The Consumer Price Index was cooler than expected in June, while the Producer Price Index was warmer. Equity traders responded by selling winners and buying losers.

 

CPI inflation fell further than most expected as easing prices for gasoline and other staples like food and new lease rents cooled dramatically. That information might help the level of anxiety people are feeling about inflation. It appears that the price points of most staples have finally flattened out year-over-year instead of constantly going up as they have for the last few years. 

 

Countering that good news, wholesale prices climbed 0.2 percent last month led by prices for services, which offset a decline in goods prices. The May PPI numbers were also revised upwards as well. However, the CPI news trumped the disappointing PPI data on the nation's trading desks.

 

Fed Chairman Jerome Powell's testimony before Congress this week paved the way for the inflation data. On Wednesday, in his testimony before the Senate Banking Committee, he said, "More good data would strengthen our confidence that inflation is moving sustainably toward 2 percent."

 

His semiannual congressional appearance at the House Financial Services Committee a day later was also encouraging. Powell hinted that the environment for rate cuts is approaching citing a jobs market that is slowing down. He also said that the Fed had been heavily focused on inflation but is now getting to a place where the labor market is drawing more of their attention.

 

Recently, the labor market data indicated that the number of jobs is declining. Powell clarified that he and his committee are increasingly aware of the risks posed by a cooling labor market. His comments kept the equity market well-bid for most of the week and the inflation data announcements were simply the cherry on the bull's cake.

 

Based on Powell's testimony and the cooler CPI data, the betting for a rate cut by September skyrocketed to more than 90 percent. Both the U.S. dollar and bond yields plummeted as a result. However, at the same time, a massive shift occurred as momentum and program traders sold down the ten or so large-cap stocks that have driven the averages higher, while buying hand-over-fist areas like precious metals, China, emerging markets, small-cap stocks, industrials, and real estate.

 

All the above areas benefit the most from a declining dollar, lower interest rates, or both. This could be good news for the health of the market if this trend were to continue. I have written about the concentration risk (too few stocks going up) that has gripped the market over the last few months. For the markets to continue to gain, we need to see a broadening out of stocks that are participating in the upturn.

 

If the market were to rotate out of some of its FANG/AI holdings into other equity and commodity areas, there likely would be a period of consolidation and volatility in the markets. I have been expecting higher highs into mid to late July followed by a period of consolidation. As of right now, I am on target and await further developments.

 

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.

Tariffs in America have been used to accomplish specific goals throughout history. Until the Civil War, tariffs were a revenue generator for the government. After the Civil War, they were used to protect U.S. industries and during the Great Depression, tariffs evolved as a negotiating tool between nations, especially after World War II.

 

In the postwar years, tariffs built stronger trade relations between nations. Reciprocity rather than protectionism or revenue was the guiding principle behind our trade negotiations with other countries and economic regions. That idea still holds sway under certain circumstances, but tariffs have become an offensive policy tool as well.

 

I remain convinced that tariffs are simply another tax that corporations and consumers pay to finance the policy goals of the government. Many may believe that tariffs are worth the price if it means more jobs for Americans but that has not been the case. The overall loss of jobs because of tariffs far outweighs the gains in tariff-protected industries, especially in a situation where retaliatory tariffs are levied on the U.S.  

 

Tariffs in today's world are being used by both political parties to accomplish an even greater spectrum of goals than simply job protection. Under the former administration, tariffs were both a weapon to help revive the domestic manufacturing sector as well as to reduce American dependence on China in a variety of economic sectors.

 

Since then, under President Biden, the goals of tariffs have been broadened further to include national security, and self-sufficiency, and to support our efforts in the green energy transition.

 

His approach is better, he claims, because it is targeted and selective. It also involves convincing allies to join him to coordinate tariffs on Chinese goods.  He argues his tariffs on foreign electric vehicles and solar panels allow our U.S. producers to gain a foothold in this area. The restrictions on semiconductor imports are both an attempt to build up the country's self-sufficiency in an area that is important to both military defense and increase made-in-America manufacturing in areas such as artificial intelligence. He has also restricted what U.S. industries can sell to China, especially in the technology sector.

 

 Former President Trump has doubled down on his first-term tariffs. He has advanced ideas that would include a new 60 percent tariff on all Chinese imports, plus a 10 percent across-the-board tariff on imports from around the world. He has also reached back into America's past when tariffs were revenue generators. His idea is to use tariff revenue to replace the income tax.

 

I do applaud him for a novel idea. However, it would require a huge increase in tariffs to accomplish such a feat. To put this into perspective, when tariffs were the main source of government revenues, federal spending was about 2 percent of GDP. Today that number is 23 percent. Total individual income generates more than $2.2 trillion in federal revenues while total import revenues are less than $100 billion. The required increase in tariffs would stifle trade and likely precipitate a worldwide recession.

 

I also suspect that Trump may be using the threat of higher across-the-board tariffs to exact concessions from both China as well as the rest of the world. He has done it before and could do it again and our trading partners know it.

 

In any case, all these tariff efforts by both parties are playing well with American voters whether Republican, Democrat, or independents. It appears that few care that we are already paying $230 billion in tariff-related price increases. A further 60 percent tariff on Chinese goods would increase prices by another $230 billion.

 

On an individual level, the Peterson Institute for International Economics calculates if Trump carried through on his promises the average middle-income family would pay $1,700 a year in higher prices on top of the $1,000 per annum they are already paying.

 

I don't think Preside Biden's tariff schemes are any better despite his selective approach. However, what I think isn't important. It is up to an informed electorate to decide if tariffs are the way 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.

It was another good week for stocks following another good month of gains. Granted, in this holiday-shortened week, the volume behind the positive moves was paltry at best. However, many traders will tell you that only the price pays.

 

The macroeconomic data seems to be coming in as the Fed had hoped, with some data showing a slight cooling of the economy and at least two months of better inflation numbers. Although the U.S. economy added 206,000 jobs last month, that was slightly down from 218,000 jobs in May. Average hourly earnings also increased, but below forecast as well. However, the overall unemployment rate did tick up to 4.1 percent, the highest reading in three years.

 

Chairman Jerome Powell appeared satisfied with the state of the economy and inflation when he spoke in Portugal this week at the Forum on Central Banking. He suggested that we are returning to a disinflationary path but "we want to be more confident that inflation is moving sustainably down before we start the process of loosening policy." 

 

His comments barely differed from that same old monetary song the Fed has been singing throughout the year. Nonetheless, the bulls ran with his comments pushing the S&P 500 Index above 5,500 for the first time.

 

Another sign the Fed is on target was the new data released by ADP this week that showed annual wage increases for workers who remained in their same job increased at the slowest rate in nearly three years in June. Wage growth is one of the main contributors to the inflation rate. As such, that may have been good news for Wall Street but bad news for Main Street where consumers are still fighting the high cost of everything.

 

Politics and the election, at long last, appear to have entered the psyche of traders and investors alike. Last week, I warned readers that I expected as much. Two events — the Biden debate debacle and the Supreme Court's ruling on presidential immunity — captured the market's interest. Bond yields rose and the dollar strengthened.

 

The thinking behind these moves was that both events strengthened the probability that Donald Trump would prevail in November. And if he did win, inflation would be much higher thanks to his promise of tax cuts and tariffs. That remains to be seen, but traders immediately attributed the pop in yields to the "Trump Trade."

 

Precious metals and other commodities also jumped on the re-inflation theme although cryptocurrencies declined. At the same time, cannabis stocks were clobbered as investors worried that a Republican sweep of the House and Senate would put an end to any further liberalization of marijuana. Drug companies also took it on the chin, since the pharmaceutical sector has traditionally been the whipping boy for both parties as election rhetoric heats up.

 

The narrowing of the market's gains continues to occur with less than ten stocks accounting for most of the S&P 500 and NASDAQ gains. Concentration risk is higher than it has been in decades. How long can this last is anyone's guess? The index averages are stretched, but we will only know in hindsight when we have reached a breaking point. 

 

As readers recall, I expect fireworks this month with new highs early on followed by a possible downdraft in the latter half of July. However, nothing in the data or the Fed's actions indicates such a sell-off will occur. Sure, the technical charts are screaming a flood of warning signs, but the momentum behind the AI and FANG stocks is still quite strong. For a pullback to occur, the bears need a trigger.  

 

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.

In this era of populism, tariffs have become as American as apple pie. Politicians are bending over backward to out-tariff their rivals. Voters are applauding the effort, and yet it is the consumer who will pay higher prices as a result.

 

I can understand how voters might disagree, given that party politicians continue to deny the obvious. "The notion that tariffs are a tax on U.S. consumers is a lie pushed by outsources and the Chinese Communist Party," declared a spokesperson for the Republican National Committee. 

 

I am neither an outsourcer nor a Chinese Communist, but I am convinced that tariffs are a tax on all of us.

 

When the U.S. levies a tariff on an imported good, the cost of the tariff comes directly out of the bank account of an American importer when the foreign-made product arrives at an American port. The importer then has a choice. It can either eat the cost or pass all or some of that added expense to the buyer of the imported goods. That buyer can be either a retailer or a consumer. How much of the extra cost is absorbed by the retailer and how much is paid by the consumer is hard to determine.

 

Historically, U.S. tariffs have been around since the days we declared independence. Tariffs generated most of the country's revenues and at one point represented 90 percent of federal revenues. That began to change when the Industrial Revolution took hold in the U.S. during the Civil War.

 

Tariffs were then levied to protect American industry, chiefly northern manufacturers from overseas imports. The Republican Party slapped tariffs on various goods from several countries in Europe and elsewhere. This period reached its zenith during the Great Depression when world economies were failing. Tariff wars exploded globally as countries rushed to protect industries within their borders.

 

Instead, these tariffs resulted in even less global growth and only worsened the state of the world's economies.

 

It was the passage of the Reciprocal Trade Agreements Act in 1934 that introduced the concept of reciprocity that began to reverse the global decline. The act allowed the president to horse trade on a global basis by negotiating lower duties if other nations did the same. After WWII, reciprocity became the dominant go-to trade policy. Over the ensuing decades, trade deals expanded from a country-to-country agreement to regional trade alliances that granted "free trade" to some while targeting duties and tariffs on others. The North Atlantic Free Trade Agreement is just one example of this practice.

 

After multiple decades, this era came to an abrupt halt when former president Donald Trump initiated a wave of tariffs on a variety of goods on China. He promised that the tariffs would level the playing field between the two countries, while bringing manufacturing jobs back home. He soon expanded his tariff offensive by placing tariffs on additional products and at the same time applying them to several additional countries.

 

His successor, Joe Biden, not only let stand the China tariffs but added to them. The costs to American consumers and companies not only increased as a result, but the jobs promised never materialized. The U.S. Customs and Border Protection estimates that Americans have paid more than $230 billion to date for tariffs that Trump imposed, and Biden extended.

 

A bipartisan working paper from the National Bureau of Economic Research found that the tariffs had no impact on the number of jobs in the affected industries. However, the tariffs did result in other countries imposing their retaliatory tariffs on U.S. products. That not only hurt consumers here at home but made the goods we exported abroad more expensive. In addition, those retaliatory tariffs lowered the number of jobs within the U.S. industries that were impacted.

 

The Chinese retaliatory 25 percent tariffs on U.S. cotton, soybean, and sorghum devastated large numbers of our farmers. The situation was so bad that the Trump Administration was forced to offset the damage by offering farmers $23 billion in taxpayer money.

 

J.P. Morgan economists estimated that the Trump tariffs on $300 billion of Chinese-made goods cost the average American household about $1,000 per year. We are still paying more today for a variety of imported goods from China including MAGA baseball caps, luggage, and shoes.

 

Next week, I will discuss the present effort to expand trade barriers and tariffs as a policy tool that is being used to advance several separate goals. Each of these tariff initiatives has serious ramifications for both American industry and consumers.

 

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 good news is that early in this coming month we should see new highs in the stock market. The bad news is that we could also see some downside as well.

 

The equity markets' grind higher throughout June has been achieved by fewer and fewer stocks. Most of the gains have been concentrated in ten stocks or less. There have been a few days where the other 490 stocks of the S&P 500 index managed to mark up some gains, but if you weren't in AI or Fang stocks, you underperformed by a mile.

 

I have mentioned this before in several of my past columns. As we push higher, a feeling of caution seeps into my bones. On the surface, there is nothing that I can put my finger on, and yet my Spidey sense tells me to tread lightly. However, the macroeconomic data does not justify my worries.

 

Inflation, while sticky in some areas, continues to come down. The Personal Consumption Expenditure Price (PCE) for May was unchanged, as expected, while the core index which excludes food and energy, rose 0.1 percent compared to 0.3 percent in April.

 

I recognize that the official inflation data (CPI, PPI, PCE) is not the inflation that normal people are feeling. Grocery prices may be coming down but are still 200 percent higher than they were.  Prices at the pump are still high as is the cost of eating out. Most restaurant prices are so high that one could feed a family for several days on a single tab for two. Rents, insurance, and a bunch of other items are still in the stratosphere.

 

This has led to a slight decline in the rate of consumer spending, especially among lower-income consumers. However, the consumer spending averages have been held up by overspending by those in the upper income brackets. Fortunately, the continued health in the jobs market allows many to still make ends meet (for now).

 

Given the above scenario, the fact that the Fed is still waiting for more definitive data to cut interest rates should not impact the direction of the markets. Many argue that the Fed does not need to cut at all this year given the strength of the economy. They have a point.

 

The deficit is climbing exponentially and interest payments on our debt now equal what we spend on defense. And yet, billions of dollars of monthly Treasury auctions that make up the government's quarterly refunding needs have hardly moved the needle on the benchmark, U.S. ten-year Treasury bond. The U.S. dollar also remains well-bid.

 

What's not to like given the above scenario? The bull case I have laid out should give me comfort that new highs in the market are justified. And maybe they are, but why isn't the market broadening out? Why are investors flocking to only the best, cash-rich, mega companies in the world if everything is so good?

 

Maybe I am looking in the wrong place for clues to the future. I have just finished several columns on populism and its future impact on the country and the economy. From all the responses I received, I have identified one clear message--people are scared. They are afraid of the coming elections, worried about our climbing debt burden, of geo-political tensions, and much more.

 

We are entering the season where election politics begin to matter to the stock market. It may be that political uncertainty may begin to trump economics.  Last night’s disappointing debate performance by President Biden, for example, has many calling for him to bow out. In any case, I suspect that for market participants July will be less about dull markets and long vacations, and more about who said what and when.

 

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.