The seasonal influence of what is normally a weaker August through September continued this week. All the averages have declined since the end of July and will continue to do so in the weeks ahead.

 

My expected pullback in the equity averages continued this week. So far in August, the S&P 500 Index is down 5 percent, the NASDAQ has fallen 7 percent-plus, while the Dow Jones industrials outperformed with a 2.4 percent decline. There are several reasons investors could point to in explaining the pullback, but for me the reasoning is simple.

 

All the markets were extended beyond reason after a great first half of the year. The prices of the Magnificent Seven group of stocks were the worst offenders. To me, they were begging for a stiff bout of profit-taking. Add that to a seasonally weak time of the year in the markets and it was not hard to predict a sell-off.

 

Fundamentally, there is also a reason for concern. For more than two months or so, I have been warning readers that the U.S. Treasury was going to auction more than a trillion dollars of bills and bonds. That would, in my opinion, pressure yields on Treasury bonds higher and that is exactly what has occurred.

 

The benchmark, U.S. 10-year Treasury bond was above 4.31 percent on Thursday, which was its highest yield since 2008.  This threatens steeper borrowing costs. There is a heightened concern that if this trend continues it could whack the equity, debt, and housing markets. A lot of bond vigilantes were expecting yields to drop, not rise. Some of these traders have been forced to unwind their long positions on bonds, which is causing yields to rise even further.

 

China has also been a big concern this week. The world's second-largest economy has been rolling over for months. The legacy of a COVID zero-tolerance policy, harsh regulatory restrictions on the nation's largest companies, overbuilding in the Chinese property sector, and a plunging currency are some of the reasons for this situation. The fault largely lies with the policies of China's leadership, specifically President-for-life, Xi Jinping.

 

And while some of us may applaud China's economic comeuppance, the facts are that when China catches a cold, most of the rest of the world develops a bad flu, as do their stock markets. China's top three trading partners are the group of ASEAN nations, followed by Europe. The U.S. is in the number three spot. Slowing growth in China means slowing profits for a wide spectrum of countries and companies throughout the world and the U.S. is not immune to this development.

 

The Jackson Hole Economic Symposium will be held next week (Aug. 24-26). Fed Chairman Jerome Powell will be sharing his economic perception of the U.S. economy as well as the world. There is always the possibility that he could throw a curve ball that investors are not expecting. The bond market will be watching for any comments on interest rates and rising yields.

 

As I said last week, I am waiting for a short-term bounce-up in the markets, since we are getting close to my target of a 5-6 percent decline in the S&P 500. Right now, I am expecting yet another possible drop into mid-September if yields continue to climb higher.

 

If I am right and we do slide, how far could the decline take us? The 4,100-4,000 level on the S&P 500 Index is possible. If things really get unstrung a fall to 3,800 might happen but I am not really expecting that.    

 

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.

Over the past decade, a large swath of the American population has migrated to the Sunbelt in search of a better climate, fewer taxes, and lower costs of living. Unfortunately, this area is among the most vulnerable to extreme changes in climate.

 

In total, nearly 5 million Americans abandoned states in the Northeast and Midwest and migrated to the Sunbelt states in the last 10 years. As such, it has become the fastest-growing region in the country. At the same time, as climate change accelerates, this region has been experiencing higher temperatures, more frequent hurricanes, and in some metro areas a scarcity of water.

 

Of course, this is not the only U.S. region impacted by climate change. The litany of climate disasters impacting this country this summer would just be too long to list.  From raging fires to floods, drought, air pollution, and of course heat. June and July 2023 were the hottest months in recorded history. And where are the highest temperatures occurring -- in the states that attracted the lion's share of new residents in 2022.

 

Florida, Texas and the Carolinas, followed by other states in the South and West. Among the 10 fastest-growing counties in the U.S., two are considered at very high risk for natural hazards and eight are considered at relatively high risk, according to the Federal Emergency Management Agency (FEMA). All of these fastest-growing counties are in the West and South, including six counties in Texas, three in Florida, and one in Arizona.

 

Despite the well-known climate risks, Americans continue to disregard the present and, more importantly, the future dangers to their environment in pursuit of "milder" temperatures, bigger homes, and more reasonable prices now. This has long been the trend among retirees here in the Northeast with coastal Florida and the Carolinas the most popular destinations for snowbirds. In California, Texas seems to be a top choice.

 

It is not completely clear what motivates people to ignore the risks of hurricanes, fire, and the like in their migration decisions. A research article by Frontiers in Human Dynamics, "Flocking to Fire: How Climate and natural hazards shape human migration across the U.S," penned by researchers from the University of Vermont and the U.S. Department of Agriculture indicates that the dangers of climate change (such as wildfires) do not outweigh the perceived benefits of life in a fire-prone area.

 

Moving to a new location is a risky bet at the best of times whether for one who is hoping to find better employment opportunities or simply retiring. Normally, buying a home, for example, is the single largest investment a family will make. And yet, climate change does not even make the list of the top 10 things to consider when relocating.

 

In a recent article, I wrote about the increasing difficulty in obtaining home insurance in many of these areas. Insurance companies are simply refusing to insure homeowners in affected areas. Few migrating families are even aware of this issue until it is too late to do anything about it.

 

Retirees have even more at stake when it comes to climate change. So many of the elderly list a warmer climate as their first or second reason for moving to the Sunbelt. Be careful what you wish for. The older one gets, the more air and water pollution becomes serious health risks and this summer's record-breaking heat is already threatening the health of some of our nation's most vulnerable people.

 

Scientists warn that the prospects for even hotter summers in the future will make certain areas uninhabitable, especially for the elderly. Aside from the present recognized dangers of forest fires, drought, hurricanes, tornados, and flooding, the future danger of these events is not being considered. The violence and frequency of these weather events will increase and encompass a wider and wider area. Settling inland from a coast or a waterway is the knee-jerk answer for some seeking safety. The problem with that approach is how far inland is "safe." 

 

My own opinion on why people are deliberately putting themselves in harm's way is twofold. Although there is a wealth of information on climate change and its impact on the environment in the future, few have taken the time to read it, and even fewer care to. Unless the water is lapping at our bedroom doors or sparks are falling on the roof, Americans would rather watch the latest episode of their favorite show or tune in to the ball game.

 

My second reason has to do with America's national trait — eternal optimism. It has stood us in good stead for centuries, but in this case, it is our worst enemy. Around 80 percent of people, across all age groups and genders, suffer from what social psychologists call optimism bias.

 

Tali Sharot, a neuroscientist, and professor of cognitive neuroscience at University College in London, brought the theory of optimism bias into popular consciousness. She argued that many of the seemingly unbiased decisions we make every day are influenced by the fact that we think positively about the future. It is one of America's strengths, but it also gives way to that "it won't happen to me" attitude. It leads us all into believing that whatever the disaster or danger that may threaten those around us "it won't happen to me."

 

Unfortunately, climate change overall, in this country is still in the "show me" stage and that show is just beginning. Recall that fewer than half a dozen years ago, many of our politicians in federal, state, and local governments denied even the existence of climate change and there are still a few holdouts today. For people to begin to include the danger of climate change in their future migration decisions, a lot must change. It will. Unfortunately, those changes will be up close and personal for too many of us.

 

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.

August into September are usually difficult months in the stock market. So far, this August is no exception but how you handle it will make all the difference to your investment plan.

 

If you have been reading my weekend columns, you know that I have been warning investors to prepare for a 5-6 percent pullback in the markets. For many investors who have enjoyed more than six months of gains in their portfolios, even a minor decline in the markets will be painful.

 

On average, pullbacks like the one I am expecting last a month or more and then require another month to regain the previous price level. Stocks can repeat this behavior several times a year before regaining losses and moving higher. Every two or three years the markets experience a 10-20 percent correction. Since the year 2000, downturns of 10 percent or more occurred in more than half of those years. Only 20 percent of these corrections have resulted in a bear market since 1974. 

 

The fact is that most people are hard-wired to react emotionally to the ups and downs in the stock market. Scientists believe that it all stems back to prehistoric times when a struggle for survival evoked a fight-or-flight impulse that exists to this day.

 

Those same experts argue that the pain of losing is psychologically about twice as powerful as the pleasure of gaining. This loss aversion principle affects us all. The difference between successful investors and those who are not depends on how we handle these emotional responses.

 

Many times during my career as an investment adviser I found myself talking clients off the edge, especially in bear markets or sharp pullbacks. The longer the downturn the more time I spent just keeping clients from caving into their impulse to sell in many cases simply to stop the pain of losses. These same clients would often set themselves up for a fall by getting too aggressive on the way up or making other rooky mistakes.

 

I asked my former colleague and financial adviser at Berkshire Money Management, Scott Little, for his view on the subject. Scott recently completed a certificate in behavioral finance (BFA) to further assist his clients in times like these. Here are his thoughts on the subject:

 

"When markets gain like they have in 2023 with so many consecutive months of returns since the October 2022 low, it becomes a breeding ground for several dangerous biases. The first is the optimism bias. This is the tendency to overestimate the likelihood of positive outcomes and downplay the possibility of negative ones. The market is going up, I feel great, and everything will continue to be great.

 

"The second is the recency bias which is the tendency to overemphasize the importance of recent experiences or the latest information we possess when estimating future events. Recency bias often misleads us to believe that recent events can give us an indication of how the future will unfold. Because the market was positive last month, I should add to my stock position so I make more money next month.

 

The last is the confirmation bias. This is the tendency to search for, interpret, favor, and recall information in a way that confirms or supports one's prior beliefs or values. Because I just invested a bunch of money in the market, I begin reading all the analysts and reports that support what I did while I ignore those with a contrarian position. They don't know as much as the other people.

 

"To avoid falling prey to these biases try to keep emotions in check. Avoid chasing stocks when arrows are green and stick to your long-term plan. Be open to differing opinions about the market and weigh each equally. Finally, understand that human's ability to predict the future has never been greater than zero. Stay diversified within a portfolio that suits your risk tolerance and will help you achieve your long-term goals."

 

Amen to that.

 

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 NASDAQ 100 index has carried the market for the first half of the year. Over the last few weeks, however, other areas of the markets have been coming back to life. Nimble traders might look at some of those sectors in the weeks ahead.

 

August into September is a fairly volatile period for markets historically. We could see markets suffer bouts of profit-taking, which could give investors a chance to buy stocks in certain sectors that have lagged the markets but have the potential to outperform in the months to come.

 

One area that is risky, but may promise higher rewards, could be the China trade. Most readers are aware of the many negative developments that have plagued the Chinese market over the last two years. Political issues between the U.S. and China including trade tariffs, microchip sanctions, national security blacklisting of certain companies, and limitations on U.S. investments in certain targeted areas have soured investor attitudes toward the Chinese stock market.

 

On the Chinese side, regulatory crackdowns on mega-cap companies by their central government devastated their stock market. The stock prices of many companies that had represented the best that China had to offer were decimated. All of this is well known.

 

At the same time, thanks to the Peoples' Republic of China's zero COVID-19 tolerance policies, the mainland economy was severely damaged and has still not recovered.

 

Chinese retail investors, who represent 60 percent of trading volume on China's stock market, are cautious if not downright bearish on their market. Domestic and foreign Investors have been waiting for months watching for signs that the government will begin to announce plans to jump-start this faltering economy.

 

Only recently has there been any indication that economic policy is beginning to change. And while officials promise to change, they are taking their sweet time in providing any concrete stimulus measures that could do the job. Nonetheless, anticipation that change is just around the corner has ignited what I call a catch-up trade in China and its beneficiaries.

 

Globally, commodities, material stocks, mines and metals, oil stocks, and agricultural equities are all beginning to show some life. Why? On the margin, a growing Chinese economy will create increased demand for all these raw materials. These products have traditionally fueled China's factories and their exports. In addition, a recovering Chinese economy becomes the locomotive for dozens of emerging and frontier markets throughout the world.  

 

All the above areas have been left in the dust this year as everyone's focus was squarely on the Magnificent Seven and lately AI stocks. As a contrarian, I am attracted to unloved areas like this. That is not to say that the technology sectors of the market will not participate. They will, just not at the same rate as those in a catch-up trade, in my opinion.

 

There is also a second player in the metals markets with billions in cash to spend. Saudi Arabia has decided to become a hub for the processing and trade of minerals which are vital for the energy transition. In an ongoing effort to diversify the country's oil-dependent economy, they plan to develop more than $1 trillion in copper, phosphates, zinc, uranium, and gold.

 

Progress in this effort thus far has been slow so to jump-start their processing facilities, a new entity controlled by its huge sovereign wealth fund and its national mining company has begun to buy up mineral resources around the world and ship them home for processing.

 

I believe the prospects are attractive in the second half of the year for further gains in China, emerging markets, mines, metals, materials, energy, and other commodities.

 

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.

Corporate earnings results for Google and Meta helped push the averages higher this week, while Microsoft results were somewhat disappointing. The net result was higher stock prices for many sectors of the markets.

 

The most interesting change that I perceived in the overall markets this week was the FOMC's lack of impact on financial markets. Over the past year, these monthly two-day Fed events were market-moving. Investors parsed every word of every sentence in the meeting notes and spent hours and even days interpreting every answer that Chair Jay Powell uttered in the Q&A session.

 

This week, the Fed raised Fed fund rates yet again to a 22-year high at 5.25 percent. They also insisted that there could be more hikes to come if the data warranted. Nothing changed in their hawkish policy stance and yet, the markets closed flat on the day.  It appears investors were far more interested in the earnings results of Meta which were announced after the close than on what the Fed had to say.

 

Granted, the markets expected and had already discounted a rate raise and a continuation of the Fed's policies. They also believe that even another rate raise or two is not going to have much of an impact on the overall health of the economy and corporate earnings.

 

Lending strength to this argument was the latest data on the U.S. economy which grew at a faster-than-expected pace in the second quarter of 2023. Gross Domestic Product grew at an annualized pace of 2.4 percent, which was faster than the consensus forecasts of 1.8 percent.

 

Readers may recall that the first quarter was revised upward to a 2 percent growth rate. Both consumer spending and nonresidential fixed investment were the engines of growth behind the results. To put this in perspective, these results were achieved despite 11 hikes in interest rates over the last year. At the same time, this week's unemployment claims continued to fall, indicating that employment is still robust. In addition, the Fed's favorite inflation gauge, the Personal Consumption Expenditures Index (PCE) dropped last month to its lowest level since March 2021.

 

What does that mean for the financial markets? It means that the era of a Fed-driven stock market may be coming to an end.

 

In the future, barring any drastic change in the world economies such as a rebound in inflation, a severe global recession, or another geopolitical event, investors may begin to emphasize fundamentals over Fed policy. Things like economic prospects, future revenues, income, profits, and the like could take a front seat in determining the proper level of equities in general and individual stocks in particular.

 

One change overseas caught my attention. The Bank of Japan's (BOJ) monetary policy has been dovish for years, but that may be changing. The central bank loosened its yield curve control that has anchored the yield on their ten-year government bond (JGB) at 0 percent for some time. The BOJ is planning to start purchasing 10-year JGBs at 1 percent through fixed-rate operations. Although minor, the change may indicate that Japan may be reversing its interest rate policies just as other countries are cutting or slowing their rate raises. If so, this could have a far-reaching impact on U.S. interest rates (higher) and the dollar(lower). 

 

The S&P 500 Index topped 4,600 this week, so we are getting closer to my 4,630 target. At this point, it would not surprise me to see a pullback in August of the 5-6 percent variety sometime in the next few weeks.

 

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.