@theMarket: Fed Rate Hike Sets Stage For More

This week the Federal Reserve hiked interest rates again. That's two times in as many quarters. Back in the day, the markets would have swooned. This week they did the opposite. What gives?

The short answer is investors believe both the economy and inflation are beginning to accelerate, so the Fed has every right to reduce the gas and ease its foot off the monetary pedal. There is, after all, no need to keep interest rates at historically low levels at this point.

That's good news, after buoying both the economy and the financial markets through several years of anemic growth and worries over deflation. It is one explanation for why the stock market has climbed to record highs. Another would be that with Donald Trump in the White House and Republicans a majority in Congress, most investors believe only good things are ahead of us on the economic front.

So tell me something I didn't know. Well, for starters these interest rate rises (with more to come) signal a new economic era in this country and possibly the world. After a race to the bottom in bond yields worldwide, our central bank has now reversed course. It is only a matter of time, I believe, before the rest of the world's central bankers follow suit.

Historically, rising interest rates have provided headwinds for the stock markets. Looking back, about the best that can be said was that stocks do OK for the first two years in a rising rate environment, as long as interest rates rise gradually and each rise is moderate. Call it the "goldilocks" version of the economy where higher rates are offset by greater growth and moderate inflation.

Over time, even that scenario usually comes unglued as economies begin to overheat; inflation climbs and bankers need to become even more hawkish to subdue these animal spirits. Normally, the result of this rate rising is a recession, sometimes mild, sometimes not, depending on how well a central bank can predict the economic future.

At this point, you may realize that managing an economy as large as ours (no never mind managing all the world's economies) is definitely an art and not a science. In times past, central bankers have gotten it very wrong (and sometimes right), but not without a lot of luck thrown in for good measure.

Why the lesson on rising rates? Because from here on out the main risk to the economy and the stock market is not Donald Trump. It is interest rates. Thanks to the Fed, we avoided another Great Depression eight years ago. Since then, with no help from the Federal government, they have single-handedly steered the economy back to a recovery. There is no reason to doubt their abilities.

But Janet Yellen would be the first to admit that she and her board of governors are not infallible. They are feeling their way through this process of normalization. That's financial-speak for disengaging from an overly heavy hand on the economic throttle. It is a process of turning over some of the responsibilities for economic growth to both the free markets and, hopefully, a more responsive government.

So far the markets approve of the way the Fed has handled the first two rate hikes. But it is early days. We have at least two more such hikes waiting in the wings this year. The risk is that there may be more, or that the size of each hike grows. Let's hope that they get it right.

@theMarket: Mushy Markets in March

@theMarket: Markets Are Priced for Perfection

What a week for stock investors! All the main averages and most of the minor indexes registered historic highs. No question, Donald Trump has been good for the markets. The question is when will investors begin to take profits?

Calling a top (or a bottom) in the markets is notoriously difficult. Granted, over the years I have been lucky and managed to catch a turn or two once or thrice. As readers know, once we hit 2,330 on the S&P 500 Index, I expected and still do expect some profit-taking. That doesn't mean you should panic nor do anything more than raise a little cash.

My strategy is to re-employ that cash as we pull back. The timing of such a move is always more of an art than a science. Think of it as a process. Sell a little today, a little more tomorrow, and so on. I'm not looking for a big pullback, maybe 4-5 percent. After the market declines, use the same kind of technique to buy back stock. But don't go overboard because I believe the Trump Rally still has legs.

What, you might ask, has our new president accomplished in order to justify this ongoing rally? Well, aside from a flurry of executive orders that have reversed some of the prior president's executive orders, not very much. But it is what he has promised that has investors drinking the Kool-Aid.  

The litany of tax cuts, infrastructure spending, Obamacare overhaul and an end to onerous rules and regulations has given investors hope. Analysts and pundits are fueling those feelings by drawing up all sorts of "what-if" scenarios that promise good days ahead.

Material, building, construction and defense sectors have skyrocketed in price because of promises of increased defense and infrastructure spending. Forecasters see a big jump in corporate earnings if taxes are cut. As for the impact of less regulation, that is expected to have a beneficial impact on business spending and capital investments.

If the election was about "Making America Great Again" why are overseas markets going up as well? Wasn't President Trump going to launch devastating trade wars with the rest of the world, sending us all down the drain? Others were/are sure that World War III is right around the corner, now that there is a "wild man" in the White House. Yet, global stock markets are going up as well.

One explanation may be that overseas players believe Trump's bark is nowhere near his bite. So far that has proven to be the case. Others are taking heart, hoping that his example will lead to changes in their own countries. One could argue that Brexit began a populist movement worldwide that rejected the status quo, the rule of the few over the many and a revival of capitalism. A case in point is the rise of yet another Trump-like politician in France, where Jean-Marine Le Pen, the far-right candidate of the National Front, looks set to gain even more popularity.

While all of this movement may be intoxicating to market participants, we need to see a little more beef before justifying the present levels of stock prices. I have no doubt that the new administration will get much of what they want done, but it will take time. The market has just gotten a little ahead of itself right now.

Bill Schmick is registered as an investment advisor representative and portfolio manager with Berkshire Money Management (BMM), managing over $200 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: Market Stalls at Record Highs

Stock market averages made another batch of new highs this week only to fall back in what may be buyer exhaustion. If the trend continues, investors may be looking at a 4-5 percent decline from here.

It is too early to tell, because one day does not make a trend. We could easily experience a rebound next week, but I would still consider the present levels of most indexes ripe for a fall. My column last week pointed out that we are now in a "danger zone." Sure, the markets could continue to grind higher but every additional point just sets us up for an overdue correction.

Since all eyes and ears are on Washington, progress on President Trump's agenda is dictating where the markets will trade. Every television appearance and tweet by President Trump simply adds to investor expectations. At this point, investors expect that tax cuts, a wholesale revamp of rules and regulations, plus a multitrillion-dollar infrastructure spending plan is just around the corner. It is not.

For those of us who understand the pace of reform in the nation's capital, it would be best to take a longer-term approach to Trump's agenda. It appears, for example, that health care will be the first area our legislatures will be addressing this year. That does not mean that one day soon Congress will vote on a soup-to-nuts replacement of the Affordable Care Act.

Instead, expect to see a flurry of piecemeal changes over the course of many months. Lawmakers will attempt to address the failings of the present health system without disrupting those who are already members of the Obamacare insurance scheme. That will not be an easy task.

Steve Mnuchin, the new secretary of the Treasury, tempered investors' expectations this week that tax reform would also be a done deal any day now. Instead, he promised "significant" tax reform before the congressional August recess. In my opinion, that is still a wildly optimistic deadline for something that has been talked about, but not acted upon, for many years. And yet, naïve investors were disappointed by the new time frame.

Prospects for infrastructure spending, another of the president's policy initiatives, appears to be fading into sometime next year. That is understandable, given the need to balance the desire to get Americans back to work again with the impact that spending will have on an already-bloated deficit.  

Of course, the problem with that kind of disappointing news is investors have already bid up material, commodity and building stocks to outrageous price levels over the past two months. Given that market participants today are notoriously short-term in outlook, there is a risk that speculators will dump these stocks now and revisit them later (hopefully at a lower price).

And if they do, what's to stop traders from taking down the entire market simply because there may be a time delay between investor expectations and the implementation of Trump's agenda? You can see the risk, and it is one reason that I have turned cautious in the short-term.

Do I believe, like some, that Donald Trump won't be able to pull off his program? No, I don't, but I am realistic about the time required to accomplish his goals. There may simply be a disconnect between what investors are expecting and what I believe can be accomplished in the short-term.

Bill Schmick is registered as an investment advisor representative and portfolio manager with Berkshire Money Management (BMM), managing over $200 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: Danger Zone

"Highway to the danger zone
Gonna take you
Right into the danger zone"

Something new is happening to the stock market, it has actually had two negative days in a row. That doesn't mean much after weeks of gains, but it just may signal a temporary halt to the Trump Rally.

My short-term target in this Trump-inspired rally was achieved this week. The benchmark index, the S&P 500, not only reached 2,330 (my target) this week, but went beyond it. The S&P 500 kept on climbing, reaching an intra-day, record-setting high of 2,351.31 on both Wednesday and Thursday. The index has subsequently fallen back but not by much.

The Dow, NASDAQ, the small-cap Russell 2000 Index, plus a slew of other averages also reached record highs. Make no mistake, that's a good thing. Hence forth, any further gains will put us on a highway to what I call the danger zone.

Like the movie, "Top Gun," we can cruise into the danger zone (where most accidents occur), but as Goose and Maverick discovered, one wrong move can send us into a tailspin. Let me make something clear, however, when (not if) this tailspin occurs, your portfolio will come out of this intact and reach even higher highs over the coming months. That is the reason I have been counseling readers to expect a decline — but not try to play it.

In this Teflon market, little can dent theses gains. There were rumors, for example, that a $4 billion hedge fund was in trouble. The markets barely moved. Then there was Fed Chairwoman Janet Yellen's annual Humphrey Hawkins testimony before Congress. In the past, investors and traders would hang on to every word for clues of what the Fed would do next in the interest rate environment. Today, the Fed's spotlight has been stolen by the actions of our new president.

And speaking of our Top Gun, this week we witnessed some really crazy action coming out of Washington. True to form, "The Donald" in a press conference on Thursday performed another media-bashing episode that sent top network journalists screaming that the president has lost his mind. I found it amusing. Some of Trump's top cabinet choices backed out, another resigned, while the Democrats continued to erect as many barriers to progress that they can. Welcome to Washington.

On the foreign front, President Trump bashed Venezuela's leaders for facilitating drug running, met with Canada's and Israel's leaders, while telling Russians to give back Crimea to its people. None of these events moved the markets. Even the presence of a Russian spy ship, the SSV-175 Viktor Lenov, off our coast could do no more than produce a yawn from the high-frequency traders.

For the markets, it is all about waiting to see what "phenomenal" tax, economic and regulatory reforms will be forthcoming from the White House. To be fair, the Federal Reserve Bank still has a role to play in investors' psyches.  Bond traders are keeping a watchful eye on exactly when the Fed plans to raise interest rates again. Right now, March is off the table and June seems the month of highest probability for another quarter point rise in the Fed Funds rate.

I expect markets to do little until further economic news is released from Trump's team. The response from Congress will also be important. At any time, we could see a pullback because now we are in the danger zone.  But as I have written, it would be a dip that should be bought not sold. Stay invested.

Note: Several weeks of Mr. Schmick's columns in January & February disappeared into the ether on their way to iBerkshires. They are being back posted to the dates on which they should have appeared.

Bill Schmick is registered as an investment advisor representative and portfolio manager with Berkshire Money Management (BMM), managing over $200 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.