This week, bond yields across the board rose on the back of several disappointing U.S. Treasury bond auctions. However, the Fed's key inflation index, the PCE, for last month came in a touch cooler. It helped, but not enough to keep stocks in the green for the week.

 

Three bond auctions this week met with tepid interest from buyers sending bond yields to their highest levels in over a month. The scorecard on government debt sales was 0 for three as two-, five-, and seven-year notes worth a total of $183 billion faced a chilly reception from bond investors worldwide. Who can blame them?

 

As the months pass, the U.S. debt level continues to rise. All most investors can see is a long road ahead of billions of dollars in Treasury bond auctions. The fundraising is necessary to fund the government's multi-trillion dollar spending programs.

 

 U.S. Treasury Secretary Janet Yellen has purposely confined most of the country's need for financing to shorter maturities, rather than auctioning 10- and 20-year bonds.

 

There is a method to that madness since selling billions of dollars in longer-duration bonds would jack up yields and might send the benchmark, U.S. Ten-Year bond above 5 percent from its current yield of 4.50 percent. She knows that would surely pressure equities lower. In an election year, a sitting president would not be happy to see a sinking stock market when he is already in a tight race to regain the White House.

 

And while yields climb, the Fed's policymakers continue to warn the markets that there is not enough inflation progress to warrant a cut in interest rates just yet. However, they continue to assure us that sometime down the road a cut is possible. Some members, like Minneapolis Fed President Neil Kashkari, have gone the other way and suggest that a rate hike is still entirely possible. That leaves investors in limbo.

 

The economic data is not helping either. First quarter of 2024 Gross Domestic Product was revised downward from the already weak growth rate of 1.6 percent to 1.3 percent. Over in the housing market, pending U. S home sales fell much more than expected. Month-over-month decline was minus-7.7 percent versus minus-3.6 percent expected. The shortfall in sales was blamed on the escalating rise in mortgage interest rate loans in April.

 

That data was bound to set tongues wagging as more traders worry about a possible stagflation scenario. They argue that rather than revisiting the 1970s era of full-blown stagflation, a milder version of the same may be in the offing.

 

Readers may recall that the 1970s was a period with both high inflation and uneven economic growth. High budget deficits, lower interest rates, the OPEC oil embargo, and the collapse of managed currency rates were the hallmarks of that period. Not all those conditions are present today. However, some argue that history does not need to repeat itself, but only to rhyme.

 

The Personal Consumer Expenditure Index (PCE) did come in a touch lower than expected. The core PCE, which strips out the cost of food and energy, rose 0.2 percent in April, which was in line with Wall Street's expectations but lower than the 0.3 percent increase seen in March. 

 

Last week, I warned readers that we would see some profit-taking. The S&P 500 Index fell almost 100 points from 5,304 to 5,214 as of Friday morning. This summer, I expect that we will be entering a period of consolidation. I don't see the averages making much headway until the end of August. It won't be all downhill. We could see bounces as markets get oversold, but it will be difficult to achieve new highs.

 

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 had to happen at some point. Gold, silver, and copper prices experienced a steep downturn this week. Profit-taking set in as traders rung the cash register after weeks of gains. However, tech got a boost from Nvidia's earnings.

 

And while tech took the lead, keeping the S&P 500 and NASDAQ up, the rest of the market did not fare as well. The strength in the economy and the early estimates of the Purchasing Managers Index called the flash PMI, indicated that prices were still increasing. The publication of the Federal Open Market Committee notes from the last Fed meeting on Wednesday didn't help.

 

Here's what the Fed members wrote: "Participants observed that while inflation had eased over the past year, in recent months there had been a lack of further progress toward the Committee's 2 percent objective."

 

That was no surprise to the markets given that all week the members of that committee were giving interviews and making speeches arguing the same "higher for the longer" theme. What was new and concerned investors was this: "Various participants mentioned a willingness to tighten policy further should risks to inflation materialize in a way that such action became appropriate."

 

It was the first mention this year by the Fed that an interest rate hike might be on the table. That set investors back on their heels. Higher interest rates are like kryptonite to the markets and especially to commodities such as gold, silver, and copper. It would call into question the gold bull's narrative that we have entered a super cycle for commodities

 

But commodities weren't the only area of the markets that saw declines. China stocks, which have had a similar period of outperformance, succumbed to the same kind of selling. Overbought conditions gave traders here and in mainland China the excuse to take profits.

 

What I found interesting is that several large-cap Chinese companies that are also traded in the U.S., reported amazing earnings and sales. PDD, the parent company of Tumu (a Chinese rival of Amazon here and abroad), for example, announced revenues and earnings that were double the estimates of analysts. Trip.com. Group (travel), Bilibili, (social media), and NetEase (online gaming) are some other companies that had great earnings as well. Yet, their stock prices fell in this downturn.

 

As for the U.S. equity and bond markets, investors had pinned their hopes on the earnings announcement of Nvidia, the number one player in the artificial intelligence space. AI has supported stock prices all year and AI plays have expanded to many areas of the market from utilities to grocery stores.

 

Fortunately, the company delivered better-than-expected earnings, sales, and guidance for the third time in a row. It also announced a 10-to-1 stock split in which shareholders will receive 10 shares for every share of the company they own as of June 7.

 

The good news sent the price of Nvidia up more than 11 percent on Thursday and took the stock market up with it at first, but while Nvidia stayed strong, the averages gave back most of those gains by Thursday's close.

 

Last week, I wrote "I could see 5,340 on the S&P 500 Index," we did reach a new intraday high, of 5,341 on the S&P 500 Index and 16,996.39 on the NASDAQ. However, I also warned that "I expect to see a couple of days of profit-taking, especially in those areas that have seen outsized gains. That would be ideal, reduce overbought conditions and set up for another ramp higher in June."

 

The pullback in commodities and China stocks this week certainly qualifies as a pullback but one that I would buy. As for U.S. markets, I suspect next week we might see some minor profit-taking earlier in the week as traders eye next Friday's Personal Consumption Expenditures Index. The PCE is the Fed's No. 1 inflation indicator. If you are bullish on the stock market, you don't want to see an increase in that data point.

 

I wish all my readers a long weekend but do take the time to remember what the Memorial Day holiday is about. I know I will be remembering my fellow Marines who were left behind in the jungles of Vietnam. Semper Fi! 

 

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.

This week's inflation data heartened investors. Equities and commodities rose while bond yields and the dollar fell. The question is whether the data will convince the Fed to relent on keeping interest rates higher for longer.

 

If we take a long-term view, the Consumer Price Index (CPI) change was minuscule. For April, inflation gains slowed from 3.5 percent to 3.4 percent, while core inflation increased over the last 12 months by 3.4 percent compared to 3.5 percent in March. That's no big deal, and yet, the numbers did break the trend of warmer CPIs over the last three months.

 

The cooler inflation announcement caught investors by surprise since most observers were convinced that inflation would continue the trend of hotter numbers. Readers may recall what I wrote in last week's column:

 

"The ramifications for the equity and bond markets could be serious. A weak inflation number in one or both indexes would be taken positively, I imagine with stocks climbing, possibly to new highs, and bond yields falling. It would also be beneficial for the commodity space and could push precious metals and copper higher. On the other hand, hotter numbers would have the opposite effect.

 

No one knows for sure, but readers aren't paying me for "on the other hand" opinions. So, I will come down on the side of cooler numbers next week. I base my guess on things like used car prices that have come down by about 30 percent thus far in 2024 and are accelerating to the downside. Insurance premium increases have been the major culprit in the hotter CPI data thus far and I am expecting at least a leveling out of price increases in car insurance this month.

 

That was exactly what happened. Stock indexes made record highs, yields fell, and commodities, especially gold, silver, and copper, soared. The question I am asking myself is now that we are above yearly highs on several indexes, are we jumping the gun here? Do you think the Fed is going to abruptly change its stance on one cooler inflation number?

 

I still don't think the data supports a change in Fed policy. The bond market disagrees. Traders are certainly upping their odds (again) for a cut in June, with more to follow. Sure, it could happen, but I won't hold my breath. Frankly, the Fed has already begun the easing process by reducing its Quantitative Tightening (QT). QT occurs when the Fed ups the amount of bonds they sell into financial markets from their balance sheet. That reduces the cash (liquidity) in the system.

 

At the beginning of May, the Fed announced it would slow down bond selling by over half from $60 billion per month to $25 billion. That is roughly equivalent to a 25-50 basis point cut in interest rates. At this point, I suspect the health of the labor market would influence the Fed more than one inflation reading. If unemployment increased suddenly (especially in an election year), the Fed might change its mind. Presently, while job gains have slowed, employment is still at almost historical lows.

 

As far as the markets are concerned, if markets continue to believe that the next move from the Fed will be an interest rate cut, risk assets will continue to gain, while the dollar and yields will decline further. I could see 5,340 on the S&P 500 Index, but I think Nvidia's earnings on May 22 will be crucial to where the market goes next. The entire AI rally and the gains in the technology sector for the year hinge on this AI chip producer. I believe it will set the stage for sentiment and earnings for the remainder of the month.

 

The markets have had a good run over the last two weeks. Is it time for a break? If so, I would call it a pause, where traders consolidate gains, catch their breath, and prepare for the summer. I expect to see a couple of days of profit-taking, especially in those areas that have seen outsized gains. That would be ideal, reduce overbought conditions and set up for another ramp higher in June.

 

June should be a period where markets grind higher. I am expecting a lot of rotation as well. Underperforming sectors will be squeezed higher, and favored areas will see bouts of profit-taking. By the end of August, we could see as high as 5,600 on the S&P 500 Index.

 

By the way, have you checked out the Chinese stock market since my column "China is on a tear?"

 

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.

Like birds on a wire, stocks wobbled early this week neither moving higher nor lower. Higher jobless claims and an okay Treasury auction nudged the indexes towards the goal line with the S&P 500 Index above the 5,200 level for the first time in a month.

 

However, there is still a lot of indecision out there. Growth seems to be slowing. Inflation remains sticky. Consumer confidence is falling, and the Fed is on hold. Countering those negatives, there are some positives. Corporate earnings have been good. Yields remain in a range and the dollar has pulled back from highs. Neither the bulls nor the bears have enough data to end this stalemate. This week should resolve the matter.

 

The Producer Price Index will be announced on May 14 (estimate plus-0.22 percent), followed by the Consumer Price Index (estimated core CPI plus-0.31 percent) a day later. All eyes will be on those data points. Given that the last three months of inflation readings have shown an increase, investors are holding their breath to see if month four will reinforce the present trend of higher inflation. We will also hear from Jerome Powell, the Federal Reserve Chairman on Tuesday as well.

 

The implications for another hot result would put the lid on the coffin of any expected rate cuts this year by the Fed. The betting has already dropped to maybe one cut this year. That is largely due to the last GDP print (1.6 percent growth for the first quarter of 2024) which showed a weakening economy compared to the final quarter of 2023 (plus-3.4 percent).

 

The ramifications for the equity and bond markets could be serious. A weak inflation number in one or both indexes would be taken positively I imagine with stocks climbing, possibly to new highs, and bond yields falling. It would also be beneficial for the commodity space and could push precious metals and copper higher. On the other hand, hotter numbers would have the opposite effect.

 

No one knows for sure, but readers aren't paying me for "on the other hand" opinions. So, I will come down on the side of cooler numbers next week. I base my guess on things like used car prices that have come down by about 30 percent thus far in 2024 and are accelerating to the downside. Insurance premium increases have been the major culprit in the hotter CPI data thus far and I am expecting at least a leveling out of price increases in car insurance this month.

 

Corporate earnings this quarter have provided support for the markets thus far. Although most companies did beat analysts' earnings and sale estimates (81 percent) the reaction to these positive surprises has been less than stellar compared to prior quarters. Some believe that these results have already been discounted by investors. However, analysts are already increasing their estimates for the next quarter and the year overall. Three sectors, (energy, healthcare, and materials) have seen a reversal from negative to positive growth in their earnings per share momentum for the year.

 

The U.S. Treasury held two bond auctions this week. The $42 billion Ten-year Treasury auction met with tepid demand, while the government's $25 billion Thirty-year bond auction had enough bought demand to keep bond yields lower and the stock market supported.

 

The usual 'sell in May and go away' argument may not hold much water this year. April was a down month, and since 1928 when April is negative, May is up 74 percent of the time. It is a tricky time for the markets. Betting on which direction we head in the short term is tough and dependent on the inflation data. Longer-term, I am still quite positive about equities both here and abroad.

 

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 a week where macroeconomic data, corporate earnings, and the Federal Reserve dictated the direction of the markets on almost a daily basis. By the end of the week, the verdict was a plus for the bulls.

 

On Friday, the non-farm payrolls indicated that the labor market cooled notably in April. The U.S. economy added 175,000 new jobs which was a lot lower than the expected job gains of 240,000. The unemployment rate rose to 3.9 percent. What is bad news for the economy is good news for the stock market since weaker macroeconomic data means the Fed may cut interest rates sooner rather than later.

 

At the Federal Open Market Committee meeting on Wednesday, the central bank, as expected, maintained their higher for longer stance on interest rates as they await further data on the direction of inflation. He also laughed at the notion of stagflation seeing neither the "stag" nor the "inflation" required to indicate this economic condition.

 

The good news was that the central bank reduced the number of bonds they planned to sell into the debt markets. For months the Fed has been reducing the size of their balance sheet by selling government bonds. That has put pressure on bond prices. This quantitative tightening or QT has been part of the Fed's efforts to tame inflation.

 

Slowing down the rate of selling is good news but has much less impact than cutting interest rates. That, says the Fed's Chairman Jerome Powell, will have to wait until he sees more progress in bringing inflation back to its 2 percent target.

 

What has most concerned many investors is the possibility that if inflation remains sticky, the Fed will be forced to hike interest rates once again. Powell eased investors' concerns on that subject during the Q&A session after the meeting when he said, "It is unlikely the next policy move will be a hike."

 

On a positive note, first-quarter corporate earnings for the S&P 500 Index have been positive so far. More than 340 companies or 68 percent of the S&P 500, have reported. Overall, 80 percent are beating estimates and those that beat have done so by an average of 7 percent. Magnificent Seven stocks still have the power to move markets. The earnings disappoint of Meta on one day and the surprise beats by Amazon, Microsoft, and Apple sent markets up and down whip sawing traders in the process.

 

Most American investors are so hyper-focused on U.S. equities that what happens overseas is sometimes ignored. It seems to me, for example, that investors, as well as the financial media, have written off China as a basket case. I am not so sure that is the case. FXI, the largest China exchange-traded fund (ETF), is up 20 percent since the Chinese New Year.

 

There is also a stealth rally going on behind the scenes in Chinese large-cap technology, as represented by the KWEB ETF, which holds companies like Alibaba, Baidu, and JD.com, among others.

 

The tech sector (up 30 percent year-to-date) has outperformed its counterparts in the U.S. market. Bank of America's manager survey recently noted that the most crowded trades were long U.S. technology, followed by short China technology. It could be that some global investors are selling high-priced tech stocks in the U.S., India, and Japan and using the proceeds to buy these cheap tech stocks in China.

 

As for the overall market, the index averages have been a chop fest this week. As I expected, earlier in the week we did sell-off, dropping almost 100 points on the S&P 500 Index before recovering. As a result, we have made little headway for the week, tacking on at most 32 points on the S&P 500. I expect we need to climb a little higher (5,181) before I can sound the all-clear for the rest of the month.

 

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.