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.

Consumers have been bludgeoned for years by higher prices. In this era of inflation, discounts disappeared as prices of everyday items climbed higher and higher each year. It has been a long time, but value is finally returning in various consumer areas.

 

This summer could be called the season of markdowns as corporations across America have become concerned that price-sensitive consumers have been trading down to cheaper goods and services. Many companies have seen sales decline as discount stores and labels have taken market share.

 

While the Federal Reserve Bank and the Biden administration applaud the progress made on inflation, the truth for the consumer on Main Street is that inflation is still rising. Sure, the headline inflation rate has been falling, but inflation itself is rising just, at a slower rate.

 

After several years of benefiting what airlines called "revenge travel," consumers are balking at astronomic ticket prices for domestic travel. Airlines have reversed course dramatically which has triggered a race to the bottom on domestic ticket prices. Some readers may already know that some big retail chains have been hawking lower prices for several weeks.

 

Even the discounters are discounting prices. Walmart has cut prices on 7,200 products to compete with rivals. Big Lots, after a hit to sales in June, intends to "significantly grow" its close-out bargain business. Retailers like Ikea, Aldi, Walgreens, and Target have also announced price cuts.

 

Auto dealers, after years of jacking up prices for new vehicles, are suddenly seeing empty showrooms and stagnant sales. In July, discounts started popping up around the country and according to Kelley Blue Book, an average of $3,383 per vehicle was lopped off prices. That was the highest level of discounts in three years.

 

Fast-food restaurants, long the haven of low-priced fare, have had some of the sharpest price hikes since the pandemic. They had risen so much that even die-hard fans of places like McDonalds abandoned their burger for food at home. McDonalds, Burger King, Taco Bell, and Starbucks to name a few, have since rolled out what they call "value meals" with great fanfare.

 

Eating at home, however, has not escaped the price crunch. Food prepared at home still saves you money with prices growing at  1.1 percent per year versus dining out at 4.1 percent annually. Yearly food inflation overall has fallen somewhat from a recent high in August 2022 to 2.2 percent in July 2024.

 

The most recent Consumer Price Index showed that the cost of food at home is up 26.9 percent over the last five years and almost 30 percent over the most recent four-year basis. The bottom line: the price level of groceries in aggregate is the highest on record. Sure, some prices are coming down, while others are still climbing.

 

In a sense, it pays to eat healthier today. Items such as apples, frozen fruits and vegetables, potatoes, rice, and pasta have seen price declines while prices for bacon, pork chops, hot dogs, juices and drinks, eggs, and butter are still rising.

 

I can tell you that after years of price increases in my local supermarkets, I automatically select store brands over name brands in most items because they are cheaper. I also have changed my habit of just shopping at one market. Instead, I frequent whatever grocery store offers the best weekly prices for protein, produce, etc.

 

Do I think price controls on food prices would work as some have suggested? Not really. Few realize that most states already have laws to restrict price gouging. They have been instituted for short times with success in times of emergencies such as floods, and other climate-related events, and even in the pandemic in some cases.

 

If inflation continues to fall as economists predict, even the most price-gouging of companies will have to relent and drop prices or lose market share to others. In the end, it is the customer and not the government who will dictate prices, and most consumers are fed up with paying for everything.

 

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 two years of monetary tightening, the Federal Reserve Bank is poised to begin loosening its policy. Is the event already priced in or will the stock market celebrate with new highs?

 

It may depend on how deep a cut the Fed is willing to make. In my opinion, in the long run it won't matter unless you are one of those day-to-day options traders who live or die based on the next trade. Nonetheless, in a market that may well hit a new high next week, what the Fed does and how it talks about future cuts will be important.

 

Some believe the Fed should cut one-half of a percent (50 basis points), while others are in the camp that it will only need a 25-basis point cut. Does that matter in the scheme of things? My answer is no. There are arguments on both sides of that decision. I come down on the side of a lesser cut. Anything more might signal that the Fed may be worried that growth and jobs are slowing too rapidly.

 

In addition, the U.S. central bank has preferred to use consecutive smaller cuts rather than big ones. The Fed might also be sensitive to the political environment as well. Although the Fed argues it is a non-political organization, one of the candidates, Donald Trump, has already warned Fed Chairman Jerome Powell (who he appointed) that the Fed should refrain from cutting rates until after the November elections. He said a cut would aid the incumbents in a tight race where the economy is one of the key areas of contention. The facts are that no matter what the Fed does, both sides will claim politics played a hand in the decision.

 

The last inflation data before the meeting came in mixed this week. The Consumer Price Index (CPI) for August registered a 0.2 percent increase, the lowest since early 2021. That was about what economists expected although the core CPI, which excludes food and energy, increased 0.3 percent. That was higher than forecast.

 

At first, skittish traders did not take kindly to that number. In the bond market, the betting on a 50-basis point cut next week plummeted. Stocks fell in the morning but bounced back as traders realized that a 25-basis point cut was still in the cards. The Producer Price Index (PPI) came in mostly cooler for August, which cheered the markets on Thursday, and betting on a bigger cut rose once again.

 

With so many cross currents, the key macroeconomic variables I am watching for direction are the labor market, the dollar, and bond yields. Weaker job growth will be the Feds' chief concern. A weakening dollar will be good for equities unless we see our currency fall out of bed overnight as it did in August during the yen-carry trade debacle.

 

Lower yields in the bond market have provided a cushion for stocks thus far. That should continue unless and until the story changes. If the labor and growth data weaken sharply, for example, that would evoke worries of a hard landing. In that case, yields would continue to drop but so would equities for all the wrong reasons. Treasury bonds would be seen as a flight to safety, while stocks fell on recessionary fears. 

 

Beyond the economic data, the most popular show of the week was the presidential debate. It was entertaining but less informative than Wall Street would have liked. As far as the economy is concerned, nothing of substance was discussed in depth. While many may bemoan the slogan-filled nature of the race thus far, do not be surprised. It is not that kind of race.

 

Few among us are undecided. Those that are, will largely make their decision based on a particular issue. Inflation is coming down, but not enough. Growth is still robust but slowing. Jobs are still available, but there are fewer. Many other issues such as abortions, immigration, crime, etc. may be more important than economic concerns to undecided voters.

 

Unless one or the other candidate pulls ahead substantially in the weeks ahead, markets will remain volatile and in a trading range until the election. My advice is not to be pulled into the day-to-day ups and downs of the market. This week, for example, we saw spikes in sectors such as solar energy (up), insurance (down), pot stocks (up and down), and crypto (up) all based on a positive or negative sentence or two from the candidates.

 

Last week, I suggested that we could see a bounce in stocks. We did. The S&P 500 Index was up more than 3 percent while the NASDAQ gained 5 percent. But remember, as I have cautioned readers for the last few weeks, we are in a seasonally bad time for equities. The final two weeks in September are especially so, and the Fed's FOMC announcement will be on Sept. 17-18. Chances are that markets will hold on to these gains next week at least up until the Fed meeting. However, be prepared for more volatility after that if not before.

 

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 fertility rate in the United States has fallen by 3 percent since 2022. That is a historic low and marks the second yearly decline in a row. How will that impact the economy?

 

In the simplest terms, if you have lower population growth then you will have fewer people producing goods and services. That will result in slower economic growth. But it is not the only impact. A shrinking workforce will also mean there are fewer people paying taxes.

 

In a country like ours that has seen decades of increased spending and higher debt, the question becomes who will pay this growing obligation.

 

As our deficits expand at an increasing rate, while the birth rate continues to decline there will be fewer and fewer people to pay off the nation's debt burden. The Heritage Foundation estimates that the total amount of debt that a baby born in 2007 assumes was $30,500. That figure almost doubled to more than $59,000 just 13 years later.

 

From 2014 to 2020, the birth rate consistently declined by 2 percent per annum, according to the CDC's National Center for Health Statistics. Last year the birth rate in the U.S. reached a record low. Just 3,591,328 babies were born, which indicates that the birthrate has now fallen below the replacement level needed for one generation to replace itself. This was not supposed to happen.

 

Experts in the field will tell you that the COVID-19 pandemic was supposed to jump-start an increase in the American birth rate. The argument was that the lockdowns were forcing couples to spend a lot more time together indoors. That would lead to many a romantic evening and an increase in babies nine months later. The exact opposite happened.

 

The year 2020 hit a record low in the fertility rate at 1.6, the sixth straight year with a decline in the number of births. The facts are that ever since the Financial Crisis of 2008, births have been declining.

 

Experts point to a variety of reasons for this trend. Changing social norms, demographics, immigration policies, and a decline in teenage pregnancies are some of the most important reasons. Chief among them is that  Americans are delaying, or foregoing marriage entirely. And if they do tie the knot, women are marrying later in life. As a result, couples are having fewer children compared to prior generations. 

 

The Pew Research Center, in tracking birth trends in the U.S., found that some groups were no longer making babies as fast as they used to. Historically, fertility among Hispanics far exceeded that of other groups. However, that is no longer the case. Researchers believe a drop-off in immigration from Mexico has reduced the birth rate among Hispanics to levels more in line with the national average. 

 

Teenage births have also plummeted. The number of births has dropped in half from 10 years ago in this age group. Why? The Pew Research Center cites a greater awareness and use of effective contraceptives, as well as an increase in the number of teenagers who report never having had sex.

 

Lower birth rates are not all bad, especially at the state level. Many school districts are experiencing declines in enrollment. The decline in teenage pregnancies has helped offset some of the rises in health-care expenditures as well. Fewer people will also mean less pressure on infrastructure as well.

 

Whether or not those benefits will offset the declines in income, sales, and other tax revenues will depend on the state. Western states are experiencing the worst declines. Decreasing birth rates in Arizona and Utah, for example, are double that of the 50-state average.

 

Migration trends and a state's tax structure will also be important in mitigating the impact of slowing birth rates. States that are recipients of an influx of new residents from other states or abroad are better positioned to weather the storm. It should come as no surprise that the Northeast has lower fertility rates and more residents migrating elsewhere.

 

It also depends on where each state derives its revenues. Those most dependent on individual income taxes face greater risks than those who generate substantial income from other sources such as extraction of natural resources or corporate income taxes. States such as Florida, Nevada, South Dakota, Texas, and Washington which rely heavily on sales taxes, will likely need to change course in how they generate revenues.

 

In addition to these threats to future revenue declines, states will need to worry about their access to federal funding. Many of the largest federal programs allocate money according to formulas that include a state's headcount. Those states that show greater declines in birth rates may see their funding reduced at a greater rate than in other states.

 

In any case, the impact of low fertility rates won't be felt for several decades when today's children reach an age where they will be spending more and paying significant income taxes. But many nations in Europe and Asia in a similar situation are not waiting for that to occur. They have already developed policies to encourage more babies, while in this country the focus has been more on individual choice and freedom. 

 

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.