As we step into the new year, stocks have soared in celebration as Donald Trump took the reins of office. This transition of power has brought a wave of optimism, which can continue, although a mild bout of profit-taking in the near term should be expected.

 

A flurry of Day One executive orders kept the markets busy parsing the meaning of this one or that one. However, the enthusiasm had more to do with what President Trump did not do than what he did. The greatest fear of investors was that the president would levy 10 percent tariffs across the board on all nations. Some nations, such as China, Mexico, and Canada, were expected to get hit by even higher duties on Day One. It didn't happen.

 

Most economists are convinced that tariffs would not only hurt economic growth both here and abroad but also fuel further growth of inflation. That does not mean that tariffs are off the board. The president indicated that tariffs on our North American trading partners could be announced by early February. China, however, not so much.

 

The currency markets immediately began to sell the dollar, which has been a winning trade (up 10 percent) over the last several months. Foreign nations have been willing to see (or orchestrate) their currencies decline to reduce the impact of the expected 10 percent tariffs Trump promised during his campaign. See how that works?

 

As a result, the yield on U.S. bonds fell in tandem with the dollar. Those developments partially explain the rally in equities this week. Of course, this trade can reverse in the blink of an eye. The president has not said tariffs are off the table. I believe it is just a question of when some countries will be targeted for tariffs. Trump has made it clear that tariffs are a negotiating tactic. There is no reason to think he would drop this tool in the days and weeks ahead. However, do not tariff trade. That is a losing proposition for those who tried that during Trump's first term.

 

Next week, the Federal Reserve meets on Jan. 29. Expectations are that the FOMC will stand pat, keep interest rates where they are, and take a wait-and-see attitude toward the future. Bond investors are not expecting any more than one or maybe two interest rate cuts (if any) during 2025. Many of the president's policies could boost economic growth and possibly inflation and the Fed will want to see how the government's economic policies unfold. 

 

Investors are focusing almost solely on Donald Trump. In a Davos speech on Thursday, for example, the president said that interest rates around the world should be "dropped immediately" and that the price of oil should also be lowered. Taking those statements as gospel, I think is a mistake.

 

A U.S. president may be able to jawbone an easier interest rate policy from a Fed chairman. It has been done before, for example, under Richard Nixon's administration, but he has zero influence on other central bankers worldwide. As for the oil price, OPEC-plus is not about to reverse policy quickly, nor would Saudi Arabia agree without some kind of multi-billion-dollar trade deal since that nation needs Brent Crude at $90 a barrel or higher to balance its budget.

 

After living and investing through Trump's first term, I learned that much of what the president says should be taken with more than a grain of salt. I consider his many pronouncements as more of a wish list, some outrageous, others as catalysts for change. He announced his new initiative called Stargate this week. It is an artificial intelligence infrastructure project, which is a joint venture formed by OpenAI, Oracle, and SoftBank. It is a great idea that promises big dividends for our country.

 

The three companies, he said, would invest $500 billion in AI infrastructure. Yet Elon Musk, the world's richest man and a close Trump adviser, who was also an early investor in AI, responded to the announcement by expressing some doubt.

 

He posted on his social platform X that these venture partners "…don't actually have the money," to accomplish the president's goal. His critique enraged many of the president’s yes-men, but the beauty of Musk is that he can speak his mind with impunity. That may get him in trouble down the road with his new-found, best bud but not right now.

 

The point is that investors should not take everything the president says as gospel. Instead, consider his statements more of a directional outline of where he wants the nation and the world to go. It doesn't mean that what he wants he gets, as his first term demonstrated.

 

As for the markets, I am looking for a small pullback in the markets over the next few days leading up to the FOMC on Wednesday. I would consider that a gift. It would be a dip worth buying before the market resumes its climb to 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.

"Day One" arrives on Monday and investors are waiting with bated breath to hear what and how the new administration will handle the myriad problems that beset the nation. No one knows how that day will go, and the stock market reflects that.

 

Stocks are up since the beginning of the year but not by much. Granted the total gains for the first five days of January were positive and that is a good sign for those who take stock in those kinds of portents. Normally if the S&P 500 Index finishes with gains by the close of the fifth day of the year (and it did), the "rule of the first five days" says a gain for the entire year is likely.

 

Over the last decade, this rule worked in five cases where stocks gained in the first five days. Since 1950, the market has been up 13 percent on average in those years when the 5-day rule was in force. For me, I would rather see positive developments in inflation, bond yields, and the dollar before declaring the year a win or loss for investors.

 

This week, we did have some "good news" on the inflation front. The Consumer Price Index and the Producer Price Index for December were better than analysts feared. Make no mistake, the inflation rate is still climbing just not as fast as some may have expected.

 

Inflation has been moving in the wrong for the last three months and I see it climbing again in January.  However, the data was enough to halt the steady climb higher in the U.S. Treasury, 10-year bond, at least for a day or two.  Yields have been climbing, and stocks have been declining since the beginning of December. Prior to that, stocks and bond yields were going up at the same time. What changed?

 

Expectations that the Trump Administration's tariff policies, tax cuts, and increased government spending in areas such as defense would contribute to rising inflation, rising deficits, and more debt. The argument that all these policies would allow the economy to grow its way out of the present debt and deficit crisis has left the bond market saying, "Show me."

 

It is why the financial markets are marking time, trading in a range until more information is forthcoming. Traders want to see the new regime put some flesh on the bones of Trump 2.0. The good news is that this time around, the new administration appears far better prepared to take the helm, with a better organization and hopefully a group of well-thought-out initiatives.

 

Expectations are elevated by at least half the voting population and the business community. Both small business and corporate surveys indicate a rising tide of support for the future direction of the country under Donald Trump. However, there are just as many Americans who fear this is the end of the world as they know it.

 

It appears that partisanship is alive and well and beginning to muddy what has historically been areas of reliable economic data. In the most recent University of Michigan Consumer Survey, for example, Republicans have become more optimistic about the economy and inflation, while Democrats have become more pessimistic.

 

The American Association for Individual Investors survey this week showed the highest percentage of bears in a long time while bullish sentiment hit the lowest level since 2023. Normally, I would see this as a bullish contrarian indicator but without knowing the partisan divide among participants, the data could be skewed meaningfully.

 

In any case, next week should determine the market's direction at least in the short term. The market's risk gauge, the volatility Index (VIX), does not show any increase in buying into the event which means that any volatility coming into Monday will be from the market reacting to what is said or not said about programs and policies during the day.

 

We are stuck between levels that indicate that the S&P 500 Index could regain the old highs or fall back below 5,800 based on the events around the inauguration and its aftermath. We do know that Donald Trump is quite adept at pumping up his audience. If the S&P remains above 5,848,  we should be okay.

 

I apologize for missing last week's column. In this difficult time, I wanted to be there for readers but another bout of COVID kept me in bed most of last week and this week. A special shout out to my loving wife Barbara for taking such good care of me.

 

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.

After several days of profit-taking, stocks tried to stage a recovery in the first two days of the new year with varying success. Traders are cautious and fear that there may be more downside to come.

 

While Santa made at best a brief appearance this year as far as the expected rally was concerned, the damage was not all that great. The S&P 500 Index suffered a loss of less than 3 percent from its all-time high while NASDAQ was hit harder.

 

The dollar and bond yields continued to climb as foreign currencies fell against the dollar in preparation for the incoming administration's expected new tariff regime. Most overseas markets vastly underperformed the U.S. equity market last year. This year, analysts are calling for more of the same as Europe, Asia, and emerging market economies decline.

 

The U.S. economy continues to perform. The latest employment data, this week's jobless claims, unexpectedly fell to the lowest since March. The overall number receiving unemployment benefits fell by 52,000 to 1.84 million workers, the lowest since September.

 

These results build the Fed's case that further interest rate cuts should be approached cautiously in 2025. As it stands, they are projecting only two rate cuts for the entire year. Part of that caution stems from a wait-and-see approach to how the new administration's economic policies will impact the markets.

 

While investors tend to be optimistic heading into the new year, the same old issues have not disappeared. Concerns over the back-up in inflation, what a tariff war will do to the economy and heightened geo-political risks have not gone away. The end of the week saw US equities bounce but the move lacked enough strength to convince me that the profit-taking that occurred last week is quite over.  The lack of a widening out of the market continues to trouble me.  Breathe needs to improve and that is not happening as of this week.

 

Right now, the algo traders and options markets are programmed to react violently when certain levels are breached on the upside and downside of the markets. This happens in periods like this when volumes are muted, and many traders are still on holiday. When these levels are hit on the downside, selling intensifies pushing stocks even lower. The same occurs on the upside. This creates a chop fest for those who are actively trading. It is not for the faint of heart.

 

It would not surprise me if we pulled back in the next week or two by another 4-5 percent on the S&P 500 before this period of consolidation is over. Given that the S&P 500 was up 23 percent for the year and the NASDAQ close to 30 percent a little more profit-taking would be normal.

 

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 is a time when financial strategists and economic experts forecast what will happen in the coming year. Since most of Wall Street is trying to sell you something, prepare for a positive outlook from most firms.

 

On practically the same date last year, I wrote that strategists were predicting the 2024 S&P 500 Index targets ranged from 4,200 to 5,500. Given that over a long period, the S&P 500 has delivered around 10.13 percent yearly returns since 1957, and 9.19 percent over the last 150 years, forecasts that mimic those returns should be ignored.

 

Those forecasts told me the authors had no idea where the market was going.  As such, they just took the historical average gain as their forecast, and very few were bearish for 2024. 

 

Overall, Wall Street did get the direction right, but the S&P 500 Index gained more than double their best forecasts. Most forecasters also expected the dollar to continue to decline, and interest rates as well. Neither happened. Given the track record, I would also take 2025's forecasts with a grain of salt. 

 

This year, the target range for the S&P 500 ranges from 6,400 to 7,007. This implies a return between plus-5 percent and plus-15 percent. The average of those two extremes is of course 10 percent. Need I say more? Unlike others, I usually refrain from forecasting where the S&P 500 will end up 12 months from now. There are just too many factors that can change my outlook along the way. So instead, I will focus on the risks and rewards I see for the markets.

 

Inflation is one of my chief concerns. I expect the inflation rate to hit 2.9 percent next month and climb higher into the summer. That means to me that the markets should not expect the Fed to cut interest rates again for quite some time. That removes one major support for the markets.

 

I do expect the economy to continue to grow but at a slower pace. As such, corporate earnings should grow along with the economy. In that environment, I do think that small-cap stocks will finally have their day in the sun. That is not a unique position. Most analysts in the financial community are recommending small-cap outperformance as well.

 

On the political front, Donald Trump will be inheriting a strong economy, a robust employment picture, a strong dollar, reasonable interest rates, and a flattening inflation rate from the Biden Administration. It is his to build upon or to squander. He will also face a historical debt burden that he will be forced to confront at some point.

 

The prevailing sentiment among investors is that the incoming president will benefit the economy due to his stance on deregulation, efficiency, lower taxes, and lower interest rates. Despite his promise to levy blanket tariffs on the world, most U.S. traders believe that his threats are at most a negotiating tactic.

 

I hope so. The rest of the world doesn't think that will be the case. Going into 2025, several major nations have already watched their currencies fall 8-9 percent against the dollar. That indicates to me that they think the tariff threats will be real and will bite, at least in the short term.

 

I would expect that if the dollar does continue its climb in a tariff war, then Bitcoin, and possibly gold and other precious metals, will do so as well.  That does not mean that cryptocurrencies will go straight up from here. I am looking for a deep Bitcoin pullback to the $86,000 to $74,000 range first.

 

As for the market's overall performance, it would be rare to have another year like the last two years. That doesn't necessarily mean markets would be down, but a less robust performance would not surprise me. Equities usually have a period of consolidation beginning in the last part of January.  I would watch out for that.

 

In addition, in populist periods in the past, stock market performance between presidential election years has been dismal at least in the Sixties into the Eighties. However, right now, the Santa Claus rally is once again in play.

 

The end-of-year flow of funds into equities is alive and well and should continue to support the market at least into January. During this period, Santa has delivered to the market a 1.3 percent gain on average since 1950. Happy New 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.

The Federal Open Market Committee cut interest rates again on Wednesday and reduced the number of interest rate cuts next year. That decision dismayed investors and triggered a run for the exits in the stock market. Will this government Grinch decision ruin the chances of a Santa Claus rally?

 

Wall Street labeled the central bank move a "hawkish cut." Prior to the meeting, most investors were expecting that the Fed would pause after this month's rate cut of 25 basis points. Given that events unfolded as expected, why did the Dow lose over 1,000 points in two hours?

 

Inflation is the short answer. You may recall in last week's column I commented that stock traders were choosing to ignore the back up in the  rate of inflation over the last three months. It is something that has concerned me for months as readers know. I remarked that others were so focused on the wonderful promise of a second Trump administration that inflation just didn't seem to be a problem.

 

That changed this week. The Fed finally admitted that their inflation forecasts for this year were not coming through. Several members of the committee began to back away from easing further.

 

In the Q&A session after the Fed meeting, Chairman Jerome Powell made it clear that their inflation target of 2 percent may not happen for another year or two. Until it does, he warned we should expect further declines in interest rates to occur at a slower pace. As a result, the FOMC has halved the number of rate cuts they expected to approve in 2025 from four to two and maybe not even that many.

 

His decidedly negative remarks immediately took the wind out of the market's sails. The Dow was not alone in its fall. Both the S&P 500 and NASDAQ declined  2-3 percent as well. Thursday saw what I would call an anemic dead cat bounce and on Friday the markets rebounded.

 

Friday was another one of those triple witching days in the options markets which occur four times a year. Given the sheer dollar value of these occurrences, markets can be unusually volatile. A total of $6 trillion in options of all kinds expire Friday. In addition, the S&P 500 Index and other indexes will be rebalanced as well. This rebalancing can cause significant shifts in trading volumes and volatility as well.

 

 All of this is occurring in a week when the Fed triggers an overdue pullback in the averages. One of the clearest signals that something was amiss was breathe. Breathe is the number of stocks going up versus the number going down. Negative breathe had been increasing for the last 14 sessions as just a handful of stocks were keeping the markets positive. It is usually a sign that a pullback is coming and sure enough we are in one now.

 

My mistake was failing to take action and instead counting on the seasonal factors to win out over breathe. Does that mean the Santa rally will be skipping the U.S. market this year? Not necessarily. Although I now believe we could fall further, it does not have to happen next week. We could bounce next week into the New Year before heading lower again.

 

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.