Over the past few years, labor unions have experienced a renaissance in interest and activity. As a result, unions have begun to flex their muscles, and their influence may extend beyond economics into this year's turbulent election politics.

 

In several columns over the past two years, I have explained how unions have made headway in various U.S. economic sectors from autos to Amazon. The UAW's strikes against the Big Three auto companies are what most readers may remember. It ended in victory for the workers and sparked further union outreach to manufacturers in the notoriously anti-union South.

 

In addition, unions in other areas have begun to organize at Amazon Starbucks, and a host of different companies with some success. And yet, all union membership in the United States is still just about 10 percent, which is half the rate in 1983. If you add in workers who have no union affiliation, but whose jobs are covered by a union contract, that percentage jumps to 11.2 percent.

 

In total, we are talking about no more than 16.2 million workers in a total American labor force of 167.58 million people. How could such a paltry number of voters impact who wins the presidency?

 

My father was a machinist, working two jobs in Philadelphia when I grew up. His union job was with SKF, a Swedish ball-bearing company, while his side job was at a non-union shop with higher pay but no benefits. He voted in every election his union bosses dictated and he also worked in his spare time to get out the vote.

 

Back in the day, Democrats took his participation, and the union vote for granted. This Democrat voting bloc carried on through the decades until at least  2012.  During the Barack Obama election, 66 percent of union voters backed him, while only 53 percent of nonunion workers voted Democratic. And then came Donald Trump four years later.

 

In 2016, only 53 percent of union members voted for Hilary Clinton, as an increasing number of working-class Americans, dissatisfied with both their political and economic share of the American pie voted for Trump and populism. That precipitated a great deal of soul-searching among the Democrats. As a result, Democrats over the last two national election cycles are no longer taking the union vote for granted.

 

They have made some headway in regaining their marginal edge with union voters. Joe Biden captured 60 percent of union votes in 2020, which was an improvement over the Clinton numbers, but still below Obama's turnout by 6 points. In the 2022 midterm elections, 63 percent of union members voted for Democrat members of Congress.

 

However, in this age of gathering populism, the union vote can go either way this time around. In the past, union members are more likely to vote than nonunion workers. And while they are only 10 percent of the workforce, in three swing states — Michigan, Nevada, and Pennsylvania — union membership is much higher than the country overall. More than 12 percent of workers in each state belong to a union.

 

Given this backdrop, it is not surprising that for the first time in history, an American president walked the UAW picket line, while Donald Trump countered that move by addressing striking workers as well. It was also no accident that the Teamsters President Sean O'Brien addressed the Republican National Convention, which was an unprecedented action by a union representative.

 

It is no accident that Vice President Kamala Harris and her pick for vice president, Tim Walz, governor of Minnesota,  as well as Donald Trump's running mate, J.D. Vance, made sure to visit Michigan (both a swing as well as a labor state) on Wednesday. Against heavy odds, Vice President Harris selected Governor Walz over Pennsylvania's Gov. Josh Shapiro. Pundits believe that one reason Shapiro did not make the grade was his support for private-school vouchers, which put him at odds with teachers' unions.

 

Both the Democrat and the Republican teams have floated several pro-unions, pro-worker, policy initiatives. Workers have been receptive to this kind of populist rhetoric but countering that has been the nation's weak labor laws.

 

In addition, several red states' recent legislative attempts to stop further union organizing in the southern part of the country are not playing well among the membership. The conservative Supreme Court rulings in favor of business over unions are another stumbling block for many workers as well.

 

All indications are that if the election is as tight as the polls indicate, a handful of swing states could make a big difference in who wins. In three of those five states, unions may end up holding the key to who wins. Both sides know this, so expect a lot more attention to be paid to this crucial voting bloc. 

 

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.

"Be careful what you wish for" is an often-used quote. In the case of the financial markets, all year long, traders and the Fed wished for a slower economy, less employment, and therefore a decline in inflation. Now that we have it, the markets don't like it.

 

Earlier in the week, the bulls could not have asked for a more dovish Federal Open Market Committee meeting. While the central bank maintained its higher-for-longer stance, it hinted that September could see the first of several interest rate cuts. Jerome Powell, the chairman of the Federal Reserve Bank, said it will depend on economic data over the next several weeks. "If that test is met, a reduction in our policy rate could be on the table as soon as the next meeting in September."

 

But it would not only be the inflation data that the Fed would be eyeing. The Fed has now shifted to a more balanced approach between maintaining employment and reducing inflation. Powell admitted that at this point cutting interest rates "too late or too little could unduly weaken economic activity and employment."

 

In the meantime, other central banks have already cut interest rates. The Bank of England was the latest bank to reduce their interest rates on Thursday. Both traders and the Fed, have been watching the labor market for clues to the health of the economy.

 

As Powell explained in the FOMC Q&A session on Wednesday, "I don't think of the labor market in its current state as a likely source of significant inflationary pressures. So, I would not like to see material further cooling in the labor market." However, that is exactly what occurred one day after that meeting.

 

On Thursday, last week's report on jobless claims rose to an 11-month high with unemployment benefits filings hitting 249,000, up from 236,000 last week. Those numbers are still small compared to the overall number of employed in the nation, but the trend is not your friend if you are worried about a softening labor market and a hard landing for the economy.

 

It didn't help that on the same day the deteriorating health of the manufacturing sector came under the spotlight. Manufacturing has been weak for months. The sector has been below 50 on the ISM Manufacturing PMI, which is the cut-off between a weakening sector and one that is healthy. The ISM Manufacturing PMI for July showed a decrease to 46.8 versus 48.8 expected. The market interpreted that data point as a sure sign of a weakening economy.

 

Coupled with the jobless claims data and the ISM numbers, Friday's non-farm payroll data was also a disappointment. Job gains registered a mere 114,000, which was below the consensus of 175,000 expected. The unemployment rate also spiked higher to 4.3 percent from 4.1 percent in June. Wage growth also slowed to 3.6 percent from 3.9 percent year-over-year.

 

Suddenly, in the space of three days, the mood of the markets swung from Wednesday's "The Fed has it covered" with their wait-and-see data stance, to the "Fed has waited too long to cut."

 

Fed critics have argued for some time that when you begin to see the labor market roll over, it is already too late to avoid a sharp decline in economic activity. Many economists agree with the Sahm Rule, named after a former Fed economist, Claudia Sahm, who believed that when the unemployment rate rises 50 basis points from its low of the past year a recession is almost always underway. That has now happened.

 

The debt market took note by driving the yield on the benchmark 10-year, U.S. Treasury bond below 4 percent first the first time since February. Traders are not only convinced that the Fed will need to cut interest rates soon but are also worried that when they do, it will be too little, too late to stave off a recession. That triggered a rush for safety. Between the drop in yields and the poor manufacturing data, the stock market swooned giving back all of the gains for the week and then some.

 

If you recall my writing a month or so ago, I acknowledged at the time that everything was coming up roses as far as the economic environment was concerned. Nonetheless, my Spidey sense told me to be cautious in July and expect a sell-off. I have found that intuition is sometimes as valuable as a spreadsheet full of data in this business.

 

As for this weeks' recession scare, I come down on the side that one or two data points stacked up against a lot of numbers indicating continued growth in the economy fails to convince me we are heading for a hard landing. But if one needed a trigger to take profits, a recession scare is a good excuse.

 

In any case, the volatility in July has now rolled over into August. This week, stocks have gyrated in both directions, gaining and losing more than 1-2 percent a day in all three averages as well as in the small-cap arena. It is the kind of action one normally sees at the bottom and top of markets and indicates a change in the trend.

 

The S&P 500 Index racked up a 5 percent loss, while the NASDAQ lost double that in July. So far this month, which is usually a bad month for the markets anyway (as is September), we are extending those losses.

 

Last week, I wrote that the pullback was not yet over, but I did expect a bounce, and we got that last week. I believe there may be a bit more downside ahead with a total decline of as much as 7 percent from the high on the S&P 500. We may see that by the end of this week, and I may be conservative. A full 10 percent correction would not surprise me either.

 

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.

Most people think of stocks when financial markets are mentioned. That is where the action is and where the big money is made. That may be so, but investors should not ignore the promise of the bond market.

 

In my graduate school days, a required subject was Modern Portfolio Theory. Its author, Harry Markowitz, who, back in the '50s, proposed that the optimal portfolio for most risk-adjusted investors was 60 percent U.S. stocks and 40 percent U.S. Treasury bonds. The idea was that these two asset classes were negatively correlated, meaning that if stocks went down, bond prices would increase and vice versa. Over time, this diversification would produce better returns than putting all your eggs in one basket.

 

For most of my career, this investment theory worked well. However, over the past decade, interest rates were at or near zero. This made the bonds side of this equation a drag on overall performance. As a result, more and more fund managers reduced their bond weighting as stocks continued to rise. And then came COVID.

 

During the initial COVID market crash, both bonds and stocks fell together. In the subsequent market rally, both asset classes went up simultaneously. They lost again when the Federal Reserve Bank started hiking interest rates. In 2022, the 60/40 portfolio suffered a 17.5 percent decline. That was its worst performance since 1937 and its fourth worst in 200 years.

 

Both prices of bonds and stocks rose together once again as inflation peaked.  Investors started positioning for a time when interest rates would come down. In this period the Fed stopped tightening and inflation was beginning to weaken. In the meantime, stocks were increasingly being priced as if they were bonds.

 

The formula was the same for both asset classes. The present value of a stock (or a bond) was calculated as the worth of its future cash flows (earnings and dividends, or in the case of bonds, interest payments), discounted at prevailing interest rates. Therefore, when those interest rates go down, the value of the stock rises just like a bond. The reverse happens when rates rise.

 

It appears that inflation and the global central bank response to combat it (coordinated interest rate hikes) had forced the correlation between stocks and bonds to become much closer. This we know to be true. In a study they completed this year, Morgan Stanley, the brokerage firm, found that whenever U.S. inflation exceeded 2.4 percent over the last 150 years, there was an increase in the correlation between stocks and bonds. It also led to heightened volatility in both asset classes. 

 

Morgan Stanley (and others) believe the past few years were an anomaly. It was a period where inflation spiked, driving the correlation between bonds and stocks together. If we fast forward to today, the picture has changed. Thanks to the Fed's tightening program over the past two years, interest rates are now high enough to provide a healthy return to a bondholder. In addition, the market expects the Fed to begin cutting interest rates as early as September. If and when they do, and rates start to fall, bonds will rise in price giving holders significant capital gains in addition to interest payments.

 

Stocks, on the other hand, are already close to record highs and extended. In the best of all worlds, If the Fed cuts rates, equities should continue to gain, but likely at a slower rate than the price appreciation of bonds.

 

If this were to happen, one would expect the 60/40 portfolio should come back into vogue. Vanguard, one of the world's leading fund managers, expects U.S. bonds to yield between 4.8-5.8 percent over the next ten years, compared to 4.2-6.2 percent for stocks. If they are right, taken together, a 60/40 portfolio may just be the optimal approach for a moderate-risk investor.

 

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.

July, as promised, has turned out to be a month where financial markets have been buffeted by fireworks on various fronts. A gambit of data from inflation to economic growth combined with a new American brand of populism has led to some unexpected market consequences.

 

The good news first. In the second quarter, gross domestic product grew well above economists' expectations at an annualized pace of 2.8 percent, compared to forecasts of 2 percent growth. The "core" Personal Consumption Expenditures Index (PCE), which excludes food and energy, grew by 2.9 percent in the second quarter. That was above estimates of 2.7 percent but significantly lower than the 3.7 percent gain in the prior quarter.

 

On Friday, the monthly PCE data came in as expected edging up 0.1 percent month-over-month in June following a flat reading in May. However, the core index was a bit higher than forecasts at 0.2 percent versus expectations of a 0.1 percent increase. While still an increase, it is the slowest pace of inflation since March 2021. It is doubtful that the data will convince the Fed to change monetary policy sooner than the market expects.

 

On the political front, my prediction that President Biden might relinquish his candidacy in favor of his vice president, Kamala Harris, proved to be true. The impact on the financial markets has been negligible thus far, but the odds of a Trump win have gone down somewhat. As a result, the fervor to buy areas of the market that might benefit from a Republican sweep has subsided a little.

 

I believe that to make investment decisions at this point on who will win or lose the elections is largely fools' gold. Far better that we focus instead on something more tangible like the expectations that the Federal Reserve Bank will likely begin to cut interest rates at their next meeting in September.

 

We will know more about this in the coming week when the FOMC meets again on July 30. While there is only a 6 percent chance that the Fed will cut interest rates at this month's meeting, the odds are almost 100 percent that they will cut interest rates in September. That bet is what has investors buying small-cap stocks, which benefit the most from the loosening of monetary policy.

 

In the meantime, stocks have done what I predicted. The S&P 500 Index declined by 5 percent or so with NASDAQ falling almost double that amount. However, the Great Rotation that I discussed in my last column is alive and well.

 

The Russell 2000 small-cap index outperformed as did other forgotten areas like financials, real estate, and industrials. On the downside, the darlings of the market over the past months, FANG and AI companies were clobbered as did the technology sector overall.

 

You might think that if some sectors were up, while others were down, the overall market would balance out. Not so. Market capitalization is the key. Over the years, the growing weight of this handful of tech stocks in just about all of U.S. equity indexes has been extreme. The entire market cap of the Russell 2000 Index, for example, is equal to the market cap of just one of the FANG stocks. As such, no matter how much small caps gain, they can never make up for the declines in the technology sector.

 

In the short term, where FANG and AI technology go, so goes the markets. On the surface, the carnage in some stocks was nasty, but in the grand scheme of things a mere bump in the road considering the gains we have enjoyed thus far in the stock market this year.

 

The question you may be asking is whether the selloff is over. I sense that we still have more to go, but we could bounce first before rolling over again. This volatility could last until the Fed meeting late next week. At that point, with possibly more visibility on rate cuts, the market could find support.

 

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.

Have you ever wondered how much your time and effort were worth as a stay-at-home spouse? Chores like child care, laundry, home repairs, and meal preparations rarely come with a bill attached, but what if they did? You may be about to find out.

 

All the above chores plus many more, from driving the kids to school or soccer practice to treating illnesses among family members are critical to the functioning of the U.S. economy. However, none of that essential work is measured.

 

ScienceDirect defines household production as "the production of goods and services by the members of a household, for their consumption, using their capital and their unpaid labor."

 

The concept is recognized worldwide (including the U.S.), as an alternative economy to the labor market. In many nations, the household economy absorbs more labor and at least one-third of the physical capital used in the market economy. Because this work isn't tracked through marketplace transactions, it is excluded from U.S. Gross Domestic Product (GDP). Three years ago, thanks to the labor dislocations spawned by COVID-19, the Department of Labor decided to change that. 

 

As part of an initiative to come up with a major new input to their understanding of consumer expenditures, the DOL commissioned a group of economists at Bard College to figure out how the government could put a dollar and cents value on household activity. Overall, the survey examined how much Americans spend on everything that costs money. It excludes activities that don't cost money but do cost time.

 

Last month, the resulting Integrating Nonmarket Consumption into the Bureau of Labor Statistics Consumer Expenditure Survey was published by four researchers, Ajit Zacharias, Fernando Rios-Avila, Nancy Folbre, and Thomas Masterson. Chief among their findings was that women performed 78 percent of the total value of unpaid production in 2019.

 

I'm betting that most readers are not surprised that women are responsible for the lion's share of household production. What is as important is that the study promises to give the country insight into how worthwhile this unpaid labor is but is also critical to the continuing functioning of the economy.

 

For years, mainstream America argued unpaid work was not an economic issue. Sadly, I still hear it all the time (mostly by men) that it is a woman's moral duty, borne out of love, to take care of the household. During the pandemic, I wrote several columns on women as the unsung heroes throughout the lockdown. To me, they were the engine that kept the economy running.

 

So many of them were expected to not only continue to work at home, or even in the office while assuming the additional burdens of at-home education, child care, homemaking, etc. But it goes beyond that effort.

 

There is a thing called cognitive labor as well. It is invisible but requires an enormous amount of effort, especially in periods of societal crisis like in the pandemic. A Harvard sociologist, Allison Daminger, breaks it down into four parts: Anticipating needs, identifying options for meeting those needs, deciding among the options, and monitoring the results. It is how shit gets done in most households and I believe women do most of it.

 

The Bard economists looked at realms of data from the Census as well as other sources to determine how Americans spend their time. They then paired this data with DOL numbers on how much each work category costs. How much, for example, is the going rate for six hours of child care? What are the wages for the typical caregiver? Was the rate higher for simply reading to a child versus supervisory work?

 

Other areas from laundry to cooking and everything in between were studied and included in the research. The object was to convert the hours spent on tasks into a measurable value. They also looked at the unpaid contribution of members outside the household like grandparents, sisters, or aunts.

 

The DOL is hoping that this additional data will bring all of us closer to determining the true cost of living for Americans. It could also explain and give further insight into the pay gap between genders and the lower labor participation rates between men and women. For example, people tasked with household production have fewer hours for paid work, on average, and can be expected to earn lower incomes as a result.

 

The next step will be for the DOL to evaluate the methodology of the report, and if that passes its' economic litmus tests, they intend to add a household production measurement to its consumer expenditures data by next year.  In America, it is all about the buck. Unfortunately, most of us measure one's worth by this dollar and cents metric. Putting a price tag on household production would provide a great leap forward to appreciating those of us who toil without pay in the interests of the family.

 

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.