The first interest rate rise in years was officially triggered in this week's Federal Open Market Committee meeting. Since then, stocks gained more than 5 percent on the news, which was contrary to many investors' expectations.

 

The reaction was even more confusing when you consider how hawkish Chair Jerome Powell and his FOMC members were both in the minute meetings and in Powell's Q&A session after the meeting. The Fed is officially planning for seven rate rises this year after the 25-basis point move on Wednesday.

 

The next hike could come as early as the central bank's next meeting in May. There is no guarantee that the next hike could be even higher than 25 basis points. That, said Powell, would depend on the data. The overall message, however, was clear enough: inflation is the Fed's No. 1 priority and will remain so for the months ahead.

 

You may remember that in my last column, I predicted that the markets would like the outcome of the meeting. The gains since then have been north of 5 percent. The positive reaction could have been fueled by Powell's contention that the economy remains strong and is in great shape to accommodate tighter interest rates now. His prediction that inflation could end the year below 5 percent could have also heartened investors. I question that number, but I think there was another reason for the gains, which was purely psychological.

 

As I have said countless times in the past, investors hate uncertainty. For months unanswered questions have bedeviled investors. "Will they, or won't they raise rates and by how much?" "How high will inflation rise, and what is the Fed really going to do about it?" "Will the Ukraine War temper the Fed's actions?" I could go on, but you catch my drift.

 

Uncertainty is what investors wake up to in the morning, worry about all day, and obsess over when we hit the sack at night. Clearing up even a little of the unknow has a beneficial effect on a market starving for stability.

 

But now that the Fed meeting is over, (until the next one) where will investors focus their attention? The obvious answer is the Ukraine-Russian crisis. Both sides of the conflict appear to be coming closer to a cease-fire. It would not surprise me to see a truce of some kind announced in the days ahead. You might ask, "Why?"

 

It is all about the calendar. Ukraine is running out of time, if their farmers hope to take advantage of the planting season for wheat and corn. if this war goes on, and the fields lay fallow, the world could face a life-threatening shortage of food. We are already facing massive shortages due to climate change and the coronavirus pandemic.

 

Unlike additional oil that can practically be pumped at the flick of a switch by Saudi Arabia or the UAE, additional food stuffs are governed by the calendar. If you miss the planting season, you can't do anything about it until the next season, which is months, if not a year, away.

 

So, if I am right, and the war winds down, we could see a few weeks of upside into April 20th or so. That could mean another 200 points or more tacked onto the S&P 500 Index from here. A cessation of hostilities would also recoup some of the losses in the beaten-up European markets. And let us not forget China, the world's second largest economy.

 

China's about face this week in promising to ensure stability in capital markets, support overseas stock listings, resolve risks around property developers and complete the crackdown on technology companies has removed another overhang weighing on the markets. If the Chinese government fulfills its promise to add more monetary and fiscal stimulus to their slowing economy, that may also eliminate some of the drag in the global economies brought on by the crisis in Eastern Europe.

 

U.S. stocks, under that scenario, would rise. I would imagine overseas markets would gain even more in the short term. But all these bullish actions would likely come to an end in late April as the next quarter's earnings season begins, the May Fed meeting and another rate hikes looms closer, and the inflation rate tops 10 percent.

 

A good chunk of the the move in equities this week has been simply short covering. It remains to be seen if real buyers decide to push markets higher. There needs to be a fundamental reason for that to happen. It could be a cessation of hostilities.

 

I still see a difficult first half of the year that will probably spill over into the summer. Sure, we can have relief rallies like we are in right now. But for me to become more bullish, I would need to see earnings bottom, inflation subside, and the Fed to stop tightening monetary policy. Don't hold your breath.

 

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 last year, the People's Republic of China has instituted several far-reaching policies that have roiled its economy and stock market. As a result, the Chinese stock market has lost some $2.1 trillion from its high. Are things about to change?

 

In a brief statement on March 15, 2022, China's top financial policy body seems to have relented somewhat, if not completely made a U-turn on policy The governing policy committee promised to ensure stability in capital markets, support overseas stock listings, resolve risks around property developers and complete the crackdown on technology companies. Both the central bank and the banking oversight committee would help implement these policy changes.

 

Some might say that China has been its own worst enemy. An increasing (but late) chorus of Wall Street pundits have deemed the Chinese stock market as "uninvestable." Some might ask where have they been over the last 10 months or so?

 

On July 8, 2021, I warned investors in my column "China's Red Hand of Regulation" https://tinyl.io/5uAP that "there are all the signs that these new regulatory risks are here to stay. In which case, we can expect more of them and as a result, a re-rating of Chinese securities (downward) would certainly be in order."

 

I believed that the efforts of the Chinese Communist Party faithful, led by President Xi Jinping, to clamp down and extend control of its largest companies in the name of "common prosperity" would not only be successful, but also devastating for both local and international investors. The result: a $2.1 trillion hit to China's financial markets. But is it now time to look forward?

 

Until this week, the red hand of this communist government had become even more intrusive and had moved into areas that were thought to be governed by the private capital markets in the name of national security.

 

There were also real concerns that another $1.1 trillion worth of U.S. listed Chinese stocks could be in jeopardy. The fear was that some large mega stocks like Yum China could be de-listed under the Holding Foreign Companies Accountable Act for failing to submit detailed audit documents that support their financial statements.

 

An ongoing auditing dispute between Chinese regulators and the U.S. Securities and Exchange Commission is still not resolved. This issue is also complicated by several other events which need to be resolved between both nations.

 

For example, in February 2022, China and Russia declared a new era in the global order, endorsing their respective territorial ambitions in Ukraine and Taiwan among other things. Since then, Russia invaded Ukraine, leading many to believe China was fully aware of Putin's plans. China refused to condemn the move, nor agree to the economic sanctions levied against Russia by most of the West.

 

Relations between the U.S. and China have deteriorated further since then as China now appears to be helping Russia circumvent the sanctions. This issue goes away with a cease fire between Ukraine and China.

 

And while all of this is going on in the international front, China's economy has taken a massive hit last year due to its over-leveraged real estate market. But the latest economic figures for January through February 2022 were well above expectations, with industrial output rising 7.5 percent versus last year, fixed investment grew by 12.2 percent and retail sales up by 6.7 percent. These were double the estimates of most economists. Growth this year is estimated to fall to 5.5 percent, which is still a healthy rate, but down from last year's 6 percent. 

 

Unfortunately, over the last week, the Chinese have suddenly been forced to begin shutting down some areas of their economy thanks to a resurgence in the Omicron variant of the coronavirus. This may call into question whether the country can sustain its expected growth rate.

 

China's zero-COVID strategy, which was introduced early in the pandemic involves large-scale lockdowns, mass testing, and international travel bans. Tens of millions of people country-wide are facing restrictions. Shenzhen Province, home to 12.5 million people, has been locked down. It is the nation's technology hub and a critical supplier to major auto companies and many semiconductor suppliers.   

 

Jilin Province has also been shut down, with residents banned from moving around. This is the first time China has locked down entire provinces since the Wuhan and Hebei lockdown at the beginning of the pandemic. More lockdowns are expected in the next few days. However, if the global experience with Omicron is any guide, the surge in cases may be short-lived.

 

In my opinion, if you are willing to take a higher-than-normal level of risk, it is time to once again dip your toes into the Chinese stock market.

 

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 economy is slowing. Inflation is climbing. Investors are worried that these trends appear to be a recipe for the "S" word.

 

The economic concept of stagflation where the witches' brew of a faltering economy, aided and abetted by skyrocketing inflation, harkens back to the malaise of the late 1970s. At that time, interest rates rose to nearly 20 percent. Inflation, as measured by the Consumer Price Index (CPI), reached an annual average of 13.5 percent by 1980. Oil prices (like today) surpassed $100 a barrel.

 

Blame for this period of stagflation fell squarely on OPEC, a newly formed energy cartel of oil producers, that decided to raise oil prices sharply after decades of artificially controlled suppressed prices by mostly Western nations and their energy producers.

 

Since energy is used in so many of the industrialized economies to produce just about everything, this oil shock reverberated throughout the economy. As costs rose, prices pushed higher causing more and more inflation (sound familiar). It didn't help that for the most part, monetary expansion was the name of the game throughout most of that decade.

 

Looking back, economic growth and unemployment in the 1970s was uneven at best with two recessions, one at the beginning of the decade, and another from 1973 through 1975.

 

It's not hard to point to the similarities between then and now.

 

Today, we are confronting similar supply shocks, which began during the pandemic and have since been amplified by the onset of the Ukrainian War. We have also been functioning under a highly expansionary monetary policy that has been in place since the financial crisis of 2008-2009. Where we differ today is in the areas of economic growth and employment. Neither qualify as coming even close to stagnation.

 

Proponents of stagflation would say that it is only a question of time before the economy slows and is in fact doing so as I write this. They would be right, at least in the short-term. Most economists expect this present quarter to register anemic growth. Yet, for the year 2022, the expected growth rate is still 3 percent and 2.3 percent for 2023.

 

However, the Russian invasion of Ukraine and the resulting sanctions may trigger recessions in both warring countries. Theses actions will also spill over to the European Community (EU) and directly impact its economies. It will also create even further supply chain obstacles and higher inflation.

 

One would expect that the U.S. economy will feel these impacts as well. The Conference Board estimates that these headwinds could cut as much as half a point or more from our growth rate.  On the unemployment front, we are nowhere near where we were in the 1970s. Right now, unemployment is at a low of 3.8 percent. And readers must remember that global economies are less energy intensive than they were back then. In a research report, UBS Wealth Management USA argued that "oil intensity of global GDP has dropped by 25 percent since 1990 (and by more than 50 percent since the early 1970s when oil price shocks caused recessions)."

 

However, what we don't know is what economic impact the Fed's intention to tighten monetary policy will have on the economy. Investors point to what happened when Federal Reserve Chair Paul Volcker addressed inflation back then. He raised interest rates to double-digit levels, drove inflation down, but also sent the economy into a deep recession. Could the Fed do that again?

 

I doubt that today's Fed will ignore the past and simply "do another Volcker." But make no mistake, the Fed is going to raise interest rates next Wednesday, March 16 by 25 basis points and likely raise rates again at the next two meetings. How will the markets handle that?

 

We are the lower end of the box on the S&P 500 Index (the lower end of that box is 4,310, give or take 20 points). I believe markets will continue to move on every headline between now and the FOMC meeting next Wednesday.  If I were a betting man, I would say markets like what Chair Jerome Powell has to say. In the meantime, stocks are managing to hold up and will continue to do so, barring a game changer in the Ukraine conflict.

 

Commodity prices are flying. Nickel doubled in price in two days. Wheat is up 50 percent and has experienced trading halts for five straight days. Gold has breached $2,000 an ounce and we all know what has happened to the price of oil. How long can it last?

 

As longtime readers know, I formally recommended commodities as out-performers back in January 2021. At that time, I was bullish on oil, copper, and soft commodities like food and lumber. I also liked crypto currencies. As for precious metals like gold and silver, not so much.

 

Back then, most market participants had dumped gold and were piling into Bitcoin and the like. These digital currencies were touted as the "new gold" and precious metals were relegated to the sidelines.

 

It wasn’t until five months later (May 2021) that I began to warm up to precious metals as cryptos hit all-time highs. As I said back then, "I believe we may be on the cusp of a new move higher in this precious metal (and silver along with it)." But it wasn’t as if gold had gone nowhere in the meantime.

 

Gold made what I believe was a cycle low back in November 2020 at $1,767.20 an ounce and hit $1,882.70 by the time I recommended it. That amounted to a 6.5 percent gain from the cycle low. The gold price hit $2,082 this week before profit taking took it back down below $2,000 per ounce. Most of the other commodities on my list have done equally as well, or even better. Granted, the gains are good, but what do we do now?

 

Unlike many investments, the time to buy commodities is when prices continue to climb higher as they have been doing for the past year or so. Traditionally, as prices increase, experienced traders know to chase prices higher. A virtuous and somewhat vicious cycle of higher and higher prices erupts. That behavior has hit home to many investors during the past few weeks. Commodities are in a parabolic move higher.

 

Common sense would tell you that this phase of price gains, were it to continue, would cause severe dislocations in the economy. These stratospheric prices would boost the cost of manufacturing inputs to the point where production would begin to falter. Inflation would leap, and prices skyrocket for goods to the point that most global economies would fall into a recession, or a period of stagflation. As such, I believe it is time to take some profits.

 

The problem with calling a top in commodities in this environment is that their rise (and ultimate fall) depends on several geopolitical events that cannot be predicted. Take it from an old-time, commodity investor, the way to handle this rise is to begin selling into these price gains. I made my bones in the commodity market by buying and selling gold and silver, while working as a bunker oil salesman in New York Harbor. I made enough to pay my way through graduate school back in 1979 and I never looked back.

 

Since then, over the decades, I have seen several huge moves in commodity cycles. The most successful traders I know begin to sell (slowly) when there are a series of limit-up moves and/or trading halts. That is the environment we are in today.

 

 Another sell sign is when analysts and experts begin to increase their price targets for various commodities. Recently, I am beginning to see forecasts that gold prices could get above $3,000 per ounce, and oil prices as high as $200 per barrel. That should tell you to start profit-taking. My own view is that after the end of the present geopolitical turmoil, we could see gold down several hundred dollars by mid-year.

 

Commodities are soaring. Interest rates are falling. Stocks can't get out of their own way. All of this is occurring, while the first war in decades continues to rage in Ukraine. Seems to me that any gains in the market averages next week will remain dead cat bounces in this bear market.

 

Yes, I hate to be a squeaky wheel, but I've got to call it like I see it. We have a much greater chance of sliding lower from here than higher. Here's why.

 

Investors received a new lease on life this week when Fed Chairman Jerome Powell, testifying before the Senate banking Committee, triggered a market rise in the averages.  All he did was relieve a little market angst by stating that a 25 rather than a 50-basis point move should be expected later this month at the FOMC meeting. In that context, I would label the resulting short market bounce as simply a relief rally.

 

Initially, the markets rallied because the Fed is not raising rates as high as expected. That usually means higher stock prices, so the bounce was understandable. But the reason the Fed plans to raise rates in the first place is due to soaring inflation. What did investors do?

 

Prices of basic and precious metals, like aluminum, nickel, copper, gold, silver, and food commodities like wheat, corn, fertilizer, and of course, oil and gas were bid up leading the market gains.  The combination of these Russian fear trades, plus inflation plays, continued to lead gains throughout the week. Technology and speculative areas were largely left in the dust.

 

This action has only pushed up commodity prices even higher. Now what will that do to the inflation rate?  Push it even higher, and possibly make the Fed reconsider its plans. Those bond traders who were betting on a "one and done" interest rate hike have changed their forecast. The betting is that there will be at least two more hikes coming before June.

 

On Thursday night, March 4, the Russians attacked Ukraine's largest nuclear facility, which provides 20 percent of European electricity. Fortunately, there did not appear to be any leakage of radioactivity but that could have occurred. The U.S. dollar jumped more than 1 percent, an extraordinary event, indicating a "run for the hills" mentality overwhelming investors.

 

 Unfortunately, this is the kind of market where most market participants are headline driven. Given the circumstances, that is understandable. Algo traders are careening from buys to sells as news pops up on the terminals. Whether it is testimony from Powell, Russian cease fire rumors, oil embargo news, or new atrocities in Ukraine, stock prices either crater or explode hour to hour.

 

Few of these traders know or care about things like price/earnings ratios, balance sheets, corporate earnings or even macro data like the positive gains in employment we saw last month. Remember, most market participants have little to no experience in a higher interest rate environment nor how to invest in equities when inflation is rising. As for maneuvering world markets on a war footing, few have any experience at all.

 

It is obvious that just about everyone is focused on the oil price. The higher oil climbs, the greater the probability that inflation will continue higher, and the greater the chance that global economic growth slows.  Analysts at Bank of America, for example, have raised their forecast for oil to $120 per barrel by the middle of 2022.

 

At the present price of oil, the U. K's National Institute for Economic and Social Research estimates that the Russian-Ukraine conflict could hack $1 trillion off the value of the world economy. It could also add another 3% to the world's overall inflation rate. Predictably, Eastern Europe would get hurt the most. Those numbers worsen as the oil price rises.

 

There are all sorts of worst-case estimates as to where oil prices could go depending on whether there is an embargo on Russian oil, a reduction in exports due to war damage, or if Russia curtails energy supplies to Europe in response to sanctions.

 

It appears to me that the markets have settled on a worst-case price of between $120-$130-barrel oil at this time. If that were to happen, and remain at that level over several months, the impact on the U.S. economy would be to slow growth and bring on the specter of stagflation. I believe it is way too early to predict that outcome.  I did forecast back in December 2021, however, that this scenario would begin to make the rounds on Wall Street about now. In my opinion, the onset of stagflation would be a stretch, given the present robust growth rate of U.S. GDP and the Fed's intention of tightening monetary policy beginning in mid-March.

 

As for the future of the markets, I am sticking to my guns. Stocks will remain in a box until after the March 2022 meeting of the FOMC. That means we could easily test the lows of January 2022 again, either before or after the Fed hikes interest rates.