The July minutes of the last FOMC meeting were released Wednesday. In the announcement, Fed officials expressed their willingness to start reducing asset purchases before the end of the year. In response, traders dumped stocks. Was that the right move?

 

Stock jockeys seem to believe that by reducing monetary stimulus by even a smidgeon, all will be lost in the stock market. I find that hard to believe. The Fed is purchasing $120 billion a month in bonds. If they reduce that amount by $10-$20 billion, that still leaves a lot of central bank firepower.

 

A much better explanation for the losses this week could be that it is a slow week, and a seasonally treacherous time of the year in the equity markets. Traders can move stocks up and down easily on little volume, racking up big losses (and gains) from unsuspecting investors.

 

Add into that mix, a host of unknowns ranging from the latest surge in the Delta variant of the coronavirus, events in Afghanistan and China, plus the upcoming battle over the debt ceiling, and you have a genuine witches' brew of misinformation, fear, and worry. Oh, and did I happen to mention that all this is occurring at the very top of the markets?

 

Let's begin with the Fed's statements. Nothing, absolutely nothing, in the minutes was new information. I have been writing about this upcoming taper for weeks. Everyone knows it is coming by now. It is only a question of how much the Fed plans to taper and when.

 

The fall of Afghanistan and the rise of the Taliban may hurt American pride, and possibly damage our credibility among allies and our enemies, but that's about it. Talk of increased terrorist activity as a result is a bit much, and no reason to sell stocks, unless you own an Afghanistan country fund (of which there are none). But again, it was a slow week in the markets.  

 

The ongoing decline in American-held Chinese stocks is a horse of a different color, however. A month ago, I warned readers that Chinese stocks traded in the U.S. and abroad would face a massive re-rating as a result of the actions of the Chinese government. Many Chinese stocks have declined by 50 percent or more since my column.

 

I have watched as investors bought every dip (just like they have done in the U.S.), thinking they were buying quality stocks at a bargain, only to see prices fall even further. Investors need to understand that the Chinese government is a communist and not a capitalist system. They could care less how much you lose on their way to achieving their political and socialistic goals over the next five years and beyond. Chinese equities may have a dead cat bounce soon, but the risk is still real, and will continue to pressure these stocks.

 

Another threat I have been taking seriously is the ongoing COVID Delta variant. My concern, aside from the health risk to everyone, is the Delta variant's potential impact on the global economy. We are starting to see additional supply line bottlenecks forming throughout the world, causing a scarcity of parts and products.  Consumer sentiment is also retreating. Retail sales, however, still seem to be okay but have cooled somewhat in the last week, according to Bank of America's debt and credit card spending data.

 

This week, medical experts revealed that the efficacy of the vaccinations we have already received may be becoming less effective in preventing coronavirus infection as time goes by. U.S. health officials on Wednesday announced plans to dispense Covid-19 booster shots to some Americans starting in September 2021 (for those with certain underlying health conditions). Bottom line: we are still at the mercy of this pandemic, and until a large percentage of these anti-science citizens in mostly southern states get with the vaccination program, we will never get out from under. 

 

The Afghanistan mess does muddy the waters somewhat, at least as far as the timing of the debt ceiling debate. Congress still needs to debate and pass the $3.5 trillion budget proposal through the reconciliation process as well.

 

I have been surprised by how well the markets have been handling all of these challenges. Markets snapped back on Friday somewhat, however, we will need to wait until next week's outcome of the Fed's Jackson Hole Symposium before signaling an all-clear in the short-term.  

 

The small-cap, Russell 2000 Index and the Dow Transportation Index have already declined a good 9 percent over the last few weeks. I suspect that somewhere down the road, the main averages will follow them down but thus far, unlike the Chinese stock market, it has paid to buy every dip. 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.

The major indices have been working higher over the last few weeks, while rotation among sectors continues unabated. The higher markets climb, the more investors begin to question how long the bull market can sustain its upward trajectory. 

 

"Thin" would be the way I would describe the movement upward in the S&P 500 Index. The same term could be used for the slight downward drift in the NASDAQ and technology stocks in general this week. It is August, after all, and volumes dry up as many on Wall Street take vacations.

 

Technically, we are trading in the middle of a monthly range in many sectors. A cursory view of some of the sectors reveals that semiconductors and FANG stocks  are weakening, transportation, materials, and industrials are gaining, and retail and small caps  are basically flat. Large cap stocks, in general, are outperforming all others.

 

Commodities like oil and precious metals have been taken out to the woodshed over the last week. The main trigger for this downdraft has been the strengthening U.S. dollar as well as rising yields in the bond market.

 

Remember, the greenback is a safe haven when times are uncertain. The explosion in the number of Coronavirus Delta variant cases worldwide has foreign investors flocking to the dollar. A strong dollar hurts commodities, since they are priced in U.S. dollars and therefore makes the price of commodities more expensive.

 

Friday's (Aug. 13, 2021) U.S. consumer sentiment data didn't help the mood. Sentiment plunged to the lowest level in almost a decade as Americans grew more concerned about the surge in Coronavirus and its potential impact on the economy.     

 

Good news on the infrastructure front helped counter some of those concerns. The materials and industrial sector got a lift, although the passage of the $1 trillion plan was already baked in to stock prices for the most part. Next up, we can look for the debate over the $3.5 trillion, anti-poverty, climate plan, which is expected to be a Democrat-only initiative. That initiative includes tax increases for the wealthy and for corporations. It will need to go through a special process called reconciliation as part of a budget resolution.

 

Republicans have already dissed the plan, protesting that it will add to the inflation rate (doubtful), and increase costs to the American family (specifically, those who make more than $450,000 annually). But there is no guarantee that the progressive and moderate/conservative wings of the Democratic Party will come to an agreement on this initiative.

 

Touted as the largest expansion of the nation's safety net since the "Great Society" of the 1960s, the proposal will require compromise on both sides of the Democratic Party. Some question whether it can be done. I suspect that President Biden is up to the task.  He is the first President in decades to forge a bi-partisan infrastructure program with a deeply divided Congress.

 

Over in the bond market, traders have been pushing yields higher in advance of the Jackson Hole Economic Symposium scheduled for Aug. 26-28, 2021.  Every year, investors eagerly await the speech of the Federal Reserve Bank Chairman hoping to pick up clues as to the Fed's next policy move. They should know by now that this is an international symposium of central bank leaders. It is not a Federal Open Market Committee meeting. The FOMC meeting is the appropriate place to announce and discuss U.S. policy. That will happen in September 2021 and will likely include some more information on when Fed bond buying may begin to taper.

 

Some question whether the taper will occur at all as long as we continue to face the onslaught of the Delta variant. Overseas, the pandemic is continuing to delay and cause new bottlenecks in the global supply chain. China, for example, just shut down the world's third largest shipping port due to a coronavirus quarantine.

 

As for the markets, I still believe we can eke out another 100 points or so in the S&P 500 Index, although we are heading into the worst seasonal period of the year for stocks. As has been the case all year, the market's fate is intricately dependent on the progress, or lack thereof, of the coronavirus.

 

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.

As stocks hit record high after record highs, it might be normal to expect that equities will just get too expensive and collapse under their own weight. Not necessarily.

 

One of the investor's favorite valuation metrics is called the forward price/earnings (P/E) ratio. The concept is quite simple: compute the market value of any stock and divide it by what the company is projected to earn over the next 12 months. If the ratio is higher than the long-term average, consider it expensive. It is considered cheap (generally) when the stock trades below that average.

 

The P/E ratio you can compute for an individual stock can also be applied to a market index, such as the benchmark S&P 500 Index. In late August 2020, the forward P/E of the S&P Index hit a high of 23.6. At the time, the index was trading at a bit more than 3,500. Intuitively, you might think that today that ratio would be much higher given the gains in the market. However, at the end of July, 2021 that forward P/E was 21.2 — lower than a year ago — despite a gain of 25 percent in the S&P 500 Index.

 

A 21.2 forward P/E is still expensive compared to the 10-year average of the ratio, which is 16.2 percent. Yet, according to one Charles Schwab equity strategist I admire, Liz Ann Sonders, an investor shouldn't place too much weight on long-term historical averages.

 

During the early months of the pandemic, no one knew what companies were going to earn, so analysts took the most conservative approach, and cut earnings estimates drastically. That caused the forward P/E ratio to move higher. Since then, as more information was forthcoming, earnings estimates have risen even faster than stock prices.

 

Second quarter's earnings results are a great example of this. More than 90 percent of S&P 500 companies have beat estimates on both the bottom and top line. That is to be expected in a booming economy, and will lead to even lower P/E ratios. Low interest rates also provide an added boost to earnings because the cost of borrowed money is much lower.

 

Investors should also remember that a growing percentage of companies in the S&P 500 Index are technology companies that reflect today's market realities. As such, tech companies command higher valuations, since their prospects of future growth are much higher. It is just something to remember when you hear someone citing forward P/Es as a reason to sell the market.

 

All the worries that have plagued investors last week still exist. And as is its custom, stocks continue to climb this wall of worry as we enter the month of August. As I expected, the averages have been volatile on a daily basis with the NASDAQ clearly leading stocks higher.

 

I had coached readers to keep their eyes on the Semiconductor index as a "tell" on how bullish the markets remain. That index made a new all-time high this week, and appears poised to continue its gains. Technology shares have been the best performers lately. I believe they will continue to take the lead as long as the number of Delta variant coronavirus cases continue to climb.

 

It is somewhat similar to the playbook investors used last year when COVID-19 had all of us on lock-down. No one knows how bad the Delta variant will be, nor if the next mutation, Lambda, will be worse. The fear is that the pandemic will begin to hold back the economy and maybe even result in some lock-downs causing investors to shun industrials, commodities, materials and financials in favor of Investing in FANG stocks, stay-at-home plays, and the Kathy Wood universe of new era, growth names that I call "Wood Stocks."

 

The latest non-farm payroll report reported on Friday (Aug. 6) was an upside surprise, however, with the economy adding back 943,000 jobs, while reducing the unemployment rate to 5.4 percent. Those numbers breathed some new life into those underperforming sectors, helping the overall market to continue to forge ever higher.

 

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 first. The economy grew by 6.5 percent in the second quarter, which was one of the best quarters in recent memory. The bad news: it was a big miss.

 

Economists were expecting an 8.4 percent rise, but the markets took it in stride. One explanation is that investors are well aware that the macroeconomic data is, at best, somewhat unreliable and prone to large revisions. It is not the government's fault. The pandemic and subsequent reopening of the economy has made gathering economic data difficult.

 

Another reason investors gave the miss a pass is that consumer spending, the biggest component of U.S. economic activity, exceeded expectations. A stronger than expected number supports the case that the economy is still in good shape. It was shrinking inventories, rather than a falloff in demand, that dented growth. Supply chain restraints and shortages were a substantial part of the drawdown in inventories.

 

The weaker GDP number is also one of those "bad news is good news" events, since it supports the Fed's argument that there is no need to tighten right now. This month's FOMC meeting, and Fed Chairman Jerome Powell's press conference, drove the point home that there would be no change in policy.

 

For the time being, Powell said, the Fed will be more focused on gaining jobs than in controlling a temporary spike in the inflation rate. Bond traders are guessing that at some point in the fall we can expect the central bank to begin tampering their bond purchases. Of course, the wild card will continue to be the spread of the Delta variant of the coronavirus.

 

On the political front, kudos are in order for those on both sides of the aisle. Senators from both parties finally arrived at a compromise on infrastructure spending. The 67-to-32 Senate vote, which included 17 Republicans in favor, cleared the way for passing the first infrastructure bill in years. President Biden deserves credit for his ability to lead (as well as to compromise). But investors should know that there is still a long way to go before this deal becomes law.

 

My own disappointment centers around the fact that this agreement only includes $550 billion in new federal spending spread over many years. It is not nearly enough, in my opinion, to repair and rebuild a nation's worth of roads, bridges, railroads, transit, water, and other necessary physical infrastructure programs.

 

For example, just repairing (or rebuilding) one century-old tunnel that connects New Jersey with Manhattan would cost $11.6 billion or more. How many more such bridges and tunnels are there across the country? If we compare the amount other nations spend on infrastructure, (think China for example) this bill is woefully inadequate. It almost guarantees that our nation will continue to slip lower on the economic scale, among most nations.

 

Fortunately, the Democrats are working on a $3.5 trillion budget blueprint that will provide additional spending on climate, health care, and education.

 

As this quarter's earnings season winds down, it is no surprise that the vast majority of companies beat estimates on both the top and bottom lines. It was to be expected, given easy comparisons and the surge in economic activity. Those earnings are what have propelled the averages to new highs.

 

Large cap, growth stocks have had a great run recently and seem to me to be a bit over-extended. Some of the FANG stocks experienced a bout of profit-taking this week as well. We will also have passed the Aug. 1 deadline on raising the debt ceiling, which should create some short-term angst among traders. It wouldn't surprise me if we see a mild pullback (3-5 percent) in the weeks ahead, so be prepared.   

 

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 just one week, the major averages have had a 3 percent swing from lows to highs. These gyrations go hand in hand with the high level of indecision investors are feeling right now. Can you blame them?

 

Last week, and into the end of the day on Monday, the S&P 500 Index registered a 3 percent decline. In the next few days, all of those losses were recouped and then some. While investors breathed a sigh of relief, I don't think we are out of the woods just yet.

 

Most strategists blame the decline in stocks on the free fall in yields. The U.S Treasury Ten-Year Bond (the "Tens") fell to 1.13 percent at its lowest point on Monday. At the same time, the U.S. dollar spiked higher and broke through several technical resistance levels. Wall Street traders worried that something "big and bad" might be about to happen.

 

Equity investors decided to sell first and ask questions later. The fact that we are in the middle of summer vacations didn't help. On low volume days like we have now, traders can push the prices of stocks much higher (or lower) than normal. The one thing I can say for sure is that the actions in the financial markets over the last week were not normal.

 

Bond yields rarely move in such a wide range in such a short period of time. This week, we have seen yields on the "Tens" move from 1.13 percent to 1.30 percent, and back down to 1.25 percent. Those are massive moods for the bond market.

 

The price of oil dropped to $65.56 a barrel on Monday, which was more than a 7 percent decline in a single day, but now, just a few days later, that same barrel of oil fetches $71.75. Heck, the price of Bitcoin suddenly appears to be a model of stability compared to some of the moves in stocks, bonds and commodities this week.

 

Fed policy, interest rates, deflation, inflation, stagflation, and now the upcoming battle over the debt ceiling fills out the list of worries that have investors on edge.

 

Monday's stock market swoon may have also had something to do with the Coronavirus Delta variant. As I warned readers, the new cases of the Coronavirus Delta variant are surging and should be taken seriously. I'm guessing the fear of the Delta impact on economic growth is finally dawning on investors. But the event I fear most is a vaccine-resistant, coronavirus mutation, spawned from within the huge population of unvaccinated.

 

We have already witnessed a number of new virus strains that are assaulting the efficacy of our present vaccines. Take, for instance, the recent findings from a team of New York University researchers that the one-shot, Johnson & Johnson vaccine is far less effective at preventing coronavirus infections from the Delta variant and other mutated forms of the virus than from earlier strains. An Israeli study found that the Pfizer vaccine is less effective against the Delta variant than we thought.

 

What would happen if a future mutation proves to be resistant to any or all of our vaccines? I fear that as long as the majority of the world's population (including 40 percent of the U.S. population) remains unvaccinated, the probability of such an occurrence is increasing every day.

 

The actions of the market this week make me believe we will see more volatility in the weeks ahead. The main averages may not fall out of bed, altogether, but they could. It's been a long time (last October), since we have had even a 5 percent pullback in the broader market.

 

So far, we have avoided a general market decline. Instead, we have experienced a series of rolling corrections throughout various sectors. The transportation index, for example, was down as much as 12 percent since May. Some basic material and commodity stocks have also had similar big corrections.

 

My advice is to get ready for some more weeks like this last one. They may not all end up in favor of the bulls, either, because July into August is usually a weaker period for equities. You might want to consider a vacation in the weeks ahead, and let the markets work out some of their issues.

 

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.