New highs on the S&P 500 Index this week gave the bulls more ammunition to forge ahead. Leading the charge were clean energy, infrastructure, and technology stocks. Is this the start of another leg up for the equity averages?

 

Credit for the advance, in my opinion, was the increase in the rate of U.S. vaccinations (despite the uptick in coronavirus cases over the last week). Second were the actions of the Biden administration in moving rapidly to tackle the needs of the U.S. economy. Possibly even more important, at least in the long term, were their proposed efforts to address the dangerous widening of the income inequality gap in this country.

 

As readers are aware, the gap in income inequality has been growing in this country for three decades. The ongoing pandemic has only accelerated this problem. After years of politicians and economists arguing that "trickle down" economics would narrow this gap, the opposite has occurred.

 

President Biden has decided to try another approach. He is committing the largest spending program since Roosevelt's New Deal to narrow the income inequality gap between the haves and have-nots. His latest $2.25 trillion proposal, announced this week in Pittsburgh, was focused on dealing with the deteriorating state of the nation's infrastructure. But it also included a $400 billion program to care for elderly and disabled Americans, and $300 billion that would be directed into building and retrofitting affordable housing. These are areas where the income gap has caused enormous pain and suffering in many Americans.

 

Those who still insist on the bankrupt theory of private sector solutions to all our economic issues argue that there is little return on investment in programs like that. It is the kind of thinking that has divided this nation and alienated at least half our population. Whether you are Republican or Democrat, a Trump hater, or lover, income inequality affects all of us. Income inequality is color blind as well. My belief is that it is time to try something different, and the markets seem to agree with my assessment.

 

Despite Biden's plan to raise taxes on corporations and those earning $400,000 in income, the markets continue to rally. This has surprised the bears as well as many politicians. They trot out the same old tired arguments, warning that raising taxes in a weak economy will crater the economy. Historically, the threat of higher taxes usually resulted in a short-term decline in equity markets, but not this time. Why?

 

My explanation for this week's leap higher in the markets is simple. Most of Corporate America (and Wall Street} recognize the long-term jeopardy of the continued widening of the income gap on their own businesses. Remember, consumer spending comprises almost 70 percent of the economy overall. The less money consumers have, the less they spend. The less spending, the lower the economic growth rate.

 

This week, the market's gains were fueled by a come-back in technology stocks, led by the semiconductor and clean energy sectors. It was a welcome development for the bulls. Friday's labor report also held good news. U.S. job growth in March showed 916,000 jobs were added in the economy, while the unemployment rate dropped to 6 percent.

 

Now that March's volatility is winding down, and the end of quarter rebalancing is over, I am hoping for a better April into May for investors. Those who had raised some cash in February had some great opportunities to buy back stocks last month. I expect markets to continue higher but rotation between various sectors will also keep markets somewhat volatile.

 

A word of warning, however. Investors should not expect that President Biden's infrastructure proposal will pass in its present form. Its passage will require a great deal of negotiations and time. I'm thinking legislation won't be passed until October, with the price tag reduced to something below $2 trillion over 10 years. Remember, too, that in the past, infrastructures bills have failed to pass more times than not.  Hopefully, in the end, something meaningful will actually get done, so keep your fingers crossed.

 

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.

Renewable energy stocks were all the rage last year. This year, however, not so much with clean energy funds taking hits of between 25-50 percent. Will President Biden's proposed $2.25 trillion infrastructure bill breathe new life into this sector? 

 

President Biden ran on a platform that included the build out of an infrastructure plan that would "achieve net-zero emissions, economy-wide, by no later than 2050." By the time of his November election last year, investors had bid up the clean energy sector, which includes everything from electric cars, and clean water to solar and wind power, by over 200 percent in some cases.

 

New renewable energy exchange traded funds (ETFs) and mutual funds were offered with names like "Tan" and "Fan" that were snapped up in anticipation that they could only go higher. Of course, like all mini-manias, prices failed to keep up with investor's expectations. Markets moved on to buying "reopening trades" like dirty old oil stocks, airlines, and cruise ships.

 

However, on Wednesday, March 31, President Biden unveiled some of the details of his multitrillion-dollar infrastructure plan. In addition to programs to upgrade the nation's schools and spend $580 billion in job training and R&D, the plan should benefit many companies in the clean energy sectors.

 

About $621 billion will go toward physical improvements to roads, bridges, public transit, ports, airports and electric vehicles. Another $300 billion is earmarked for improving drinking-water infrastructure, expanding broadband access, and upgrading electric grids. Included in that spending will be energy-efficient affordable housing, electric vehicle charging stations, as well as potential extensions in government tax credits that would benefit both the solar and hydropower industries.

 

Congress has already extended the investment tax credit used for residential and commercial solar projects at the current rate of 26 percent for two years in 2020 as part of the $2.3 trillion spending and coronavirus relief bill. If the clean energy lobbyists get what they want, it could mean billions of dollars for solar, wind, clean energy storage, and other industries from electric vehicles to pollution controls that would decarbonize our environment.

 

Allied Market Research, an expert in this area, forecasts that the global clean energy market will be worth $1.5 trillion by 2025. There is an array of companies to choose from, in fact, so many that the average investor may have a hard time making investment decisions. However, fear not, because there are many exchange traded funds that do the work for you. 

 

Some funds that are available include the IShares Global Clean Energy ETF (ICLN), the Invesco WilderHill Clean Energy ETF (PBW), and the ALPS Clean Energy ETF (ACES). There are also some more focused funds such as the Invesco Solar ETF (Tan) and the First Trust Global Wind Energy ETF (Fan).

 

Although President Biden's infrastructure plan should be good news for Americans and the economy it is far from a done deal. His plan to raise corporate taxes to 28 percent from 21 percent and to establish a global minimum tax for multinationals corporations to ensure they pay at least 21 percent (up from 13 percent) in taxes in any country won't sit well with Republicans and many others on Wall Street. I expect there will be a lot of horse trading in the weeks and months ahead before a final agreement is reached and passed. But if it is, some of the prime beneficiaries should be the clean energy companies.

 

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.

You would think that with a $1.9 trillion spending package, an increasing rate of coronavirus vaccinations, and a potential $3 trillion infrastructure package waiting in the wings, the market would be at record highs. That it is not should tell you something about the indecision plaguing investors.

 

When good news fails to impress, it usually means stocks (or at least some stocks) are headed lower. That should come as little surprise to readers. I advised investors to raise cash last month in preparation for what I see as a buying opportunity this month. The challenge — when do you put that cash back to work?

 

No one can call a bottom in stocks, so last week, I did advise readers to begin investing that cash "on down days." We have had a number of those this week. We have also seen stocks spike higher with little warning, so timing demands attention and patience. It is why I advise a simply buy-and-hold strategy for most readers, most of the time.

 

If you simply look at the S&P 500 Index, there appears to be little damage thus far to the averages. We are simply in a 100-point trading range. However, Nasdaq and the small-cap Russell 2000 Indexes are a different story.

 

Right now, we are in the worst technology selloff in six months. The NASDAQ 100 fell over 10 percent this month while small caps just fell to their 200-day moving average (before bouncing yesterday and today}. That makes sense, since what goes up must come down, or so the saying goes.

 

Both of those averages have outperformed considerably in the past. The Russell 2000 Index, for example, gained more than 40 percent over the last half year. NASDAQ, as you probably know, has been outperforming everything for years now.

 

Things changed the moment interest rates began to rise in February. It is one reason I advised caution back then, especially in those high-flying stocks that the Robin Hood traders and others had bid up to insane prices. Many of those companies were what investors considered "new age" stocks (think electric vehicles, solar, or 5G}, or "stay-at-home" stocks like the FANG names and other companies in the same space.

 

 Rising interest rates, as I have explained, have a tendency to hurt earnings in these companies, which were already priced to perfection. At first, investors simply sold those winners and rolled the money into what is now called the reopening trades — airlines, hotels, restaurants, cruise lines, industrials, materials, etc. At the beginning of this quarter, valuations were reasonable, since the timetable for a resumption in economic activity was uncertain at best.

 

 However, since then, here in the U.S., the accelerated pace of vaccinations, plus $1.9 trillion in government spending (thanks to the Biden Administration}, gave investors the confidence to pile into these "value" areas. Afterall, it is thought that they would benefit the most from the imminent explosion of economic growth, something which was suddenly thought to be just around the corner.

 

Inflation worries, and a potential third wave of virus cases, however, has recently put a damper on these expectations. Inflation is rising and no one knows just how high it will go. Higher inflation could damage earnings across the board, but more harm in some sectors than others. If you then throw in the possibility of a third wave of virus cases, the market suddenly has doubts of how sustainable the reopening trade might be.  But the problem is that investors have already bid up many of these value stocks to prices that are higher than they were before the pandemic began.

 

Europe, which has proven to be a 2–3-week leading indicator for virus cases in our own country, is now shutting down again. The difference this time, in my opinion, could be that our efforts to provide vaccinations for our population are in full swing, while Europe struggles to establish an effective program.  Just yesterday, President Biden has doubled his forecast (to 200 from 100 million} for vaccinations available by the end of May.

 

All of the above uncertainty is what I believe is behind the radical behavior we are witnessing this month in the stock market. This too shall pass. I am hoping by the second week in April we will have put all this indecision behind us. In the meantime, take advantage of any pullbacks to move into areas I have already recommended in the beginning of the year such as industrials, materials, financials, and energy among other commodities as well as small caps.

 

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.

Last week, a bipartisan slate of U.S. Senate co-sponsors introduced the Secure and Fair Enforcement Banking Act (the SAFE Act) that would allow the cannabis industry to tap the federal banking system. If passed, this could be a game changer for marijuana companies.

 

The SAFE Act has already been passed by the House back in September 2019 but was never brought up for a hearing, much less a vote in the Senate.

 

The bill's author, Congressman Ed Perlmutter, a Colorado Democrat, has introduced several versions of this bill many times over the last eight years. During that time, the legalization of marijuana has moved from a pie-in-the-sky hope of a few legislators to something that may actually have the votes to pass.

 

Forty-seven states have already legalized either recreational or medical marijuana (as well as the District of Columbia and four U.S. territories). That should have been pressure enough to overcome lawmakers' resistance and yet, the legal status remains the same. Cannabis is still a Schedule 1 drug that makes it illegal on the federal level; as such, most cannabis companies are excluded from utilizing banking accounts. They have to operate on a cash-only basis.

 

At the same time, the banking sector, as well as numerous public companies that might want to enter the cannabis space, are precluded from doing so in fear that they will run into problems with federal insurers and the federal government.

 

The cash-only model hamstrings marijuana companies that would like to borrow in order to expand but can't because bank loans are unavailable. It is both frustrating and somewhat ludicrous to many that this U.S. sector, which is valued at $17 billion, remains a cash business. It has also developed into a public safety issue since cash-laden tills of cannabis companies are prime targets for robberies and burglaries.

 

During the pandemic, a large number of states deemed the cannabis industry an essential business due to medical marijuana prescriptions. That also presents a public health concern, since more and more of these medical marijuana companies are dealing with increased demand. Many of them need access to the banking system to insure the continued flow of product to their patients.

 

In any case, in order for the SAFE Act to pass in the Senate, a minimum of 60 votes would be needed. At last count, advocates believe they have 59 votes, which would be more than enough momentum to at least field a Senate committee hearing. After that, the bill could be moved to the full Senate for a vote within the next month.

 

In the meantime, the New York State Legislature is expected to vote on its own Marijuana Regulation and Taxation Act, any day now. Passage would legalize recreational marijuana, as well as provide $350 million in tax revenue per year. This could be another large boost in revenue for several marijuana companies. The market for recreational pot could become a multibillion-dollar industry in the state. Some forecasters expect sales to grow as high as $7 billion throughout the next four years.

 

And while investors focus on the U.S., don't forget that Mexico has already passed legislation in their lower house, the Chamber of Deputies, this month. The bill will now go to the Senate before being sent to President Andres Lopez Obrador, who already supports passage. The legislation is expected to be approved by their Senate any day now. Mexico, with 130 million people, would represent the largest marijuana market in the world by population.

 

With all this good news on the legislative font, it appears to me that we are on the cusp of a major series of catalysts that should benefit the cannabis industry and propel the stock prices of several well-positioned and profitable marijuana companies here in North America.  

 

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 saga of rising interest rates in the long end of the U.S. Treasury market continued this week. Investors, fearing runaway inflation, sold both bonds and stocks. Will the selling continue, or Is this a buying opportunity?

 

It depends upon which asset class we are talking about. Yields on the 10, 20, and 30-year U.S. Treasury Bonds, I believe, will continue to rise. How far? It is possible that the benchmark "Tens" could finish the year at 2 percent. In the short-term, however, I expect yields to fall a bit on profit-taking.

 

Last week, I warned readers that the rise in rates was not over. I expected yields on the U.S. Ten Year Treasury Bond to hit the 1.70 percent level or higher. Currently, they are yielding 1.75 percent, which is a fairly steep move in less than a week. It is the speed of the ascent in yields that is most spooking equity investors.

 

But where is the Fed in all of this? The simple answer is that the Federal Reserve Bank controls short-term interest rates, while long term rates are determined by the buying and selling of you and me. But it goes further than that.

 

Investors have been conditioned over many years to expect the Fed to be pre-emptive in guiding monetary policy. If, for example, the FOMC board members believe inflation might be getting out of hand in the future, they will nudge rates higher now to head off that danger.

 

Not this time. The Fed, and its Chairman Jerome Powell, want inflation to rise and plan to wait until that happens before reacting. This is a new concept for market participants.

 

For the first time in a long time, the Fed is making employment its priority and not Wall Street. The real unemployment rate in this country is thought to be about 9 percent, depending on what data you look at. The Fed wants to let the economy grow until that number drops dramatically. If that means the economy grows "hot" and inflation rises for a quarter or two to achieve that goal, so be it.

 

The Fed believes that any sustained, long term rise in the inflation rate will only become a problem if wages start to rise and rise substantially. Consider that back in 2019, when the unemployment rate was as low as 3.5 percent (the lowest since 1969), the inflation rate was only 1.81 percent, despite wage growth of 4.6 percent. Given the still high rate of unemployment, it is hard to imagine that wage growth and any potential inflation it might cause will occur any time soon.

 

But what about the record rise in commodity prices, like food and energy? Isn't that inflationary? The Fed considers these price movements short-term aberrations. Consider the oil price, which can fluctuate by as much as 4-5 percent in a day. On Thursday, for example, crude fell 7 percent. The Fed is concerned with the long-term trends, while you, me, and Wall Street are focused on today, tomorrow, and at the latest, next week.

 

But who is to say that if the Fed waits to react to a 2.5 percent-3.5 percent uptick in the inflation rate, they will be able to put the genie back in the bottle? Can we trust the Fed to let the economy grow hot enough to employ America's workers without unleashing a new and damaging multi-year trend of inflation? The market seems to doubt that.

 

I advised investors to raise some cash in highflyers, mostly in the new tech area, in February because I believed this month would be volatile at best. That is proving to be the case. Over the next few weeks, readers should start putting that cash back to work on the market's down days.   

 

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.