Thus far, the markets in June seem poised for a further bounce higher. That does not mean we are in the clear throughout the summer, but let's take it one month at a time. Here is what I see.

 

Between now and June 17, 2022, I am betting for another move up in the equity indexes. We could see a rally that takes us up to the 4,300 -4,400 level on the S&P 500 Index. It will likely be the kind of surge that floats all boats higher as it rises.

 

The stocks that have been hurt the most this year would be prime candidates to outperform. China, emerging markets, energy, materials, retail, transportation, small caps, tech, mines, metals and even the Kathy Wood stocks will benefit. I have been predicting this move higher since early April 2022. I believe it has become the consensus view.

 

The energy for such a move is based on the mistaken belief that the Fed will prove to be less hawkish than the Federal Open Market Committee (FOMC) statements have led us to believe. To me, that argument is as wobbly as a three-legged chair. It is also why I don't expect that we are up, up and away for the rest of the summer. At best, the months of July 2022 through August 2022 should exhibit some sideway actions. However, I don't see the markets making a lower low (3,500 on the S&P 500 Index) until sometime in September 2022.

 

On June 1, quantitative easing (QT) began. The process of draining off some of the Federal Reserves Banks' $9 trillion balance sheet will take months to accomplish. Remember, this is in addition to the Feds' plan to raise interest rates by 50 basis points in June 2022 and again in July 2022. Some analysts believe QT could be equal to raising interest rates by another 100-basis points or more.

 

I believe investors have yet to discount this new and unique tranche of monetary tightening. You see, hiking interest rates is tangible, quantifiable and has happened many times before. It is an event that is visible and is almost immediately will be translated into a higher prime rate, followed by a rise in mortgage rates.

 

QT is less visible, a stealth tightening if you like, that will work though the credit system withdrawing liquidity as it travels and builds throughout the economy in various ways during the next few months.

 

I expect investors will only realize its impact when they see the effect it will have on housing, economic growth, consumer spending, and corporate earnings. That data will be apparent by late June, or early July, and buttressed by the second quarter corporate earnings season.

 

The problem I see is that all of the above areas are already slowing. And while inflation may have peaked, it is still high and will continue to be so. It's already stressing consumers. QT will stress them further. This will raise the risk in investors' minds that the Fed "has gone too far."

 

Investors are laser-focused right now on inflation slowing and potentially hoping for a "two and done" interest rate scenario from the Fed.  As such, I see the next few weeks as a sweet spot. A time before investors realize what is ahead of them.

 

This week, J.P. Morgan CEO, Jamie Dimon, announced that he is preparing this largest of U.S. banks for an economic hurricane, which he sees on the horizon caused by the Fed and the Ukraine War. He then advised that investors should do the same. And yet, the same company's Head of Global Research, Marko Kolanovic, is bullish and thinks that his boss is wrong. Who is right?

 

My answer is both. Short term, Marko can see the S&P 500 Index hit the 4,300-4,400 level. After that, Jamie carries the day. 

 

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.

Despite the carnage caused by firearms, the business of manufacturing, marketing, and selling guns to Americans is thriving. What is worse, it appears that efforts to control and regulate the industry may only increase sales.

 

During the start of the COVID-19 pandemic (2020-2021), gun purchases accelerated. More than 5 million adults becoming first-time gun owners compared to 2.4 million in 2019, according to a survey published by the Annals of Internal Medicine. Approximately half of all new gun owners were female, and nearly half were people of color. Month after month, sales of guns have surpassed 1 million units for 33 months in a row.

 

This year (so far), monthly sales of guns have been off slightly. In April 2022, 1.5 million firearms were sold, which was a year-over-year decrease of 20.7 percent, while long guns or rifles fell by 18.8 percent. However, if past behavior is any indication gun sales will likely surge in the months ahead. It is one reason why publicly traded gun stock prices are flat-to-up despite the horrible news of the last two weeks.

 

The facts are that mass shootings like the ones in Uvalde, Texas, or Buffalo, N.Y., motivate more Americans to buy guns rather than to give them up. Throughout the last several years, the three highest months for gun sales occurred in December 2012, after the Sandy Hook Elementary School shooting in December 2015, after the mass shooting in San Bernardino, CA. in March 2020 as a result of the Covid pandemic. There were also gun sale spikes in June 2020 as Black Lives Matter protests erupted after George Floyd's murder.

 

The most-cited reason for owning a firearm in the wake of high-profile shootings and massacres is personal security. "Self-defense" seems to be an overriding motivator for most Americans. Opponents of this behavior argue that more guns at home only increase the potential risk to the 11 million household members that are newly exposed to lethal firearms, including an estimated 5 million children.

 

As a Vietnam veteran, I am convinced that guns as a form of self-defense is a fallacy. Unlike hunter safety courses, which teach new gun owners how to safely use rifles or bows in hunting wildlife, Americans (except veterans and law enforcement) have little to no training in the far more deadly skill of killing or wounding another human being.

 

Learning that skill required, in my case, more than 18 months of sophisticated training using live fire. Even then, repeated firefights were vital in learning how to survive, reduce instances of friendly fire, and accomplish the objective of self-defense or offense.

 

In my life, I have only met a handful of men and women, who have received and have maintained those skills. My brother, for example, who lives in Delaware, has an arsenal of guns, and has never hunted, and yet enjoys shooting up old cars with his state trooper buddies. I remind him abandoned autos don't shoot back, but he ignores my arguments.

 

However, there is also another important factor in generating increased gun sales — regulation. As I write this, Congress is once again demanding something be done to reduce gun violence. And as usual, most Republican congressmen and senators display few signs that they will vote for any new gun regulation. Gun control has become a partisan issue, just as important as abortion in many circles.

 

The more vocal politicians become over limiting or hindering the purchase of firearms, the more gun advocates feel threatened that their second amendment rights might be reduced or taken away entirely. The result is usually a rush to buy and stockpile even more guns "just in case."

 

Frustrated with the stalemate in Washington, many individual states are attempting to take action where they can to reduce gun violence. Other states are pushing to reverse or strengthen voters' gun rights in response. Roughly three in five state legislatures are Republican-controlled and are determined to make guns even more accessible to their citizens.

 

 For example, one of the country's largest banks. attempted to distance itself from the firearm industry after a mass shooting in Parkland, Fla., which left 17 dead. Texas, in response, passed a new law that bars state agencies from working with any firm that decimates against companies or individuals in the gun industry.

 

The law requires banks and other professional service firms to provide the state written affirmations that they are complying with the law. Banks could be subject to criminal prosecution if they don't comply. In addition, banks worry about their bottom line, since Texas is one of the nation's largest bond issuers, with $50 million in annual borrowing, generating $315 million in fees last year for financial firms.

 

The facts are that in a country where one third of Americans own guns, don't blame the politicians for their lack of new regulations on guns and gun violence. They are simply following the wishes of their voters. Just recognize that three out of ten of your neighbors, regardless of whether you live in a blue state or red state, may disagree with additional gun controls.

 

And don't dismiss gun owners as a bunch of red-neck, no-nothings. There are countless, male and female professionals — doctors, lawyers, financial planners, etc. — that own and collect guns. As such, while my heart breaks for the slaughter that we see perpetrated by Americans with guns on an almost on a daily basis the solution eludes us. One suggestion might be to require insurance when purchasing a gun, like the existing practice of requiring insurance along with the purchase of an automobile.  It would avoid the Second Amendment controversary and probably reduce those willing to pay yearly insurance for each firearm they own.

 

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 case after case, corporate earnings guidance was at best disappointing. Those companies that disappointed saw their stocks plummet, which took the markets down with them. But earnings season is almost over. Now what?

 

This past week we saw some stocks fall 30-40 and even 50 percent in one day on disappointing results. The volatility on individual stocks has been extraordinary. Many companies who beat on the top and bottom line and gave good guidance saw their stocks climb 15 percent or more in an hour or two, but the overall markets ignored that.

 

Time was that investors shunned Bitcoin because the crypto currency could move a percent or two a day. Nowadays, the cryptocurrency is less volatile than most equites and bonds! One wonders what would happen if the fear index called the VIX were to move higher? Fortunately, over the last week VIX dropped to below 30. That was a good sign.

 

There is precious little I can add to the topics I have covered that have bedeviled inventors for most of the year — the Fed, inflation, rising rates, supply chains, slower growth in China, the U.S. and Europe. To be honest, no one knows whether the U.S. will fall into recession, or stagflation, or simply continue to grow. You would have better luck betting on the ponies than predicting where inflation will be at the end of the year, or if another strain of COVID-19 will pop up.

 

In times like this about the best one can do if trying to navigate the financial markets is to focus on price. The price investors are willing to pay for the stock and bond markets, the U.S. dollar, cryptos, commodities and so on. Some of these instrument's lead and others follow price movements. So far this year many of those price movements have been down. Few have been up.

 

Notice, for example, that the U.S. dollar is up about 8 percent, so far this year. That is a spectacular, out-sized move for the world's reserve currency. It has had an inverse effect on stocks and bond prices. The higher it goes, the lower they go.

 

Inflation, however, seems to track the U.S. dollar, as do most commodity prices. That makes some sense, since the dollar needs to strengthen in order to preserve purchasing power in an inflationary environment where commodities like oil are soaring. Can the greenback give us a clue to where stocks are likely to go? I believe so.

 

I have noticed that over the last week, the U.S. dollar has fallen, while other currencies like the Euro and yen have strengthened. Could that give us a reason to be bullish on stocks, at least until the dollar reverses course? Currency traders will give you all sorts of reasons why the dollar dropped.

 

Leading the list is the European Central Banks slightly more hawkish attitude toward monetary tightening. Higher interest rates in Europe would attract more investors to the Euro and away from the dollar. Global interest rates are a key ingredient on where investors decide to put their money. Given the same risk profile, the currency with the highest interest rates attracts the most capital.

 

However, I am guessing that the sudden dollar weakness has more to do with inflation expectations. Readers may recall that in the beginning of this year I expected inflation would begin to peak in the Spring. Friday's Personal Consumption Expenditure Index PCE), which is a measure of the prices that people in the U.S. pay for goods and services. The Fed pays close attention to this measure since it captures a wide range of consumer expenses and reflects changes in consumer behavior.

 

The PCE showed inflation rose 4.9 percent in April from a year ago. It was below expectations and seemed to indicate that inflation was slowing from 5.2 percent reported in March 2022.  That data could indicate that my peaking prediction was right on track. If inflation were to flat line (albeit at a rate higher than anyone is comfortable with), the U.S. dollar should flat line as well, at least for now.

 

That does not mean that our inflation problem will be solved. We are a long way from that, but it may not get too much worse.  In other words, I do not see a period of hyper-inflation like we experienced in the 1970s, instead we may have plateaued on the inflation front.

 

It also does not mean that the Fed is going to soften its stance anytime soon on raising interest rates. Far from it, but peaking inflation could give the markets a needed boost higher, which brings me to my "W."

 

Readers may recall that I described this month's market action as a sloppy "W" formation. The month is almost gone, and we have entered the last part of the W, which should give us more upside from here. Make no mistake; there has been no bullish buying in this rally. Markets have been pushed up by traders' short covering. Stocks are over extended, and I expect profit-taking kicks in next week. I would buy that dip.

 

The good news is that I believe we are building a base that could be able to give us a tradeable bounce for a few weeks beginning in June into July.

 

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.

Economists know that consumers spend more when their wealth increases, even if their income remains the same. However, if wealth decreases, the opposite occurs.  

 

The concept, known as the wealth effect, has spurred the economy for well more than a decade as savers' 401(k) and other retirement accounts increased year after year. At the same time, real estate values have also risen. Of course, most of the time these gains are only paper profits unless you sell your house or withdraw money from your portfolios.

 

Nonetheless, there is a behavioral element to this concept. People tend to spend more when stocks and housing prices continue to climb because they feel wealthier and become more optimistic. It is one of the reasons why, in the U.S., consumer spending continues to remain robust — until recently.

 

The Federal Reserve Bank, in past efforts to control inflation, focused on removing the supply of credit to the financial markets. They did so through hiking interest rates and slowing bond purchases. However, this time around, the Fed is targeting the demand side of the economic equation as well. Reducing demand in this case would require reversing some of the wealth accumulated over the last 10 years or more.

 

During the COVID-19 pandemic, stock portfolios and home prices soared, thanks to the huge governmental monetary and fiscal stimulus that occurred. America's top income earners, who were working from home, splurged on home remodeling, new autos, durable goods and all sorts of electronics. Trillions of dollars in stimulus checks and unemployment benefits supercharged consumer spending for those who made less.

 

As a result, all income groups increased spending at rates far faster than before the pandemic. The most recent government survey of retail sales for April 2022, indicated that retail sales outpaced inflation for a fourth straight month. And while inflation climbs, higher earners, who already account for a large share of overall consumption, seem willing to keep spending, at least for now.

 

That retail sales data doesn't tell the whole story. Low-and even middle-income households are already cutting back. Demand is falling as the wealth effect appears to be working in reverse. Almost 60 percent of U.S. consumers, according to a survey by brokerage firm Jeffries conducted in April 2022, said they have reduced the number of items they typically buy. In every category, low- and middle-income consumers were cutting back far more than those in higher income groups.

 

In addition, the National Retail Federation identified that 47 percent of consumers they surveyed last month (April 2022) were switching to cheaper products and alternatives as well. I have already pointed out this trend in past columns. Consumers are reducing meat consumption, or choosing cheaper alternatives such as chicken, pork, or fish. Supermarket sales of private label brands are booming as well.

 

But inflation is not the only variable that is impacting consumers. Interest rates are also playing their part. Mortgage rates are the most obvious victim of a rising interest rate environment. Borrowing costs have jumped for 30-year mortgages from a sub 3 percent level last year to 5.25 percent today. New home sales in April 2022 fell 16.6 percent from March and well below forecasts, which was the slowest pace since April 2020. Existing home sales were also falling for the last three months according to the National Association of Realtors.

 

Auto leases and loans and credit cards are also big areas where higher rates hit the consumer. Most credit cards and car loans are priced off the prime rate, which is in turn closely tied to the Fed funds rate. Consumers can expect those rates to climb higher, since the Federal Reserve Bank is planning to raise the Fed funds rate at least two more times in the next two months.

 

The big question most economists are asking is when will the combination of higher inflation, declining stock markets, and a possible downturn in the housing market start to reverse engineer the wealth effect at the higher income levels.

 

So far this year, many investors have suffered anywhere from a 20-30 percent decline in their portfolios and retirement savings. People are already having to rethink their retirement date as a result. Inflation and supply shortages are crimping remodeling and housing plans even as higher interest rates are expected to put a dent in housing prices soon. As a result, many Americans are starting to feel less wealthy than they did last year.

 

The Fed is counting on all of the above to change the psychology of consumers from spending like drunken sailors to something a bit more moderate (but not enough to have them swear off entirely). Tinkering with the wealth effect can have unpredictable reactions. How far is too far when you are trying to dampen down demand? It is a fine line, and the Fed's tools to accomplish this feat are far from perfect.  If they get it wrong, the economy will likely suffer. Let's hope they get it right.

 

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, as interest rates declined, some home buyers gravitated towards interest-only loans. However, times are changing, and borrowers should be careful in considering this kind of mortgage loan.

 

During the past two years, many financial lenders have tightened credit standards across most loan types. The combination of the coronavirus pandemic, supply shortages, inflation and the impact of the Ukraine war has created a drag on the U.S. economy. A slowing economy increases the risks of lending, thus tighter standards emerge.

 

Fannie Mae and Freddie Mac, the two government-sponsored enterprises that back most mortgages exclude interest-only mortgages. And while standards have been raised since the 2007 subprime collapse for these kinds of loans, there is a perception that standards may be more relaxed than conventional loans. Lenders, for the most part, keep these mortgages in their own portfolio or sell them to institutional investors.

 

An interest-only mortgage is one in which you initially only pay the interest on the loan for an allotted period, usually five, seven or ten years. As a result, your monthly payments are cheaper, since you are not repaying principal (the total amount borrowed). However, once that initial period concludes, you will still owe the same amount on the mortgages as you originally borrowed. Typically, these loans charge higher interest rates than conventional mortgages.

 

Interest-only loans are popular right now in this booming real estate market. One mistake would be to take out such a loan simply to qualify for a home you otherwise couldn't afford. Others believe they can afford larger homes with steeper asking prices because their monthly payments could be lower by several hundred dollars a month. 

 

Another mistake is to dismiss future risk by arguing that by the time the interest-only period expires, interest rates will have fallen further, or they will be making enough income to afford future payments, whatever they may be. It would be better to take a worst-case scenario and see if you can live with it.

 

Let's say you had a 30-year, fixed interest-only mortgage that you entered in 2012. Your initial interest-only period was ten years. That time is now up. What happens? You still have the entire principal to repay, only now you have only 20 years to do so. That means your monthly payments will rise simply because of the math. By exactly how much should also be of concern.  

 

Payment terms for the remainder of the loan may vary, but your new interest rate is usually determined by whatever the prevailing rate is at the time. Some loans are capped, so that the new interest rate you will be charged can be increased by no more than 2 percent. Other loans may not have a cap. In a rising rate environment that can spell disaster for borrowers.

 

In addition, remember your monthly payments now include principal repayments, plus a higher rate of interest and a shorter time period to repay the entire mortgage. This can mean your new monthly payment could cost you 2-3 times what you had been paying during the first ten years of your loan, according to the Federal Deposit Insurance Corp.

 

Ask yourself what would happen if mortgage interest rates, which hit a 30-year low last year, continue to rise over the next decade? There is a real risk that rates could rise to a point that the added costs to borrowers could present a default risk.

 

Granted, if payments become that expensive, there is always a chance that the loan could be refinanced, or the length of the loan might be extended, but at what cost? My advice is taking the necessary time and effort to analyze whether an interest-only mortgage is right for you or just a tempting alternative that fails to make economic sense in the long term.  

 

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.