It was a week to remember in financial markets. Hurricane Helene, the longshoreman strike, Iran's ballistic missile attack against Israel, American drones shot down by Houthi rebels, and a massive gain in U.S. jobs — welcome to October.

 

All the above happened in just the first week of the month. The stock market has hung in there through all of it. However, the events of the week have given heartburn to investors and traders alike.

 

The massive flooding and rising death toll in Florida and North Carolina were tragic but also negative for overall future growth and employment. The price tag is estimated to be above $34 billion. Insurance stocks did not suffer simply because they no longer cover flood damages in much of those areas. The price tag will need to be absorbed by the nation's taxpayers.

 

The Longshoreman's strike encompasses a shutdown of half the ports in the U.S. from Maine to Texas. Harold Daggett, who leads the International Longshoremen's Association, was insisting on a 77 percent pay raise but settled for less and the strike was at least postponed until early next year. Estimates put the price tag of disrupted trade for the country at as much as $5 billion daily, so we dodged that bullet for now.

 

The geopolitical events that find Israel in an undeclared shooting war with the Houthis, Hamas, Hezbollah, and possibly Iran have also riled markets and sent the dollar and yields higher. It has also supported precious metals and the price of oil.

 

Market participants fear that if Israel were to respond to Iran's latest missile attack, by damaging Iran's energy production, oil prices could spike higher. If so, that would prove inflationary.

 

Those fears may be overblown. Iran currently supplies about 3 percent of the world's oil production. Global oil demand has been slowing as it is. This week, the Saudi oil minister warned Iraq and Kazakhstan that if they ignore their OPEC-directed output cuts, prices could fall to $50 a barrel. next year.

 

In this environment, Saudi Arabia could easily make up for any lost production brought on by an Iran/Israel conflict. Oil could go higher but there is a lot of technical resistance around the $77 a barrel mark.

 

The non-farm payroll for September crushed expectations. The U.S. economy added over 250,000 jobs while the unemployment rate dipped to 4.1 percent. That was more than the 150,000 job gains expected. Wage growth also increased by 0.4 percent. This followed a good report on the ISM services sector. Where does that leave the markets? Disappointed, as far as future rates cut by the Fed.

 

Stronger employment data means less need for sizable rate cuts. If you combine that with the possibility of higher energy prices and therefore more inflation, the bull's case for more rather than less loosening by the Fed becomes that much weaker.  

 

As you know by now, September through October are historically seasonably tough months for the markets. I was expecting September to have a more negative impact on the market. I was wrong. My mistake was in not accounting for presidential election years, which somewhat dilutes seasonal factors in those years.

 

Nonetheless, October has historically been 34 percent more volatile than the average of the remaining 11 months of the year. It has certainly started that way. Although many traders are expecting a decline in the next few weeks, there are plenty of bullish factors that are underpinning stocks.

 

Friday's jobs report is just one example. Next week, on Oct. 10, September's Consumer Price Index data will be reported. I believe that data will show cooler inflation. If so, lower inflation and declining unemployment are not a bad combination.

 

Market breath (advancers versus decliners) is still near the highs. Investor sentiment is about even, neither too bearish nor bullish. About 78 percent of stocks in the S&P 500 Index remain above their 200 Day Moving Average. If we do pull back in the days ahead, I see at most a mild sell-off (barring a full-scale shooting war in the Middle East). I would be a buyer of any dips.

 

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 U.S. economy continues to grow, fueled by generous fiscal spending in an election year, robust corporate earnings, and a consumer willing to keep spending. The Federal Reserve Bank's loosening of monetary policy last month also promises to boost growth.

 

That dovetails with my expectations, at least in the short term. I expect economic growth will continue to show decent numbers when the third-quarter GDP data is released. At the same time, we should see additional modest progress in reducing inflation. September's CPI inflation data, however, could mark the low for this inflation cycle, in my opinion.

 

That is certainly not the consensus view. Wall Street is expecting the Federal Reserve to cut interest rates two more times this year and several more cuts next year. This week, Chairman Jerome Powell attempted to rein in some of those expectations in a speech before the National Association for Business Economics. He promised that the central bank would do whatever it takes to keep the economy in solid shape. However, he warned that markets should not automatically expect interest rate cuts at every Federal Open Market Committee meeting.

 

He said the committee will remain data-dependent and warned listeners that "this is not a committee that wants to cut rates quickly." My advice is to listen to the Fed. The risk I see is that we could see a bump in inflation beginning in the fourth quarter (probably December). I believe the Fed worries about that as well. They know that reducing interest rates is a risk, given the growth in the economy and the still-healthy wage level.

 

I have not mentioned the inflationary impact of the present stimulus efforts in China on materials and other commodities, the geopolitical risk of higher energy prices, nor the possibility of a long strike by union workers at the nation's ports on prices. The Fed, I believe, could be stuck between a rock (stubborn inflation) and a hard place ( avoiding further declines in employment).

 

At the same time, as I wrote in "My economic outlook for 2025" column last week  "I fear we could see declining economic growth — the result of the cumulative impact of the last two years of abnormally high interest rates. This lag effect will outweigh the Fed's interest rate cuts of September and maybe November. I am not predicting a recession, but only a slowdown, a "recalibration" to use the words of Fed Chairman Powell.

 

The plot thickens if you include the dollar and our national debt. A few weeks back (Aug. 29) I wrote a column "How the U.S. Can Manage Its Debt Load," in which I worried that at some point soon it would become necessary to do something about our rising debt load. Historically, the solution to that problem has always been to devalue the dollar. But we would pay the price for that action.

 

A weakening currency is inflationary. The dollar has already dropped 5 percent in as many months and currency traders expect this decline has only begun. It is, in my opinion, just a matter of time (possibly after the November elections), before the world and investors catch on that a devaluation of the dollar is a real possibility. 

 

If I am right, a combination of a declining currency, slowing growth, stubborn inflation, and the onset of easing monetary policy, would spark worries among economists and investors alike over the "S" word — stagflation. Stagflation is an economic situation where increasing inflation, rising unemployment and slower economic growth occur simultaneously. But just imagine how the market would react if inflation indicators like the CPI and PPI see upticks toward the end of the year, while jobs continue to fall.

 

It is not certain, and I know it is not conventional wisdom but that is what concerns me.  And no, I am not expecting a 1970s type of stagflation, but something much more mild.

 

I am not alone in my fears. Jame Dimon, the CEO of JP Morgan, is a man I respect and have followed for decades. He has been sounding the alarm over bullish economic expectations and remains highly critical of the Fed's restrictive policies, which he feels went on for far too long. As for the taming of inflation, as recently as last Friday, he said "I am a little more skeptical than other people. I give it lower odds."

 

So do I.

 

 As such, I looked at what areas do better in such an environment. Assets considered dollar equivalents like gold and silver and other precious metals do well. Some other commodities like copper outperform, as well as emerging markets and Bitcoin.

 

 In the equity arena, utilities, technology, energy, industrials, and consumer discretionary are standouts while financials, telecom, and consumer staples don't do nearly as well.

 

Investment styles such as secular growth, momentum, mid-cap stocks, low beta, and quality outperform, while small caps, dividend plays, value, and defensives underperform. Some fixed-income areas like Municipal bonds, long-dated bonds, and TIPS shine, but stay away from categories like preferred, convertible bonds, high-yield credit, and leveraged loans.

 

Predicting what the economy and inflation will do every year is difficult at best. Trying to call a change as early as December is not for the faint of heart. Right now, Wall Street is so focused on expectations of a steady stream of expected rate cuts and the outcome of the presidential elections that what happens in December seems a long, long way.

 

How long will the economy remain in this mild state of stagflation? Unless the demands of populism are somehow resolved quickly, the future economic environment might indicate more of the same.

 

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.

A week after the U.S. central bank's policy shift, Chinese authorities unleashed their monetary policy dragon. The move caught world financial markets by surprise and launched the Shanghai Composite index up more than 9 percent in three days.

 

The People's Bank of China (PBOC) launched its largest stimulus package since the pandemic. The PBOC cut interest rates, reduced the reserve requirement ratio, and introduced structural monetary policies to stabilize Chinese markets, which went straight down for months. 

 

Wall Street analysts are overwhelmingly negative on the Chinese market. Investments in Chinese stocks by  Institutional investors worldwide are at multi-decade lows. China's faltering economy, the never-ending wall of American-led sanctions and tariffs by several nations, coupled with the U.S. election promises of even more to come have made the world's second-largest economy practically uninvestable.

 

"Doubtful at best" was the knee-jerk response to the stimulus package earlier in the week. It would not be enough to bail out the economy say the professionals (who have banked big profits on shorting Chinese financial markets). China watchers insisted that fiscal spending was required for a true turnaround.

 

Almost on cue, President Xi Jinping called for even more monetary and "necessary fiscal spending" support on Thursday in a meeting of the Politburo, the second-highest circle of power in the ruling Chinese Communist Party. That sent Chinese markets rocketing higher again and pulled up global markets, especially in Asia along with it.

 

The largest gainers have been in the commodity space, especially copper. This makes sense. A pick-up in economic growth in China, as the world's marginal buyer of commodities, will mean higher demand for everything from precious metals to soybeans, to basic materials to luxury goods.

 

Did this week signal just a short-term trading opportunity, or has China now made a cyclical low? If the latter, the impact (given that China is the world's second-largest economy) could galvanize growth worldwide, especially among emerging markets. It could also fuel global asset inflation. That would put a kink in the Fed's efforts to reduce inflation in the months ahead.

 

I suspect traders will be watching for additional moves in fiscal spending before deciding. In the short term, however, technical charts say there are more gains to come on the upside. For those who want to roll the dice, there are plenty of Chinese exchange-traded and mutual funds. One could also buy an emerging market fund that includes China.

 

In U.S. markets, U.S. jobless claims fell again last week but the data point of the week was Friday's Personal Consumption Expenditures Index (PCE) for August. The Fed's favorite inflation index came in cooler than expected with a gain of 0.1 percent, less than the forecasted 0.2 percent gain. That good news and the revised GDP report for the last quarter (a solid 3 percent growth rate) gave additional evidence of a potential soft landing for the economy. 

 

On the political front, the presidential race is a toss-up, but the thinking is that both the House and the Senate will surely be divided between the two parties. If so, the markets won't care who wins because nothing will get passed in the years ahead. Markets love that kind of situation. Just look at the last two years' stock market performance in the face of a dysfunctional divided Congress. 

 

October begins next week however the seasonal factors that usually influence the performance of the stock market in September and October have been trumped by the Fed's surprise rate cut and now the potential turnaround in the Chinese market. Stocks should continue to perform with some commodities, precious metals, and emerging markets, leading gains. Overall, I see higher levels, maybe 5,900-6,000 on the S&P 500 Index as possible.

 

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.

On the back of last week's half-point cut in interest rates by the Federal Reserve Bank, equities and many commodities rallied anticipating continued growth in the U.S. economy. Why, therefore, did bond prices plunge?

 

Normally, after the Federal Reserve Bank begins an interest rate-cutting cycle, bond prices rally, and yields fall. But not this time. Economists were scratching their heads all week looking for answers. The explanation is straightforward.

 

For weeks before the meeting, many traders were betting that the Fed would be too slow to cut interest rates. And when and if they did it would be a small cut. That delay increased the probability that the economy would dip into recession quite soon. As such, investors bought bonds, the go-to safety trade in anticipation of a hard landing. That had sent bond yields down dramatically.

 

The Fed's larger-than-expected 50 basis point cut surprised traders and reversed that trade. Suddenly, the possibility of a softer landing for the economy has been vastly improved, especially after the Fed clarified that it was ready to match that cut in November if necessary. Buy equities and sell bonds was the new order of the day.

 

Chairman Jerome Powell acknowledged that the Fed's focus has shifted from the inflation numbers to the health of the labor market and the economy. He went to great pains to convince market participants in his Q&A session after the meeting that the economy was still strong, the inflation battle was all but over, and just about everyone was going to live happily ever after.

 

That may be so, but I have a different take on the Fed's actions. We are in an election year. Workers are voters and losing your job can sour one's outlook when deciding which lever to pull in November. Those in government are keenly aware of this. If given a choice between employment or inflation, what would you choose if you were the Fed?

 

The market's reaction to the news is understandable but remember it will be at least two years before the impact of this week's interest rate cut has an impact on the overall economy. Sure, some areas might see a boost sooner but not much. In the meantime, what happens to the economy?

 

The equity market and most advisors will tell you it is up, up, and away. And they are right, at least in the short term. I expect economic growth to continue to show decent numbers and would not be surprised to see a better-than-expected growth rate for the third quarter of this year. I also expect to see additional modest progress in reducing inflation. September and October's inflation numbers, I believe will show a  cooler Consumer Price Index, Producer Price Index, and the Fed's favored index, the Personal Consumption Expenditures Index. That should bolster the Fed's confidence that they have inflation licked.

 

By December, however, I am concerned that things may change. I fear we could see declining economic growth. It will be the result of the cumulative impact of the last two years of abnormally high interest rates.  This lag effect will outweigh the interest rate cuts of September and maybe November.

 

I am not predicting a recession, but only a slowdown, a "recalibration" to use the words of Fed Chairman Powell. Wall Street's interpretation of the Fed's new recalibration policy amounts to lowering interest rates quickly (faster for shorter). If so, it will lessen the blow to growth and ease us into a soft landing. But a soft landing would still be a period of slower growth.

 

At the same time, while the rate of inflation is falling, inflation is still rising, just at a lower and slower rate. And in the background, while inflation still lingers, we have an enormous budget deficit and rising debt load that is now taking more than $1 trillion a year to service. If we add on the stated intentions of both presidential candidates to increase spending by many trillions of dollars over the next four years, we have the makings of both a rekindling of inflation and a coming debt crisis.

 

Next week, we will examine what this could mean for the economy, inflation, the dollar, and the stock market.

 

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 Reserve Bank's half-point interest rate cut surprised investors and traders alike this week. The central bank also indicated that the markets could expect more of the same in the months ahead.

 

The main three averages soared on the news on Thursday and into Friday. New highs went a long way in dispelling my fears that the last two weeks of September would be rocky. The giant-sized rate cut may have at least delayed the downside that usually accompanies this seasonal period in the stock market.

 

It was the first FOMC meeting in a long time where Fed watchers were unsure how much the central bank would lower rates. Historically, a 25-basis point move would be the usual way the Fed begins a loosening cycle.  Anything more might evoke worries that the labor market and the economy were slowing too rapidly. That, many believed, would not be taken well by market participants.

 

Fed Chair Jerome Powell, in his Q&A session after the meeting, went to great pains to convince viewers that was not the case. "I don't see anything in the economy right now that suggests that the likelihood of a recession, sorry, of a downturn, is elevated," he said.

 

If anything, he hinted the Fed probably should have begun cutting interest rates at its last meeting. As such, the 50-basis point cut was simply a "recalibration"  of central bank policy.

 

The policy has now changed from fighting inflation to making sure the job market stays healthy. "The labor market is actually in solid condition. And our intention with our policy move today is to keep it there," he said.

 

This means to me that in addition to inflation data (such as the CPI, PPI, and PCE), investors will begin to equally weigh how well the labor market is doing. That could mean weekly unemployment claims could move markets as could monthly non-farm payroll announcements. The fact that these data points are notoriously inaccurate and prone to large revisions will be immaterial to day traders and big institutional trading desks. And like so many recent government statistics, leaks in this area are becoming everyday occurrences.  

 

In any event, markets will continue to celebrate the changing stance of monetary policy both now and into the future. A target of 6,250 on the S&P 500 Index is possible over the intermediate term, but that does not mean we go straight up from here.

 

Relief that the Fed has our back (at least on the labor front and therefore the economy)  will be a positive and bolster investor sentiment. It should also help to lessen some of the concerns about the upcoming election. As such, it should be no surprise that the Republican candidate for president has already described the Fed's actions as 'a political move.'

 

That does not mean I have changed my mind concerning the risks that markets will be volatile (both to the up and downside) between now and the end of October. It does mean that for now investors and traders alike can put the Fed in the rear-view mirror and focus on the upcoming earnings season.

 

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.