The Federal Open Market Committee cut interest rates again on Wednesday and reduced the number of interest rate cuts next year. That decision dismayed investors and triggered a run for the exits in the stock market. Will this government Grinch decision ruin the chances of a Santa Claus rally?

 

Wall Street labeled the central bank move a "hawkish cut." Prior to the meeting, most investors were expecting that the Fed would pause after this month's rate cut of 25 basis points. Given that events unfolded as expected, why did the Dow lose over 1,000 points in two hours?

 

Inflation is the short answer. You may recall in last week's column I commented that stock traders were choosing to ignore the back up in the  rate of inflation over the last three months. It is something that has concerned me for months as readers know. I remarked that others were so focused on the wonderful promise of a second Trump administration that inflation just didn't seem to be a problem.

 

That changed this week. The Fed finally admitted that their inflation forecasts for this year were not coming through. Several members of the committee began to back away from easing further.

 

In the Q&A session after the Fed meeting, Chairman Jerome Powell made it clear that their inflation target of 2 percent may not happen for another year or two. Until it does, he warned we should expect further declines in interest rates to occur at a slower pace. As a result, the FOMC has halved the number of rate cuts they expected to approve in 2025 from four to two and maybe not even that many.

 

His decidedly negative remarks immediately took the wind out of the market's sails. The Dow was not alone in its fall. Both the S&P 500 and NASDAQ declined  2-3 percent as well. Thursday saw what I would call an anemic dead cat bounce and on Friday the markets rebounded.

 

Friday was another one of those triple witching days in the options markets which occur four times a year. Given the sheer dollar value of these occurrences, markets can be unusually volatile. A total of $6 trillion in options of all kinds expire Friday. In addition, the S&P 500 Index and other indexes will be rebalanced as well. This rebalancing can cause significant shifts in trading volumes and volatility as well.

 

 All of this is occurring in a week when the Fed triggers an overdue pullback in the averages. One of the clearest signals that something was amiss was breathe. Breathe is the number of stocks going up versus the number going down. Negative breathe had been increasing for the last 14 sessions as just a handful of stocks were keeping the markets positive. It is usually a sign that a pullback is coming and sure enough we are in one now.

 

My mistake was failing to take action and instead counting on the seasonal factors to win out over breathe. Does that mean the Santa rally will be skipping the U.S. market this year? Not necessarily. Although I now believe we could fall further, it does not have to happen next week. We could bounce next week into the New Year before heading lower again.

 

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.

 

Jan. 20 is just around the corner. It is Day One in the tariff wars that our next president is intent on launching. The corporate world is trying to dissuade him from that course of action, with no success. 

 

It is an economic fact that the cost of tariffs is passed on to the consumer. If tariffs are high enough, some imported products simply cease to be available, which can cause supply chain interruptions. At some point, buyers balk at paying higher prices. When that happens, tariff costs hit business profit margins directly. Everyone loses.

 

In the last column, I explained why Donald Trump is adamant that tariffs are the only way to turn around the trade imbalances that have plagued our country as far back as the aftermath of World War II. In his first term, Trump's tariff policies were partially successful but not without a cost. Some countries hit back with their tariffs. Our farmers were hurt so badly that Trump was forced to authorize multibillion dollars in direct aid to keep many farmers afloat. Yet, the MAGA math indicates that whatever harm is done will be worth it in the long run.

 

However, an important element in this equation is being ignored by Trump and many economists. We will use Germany as just one example. As the powerhouse of Europe, Germany has been enjoying large trade surpluses with the U.S. for many years. Back in the heyday of mercantilism (16th-18th centuries), a country would take these trade surpluses and convert them into piles of silver and gold that would sit in their monarch's coffers for years. That is not the case today. 

 

Germany, as well as China, Japan, and most other European nations have much higher savings and investment rates than we do in the U.S. Why should that matter? Because instead of hoarding their cash profits on trade (the modern-day equivalent of precious metals), they have been taking their current account trade surpluses and recycling those capital flows back into the U.S. and other countries. Those flows find their way into building new plants and equipment in the U.S., creating jobs, investing in our technology, and purchasing our stocks and bonds. 

 

This flow of funds allows the American consumer to continue to save less and spend more. The risk is that by raising tariffs, we reverse this process. These offending nations would see their current account trade surplus go down as their exports to the U.S. slowed. That means they would have less capital to invest back in America.

 

I see other differences between the Trump approach and the mercantilists of old. Back in those days of colonial expansion, currencies did not represent the value they do today. Only gold and silver were considered stores of wealth. Today, nations can do more than just raise tariffs in response to a burgeoning tariff war. 

 

Since Trump has already telegraphed his intent to levy tariffs on America's trading partners, exporters have already acted by using their currency to lessen the impact on their trade balance. How — by reducing the value of their currencies against the dollar.

 

If Mexico, for example, is hit with a 10 percent tariff on exports and allows its currency to depreciate versus the dollar by 10 percent, the price to importers remains the same. No harm is done, and it is business as usual. This is why the U.S. dollar has been strengthening against just about every currency all year.

 

Another area where Trump departs from the mercantilist model is government control. He believes in the heavy hand of government as far as trade is concerned, but he is in the opposite camp where rules, regulations, and taxes by the same government are concerned. Unlike the nations of old, he does not believe that wealth is finite, nor should it be measured by the amount of gold, silver, or even crypto that a nation holds.

 

That puts him at odds with the core belief that supported mercantilism. As for acquiring colonies, his policy appears to be both nationalist and anti-imperialistic. Trump has shown himself to be against foreign entanglements and has no interest in acquiring territory (unlike China, Iran, Russia, and other quasi-mercantilist societies). He does not see it as America's role to right every wrong or spend money or American lives on people and causes which he believes has nothing to do with our interests.

 

That does not mean he plans to withdraw America from the global scene as many might fear. The U.S. is just too big an entity to accomplish that. Instead, because of his mercantilist leanings, if other nations want us to intervene then they must be prepared to pay for that privilege. He has made that point with Taiwan, and with the countries that comprise NATO, and will do so at every opportunity, in my opinion. 

 

 Many voters see our new president as a strong leader. They applaud his desire to wield more power and authority than others have done in his office. Given the present populist era where distrust of government and our economic system are at historical highs, this is not surprising.

 

Although he has a soft spot for pomp and circumstance and may envy autocratic leaders, he seems less interested in power for power's sake. Time and again, the mercantilist in him, appears to support one conclusion: if there is an advantage to be had (whether in finance, economics, or policy) by simply cutting a deal, that is what he will do.  

 

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.

New highs continue as equities ignore the inflation data and focus instead on the prospects of the next administration. Wall Street consensus is that the upside in stocks should continue at least until the new year.

 

As a contrarian investor, I often disagree with the consensus view but not this time. Last week I explained how global money flows usually support the markets and create the Santa Claus rally. This period of good cheer and higher prices should extend into mid-January.

 

This week, the most recent data on inflation confirmed my fears that we have not seen a bottom in inflation. Back in September, I predicted that inflation would begin to rise again, and it has. The Consumer Price Index (CPI) gained 0.3 percent for November and 2.7 percent compared to last year. The Producer Price Index (PPI) rose 0.4 percent, up from gains in both October and September.

 

Wall Street economists pointed out that if you exclude food and energy, the PPI was almost in line with expectations, but it was still an increase. Sometimes I think the Fed, financial analysts, and economists live in another world.

 

Why they exclude two of the most vital elements for Americans — food and energy — in calculating the inflation rate is beyond me. One PPI category finished consumer food, which is processed food ready to be sold to consumers, was up 31 percent! Of course, they will say those categories fluctuate too much to be proper indicators.

 

Tell that to those who need to fill up at the pump to get to work. Tell that to Joe Biden and Kamala Harris who lost the election because the progress on inflation they touted was nowhere to be seen in the grocery aisles. If tariffs under the new administration raise food prices further, there will be hell to pay.

 

In the meantime, I expect we will see even higher inflation in the data for December and into January. You would think that with this backup in the inflation numbers, the Federal Reserve Bank might at least pause cutting interest rates at their meeting next week on Dec. 18. However, that doesn't seem likely. The bond market is betting (with a 95 percent probability) that the Fed will cut interest rates again by one-quarter of a point.

 

It was why stocks continued to climb this week despite the inflation numbers. The NASDAQ composite had its first-ever close above 20,000. The S&P 500 Index is only a few points away from 6,100, which would be another all-time high for that index. It seems clear to me that investors are counting on both the Fed and Donald Trump to support the stock markets in the coming months.

 

At this point, most traders believe the Fed while cutting rates in December will then stay on hold until at least March. Traders are also counting on the "Trump Put" to support stocks. Since Donald Trump is known to use the stock market as the leading indicator of his progress, he will do whatever it takes to keep the market supported and on an upward trajectory. That remains to be seen. It indicates to me how giddy the markets have become since the election.

 

One variable I follow is the NFIB Small Business Survey. Small businesses represent 99.9 percent of all U.S. businesses. These small firms employ over 46 percent of all private sector workers and contribute 43 percent to Gross Domestic Product. The index gives me a good read on the economy overall.

 

Last month, the NFIB index jumped 8 points to 101.7. That is the highest level it has reached in almost five years. Prior to last month, the index had remained below its 50-year average of 98 for 34 months. At the same time, the uncertainty index which hit an -all-time high of 110 in October, fell by 12 points after the election. It gets better.

 

The net percentage of businesses expecting higher sales volumes rose by 18 points, its highest level since February 2020. Critics might argue that it is just one data point and not a trend. That is true, but the same thing happened after Trump was elected for his first term. Small business sentiment spiked higher after the 2016 election and continued to increase for two more years.

 

One troubling indication of the market's health is breadth, which is the number of stocks going up versus those going down. In December thus far breadth has been falling and getting worse. In November the rally in stocks had broadened out as financials, consumer discretionary, and industrials as well as small caps joined the bull market. That was a good sign.

 

Since then, seven sectors have fallen, and the equal-weighted S&P 500 has fallen sharply this month.

 

As readers know, the performance of the benchmark S&P 500 Index is largely dependent on the heavy weighting of a handful of large-cap mega stocks (FANG & AI). If this trend continues, it means that as we move closer to Christmas the market's gains become more precarious as fewer and fewer stocks participate.

 

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.

Mercantilism is often associated with Donald Trump's economic policies. Can reaching back into the past truly make America great again? That is up for debate.

 

For those few of us familiar with the term, mercantilism was the dominant economic system in Europe from the 16th to the 18th centuries. It was a world where it was believed that global wealth was fixed and finite. To become powerful, a nation needed to acquire as much wealth as possible. Back then, a nation's wealth was measured by how much gold and silver it accumulated.

 

If this period evokes visions of tall ships, the Spanish Main, and epic exchanges of cannon fire between Spanish galleys and English Sea Hawks, you wouldn't be far wrong. All nations strove to maximize their wealth by exporting more goods than they imported by any means possible. Those that could plundered far-flung lesser more undeveloped nations and carried back sugar, timber, cotton, cocoa, gold, minerals, and more.

 

It was a period where many European countries raced and fought to establish colonies. The extraction of raw materials fed a rapidly growing manufacturing system at home. The end products were then sold back to the colonies in exchange for precious metals and more commodities.

 

This resulted in a favorable trade balance under strict governmental control where sea-faring nations established protectionist policies such as tariffs, navigation acts, and quotas that limited imports while promoting domestic industries. It was a beggar-thy-neighbor approach to economic development. Exploiting others led to power at home, vast piles of gold and silver, continuous conflict among rival nations, and ultimately revolutions among colonies.    

 

Now that we have established the concept, fast forward to today. Is Trump truly a mercantilist in the traditional sense? Let's look at the tariff issue that occupies center stage and worries many economists. Trump argues that for decades various countries have taken advantage of America's goodwill in many areas from defense spending to trade balances. He has singled out China, Mexico, Canada, Japan, Germany, and others as targets of his tariff initiatives.

 

There is no question that these countries have been running sizable bilateral current account surpluses with the U.S. for decades. Many of his critics forget that Trump is certainly not the first president to have complained about this situation. In the 1960s, 1970s, and 1980s, Richard Nixon, Ronald Reagan, and John F. Kennedy were just a few of our leaders who attempted but failed to balance the terms of trade between us and other nations.

 

Given this background, one could argue that enough is enough and Trump's approach is long overdue. The question is whether it works in a mercantilist world where our trading partners can levy tariffs in response. Critics argue that a tit-for-tat response will only send global trade downward and the U.S. economy along with it.

 

That could happen but it is far more likely that our partners will settle for buying more of our imports and selling us less of their exports in exchange for a tariff break. It happened in round one of the Trump administration and could happen again. Next week, I look at how Trump's brand of mercantilism is far different than what came before him.

 

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.

Each year from roughly the end of the second week of December through the second week in January the stock market rises most of the time. This year, expect a similar occurrence.

 

There are plenty of explanations for why this occurs. Many believe it is simply the good cheer the holidays bring to the markets. Others point to the additional spending triggered by holiday shopping, while some argue it is because institutional investors buy stocks before going on their Christmas break. 

 

For me, it comes down to the flow of funds in and out of financial markets. Every year, for many reasons the flow of funds into the financial markets increases at the end and the beginning of each year, especially when the stock market delivers outsized gains like they have this year.

 

Think about it. Money managers saw gains of 20 percent-25 percent in 2024 in equity markets worldwide worth roughly $100 trillion or more. That means that there is now another $25 trillion-plus in gains that are available for investment. Where does that money go?

 

Unless you and everyone else cash in all your chips and put them under your pillow, you would expect your investment adviser to reinvest that money into the stock market. If, as many believe, the future looks rosy, at least in the U.S., managers would like to put that money to work sooner rather than later.

 

But that is just the beginning. In December and January, the lion's share of bonuses are paid to employees worldwide. Most of that money will go straight into bank accounts, savings accounts, investment accounts, etc. That flow of funds will also find its way into financial markets.

 

Then, there are those contributions to all those tax-deferred accounts: (401)Ks, 403(B)s, IRAs — held by 50 percent of the American workforce. Much of these money flows hit the financial markets in the next month or so.

 

Many other pools of capital that are a bit more exotic also expire at the end of the year and begin again in January. These instruments like structured products, equity derivatives, yearly, long-dated options expirations, credit spreads and more have one thing in common — leverage. Every year, you take your winnings from last year, borrow money against them, and buy even more of whatever instrument you decide will make the most profits. This creates even greater flows of capital.

 

In a matter of weeks, this river of electronic capital flows into the financial system and washes up on the shores of various markets. A large portion will end up in the stock market. These flows should continue until the middle of January before ebbing once again.

 

This does not happen every year, but since 1950 December has been an up year 74 percent of the time as measured by the S&P 500 Index. That number climbs to 83 percent (in election years 100 percent) when the S&P 500 Index is up more than 10 percent in the first half. Many simply chalk the gains up to "seasonality" without recognizing the powerful underlying currents that create this holiday phenomenon.

 

In any case, last week the S&P 500 tacked on another 50 points reaching the 6,100 level. Bitcoin finally passed the $100,000 mark before backsliding. And November's non-farm payrolls bounced back from a flood and strike-depressed performance in October.

 

This coming week all eyes will be on the last Consumer Price Index data before the Fed's Dec.18 meeting. I expect a hotter number which may (or may not) convince the Fed to pause before cutting interest rates again. I believe it won't matter in the broader context of money flows to a market that seems destined to continue to climb.

 

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.