I would call off this present stalemate and declare both sides a winner. Afterall, we did suffer a 5-plus percent selloff, which should satisfy the bears' need to see some "blood in the streets." The bulls should be thankful that the downside has been contained.

 

Readers who follow my columns regularly know that I highlighted the seriousness of the supply chain shortages months ago. Today, that's all you read about in most media outlets. I am not crowing about my forecasts, rather, I am reminding investors that this is old news and has already been discounted in the price of stocks, in my opinion, so ignore the headlines.

 

The only question to ask is how long this global condition will persist, and what that may do to the inflation rate. My own belief is that it won't be resolved until well into next year.  Even then, some shortages will persist, but it is impossible to predict which ones will remain. Clearly, this problem will continue to act as a weight to further global growth, but it won't kill it, as some are predicting. As for its inflationary impact, it adds another variable to the factors that are already contributing to a rate of inflation that has surprised everyone, including the Federal Reserve Bank.

 

One reason the markets rallied this week above that all-important 50-DMA was a less than anticipated rise in both the Consumer Price Index (5.4 percent year-over-year), as well as the Producer Price Index (8.6 percent year-over-year) for September 2021. Prices paid to U.S. producers increased in September at the slowest pace of the year, thanks to cooling costs of services. Final PPI demand increased just 0.5 percent from the prior month.

 

Since PPI is one of the main variables that the Fed studies when making monetary decisions (like when to raise interest rates), markets rose over 1.5 percent on Thursday and added to those gains on Friday. But one set of monthly numbers does not tell the whole story. I expect further increases in the inflation rate before the pressure subsides.

 

However, I am hopeful that we enter a more positive period for stocks in the last two months of the 2021 led by cyclical sectors of the market. I began the year by recommending commodities, industrials, financials and some technology. That advice remains viable. We are halfway through October and the markets are already shaking off their worries. Let's keep our fingers crossed.

 

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 was another tumultuous week in the markets. Volatility spiked as events in Washington and around the world injected an atmosphere of caution and indecision among investors. I expect more of the same.

 

Welcome to October. A month in which I see a continuation of the last few weeks of uncertainty. The political circus in Washington, D.C., is not helping, and is set to continue making headlines in the days ahead. The debt limit controversary is probably the largest challenge investors face this month. Simultaneously, the battle between progressive and moderate Democrats over the passage of two government spending programs, will continue to monopolize investor's attention.

 

The bipartisan infrastructure package and the larger, "Democrat only" Biden social safety net program is the scene of an unusual battle between splinter groups of the same party. Republicans have already said that the larger Biden program would be dead on arrival in the U.S. Senate, so passage will depend on getting Biden's program passed via the reconciliation process. In order to achieve that, the progressive wing of the party demands that the programs be twin tracked, otherwise no deal. At stake is a lot of spending that would power the economy in the years ahead, but also increase the federal debt substantially.

 

I expect both will pass at some point. The Biden $3.5 trillion spending plan will need to be whittled down by a $1 trillion or so for the moderates to agree. The $1 trillion bipartisan, infrastructure plan will probably pass as is, because polls show that most American voters are in favor of the infrastructure spending on roads, bridges, and transportation. Parts of the larger package — boosting education, care of the sick and elderly, health care, and climate change — also have strong voter support. But the areas that have lower support among voters will probably determine what will get cut (or modified) and what stays in the plan.

 

As I advised last week, the shutdown in government was averted. A stop gap measure passed on Thursday, Sept. 30, effectively kicked that can down the road until December 2021. It is still on the plate, but on the back burner for now.

 

Expectations of the U.S. economy's third-quarter performance, as well as the yearly results for 2021, continue to be ratchetted down. As I warned readers, economic growth has been slowed somewhat by both the Delta variant of the coronavirus and supply chain bottlenecks. That said, the GDP is still expected to grow by 5.6 percent, compared to the 6.7 percent forecasted in a May 2021 survey conducted by the National Association for Business Economics. 

 

Although the economy may be slowing, inflation remains stubbornly high, contrary to the Fed's belief that any inflation we experienced would be "transitory." In fact, the word has disappeared from Fed statements and speeches altogether. Instead, Fed Chair Jerome Powell called inflation "frustrating" and sees it running into next year. Some market forecasters wonder if we might be heading toward stagflation, which might be in the cards for next year.

 

It is too early to tell, but whatever the outcome, the Fed has already decided to taper, beginning sometime this quarter. About the only thing that might delay that decision would be the non-farm payroll report set to be released next Friday, October 8, 2021. If job gains slow dramatically, it might cause the Fed to postpone tapering, or so the market believes.

 

As for the markets, last week, I warned that we were not out of the woods just yet. This week we suffered another pullback, re-testing and broke last Monday's lows on the S&P 500 Index. This is a change from the recent behavior of the stock market since last March. Up until now, every dip has been bought, and stocks never looked back. We have now broken the uptrend channel in place since last April This change in behavior and the technical charts argue for further downside ahead, maybe even to the 200-day moving average, which would be another 5 percent down from here.

 

Large cap technology suffered the brunt of the selling, while cyclical sectors managed to outperform on a relative basis. I expect the selling will continue if the U.S. dollar continues to rise and bond yields rise along with the advancing greenback.  If we are headed downward, there will be oversold bounces that could last for a week or two along the way. I believe that after this volatile period, markets will rebound into the end of the year.

 

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 week, investors suffered through the gloom and doom of a declining market. Many Wall Street equity strategists added to the angst by predicting terrible times ahead. I begged to differ, counting on dip buyers to save the day once again. And that is exactly what happened.

 

In case you missed it, last Friday, the S&P 500 Index was at an important level, hovering just below its 50 Day Moving Average (DMA). This had happened several times before since March 2020, and each time buyers appeared to "buy the dip."

 

 "I suspect they will again," I wrote, "so, no, I won't get bearish quite yet. I will go the other way and predict that markets will bounce next week. But what if I am wrong? Technically, the downside risk could be another 80 points (1.8 percent) to around the 4,365 level on the S&P 500 Index."  

 

As it turns out, I was right on both counts. Buyers swooped in at the lows an hour before the close on Tuesday, September 21, 2021.  The S&P 500 Index ended the day at 4,357, just eight points lower than my worst-case scenario. We proceeded to rally through the remainder of the week, regaining the 50 Day Moving Average and then some.

 

That doesn't mean we are quite out of the woods just yet. This week the children in Washington, D.C. that we call our "legislators" are once again squabbling over increasing the nation's debt ceiling. The federal debt ceiling has been raised more times than I can count, but it has never been reduced.  

 

In 2019, the debt ceiling was suspended for two years under a bi-partisan agreement. At the time, former President Donald Trump was busily increasing the nation's debt by $7.8 trillion (after promising he would reduce it). Instead, Trump engineered the third largest increase in our debt (relative to the size of the economy) of any U.S. president in history. The federal debt rose from $19.95 trillion in 2018 to $27.75 trillion by the end of his term — up 39 percent, or 130 percent of GDP. Why am I bringing this up?

 

Because the Republican Party opposes raising the debt ceiling. I won't bore you with the details, other than to remind readers that the debt ceiling today is where it is because of yesterday's bills. Specifically, it is the spending that was authorized and spent by those very same Republicans who now refuse to pay their bills.  Wall Street, one would assume, is totally inured to this theatre, but I suspect it still may cause some temporary volatility throughout the next few weeks.

 

In addition, there may be some drama next week around funding the government. A spending bill — called a "continuing resolution" — that would keep the government running after its current fiscal year ends on Sept. 30 needs to be passed, or the government could shut down.

 

Government shutdowns have happened before, most recently when the former president held the country hostage demanding billions for his now rusting and dilapidated "Wall." The markets took this in stride. All he really managed to do was make the holidays miserable by denying paychecks to thousands of government workers. In any case, a shutdown could add uncertainty to the markets.   

 

Of course, the market-moving news this week was the upcoming tapering of bond purchases by the Federal Reserve Bank. On Wednesday, Fed Chairman Jerome Powell, after the FOMC meeting, announced that the Fed had met both its inflation and employment targets and the time to taper was coming. It could be as soon as November or December—barring any unforeseen pitfalls. He left the door open to delay if something like an upsurge in the coronavirus threatens the economy.

 

The meeting notes also revealed that the committee membership was about evenly split on when they might begin to raise interest rates. An interest rate hike could happen as early as next year or be delayed into 2023. The markets took the announcement on board, and while the news was decidedly hawkish, investors were expecting it. Stocks rallied further on Thursday (Sept. 23)and into Friday (Sept. 24) before some profit-taking set in.

 

This should go down as a September to remember, and it is not over yet.  In the days and weeks ahead, we may suffer through another such pullback and test some of those lower levels of last week. If we do, I suspect the dip buyer will again save the day. In the meantime, stay the course and stay invested. Next up, October.

 

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.