Corporate earnings results for Google and Meta helped push the averages higher this week, while Microsoft results were somewhat disappointing. The net result was higher stock prices for many sectors of the markets.

 

The most interesting change that I perceived in the overall markets this week was the FOMC's lack of impact on financial markets. Over the past year, these monthly two-day Fed events were market-moving. Investors parsed every word of every sentence in the meeting notes and spent hours and even days interpreting every answer that Chair Jay Powell uttered in the Q&A session.

 

This week, the Fed raised Fed fund rates yet again to a 22-year high at 5.25 percent. They also insisted that there could be more hikes to come if the data warranted. Nothing changed in their hawkish policy stance and yet, the markets closed flat on the day.  It appears investors were far more interested in the earnings results of Meta which were announced after the close than on what the Fed had to say.

 

Granted, the markets expected and had already discounted a rate raise and a continuation of the Fed's policies. They also believe that even another rate raise or two is not going to have much of an impact on the overall health of the economy and corporate earnings.

 

Lending strength to this argument was the latest data on the U.S. economy which grew at a faster-than-expected pace in the second quarter of 2023. Gross Domestic Product grew at an annualized pace of 2.4 percent, which was faster than the consensus forecasts of 1.8 percent.

 

Readers may recall that the first quarter was revised upward to a 2 percent growth rate. Both consumer spending and nonresidential fixed investment were the engines of growth behind the results. To put this in perspective, these results were achieved despite 11 hikes in interest rates over the last year. At the same time, this week's unemployment claims continued to fall, indicating that employment is still robust. In addition, the Fed's favorite inflation gauge, the Personal Consumption Expenditures Index (PCE) dropped last month to its lowest level since March 2021.

 

What does that mean for the financial markets? It means that the era of a Fed-driven stock market may be coming to an end.

 

In the future, barring any drastic change in the world economies such as a rebound in inflation, a severe global recession, or another geopolitical event, investors may begin to emphasize fundamentals over Fed policy. Things like economic prospects, future revenues, income, profits, and the like could take a front seat in determining the proper level of equities in general and individual stocks in particular.

 

One change overseas caught my attention. The Bank of Japan's (BOJ) monetary policy has been dovish for years, but that may be changing. The central bank loosened its yield curve control that has anchored the yield on their ten-year government bond (JGB) at 0 percent for some time. The BOJ is planning to start purchasing 10-year JGBs at 1 percent through fixed-rate operations. Although minor, the change may indicate that Japan may be reversing its interest rate policies just as other countries are cutting or slowing their rate raises. If so, this could have a far-reaching impact on U.S. interest rates (higher) and the dollar(lower). 

 

The S&P 500 Index topped 4,600 this week, so we are getting closer to my 4,630 target. At this point, it would not surprise me to see a pullback in August of the 5-6 percent variety sometime in the next few weeks.

 

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.

Between the weather, shortage of planes, computer snafus, and pre-pandemic levels of customers, air travelers face a gauntlet of travel delays. A lack of pilots and air traffic controllers is adding to the high level of aggravation during this summer season.

 

The pilot shortage has been building in the aviation industry for several years. It is not confined to the U.S. Global air travel has surged in the post-pandemic era as emerging economies grow and more people can afford air travel. Airlines have expanded their fleets while extending and adding new routes to capture this spike in business.

 

This has led to increased demand for airline pilots just as a substantial portion of the pilot population here in the U.S. is reaching the mandatory retirement age. You can blame the Baby Boomers once again. Nearly 50 percent of the commercial airline workforce will retire in the next 15 years. Unless things change, prospects are dim that supply and demand for this vital workforce can come back into balance any time soon.

 

This year, the gap between demand and supply of pilots will be roughly 17,000 unfilled positions or 15 percent of the workforce. And while pilot shortages are the most visible area, the country also needs workers in several other airline categories such as air traffic controllers, flight attendants, and ground crew. 

 

The root cause of the scarcity of pilots comes down to two factors. The 1,500-Hour Rule, enacted in 2012 by the Federal Aviation Administration, requires first officers in the commercial airline industry, also known as co-pilots, to have a minimum of 1,500 hours of flight training time. Some say this rigorous requirement has made American skyways the safest in the world. Detractors argue that it is a major roadblock in putting more pilots in the air.

 

 The high cost of receiving an airline transport pilot certificate, accruing hours, and flight training are other obstacles an aspiring pilot must contend with.

 

It costs $99,000 to become a pilot, if you are starting with zero experience. If you already have your private pilot certificate, the price drops to $82,000. For many, this is a substantial financial commitment. The traditional view is that young pilots need to "pay their dues" before embarking on the road to riches and achieving a senior pilot position at a major airline.

 

Given the present state of pilot economics, this is a big nut to swallow for a fresh-out-of-school pilot who normally begins her career at a regional carrier. These pilots receive an extremely low hourly rate (as low as $18 an hour) while working long hours under grueling and stressful conditions. It makes paying back student loan debt at minimum wage practically impossible.

 

One could make more at a fast-food outlet, without incurring student debt, or become a truck driver at 2-3 times the income.

 

You may ask what happened to the assumption that airline pilots are among the highest-paid professionals in the world. It is still true, but it depends on a pilot's career path. A pilot may spend years working toward the cockpit of a major airline and might make the cut, but there is no guarantee. His success depends on his seniority and the major airline he works for.

 

The present landscape of pilot shortages in a global airline market of cutthroat competition has forced major airlines to pay up for senior pilots. Recently, both Delta Airlines and American Airlines, two of the largest airlines in the world, for example, ratified an unprecedented new multi-billion-dollar contract with their pilots.

 

Senior captains can make almost $600,000 annually at American. It is expected that most majors will follow suit with senior captains making $500,000 a year and senior first officers over $300,000 yearly. 

 

As for the regional airlines, the growing scarcity of pilots is forcing even the cheapest of the cheap companies to reconsider their pay scale if they want to maintain their existing flight schedules. More pilots, however, only compound the understaffing issues facing the FAA on the air traffic side.

 

The shortage of air traffic controllers nationwide has been around for several years. This year there is an estimated shortfall of 3,000 controllers, according to the FAA. There is no quick fix since, once hired, it requires months of training and three years of on-the-job experience before certification. Many drop out long before that happens. In addition, air traffic controllers are required to retire at 56 years of age. What's worse, the FAA hates to hire anyone over 31 since they want candidates to have at least a 25-year career path at the FAA.

 

This understaffing is both a negative for traffic as well as a danger to the public. This year, there have been several near misses between planes on U.S. runways in at least seven airports. In some airports, like those in the New York metropolitan area, the FAA has asked airlines to reduce summer traffic. A key radar facility there is only 54 percent staffed.

 

The shortage problem has now caught the attention of lawmakers and both the industry, and its workers are looking to Congress to come up with some solutions. There is somewhat of a time limit on legislative action since Washington will be required to pass legislation to reauthorize the FAA by the Fall.

 

Last week, the House of Representatives began work on an airline bill. Two ideas to relieve the pilot shortage would be to increase the retirement age from 65 to 67 years of age. Another idea would be to change the 1,500-hour rule to allow some of these hours to be done in flight simulators. There are also some plans to make the FAA more efficient, strengthen its workforce, and cut some regulatory red tape. Between the airlines, the unions, and the government one would hope that a solution is in the offing.

 

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 the Federal Reserve Bank's long battle against inflation is showing some progress. This week, two key inflation measures indicated inflation rose at its slowest pace since March 2021. Investors celebrated the news.

 

The Consumer Price Index (CPI) for June rose a mere 0.2 percent and only 3 percent over the prior year. Both measures were a bit better than economists were forecasting. If you strip out food and gas prices, the core CPI climbed 0.2 percent month over month and 4.8 percent over last year; again, slightly better than expectations. The Producer Price Index (PPI) also saw some encouraging news. June's wholesale prices followed the CPI data lower. PPI rose 0.1 percent, less than the consensus estimate of 0.2 percent

 

All week, in anticipation of these expected cooler inflation numbers, market bulls were buying stocks. That gamble has paid off. The U.S. dollar dropped on the news. Bond yields also gave up recent gains.

 

That set up the perfect environment to rise for those sectors that have an inverse relationship with declining dollars and yields. Commodities, basic materials, and precious metals exploded higher. In another interesting turnabout, the small-cap Russell 2000 Index outpaced NASDAQ and the S&P 500 Index for the week.

 

As for the Magnificent Seven stocks and Nasdaq in general, prices took a back seat for once. An explanation for exactly why that should have occurred lies with a decision by the management of the NASDAQ 100. Last Friday, Nasdaq announced that the index will undergo a Special Rebalance effective before the market opens on Monday, July 24.

 

The intent is to reduce the concentration of heavyweight companies that now account for nearly half the weighting of the index. Microsoft, Apple, Nvidia, Amazon, and Tesla combined, account for 43.8 percent weight in the index. As part of the rebalance, that number will come down to 38.5 percent.

 

For portfolio managers and investment funds that track the index, it will mean selling some of the shares of these overweighted companies and increasing their share of other companies in the index. Since the announcement, the Magnificent Seven stocks have been volatile as has the index overall.

 

There is some speculation that the S&P 500 Index could follow suit. That would have a much more serious impact on stock prices overall because of the importance of this benchmark index. Rebalancing the S&P 500, as I understand it, would occur when the aggregate of companies, with each having a weight greater than 4.8 percent, exceeds 50 percent of the total index.

 

As of today, only Apple and Microsoft exceed that 4.5 percent weight.  In total, these two stocks plus Amazon, Nvidia, and Tesla have a combined market value of the S&P 500 index of 22.2 percent. Fortunately, we have a long way to go before a rebalancing of that index is in the offing. 

 

Last week, I mentioned that although the markets were stretched, I was hoping for a little more upside in the averages. That is exactly what occurred with a 100-point (2 percent) gain in the S&P 500 Index. At this point, don't be surprised if a bout of profit-taking were to occur. I am not expecting anything serious, just a pause as the market once again catches its breath.

 

As for me, I will be on vacation next week so do not expect my usual columns. I will be back the following week, ready to go.

 

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.

Retail theft in general is a growing problem in the United States and organized crime has long considered that cargo is its most lucrative target. Crooks have used everything from road pirates to sophisticated computer hacking to rake in billions of dollars and that number is increasing each year.

 

Possibly the fastest-growing segment of theft in the U.S. is related to cargo. The commercial shipment of freight moving by railroad car, truck, and aircraft, as well as storage, warehouses, distribution, and consolidation facilities, is the red meat for cargo pirates.

 

It is a large industry that accounts for anywhere between $15 to $35 billion in thefts per year. Depending on what is inside a container truck, for example, thieves can walk away with thousands to millions of dollars in stolen goods. Common targets this year include food, beverages, auto parts, solar panels, vehicle batteries, tires, and pharmaceuticals.

 

You may think there are plenty of higher-value products that should have made the stolen goods hit list and you would be right. However, the resale of stolen products is just as important as the product itself. Consider the difficulty in identifying stolen avocados or sirloin steak. How would you know a solar panel was pilfered, or a tailpipe?

 

Thus far in 2023, cargo theft has experienced a 41 percent increase from 2022.  Tactics range from targeting refrigerated trucks to Mission Impossible scenarios where criminals are disguised as legitimate drivers, employees, or business representatives. They also use high-tech "sniffers" to detect GPS trackers manufacturers placed in or on high-tech cargos. Cyber robbers hack into dozens of companies exploiting transportation and shipping systems to forge invoices and delivery documentation. This allows bad actors to brazenly pick up cargo from warehouses and other distribution centers offering forged documents and steal containers full of goods in front of unknowing employees and or security guards.

 

Behind this crime wave are professionals with organizations that are capable of evading federal, state, and local police, as well as corporate security including insurance agents. As retail crime continues to rise, a handful of states have attempted to stiffen penalties on those that steal in groups. Other states may follow. However, much of what needs to be done to stop further spikes in retail crime lies in updating and focusing on American crime policies. For example, most police departments do not have a separate category to distinguish retail thefts from other kinds of robberies and larceny.

 

Many of the sophisticated people orchestrating retail crimes tailor their tactics to recent criminal justice reforms. In many cases, mobs employ hundreds of freelancers to steal goods. Changes in bail policies make it easier to entice people to steal because they won't spend time in jail should they get caught. The amount of money stolen to trigger a felony charge is another issue. You would think that upping the penalty for stealing would simply be a commonsense solution to retail theft of any kind, but not in this country.

 

Some argue the problem is too complex for such simplistic solutions. Others question whether increasing sanctions such as an automatic felony for retail crime, in which the thief spends more than a year in prison, is an effective deterrent. Since 2000, at least 39 states have increased the value of stolen goods required to trigger a felony charge.

 

Over two decades, researchers found no change in property crimes in states that increased penalties versus states that did not increase the amount required to warrant a felony charge. Go figure.

 

The retail industry is urging state governments and law enforcement to go after the mob bosses and masterminds behind the crime scene. To do so, organizations such as the National Retail Federation want lawmakers to enact statutes that would create a new category of crime — organized retail theft.

 

This new category would give law enforcement a tool to combat the crime surge. Exactly how the statutes are used is up to the discretion of police and prosecutors and therein lies the rub. Critics say discretion could lead to racial disparities in the justice system and probably has in several states.

 

As in everything else in America, retail crime and its solution are a politicized issue and will likely remain so, leaving the industry to fend for itself. One step that a few large retail chains are using is to simply close their doors in areas where they are experiencing high crime. Although that may be a highly visible act to counter smash and grab theft, it does nothing for the continued upticks in cargo crime, car theft, and so much more.

 

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 July 4th shortened week was one where volatility claimed the markets. Interest rates and the dollar rose, sending stocks lower. The job data was the culprit.

 

The media blamed the setback on higher interest rates, as Fed heads cluttered the airways with warnings that the pause is over and higher interest should be expected by financial markets. The point hit home when the most recent data on job growth indicated further strength. On Thursday, the payroll processing firm, ADP, reported 497,000 jobs added in June; the most in over a year. At this point, there are more than 50 percent more job openings than people unemployed.

 

The latest reading on the Supply Chain Management Services Index also ticked up to 53.9 in June, which was higher than the expected reading of 51.2. That led the Atlanta Fed to push up its second-quarter GDP expectations from 1.9 to 2.1 percent.  

 

Even though the manufacturing side of the economy appears to be weakening, the services side of the economic ledger appears to be buoying economic expansion. That could lead to even more job growth as the services sector continues to hire workers to fill the continued demand.

 

On Friday, however, the non-farm payroll data for June came in far lower than expected. It came in at 209,000 job gains versus 240,000 expected, and the unemployment rate was unchanged at 3.6 percent, but average hourly earnings went up 0.4 percent versus a gain of 0.3 percent 

 

None of this is going to make the Fed happy. The difference between the two labor reports was contradictory at best. The wage gains were not. It likely means inflation and the Fed will keep interest rates higher for longer. There is even talk that we may face several more rate hikes instead of just one or two more in the coming months.

 

The debt market has responded by selling U.S. Treasuries in anticipation of that possibility, which has sent the ten-year U.S. Treasury bond above 4 percent for the first time in months. Mortgage rates also hit the highest point of the year with a 30-year fixed rate mortgage at 6.71 percent. That has hurt housing activity this summer as homeowners pulled back from listing homes and rate-sensitive buyers reigned in their purchase plans.

 

There is no question that stocks are extended. This week saw some of the air escape from the bullish balloon that has sent stocks higher since the beginning of the year. Those stocks that were most overbought, like the Magnificent Seven, were not immune from the selloff. I suspect that we face a period of consolidation ahead, which will delay somewhat my expectations for more market gains.

 

The summer months, on average, are usually more volatile since there are fewer players on their computers. Vacations and shorter work weeks leave markets vulnerable to larger moves both up and down. I plan to be on vacation myself in the week starting July 17 so no columns that week, unfortunately.

 

Many strategists are looking for a temporary peak in the markets this month. I agree. I am hoping stocks can move a little higher and they still may, but we are stretched at this point. Corporate earnings are right around the corner. Valuations are stretched and many companies are going to have to show stellar results to support prices. 

 

Inflation data in the form of the Consumer Price Index and the Produce Price Index are due out next week as well. That should offer a chance for stocks to move higher if the numbers are cooler. Hotter results would give traders an excuse to sell. The bottom line, however, is that I believe markets will climb higher in the months ahead, so stay invested. 

 

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.