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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.

We grew up with tales of $500 toilet seats and bridges to nowhere when describing the abuses of government spending. In a few days, Americans will get our first taste of what it will mean to make our government efficient once again.

 

The Department of Government Efficiency (DOGE) is not an official government department. That would require an act of Congress. Since members of that august body have been the major contributors to decades of inefficient use of government funds, it probably was a good idea to bypass a vote on making DOGE "official."

 

Instead, it will operate as an advisory body, run by two of President-elect Trump's closest allies with a direct line to the Oval Office. Billionaires Elon Musk and Vivek Ramaswamy will serve as volunteers and not federal employees or officials. They will assist the president in recruiting a team of professionals who will provide guidance to the White House on spending cuts and compile a list of regulations they believe are outside of various agencies' legal authority.

 

Both men floated the idea of saving the country $2 trillion in savings or around a third of annual federal government spending by slashing federal regulations, overseeing mass layoffs, and shutting down some agencies entirely. That played well to the populist wave of voter sentiment but has since been paired back by half after winning the election. Their job, even with the newly reduced target of $ 1 trillion in savings is still formidable.

 

Just about everyone is for more government efficiency, if it does not come out of their backyard. Reduce defense but don't touch Social Security. Get rid of the education department but keep consumer protection. Everyone's interests are supposedly represented by lawmakers in Congress. Given that the House is almost evenly split and rife with factions in both parties, consensus on the passage of spending cuts will surely test both the persuasive abilities of Trump and his unofficial volunteers.

 

Their success or failure will have far-reaching effects on the stock market and the economy. Over the last decade, government spending has gone through the roof. The U.S. spent $6.75 trillion, an increase of $617 billion over 2023. That spending was 23.4 percent of Gross Domestic Product. Some argue that if you include the 13 percent spent by states and local governments, plus annual compliance costs to comply with federal regulations, the total is far higher.

 

As a result, the country's deficit is expected to grow to $1.8 trillion last year and to total $2 trillion in 2025 unless something changes, according to the Congressional Budget Office. Total debt is now running at $6 trillion, or more than 125 percent debt to GDP ratio which means that the U.S. government has more debt than the size of the entire economy. We are fast becoming what is called a "banana republic country." It is one of the main reasons why the benchmark 10-year U.S. Treasury bond’s yield has exploded in the last few weeks.

 

Given this backdrop, reducing the size of government while increasing its efficiency generally leads to positive effects on economic growth, which is extremely important for reducing the deficit and debt. According to most economic theories, a smaller government with effective operations can often stimulate private investment and innovation. That should lead to faster economic expansion over time, more tax revenues, and less need to borrow. How that all plays out depends on how the government is scaled down and which programs are affected.

 

Few in the media are talking about what will happen to the economy in the event DOGE is successful in reducing spending. Sure, according to economic theory, a more efficient government will lead to higher growth but over what time frame? My own opinion is that in the short run (the next year or two) slashing government employment, programs, and agencies will hurt the economy more than it helps it.

 

Let's be conservative and guess that all-in, Musk and his men, succeed in pairing $800 billion from the government's 23.5 percent share of the economy. What happens to GDP? It doesn't take a rocket scientist to figure out that we could see a substantial decline in economic growth. It would probably mean higher unemployment too since the federal government employs more than 3 million people or 1.87 percent of the civilian workforce.

 

This slower growth would hurt corporate revenues and profits and possibly translate into a lower stock market, all else being equal.

 

The upside would be a leveling off in interest rates, some relief on our mounting debt burden and deficit, and maybe less inflation. At the same time, other policy initiatives from the new administration such as tax cuts, tariffs, and immigrant efforts could contribute to even slower growth or achieve the opposite.

 

In any case, over the next two to three weeks, I would pay close attention to the balloons floated by the DOGE boys. See what initiatives create the most blowback and what ideas may stick. Deep cuts in Medicaid, for example, which represent 10 percent of the federal budget, would hurt blue states the most, as well as hospitals in general. That suggestion and many others would cause a great deal of outrage. It is a question of whether the country is willing to accept short-term pain in exchange for long-term gain. 

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.

Saving for retirement will get a little more attractive next year. Given the dire state of savings in this country, anything that convinces workers they need to save more will be beneficial.

 

The Secure Act 2.0, enacted in 2022, ushered in several additional improvements in retirement savings, including even higher 401(k) plan catch-up contributions. The object was to make it easier for older American workers facing a retirement savings shortfall to set aside more money quickly. 

 

The facts are that there is a widespread retirement savings shortfall in the U.S. that spans generations. Sixty-five percent of Baby Boomers (age 55-64) have less than $25,000 to $100,000 saved toward retirement. If we use $500,000 as a marker, less than 7 percent of boomers saved that much and only 5 percent of the GenX generation (45-54).

 

Younger generations like older millennials (35-43) are not much better off and 10 percent lack a 401(k) entirely. However, 65 percent of Gen Z and younger millennials (21-34) do have $25,000 to $100,000 saved but doubt whether they will ever reach $1 million by retirement. Overall, if one believes the benchmark total of $1 million is needed to retire, only 2 percent of 401(k) holders have achieved that. And over one-third of Americans today believe they will never reach that benchmark.

 

In 2025, the government will provide a few more incentives to bolster savings. Contributions for 401(k), 403(b), governmental 457 plans, and the federal government's Thrift Plan will inch higher. The new limit for all the above plans will increase by $500 to $23,500.That is not much, but every little bit helps. For older workers, aged 50 and up, additional savings are allowed under a catch-up plan. 

 

While the catch-up contribution limit for those 50 or older remains the same, bringing their total contribution to $31,000, those workers between 60 and 63 years old can save even more in the coming year. The catch-up limit for those in their early sixties increases by $11,250 annually. That is substantially higher than the $7,500 allowable now.

 

The contribution limits for Individual Retirement Accounts (IRAs) will remain $7,000. The catch-up limit for individuals over 50 stays the same as well at $1,000.

 

For those who favor contributing to Roth IRAs, there is some good news. The income limit range for workers will increase to between $150,000 to $161,000. If you are married and file jointly, the range increases to between $236,000 and $246,000, which is up from $230,000 to $240,000. 

 

There are some additional incentives to at least jump-start savings for the 32 percent of working-age Americans (about 58 million people) without a retirement savings plan. The income limit for the Retirement Savings Contributions Credit, also known as the Saver's Credit, was increased. The Saver's Credit, available since 2001, is a tax credit worth up to $1,000 ($2,000 if married and filing jointly) for mid- and low-income taxpayers who contribute to a retirement account.

 

To qualify, you need to be over 18, not a full-time student, or a dependent on someone's tax return. Your adjusted gross income in 2025 needs to be below $79,000 for married couples and $59,250 if you head a household. If you are single or married but filing separately your income cannot exceed $39,500.

 

It baffles me why Americans aren't saving more in retirement accounts. Many say they just can't afford to max out their savings plans even when their companies offer to match some portion of their contributions. That may be true in many cases. Thus far, there is no other way to force Americans to save for retirement other than through the Social Security tax on income.

 

Given the worries over the deficit, funding, and continuing threats by some to cut Social Security benefits, why hasn't it happened already? The simple answer is if you cut Social Security, millions of people with no savings will end up destitute and on government life support in retirement. That would be an even more expensive proposition than the Social Security system.

 

Yet changes to the Social Security program seem inevitable at some point. If so, why not require the government to match retirement plan contributions while reducing Social Security benefits simultaneously for those under retirement age?

 

In the short term, it might be moving the chips from one side of the table to the other, but it need not be forever. The trick would be to incentivize workers to establish a savings habit. That wouldn't take too long. Once accomplished, especially with savings withdrawn from paychecks automatically (just like Social Security taxes), the match could be raised or lowered depending on circumstances.  

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.