World markets declined again this week. Despite world condemnation, which included most of America's economists and corporations, Donald Trump unilaterally forged ahead in implementing his own brand of protectionism. Investors fear the consequences.

 

While tariffs on imported steel and aluminum are still being negotiated, the president has upped the ante and is now pursuing China. The United States has long accused China of stealing our intellectual property. The Chinese, of course, have denied that and so, for years the discussions went round and round — until now.

 

On Thursday, our president announced his intention to slap $60 billion of tariffs on 1,300 product lines of Chinese imports. As a result, all three averages experienced a major market sell-off. Investors and corporations alike fear China's response. The media is spewing out lists of companies that will get hurt the most by a Chinese trade war. One of the most vulnerable areas is America's breadbasket.

 

China imports a lot of food from us. We are, in fact, China's second-largest trading partner in the agricultural area. Investors are worried that China could hit that sector hard. That makes sense since that area of America is where Trump's base is strongest.

 

The Chinese are well-schooled in American politics. Remember the response of our European trading partners on steel and aluminum tariffs. They responded by threatening tariffs on export items important to Paul Ryan's and Mitch McConnell's' home states. But unlike steel and aluminum workers that together only amount to a few hundred thousand jobs, a Chinese tariff on soybeans, for example, could decimate our farming sector. What better way to retaliate against our country and attack Trump personally where it hurts — in the support of his base approaching the mid-term elections.

 

Republicans are already worried about keeping their majority in the House come November. Recent election contests have not gone well for Trump or the GOP. Political strategists believe that if the Democrats do re-take the House, they most certainly will begin impeachment proceedings against Trump.

 

It does not matter whether that effort will succeed, only that Trump will be so tied up (think Nixon) in defending himself from the Russian probe, sexual harassment lawsuits, etc. that all legislative progress (including his trade war) will halt for the remainder of his term. That would suit the Chinese just fine.

 

In addition, it is entirely possible that a Democratic-controlled Congress will rollback a sizable chunk of the tax reform act. Thus far, there is no evidence that the tax cut benefits anyone but the Republican's corporate campaign contributors and the wealthy. There has been no pick-up in investment nor jobs beyond what would have normally occurred.

 

Given that the tax cut is not popular with most Americans, (especially in states with an income tax), the stock market could be in for a shock in the second half of the year depending on who wins the House. These dynamics go a long way in explaining the volatility in the stock market.

 

For most of last year, Trump claimed credit for the market's advance, boasting that the averages were a clear signal of his approval rating in the country.  Of course, he ignored the fact that over half the population cannot afford to be in the stock market.  But this year he has been strangely silent when it comes to the market's decline.

 

As the White House becomes a revolving door where experience and knowledge are on the way out and "Yes" men are on the way in, investors are beginning to realize the potential downside of an amateur in the White House. 

 

I am still of the opinion that much of this tariff talk is simply Trump being Trump. Unfortunately, what may have worked well in a real estate deal, or naming a winner in a reality tv show, does not work all that well in the global arena.

 

"Breaking a few eggs" in bringing in a new casino or selling a building was all well and good, but using similar tactics on a global scale can generate very different consequences. Let's hope you and I do not end up in the frying pan. In the meantime, hang tough, stay invested, and grin and bear it.

 

Bill Schmick is registered as an investment adviser representative and portfolio manager with Berkshire Money Management (BMM), managing over $400 million for investors in the Berkshires.  Bill's forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquiries to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.

Stocks declined this week. This is a typical and largely expected reaction that should see the averages re-test the lows suffered in early February.  Investors should understand that this is no cause for alarm.

 

In past columns, I had warned investors that there may be another shoe to drop before the correction in the markets was truly completed. Typically, stocks make a low, which we did when the S&P 500 Index hitting the 200-day moving average (DMA) before rebounding. We subsequently regained about half that loss quickly. And now we are in the process of re-testing the lows. This is a classic stock market pattern, so don't fret.

 

Volatility reigns supreme right now as it should. The Dow, for example, rose or fell a minimum of 300 points in six out of the last seven sessions. Sickening declines, followed by nerve-rattling rises, have most investors on a roller coaster of emotions. If you can't take the ups and downs, my advice is to turn off the financial news flow and do something productive.

 

Investors might recall that the stock market exhibited similar behavior in 2016 when the averages declined 10 percent in January, regained their losses and then declined again in February. Those who panicked and sold made a terrible mistake, because all the stock indexes went on to move much higher in the ensuing years. 

 

Since markets always need an excuse to go down, this week the testimony of our new Federal Reserve chairman, Jerome Powell, gave traders a chance to do a little profit-taking. The new Fed chieftain, in his Humphrey Hawkins testimony before both houses of Congress, said nothing new or earth-shaking. The entire session was really a grandstanding play by Democrats to trash the tax cut and ask the new chairman questions that were entirely outside of his job description.

 

He did say that a fourth rate hike may be in the cards, if conditions warranted it. Fed officials have been saying that for months. The markets decided to hear it differently this time, however, and so, the markets sank. But it was Thursday afternoon's comments by the president that really triggered this latest waterfall decline in equities.

 

"The Donald," in his own unpredictable fashion, announced (during what was supposed to be a listening session of gripes by U.S. steel executives) his intention to raise tariffs on foreign steel and aluminum producers by as much as 25 percent early next week. His unexpected announcement caught both his staff, the Republican party and global investors by surprise.

 

"Trade War" has become the new battle cry overnight and Friday's reason to sell all stocks, no matter how low, because the world's markets are never, ever going to come back. Sounds silly, doesn't it, but if you listen to the news that's what you hear. Why are we so surprised?

 

Donald Trump had campaigned on this issue. After the election, he promised to do something about what he believed to be unfair trade practices by our trading partners. He backed out of TPP, threatens to do the same with NAFTA, and has promised relief for our steel and aluminum sectors, specifically. So now he has gone and done it. There is no doubt in my mind that our trading partners will retaliate at some point.

 

Contrary to the myth that the U.S. is the only country in the world to practice "fair" trade policies, we don't. We dump our products overseas to support our producers here at home just like China or the European Community does. We dump our agricultural products, such as wheat and soybeans, overseas and do so year after year to protect our farmers. Most of which are no longer the actors you see in commercials wearing overalls. The guys we protect are more like the Koch brothers or mega-cap, corporate conglomerates like Cargill.

 

In the real world, we protect our farmers and they protect their steel producers. It is the way the game is played. God forbid a politician should tell us the truth!  But tariffs are inflationary. Prices go up every time another tariff is enacted. If this tit for tat were to continue, and it might, commodity prices should start to move higher.

 

In the meantime, take a deep breath, accept that your portfolio will suffer losses, (because that's what is supposed to happen every now and then) and expect a rebound.

 

After years and years of historically low-interest rates both here and abroad, stock investors are suddenly paying attention to the day-to-day movements of the world's bond markets. They may be getting a little too obsessive for their own good. 

 

This week, the 10-year Treasury note and the equity averages moved hand in hand. As the yield on the U.S. Treasury moved higher, stocks moved lower. As the yield fell, stocks gained ground. This change in behavior is causing a great deal of needless volatility but I believe it is all part of the "normalization" process.

 

That is a term coined by investors to explain what happens when our central banks begin to back off the last ten years' worth of monetary stimulus and let the markets begin to dictate the level of interest rates. Now, historically, bond and stock holders have had a symbiotic relationship.

 

As interest rates rise, stock holders would take account of the rising yield on bonds and compare it to what they can get in the stock market. If they deem that bonds are a better deal than stocks, they sell equities and buy bonds. Usually, investors take into account the longevity of these investments -- one, five, seven, ten, twenty or thirty years, while what happens to yields on a day-to-day basis does not tend to move stocks. But these are not normal times.

 

The controversial but largely successful actions of the world's central banks to stave off a second global depression brought on by the U.S. financial crisis is now being unwound. Since there were no precedents for the Fed's massive market "save" over the past decade, there is no surety that reversing the process will work without tipping us into some unforeseen calamity.

 

Remember too, that we now have an entire generation of financial sector players from retail brokers to institutional proprietary traders that have never experienced a rising interest rate environment. It has been almost 45 years since interest rates topped out during the Jimmy Carter years. Since then, rates have fallen lower and lower until quite recently.

 

At the same time, the wide spread use of algorithms, computer-driven trading and the like has largely replaced human thought and behavior in over 70 percent of daily trading volume. These computers are driven by software programs created by extremely young and unseasoned "quants" that simply look at numbers. They instruct their machines to sell if "X" price falls or rises by a certain amount.

 

They have neither context nor history to adjust their programs for a rising interest rate environment, so they treat bonds just like they were stocks. These technicians are running around building "models" to trade these short-term blips in bond movements, while trying to figure out their impact on individual stocks and indexes. There is no doubt in my mind that they will succeed. The problem is that bonds are not stocks.

 

Unlike the majority of stocks today, bonds are meant to be held, sometimes, until they mature (which can be as much as 30 years). Daily price movements are simply "noise" in the grand scheme of things in the bond world.  But, today, young Turks act and trade like a 4-5 basis point move in bond yields will mean that the trillions of dollars invested in these instruments will be sold or bought in the next minute or so.

 

For you and me, what this development will provide is another reason why daily and weekly moves in the equity markets will have little to do with reality. The day's stock market results will simply be a reflection of a schoolyard full of little boys and girls playing with their toys. Some will make money doing it, while others will lose.

 

As for the markets, this week I expected them to pull back some. They did. During the last four days, stocks traded up and down in huge intra-day moves. On Tuesday alone, the Dow gained over three hundred points, dropped almost the same amount, before gaining half of it back. This kind of volatility tells me this consolidation period may not be over. We could still see a little more damage in the very short term, but overall, I am still convinced we are going higher and fairly soon.

 

Bill Schmick is registered as an investment adviser representative and portfolio manager with Berkshire Money Management (BMM), managing over $400 million for investors in the Berkshires.  Bill's forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquiries to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.

Stocks have had what is called a "V" shaped recovery this week. The indexes climbed every day at least one percent or more. Will it continue or ...

 

It wouldn't surprise me if stocks took a breather about now. A bout of profit-taking after the stupendous come-back we have had would be entirely reasonable. If the S&P 500 Index, for example, fell back 2-3 percent over the next week or so that would be healthy.

 

Remember, we are still in that period of the markets where investors are driven by the fear of missing out. As interest rates continue to climb and bond investors experience losses, the natural thing would be to sell bonds and buy equities. 

 

In a lesson in reverse psychology, investors over the past week have talked themselves into believing that higher rates and a pick-up in inflation is actually good for the markets. Last week that same set of variables spelt doom for the stock market.

 

For me, the pullback was part of the natural rhythm of the equities market. Expect more of the same as the year goes by. However, these market dips will be supported by the accelerating growth of the global economy. That growth should climb this year to about 3.7 percent, while the U.S. economy should grow by almost 3 percent. We will also see inflation begin to climb to a 2.5 percent rate (give or take), which is higher than we have seen for many years.

 

The market is not wrong when they say a little inflation can be good for the economy. Everything is good in moderation.  It is sudden spikes, whether in interest rates or inflation, that unsettles the market.

 

Since prior to the Republican tax cut, I have been saying that the danger would be that the tax cut really did what the president promised:  increase investment and boost employment. If, on the other hand, the $1.5 trillion was simply a mass redistribution of wealth out of the pockets of Main Street and into the coffers of corporations and the rich then the stock market has little to worry about.

 

The money will simply be used to buy back stock and increase dividends. Since 84 percent of all stocks are owned by the wealthy (including Trump and almost all senators and congressmen), not only will these beneficiaries gain on a lower tax rate, but their investments will also gain.

 

As for the economy, it will do quite nicely without the additional fiscal stimulus. Unemployment is already approaching historical lows. So, from an economic point of view, the tax cut was eight years too late and is a needless addition to an already-huge government deficit. 

 

So far the evidence points to the tax cut as a redistribution of wealth. Since the tax cut announcement, corporate buybacks have gone through the roof. Year to date, (and we are only in February) the amount totals $170.8 billion (17 percent of the tax cut) versus $75.7 billion for all of last year.

 

As for investing the tax cut into plant, equipment, and new jobs, well, 70 percent of corporations polled have no intention of investing the money, while the other 30 percent had plans to invest anyway prior to the new tax cut.

 

The final and most recent fiscal spending proposal on the nation's infrastructure announced this week is much-needed. However, the scheme, as presented, would mean the federal government would put in "seed money" of $250 billion, while the states and private sector would put in $750 billion.

 

Given that the tax cut was an enormous economic blow to states that have their own income tax, asking them to now ante up $750 billion for much-needed infrastructure repairs is the height of lunacy. Of course, Trump knows this all too well, but it gives him an out to blame the states for not doing their fair share when his proposal goes belly-up.

 

As for the markets, remain invested. Increased volatility is no excuse to sell, only a reason not to look at your portfolio every day or week.   Remember that the more red you see in your portfolio on any given day, the higher the probability that you will sell at the exact wrong moment.

 

Bill Schmick is registered as an investment adviser representative and portfolio manager with Berkshire Money Management (BMM), managing over $400 million for investors in the Berkshires.  Bill's forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquiries to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.

@theMarket: Higher Wages Clobber Markets

 

Gains in a worker's paycheck are supposed to be a good thing, right? It means they can spend more, which contributes to growth in the economy, and maybe have a happier life. If all of that is true, why has the stock market swooned in response to Friday's labor report?

 

It's simple really. The non-farm payrolls report was another upside surprise. The nation gained 200,000 jobs in January, which is better than the 180,000 we expected. While the official unemployment remained at 4.1 percent for the fourth straight month, it was the growth in wages that surprised the market most.

 

Hourly wages rose 0.3 percent over the prior month. That brings the year-over–year wage gains to 2.9 percent versus last year. That's the best wage gain news since 2009. However, what may be good for workers, may not be good for the stock market and here's why.

 

The labor market is tight. There are thousands of jobs out there that are unfilled and that number is mounting.  Now, what happens when you need a skilled worker and can't find one? You have to raise wages and woo someone else's worker to you. Right now, the construction and food services areas are feeling the pinch. In those areas, wages have spiked by as much as 4 percent.

 

Since both I and the country's central bank use wage growth as an important gauge of future inflation, a rapid increase in hourly compensation could force the Fed to raise interest rates higher and faster than investors expected (in order to head off a spike in inflation before it happens).

 

As we entered 2018, investors were not discounting higher inflation. Instead, they have betting on moderate GDP growth, a continuation of modest rate hikes throughout the year by the Fed, and robust earnings growth. 

 

And then Congress and the president passed tax reform.

 

Ask yourself this question: if President Trump is correct and the tax cut is going to mean American corporations will be spending that $1.5 trillion in tax savings on investment, while hiring new skilled workers at higher wages, what do you think is going to happen to wage growth?

 

As I have said before, we did not need a tax cut. The jobs market was already tight (as we can see in the numbers today). The economy did not need to grow any faster than it already was. The time to have passed a tax cut of this size was in the Obama years when the Fed was begging Congress to help stimulate the economy. Instead, Congress refused, arguing that it would balloon the deficit, something the GOP was steadfastly against. Instead, Republicans insisted that spending should be cut, which it was. The result: years of slow growth, misery and high unemployment.

 

Fast forward to today. The tax cut is blowing up the U.S. deficit as a result of the Republicans change of heart towards deficits (go figure). This week's U.S. Treasury bond auction revealed that the Treasury is going to have to sell much more debt in order to fund this tax cut-driven deficit. In the bond market, the more debt the nation sells, the more interest bond buyers are going to demand. This will apply even more pressure to the upward path of interest rates. 

 

It is already happening. Since the tax cut passage, the U.S. benchmark interest rate, the 10-year bond, has spiked past 2.70 percent (today it is trading at 2.85 percent). Many bond players believe if the ten-year cracks 3 percent, the stock market is going to have a big correction.  By the way, the thirty-year U.S. Treasury bond has just topped 3 percent, so you see where this is going.

 

Readers may recall my distinct unhappiness at this tax reform. Over several weeks, I tried to warn readers that this tax cut was going to be a disaster. Those in the Trump camp discounted my columns, sending me hate mail instead. Partisans on the other side simply cried all the way to the bank as the stock market roared higher in January.

 

Okay, so now what? It is not the end of the world. Instead, these fears of higher rates, spiking inflation, etc. are overblown for now, since we do not have enough data to determine what will unfold as the year progresses. Right now, these events are simply an excuse the markets needed to pull back. Something I have said is long overdue. That is healthy. How far down? I am expecting a 5-6 percent pullback overall before the market resumes its upward trend.

 

Remember, I have said that if the tax cut is simply a "thank you" from the Republican Party and the president to business and the wealthiest one percent of taxpayers for their 2017 campaign contributions, than it is simply politics as usual and no harm done.

 

If companies use the tax windfall to buy back shares, pay bigger dividends, and reward their CEOs, that helps the stock market, but not the economy or its workers.  Inflation will increase, but at a modest pace, and the Fed will continue its program of gradually tightening, instead of jacking rates up quickly and driving the country into recession. We won't know which way this will play out until the spring. In the meantime, hang in there and hope that the tax cut was simply a payoff and tool to buy votes in November's elections.