The bull market has been a story of eight to 10 stocks for most of the year. The frenzied trade in AI stocks has fueled those gains in that elite group of mega-stocks. But investors need to expand their focus to other areas for the stock market to continue to climb.

 

Artificial Intelligence (AI) has become this year's buzz words. Even though it has been around for well over a decade, investors have suddenly recognized the potential of this technological advancement. The benefits to productivity and economic growth in the years ahead may be as important, if not more important, as the internet revolution.

 

As in the dot.com boom, any company that can wag the flag of AI in front of the bull's face has seen its stock price soar. Investors should be warned, however, that there are a lot of companies that are claiming to be in the forefront of AI when they are not. As such, many investors are sticking with the leaders, which they know are leaders in AI. Companies like Google, Meta, Amazon, Microsoft, Tesla, and Nvidia have seen their stocks explode higher as a result.

 

All this excitement has narrowed the number of stocks that are pushing the markets higher, leaving other sectors in the dust. This works until it doesn't. The dot.com boom and bust comes to mind when looking at the present situation.

 

Back in the early 2000s, that mania saw investors bid up dot.com stocks to crazy levels only to see the whole thing collapse, cutting the NASDAQ in half or more over two years. That index only recovered its dot.com peak this year. One way for investors to avoid this danger would be to see an expansion of the number of stocks that are participating in this rally.

 

In the past week or so, I am starting to see this begin to happen. Small-cap stocks, as represented by the Russel 2000 Index, have been languishing for months and months until recently. This week it has outperformed the S&P 500 Index and even NASDAQ. I have also noticed that financials, industrials, basic materials, mining and metals, and precious metals were also seeing some interest. That is encouraging.

 

Many investors, wary of adding even more money to the "Mega-Cap 8," seem to be searching for alternative equity investments, especially if the Fed engineers a soft landing in the economy. All the above sectors would benefit under that scenario, as would the energy patch. A continuation of this rally is dependent upon good news next week.

 

We have three important events coming up--the Consumer Price Index (CPI), the Producer Price Index (PPI), and the Federal Open Market Committee (FOMC). The consensus view is that the CPI and the PPI will both come in lower for May. The FOMC meeting is expected to result in a pause in interest rate hikes. Skipping one month of increases will also be read as a positive by the markets.

 

Higher inflation numbers might cause the Fed to change its mind and raise interest rates again, which, as you might guess, would be taken negatively by the market and precipitate a sell-off. I don't think that will occur. However, we have already reached my low-end target on the S&P 500 Index at 4,325 (intraday). I said we could hit 4,410 or so if the stars are aligned and the data cooperate. Nonetheless, I suspect we will see some pullback in the markets in the weeks ahead once we climb a little 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 debt ceiling crisis has come and gone but the financial markets did not get away scot-free. The bond market is facing an avalanche of new bond sales that could pressure interest rates higher.

 

The government's bank account, called the Treasury General Account, is practically empty in sovereign terms. Today, there is less than $50 billion in the account as of June 2, 2023.

 

The U.S. Treasury has been draining this account since January 2023, when the government debt ceiling controversy started to heat up. The government cut back on the number and amount of bond auctions, which were almost a weekly feature of sovereign debt financing in normal times.

 

The dearth of new supplies of government bonds added liquidity to the financial system. As the fear of a government default grew, yields on government bonds rose and liquidity continued to increase. Where did all that money end up — in the stock market?

 

It explains to some extent why investors flocked to the FANG stocks. Investors sought the largest, safest, most liquid equities they could find as bond equivalents. Stocks continued to climb as liquidity increased.

 

Could we be facing a reverse of this situation as the supply of Treasury bills increases in the months ahead? The answer depends on how much money the government will need to raise in the short term.

 

Experts expect the government will need to raise as much as $1 trillion-$1.4 trillion in Treasury bills over the next six months just to return the government's balances to normal. That would include continued funding of the U.S.'s day-to-day needs.

 

If that estimate proves to be accurate, it would be the largest issuance of Treasury bills in history (excluding the major financial crisis of 2008 and the pandemic in 2020). To put this in perspective, the money needed to be raised would be about five times the supply of bills in an average three-month stretch in the years before the pandemic.

 

On the negative side of the ledger, dumping that amount of bills onto the market, while the economy appears to be slowing, is risky enough. If one also includes the problems in the regional banking sector, then we may be flirting with financial danger. Siphoning a lot more money out of the banking system, which has already seen enormous outflows because of the regional banking crisis, would force these banks to raise more cash.  Their financing costs would rise and stress an already fragile system.

 

However, some positives could mitigate some of the risks. Currently, more than $2 trillion is sitting in money market assets yielding over 5 percent at the Federal Reserve Bank's overnight repo facility. This money is what I call "yield-hungry assets" that can move to wherever the return in yields is greatest. That money could easily support the government's treasury bill auctions, but the price of that would be higher interest rate yields.

 

What that may mean for you and me, is an opportunity to earn even more on your money market funds this summer. It could also mean an overall rise in yields on two-, three-, and four-year bonds, which could also offer bond investors opportunities. It could also cause some disruption in the stock market during the same period. Time will tell.

 

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.

Now that the debt ceiling fiasco is out of the way, markets are returning their focus to monetary policy. The burning question on investors' minds is whether the Fed will skip a rate hike in their upcoming June meeting.

 

The betting by traders on such a move is vacillating around the 50/50 mark, depending on which Fed Head is talking. In recent days, the market had expected the Fed would lift interest rates once again at its June 13-14 FOMC meeting. This week, however, two policymakers, Fed Governor Philip Jefferson, and Philadelphia Fed President Patrick Harker, expressed their opinions that a pause may be in order unless Friday's jobs report came in stronger than expected.

 

Their words carry even more authority since Harker is a voting member of the FOMC and Jefferson has been nominated by President Biden to serve as the Fed's vice chair. In that position, he would be expected to aid Chair Jerome Powell in developing his policy decisions before FOMC meetings.

 

On Friday, the non-farm payroll report showed the economy remained strong with 339,000 jobs created last month, which was way above the expected gain of 195,000 jobs. However, at the same time, the unemployment rate rose from 3.5 percent to 3.7 percent, while hourly earnings month over month were unchanged at 0.3 percent and hourly earnings on a year-over-year basis dropped to 4.3 percent versus 4.4 percent.

 

The problem with a pause in their program of combating inflation by raising interest rates is that traders will immediately assume that a Fed pause signals an end to further rate hikes. As such, FOMC members are taking great pains to tell markets not to count on that scenario. They say that if they do pause, it is simply a period where policymakers can assess how the economy and the financial sector are weathering past rate hikes.

 

This "hawkish pause," as the market is dubbing it, should not by itself mean much to the equity markets. And the strong labor gains might also convince the Fed that a pause might be premature. But those risks only come into play in two weeks. However, stock players are so short-term that algo and options traders will likely push markets higher in the meantime. They will anticipate the skip until they are proven wrong.

 

Over the last several months, government bond auctions have dwindled somewhat as the limit on borrowing crept closer and closer. Now that Congress is extending the ceiling higher, the government will need to raise more money to continue spending on things like social security payments.

 

In the weeks ahead, I will be monitoring a potential counter-veiling development that could put a damper on equities and a spike in bond yields. The U.S. Treasury needs to raise about a trillion dollars in debt fairly soon. As this supply of bonds hit the markets, yields on debt instruments would rise to accommodate all this extra borrowing. That would be bad for stocks.

 

I should mention the farce that has occupied all our attention over the last few weeks. The debt ceiling agreement is a travesty. Spending cuts amounted to $1 trillion, but far less than that if one reads the fine print in the actual document. As I expected, the June 1 deadline came and went but not by much. It really didn’t matter because the supposed deadline was extended (at the eleventh hour), which magically has given the politicians the extra time needed for the Senate to pass the bill and the president to sign it. 

 

President Biden, House Speaker Kevin McCarthy, and a host of politicians got their hours of airtime at our expense. The country is no better off, and in two years we will probably have to put up with these same clowns doing the same thing yet again.

 

Marketwise, I expect the S&P 500 Index to continue to climb, hitting my target of 4,320 or even higher (maybe 4,400 maximum) as traders chase the market up in anticipation of the Skip.  Monday and possibly Tuesday could be down days (buy the dip) and then most of the week the S&P should continue to gain. Gold and silver also appear to be ending their period of consolidation. Watch the dollar; if it weakens, precious metals and bitcoin should climb higher from here. 

 

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.

For more than a year, consumers have been contending with higher food prices. The latest read of April's Consumer Price Index, however, gave some hope that relief may be around the corner.

 

Headline inflation rose 0.4 percent last month but a look under the hood revealed that the "food at home index" declined. This was the second month in a row that prices for fruit, vegetables, meat, and eggs among other items, fell.

 

That may be so, but I certainly am not seeing those price declines in my shopping bill. Let's take eggs for example. You may remember that in December 2022, we were paying as much as $5.46 on average for a dozen eggs. The culprit behind those soaring prices was a historic outbreak of avian influenza or bird flu that coincided with the winter holidays. The epidemic killed millions of egg-laying hens. Since then, influenza has subsided and there have been no new cases detected at commercial farms since December 2022.

 

The industry has bounced back since then and as it has the price of wholesale eggs has fallen. At the end of April, the benchmark Midwest Large White Egg price has fallen to $1.22 per dozen. That is a 78 percent decrease in five months. Some produce analysts expect we could soon see egg prices dip further to below $1 a dozen.

 

The average consumer paid $3.45 for a dozen large Grade A eggs last quarter, according to government data. That is down from January's $4.82, but still more than double the $2.05 the prior year.

 

While this may be good news for some consumers, a trip to my local supermarket tells me retailers have certainly not passed on those price savings to customers. Retailers can sell their eggs at whatever the market will bear. Here in the Berkshires, we are way above the so-called "average" egg prices. At Price Chopper, for example, a dozen cage-free Grade A large eggs are going for $5.39 a dozen, while organic eggs are $8.99. That is a markup of 441 percent and 736 percent.

 

I know there are other costs that retailers need to cover — transportation, labor, etc. — and there is always a lag effect between a decline in wholesale prices and the price we pay at the check-out counter. We could see price cuts in the months ahead for eggs and other products but the jury is still out when it comes to beef.

 

Beef prices remain in the stratosphere. There are reasons for this situation. A continuous and extreme series of droughts in the U.S. in recent years has made maintaining cattle herds expensive or, in many cases, impossible to maintain. Herds (including breeding cows) were slaughtered, which has resulted in a growing scarcity of beef products. This year will be the first significant drop in beef production since 2015. Less beef supply usually means higher prices if demand remains the same.

 

There is some evidence, however, that beef prices may have reached a level where consumers are beginning to cut back on their beef purchases. Tyson Foods, which processes 20 percent of the nation's beef, poultry, and pork, saw its first fiscal quarter net income drop more than 70 percent based on weaker results in all three of those product areas. Analysts believe some consumers are substituting more chicken and pork for beef in their diets. Tyson was caught between higher live cattle prices and less consumer demand and was forced to reduce prices somewhat. Will this trend continue?

 

That remains to be seen. Demand for beef usually picks up about now (during the grilling season), so this summer will be key to determining the consumers' appetite for continued purchases of high-priced hamburgers and steak. If so, we can expect meat processors and retailers to charge even higher prices in the fall and winter for meat. However, if the economy begins to slow, consumers might cut back even more on their spending across the board and that could keep beef prices flat or even slightly lower.

 

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.

One week before the debt ceiling deadline, members of Congress have adjourned, while a handful of negotiators continue to search for a compromise solution to the impasse. Investors are holding their breath.

 

As many expected, myself included, the politicians are drawing out the drama and will continue to do so until the 11th hour. Both sides have stressed that there will be no default and the market has taken them at their word. Investors have bid up stocks this week in anticipation of a positive announcement.

 

This week, Fitch, one of the big three American credit agencies, has put the nation's debt on a negative credit watch. The agency warned that it may downgrade the U.S. AAA debt rating to AA+ over the debt ceiling fight. It cites the increased political partisanship that is hindering a resolution to the debt limit. In addition, they point to the failure of the U.S. to meaningfully tackle rising budget deficits and a ballooning debt burden.

 

This brings back to mind a similar situation in 2011. At the time, another big credit agency, Standard & Poor's, downgraded the nation's debt to AA+ for the same reasons, despite the two sides coming to a compromise and avoiding default.

 

Politicians from both sides denounced the move, as did the U.S. Treasury, to no avail. It still has not restored its' AAA rating. The agency said their downgrade reflected their view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges. That sounds about right to me, and if anything, the environment has worsened over the last 12 years.

 

Although I have never seen a published dollar amount of the cost to the nation and the taxpayer of that downgrade, I do know that the rating downgrade increased the U.S. government's cost of capital (interest, fees, and yields). The higher costs simply reflect the increased risk lenders are taking in buying our debt. Given the trillions of dollars we have borrowed over the last dozen years, we are talking billions and billions of dollars in extra costs. And here we are again in the same situation. Will Fitch follow Standard and Poor's lead and lower the rating? Time will tell.

 

Throughout the week, yields on bonds have risen in fear of default with the one-month, U.S. Treasury bills now yielding more than 6 percent. Three-, six- and nine-month U.S. Treasury bills are yielding between 5.31 percent to 5.39 percent. The U.S. dollar has shot up as well, and that combination has savaged precious metals and most other commodities.

 

Equities have fared much better — thanks to AI and 10 large-cap tech stocks. Artificial Intelligence (AI) has been around for many years, but the idea has caught fire among traders and investors. Reminiscent of the Dot.Com boom (and bust), any stock that has even a whiff of exposure to AI has exploded higher. Nvidia, a semiconductor company that is at the forefront of chips needed in the AI space, announced spectacular earnings and even better guidance this week. The stock rose 25 percent overnight and carried the technology sectors along with it.

 

But underneath this hyped-up area, most equity sectors of the overall market were at best marking time while the debt negotiations continue. As I predicted, traders are reacting to every word and headline, moving markets up and down. The latest word out of Washington is that President Joe Biden and GOP House Speaker Kevin McCarthy are closing in on a deal.

 

Their idea is to produce a simple agreement with a few key top-line numbers for spending, including defense spending, and let lawmakers hash out the details through the normal appropriations process in the months ahead. That would dispense with a weighty, thousand-page bill that would require legislators to write, read and vote on all in a matter of days.

 

My belief for months is that a deal will get done and the market agrees, otherwise, the market averages would be a lot lower than they are right now.

 

The question to ask is what will happen after a deal is done? I expect markets will spike higher in a relief rally, but then what? The U.S. Treasury is expected to need to raise a lot of money in the form of new government debt sales in the weeks after an agreement. That should send interest rate yields higher and probably put pressure on the stock market. But let's just get through the next week first. 

 

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.