The Federal Reserve Bank signaled an all-clear for the financial markets this week. The tapering they promised will begin on schedule, but Fed Chairperson Jerome Powell has no plans to raise interest rates until at least some time next year.

 

The announcement was met with relief. Investors reacted by catapulting the stock market to yet another higher high. Bond traders were somewhat mollified, as well as seen by the lack of movement in interest rates. If anything, Chair Powell was a bit more dovish than investors expected.

 

He surprised markets by reducing the size of the monthly taper, which will begin later this month. At present, the U.S. Central Bank is buying $120 billion a month in assets. Investors were expecting a $20 billion monthly reduction in purchases, but the Fed decided to reduce those purchases by only $15 billion a month.

 

It appears that the rate of inflation is still not serious enough for the Federal Reserve to move forward their expectations on raising interest rates. Next summer is the earliest Powell sees a need to raise interest rates. However, he did admit that he expects the conditions that are pushing inflation higher could persist well into next year. 

 

His stance is similar to the position already taken by the European Central Bank (ECB). The ECB expects to continue its easy money policies into next year. But while most of the developed world is applying the momentary brakes ever so gradually, many emerging market countries are already raising interest rates to head off rising inflation in their economies. Chile, Russia, and Brazil, for example, have hiked interest rates recently. Of the 38 central banks followed by the Bank for International Settlements, 13 have raised a key interest rate at least once this year.

 

Investors are paying close attention to the stalled situation surrounding the two large Biden infrastructure bills after the resounding thrashing the Democrats suffered this week in various elections. Voters seem to be increasingly unhappy with what they perceive as their "do nothing." President Biden's approval ratings are dismal, and time is running out to reverse the situation before the mid-term elections.

 

It remains to be seen whether this week's election results will spur this fractured party to come together and start legislating or sink further into disarray. The House is expected to vote on at least one if not both bills on Friday, Nov. 5.

 

There is a lot riding on the outcome for the economy and the markets. And while the price tag for both bills is high, as a percentage of GDP, in reality the expenditures are a drop in the bucket when compared to what other countries are spending on their own infrastructure plans. Is it any wonder that China sees us as no more than a "paper tiger," whose politicians lack the will to compete in the areas that really matter?

 

Earnings season is winding down, but once again the results defied even the most bullish of expectations. That bodes well for stocks. More and more sectors are participating in the upturn and there doesn't seem to be many storm clouds on the horizon until we head into December, if then. This week's decline in oil may also act as a tailwind for stocks. Higher energy prices have been leading inflation higher for the last few months. If oil pulls back from here, or just remains in a trading range, equities could get a boost from that as well.

 

To me, however, the most important event of the week was drug company Pfizer's announcement that Paxlovid, a COVID-19 pill, reduced the risk of hospitalization or death by 80 percent in a clinical trial that tested the drug in adults with the disease who were also in high-risk health groups. 

 

Pfizer CEO and Chairman, Albert Bourla, said, "These data suggest that our oral antiviral candidate, if approved or authorized by regulatory authorities, has the potential to save patients' lives, reduce the severity of COVID-19 infections, and eliminate nine out of 10 hospitalizations." To me, this pill could be a game changer for the economy and for people all over the world. It is possible that we could see the coronavirus battle won by sometime next year.

 

I have been expecting a shallow pullback in the markets for the past two weeks. Instead, stocks have just climbed higher and higher. They are extended, but history says they can get even more so. As such, I am not holding my breath, nor waiting around for it. Whatever pullback does occur should be bought.

 

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.