A 5 percent gain in nine days on the benchmark S&P 500 Index was met by profit-taking. Traders booked gains in Trump trades as some had second thoughts about continued upside. Who can blame them?

 

The conviction by many that happy days are here again (or will be by next year) sent markets through the roof in a frenzy of FOMO-generated trades. Technology took a back seat for a change as small-cap stocks soared on the belief that tariffs would force consumers to buy made-in-America products from American companies.

 

Smaller capitalization companies are distinctly American and are listed on the Russell 2,000 Index. Traders know that a good 40 percent of these companies make no money and bought them anyway. Hope springs eternal when it comes to the future economic prospects of the economy under a second Trump administration.

 

Semiconductors stocks which have led the markets higher for a long time did not participate. Poor earnings guidance from several big companies, plus fears that tariffs and China bashing could reduce prospects even further, triggered a wave of selling. Even Nvidia, the poster child of AI, felt some of this cold downside draft.

 

That may change next week, however, when the company is scheduled to report earnings.   Most analysts believe it will be another stellar quarter for this semiconductor darling. It had better deliver or things could get ugly in Stockville.

 

The precious metal and commodity areas have also seen a wave of selling as both the US dollar and interest rate yields have climbed just about every day since the election. That combination of higher rates and the dollar has historically acted like kryptonite to gold and silver.  You might say a strong dollar is the result of Trump's election, and you would be correct, but it may not be for the reason you think.

 

As I wrote last week, foreign countries are devaluing their currencies against the dollar as fast as possible. They are doing so in anticipation of across-the-board tariffs that Trump has promised to levy on their exports into the U.S. They do so to lessen the impact of this policy on their exports.

 

The cheaper their currency, the cheaper their imports will cost American buyers. So, when tariffs are tacked onto these rock-bottom prices, it will simply mean prices return to where they were before his election. No harm no foul.

 

Bond prices are falling, and yields are climbing higher as the dollar strengthens. Two reasons come to mind. Trump's stated policies (tariffs, immigration, spending) will be inflationary. Second, economic growth may be stronger as well. That combination of higher growth and inflation will typically mean that bond buyers demand more returns to stay with bonds when they could get higher returns in the stock market.

 

Both the Consumer Price Index and the Producer Price Index came in slightly hotter than the consensus estimates for last month. Readers may recall that was my forecast given a few weeks ago. I believe the next data points in December could also show higher inflation. It may be the reason Fed Chair Jerome Powell said Thursday that the central bank saw no need to hurry to cut rates further.

 

Of all the great gains among asset classes since the election, Bitcoin has been the big winner, in my opinion. It is the gold standard of the now dominant generation, the Millennials. As an alternative to the dollar and the political/economic system of their parents, it is the preferred currency of populism. As a first stop in its climb to new heights, my target is $98,700, which is not unique. Wall Street overall is forecasting $100,000 for bitcoin by the end of the year. It could go higher, and probably will if you believe in cryptocurrency and are willing to wait for further developments sometime next year. Bitcoin has come of age, as have its owners.

 

I noticed that there is a small but growing army of crypto bulls who are upping their price targets over the next two quarters. This always happens in parabolic moves like this.  What I have learned over the years is if you are making money rapidly and it seems so easy (as it does right now in crypto) that is the time to be most on guard for an abrupt reversal  If that happens, just remember that you could easily see $83,000-$80,000 on a pullback in the blink of an eye.

 

My advice is to beware what may be false narratives. The stories that are being spun about the impact of future policies on certain industries and sectors should be taken with an ocean full of salt. On Friday, for example, health-care stocks were decimated because Robert F. Kennedy Jr., who holds unorthodox views on healthcare, was appointed to head the Department of Health and Human Services. Earlier in the week, defense stocks were sold because of fears that the newly created Department of Government Efficiency will hurt the profitability of government contractors. Do not get caught up in this frenzy both good and bad.

 

As for the overall market, I counseled that election results could fuel both upside and downside. In other words — high volatility. We have experienced the upside and now we get to experience a little of the opposite. Over the next two weeks, we could see further declines. If so, I would put money to work on dips. 

 

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.

Tuesday's presidential elections and the Fed's decision on interest rates have traders rushing to hedge their portfolios or go to cash. It is a little late in the day to take such action.

 

Over the last few weeks, I have been warning readers that the days surrounding the election could prove to be volatile. That situation appears to be taking center stage as we close this week's trading. I also urged investors not to get caught up in the panic and I hope you listened.

 

We are no further along in predicting the election outcomes than last month. The only thing we do know is that the race is too tight to call, and the popular vote will not be a determining factor in the results. The Electoral College will call the shots, so it comes down to the individual states.

 

The consensus on Wall Street is that the U.S. Senate has a high probability of going Republican.  The House is a toss-up. What party gains the majority will depend on whoever wins the presidency. The betting markets have Trump's probability of winning at 63 percent. The polls say it is a dead heat.

 

We may not know who won the race by Tuesday night. It could even take a day or two before there is a definitive result. Congressional winners might take longer than that since some states like California and New York have been notoriously slow in counting ballots in years past. It is fair to assume a period of recounts and legal challenges.

 

That means there may be a period where the country (and markets) will be in limbo. You may remember the Busch-Gore election of 2000 where the election results were contested by Al Gore. It wasn't until Dec. 12, 2000, that the election was decided. The S&P 500 Index fell 8 percent during that month. 

 

Historically, investors have difficulty dealing with the unknown and this time should be no different. That could mean a couple more days if not more, of extreme volatility after the election.

 

On Thursday, the FOMC will announce its interest rate decision. The bond traders expect a 25-basis point reduction in the Fed funds rate. The odds, however, of another cut in December have come way down over the last month.

 

This week's deluge of data paints a picture of a strong economy with third-quarter GDP estimated to be 2.8 percent, slightly down from last quarter's 2.9 percent pace. The most recent update on inflation, the Personal Consumer Expenditures data rose 2.1 percent last month, which was within the range of estimates. But the Fed likes to look at the "core" PCE, which excludes food and energy. On that metric inflation is at the same level it was In August showing no improvement.

 

If you look at the inflation data in a different way, it may help you to understand why many voters are unhappy with the state of the economy.  When you divide the inflation rate into discretionary items (eating out, movies, concerts, trips, etc.) versus non-discretionary items (food, fuel, health care, insurance) there is a glaring disconnect between the two. The discretionary inflation rate is down to almost 1 percent growth, but non-discretionary is greater than 5 percent. It shows that lower-income voters, who can only afford the basics, are still getting walloped by inflation.  

 

The non-farm payroll report for October was a big surprise, adding just 12,000 jobs. However, the markets are discounting that number due to the labor disruptions caused by two hurricanes plus strikes at Boeing. In summary, the macroeconomic data reported this week should keep the Fed on track to cut interest rates by another quarter percent next week. As for their plans for future cuts, I expect the Fed will remain data dependent.

 

In the days ahead, financial market volatility should increase. Markets will move quickly on the events as they unfold. I would not be surprised to see a minus-1.9 percent down day, for example, followed by a plus-2 percent up day, followed by another down minus-1 percent day. That is because the short-term movements of the markets are largely in the hands of algorithmic computers, proprietary traders, and ODTE options traders.  

 

Elections, especially this election, will not only impact financial markets but will also affect most people personally.  I get that, but my advice is to stay on the sidelines as far as your portfolios are concerned. Historically, just remember that elections have little to no impact on the market's performance after a 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.

Markets vacillate between betting on a GOP sweep and a Democrat victory with little justification for either outcome. Don't get caught up in the frenzy.

 

The betting markets have Trump winning but they have been wrong in the past and it is easy to tip the odds one way or the other with a couple of big bets. The polls are no help either because the results are all within a margin of error that makes them useless.

 

Only 36 percent of the S&P 500 have reported third-quarter earnings. So far, 79 percent of companies have beat earnings by a median of 6 percent. Sales results have also been strong with 58 percent beating estimates. The corporate results have provided strong support to the markets. 

 

The ongoing Trump trade has seen areas such as precious metals, Bitcoin, and financials outperform as traders bet on a comeback in inflation and deregulation. The expectation that tariffs, as well as massive spending and tax cuts, are just around the corner are fueling the gains in these areas.

 

Gold and silver and the miners that produce them are finally seeing some profit-taking after an enormous run higher. That is a good thing. I still think asset class has more to go in the months ahead. As for Bitcoin, I am a bull on cryptocurrencies and believe both candidates will encourage the expansion of this "digital gold" if elected.

 

Overseas markets reflect the same ups and downs as the U.S. China has given back some of its recent gains as investors doubt that the government stimulus measures announced last month are enough to pull the country out of its economic slowdown.  If there is going to be another leg of stimulus, it won't happen until after the U.S. elections, in my opinion.

 

Economic data continues to show a strong economy, which puts pressure on the Fed to stand pat rather than cut interest rates again. New home sales gained 4.1 percent. Business activity in the Chicago and Kansas City region was better than expected, while the nation's services sector continued to expand. Initial jobless claims also fell by 20,000 jobs.

 

The final week in October is laden with macroeconomic data points. Information on consumer confidence, JOLTS job data, GDP, new home sales, the core PCE, unemployment claims, job payroll numbers, and manufacturing PMI, to name just a few. Any and all of the above can move markets, but so far most of the macro data and earnings results present a Goldilocks environment for the financial markets. 

 

In this environment, we could see sharp spikes higher and dramatic declines lower. The S&P 500 Index is running up against strong resistance zones right now. In the short term, I would like to see the S&P 500 Index take out 5,900. If so, we could see another 100 points upside in that index.   

 

Depending upon the election outcomes and possible post-election controversy, the downside range could be as much as 5-7 percent. If the election outcome is called into question, the decline could be steeper. What to do? Nothing. Sit on your hands and watch but if the market falls, I would buy the dip.

 

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.

Investors are increasingly preoccupied with the general elections, which are less than three weeks away. That focus should increase as we go down to the wire, and as it does, so will volatility.  

 

It is getting harder to ignore the election contest. The media, both mainstream and social, spews out a continuous stream of political news. I finally shut down my X account this week because of it. Although difficult, my attention remains focused on the market and not the election.

 

This week, third-quarter earnings have kicked off, and results have been strong thus far. Of the 58 companies reporting thus far, 76 percent have beat estimates. Banks have surprised to the upside. Revenue growth has been tracking at plus-5 percent, within the 4 percent to 5 percent growth rate we have seen over the past eight quarters.

 

Why is that important? Many pros have been arguing that as inflation falls, so will corporate sales, insisting that much of the sales gains have been the result of price increases. That has not happened. As companies roll back prices, revenues continue to grow.

 

The debate on whether the Fed will continue to cut rates and by how much continues to rage among traders. I am firmly in the camp of no more than a 25-basis point cut when the Fed meets again on Nov. 5, just one day after the general elections. The Fed does not need to cut more than that given the strength of the economy and the rate of decline in inflation. However, there does appear to be a change in what the Fed can control in the interest rate arena.

 

Historically, the Fed controls short-term interest rates by raising or lowering the Fed fund's overnight interest rate. Normally, longer-term rates would follow suit in the same direction. But little is normal in today's debt markets. The public sector bond market (the bond vigilantes) has shown that they control the long end of the curve despite the Fed’s machinations. It explains why longer-term yields have risen ever since the Fed cut rates last month.

 

Long-term bond yields have plateaued after several straight weeks of rising. Bond players believe that the Ten-Year U.S. Treasury bond yielding around 4.09 percent may adequately discount both economic growth and the present state of inflation — at least for now. I say "now" because the election outcome may send yields soaring once again.

 

The long list of tax cuts, spending programs, tariffs, etc. made by both party's candidates would add many trillions of dollars to an already mountainous deficit. The non-partisan Committee for a Responsible Federal Budget estimates that Trump would add $7.5 trillion to the deficit, while Harris would add $3.5 trillion. At the same time, both parties are completely ignoring the $35.6 trillion in debt we owe right now. The U.S. now has a debt-to-GDP ratio of about 100 percent.

 

But while politicians of both persuasions continue to ignore that fact, the bond vigilantes do not, nor will foreign bond buyers. Their next move, whether to buy or sell bonds, will be determined by what happens on Nov. 5. The polls indicate a narrow win by one candidate and a mixed Congress.

 

If so, neither party will have enough votes to pass legislation that could add trillions of new dollars to the U.S. debt load. A sweep by either party, however, would change that equation and likely set off another spike in long-term interest rates. That, I believe, would be problematic for the stock market in 2025.

 

In the meantime, while the polls have both candidates at a dead heat, traders are taking their lead from the $2 billion presidential betting market. The Street believes the odds carry more weight since players are willing to bet their money on the outcome.  For example, this week, one of the election betting markets (Polymarket) has seen the odds of a Trump win rise to 58 percent-60 percent. Seven other betting markets show an average of 56.1 percent for Trump versus 43 percent for Harris. As such, many in the stock market are convinced that Trump will win.

 

Traders have responded by bidding up areas of the market that they think would do better under Trump. Inflation would be higher, say traders, so hard assets and precious metal stocks gained ground. Bitcoin and other cryptocurrencies climbed since Trump promised to make America a world leader in crypto. Small-cap stocks that are sensitive to lower interest rates, outperformed as well. Here, the idea is that Trump would likely pressure the Fed to keep reducing interest rates. That would also be good for financial stocks.

 

Balderdash, say I. At the racetrack, betting on the favored horse to win does not guarantee the winner. In the days ahead, one or the other candidate may say something stupid, or make a perceived breakthrough that changes the betting odds or the polls. If so, markets or sectors could reverse on a dime. Don't get sucked into playing that game.

 

On Wall Street, volatility is usually interpreted as meaning selling pressure, but that is not always the case. While markets are stretched, overextended, and expensive, they can remain so for longer than one would expect. One contrarian indicator I watch indicates that bullish sentiment among investors is at the highest level of the year.

 

In this environment, we could see sharp spikes higher as well as dramatic declines lower. Depending upon the election outcomes, the downside range could be as much as 5-7 percent. If the election outcome is called into question, the decline could be steeper. What to do? Nothing. Sit on your hands and watch but if the market falls, I would buy the dip.

 

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.

Mixed inflation data, higher unemployment claims, steeper bond yields, the unresolved Israeli counterstrike against Iran, and jitters over the election kept the equity averages volatile throughout the week. Despite those worries, the S&P 500 Index and the Dow hit record highs.

 

A bullish stock market often climbs a wall of worry. This week certainly qualified. Investors had to contend with a continued rise in yields on the benchmark Ten-Year U.S. Treasury and poor results of a government auction for that bond. The yield this week hit a high of 4.09 percent and has gone straight up ever since the Fed's 50 basis point cut in the Fed funds rate last month. If the Fed is cutting interest rates shouldn't bond yields go down, not up?

 

The answer revolves around bond market expectations. After last month's interest rate cut, the bet that the Fed would give us even more cuts in the months ahead rose substantially. Many traders concluded that the Fed would follow up that first cut with two more half-point cuts in the next two months, and as much as four more the following year. By the time the Fed announced its first cut, bond yields had already plunged, discounting this rosy scenario.

 

In the meantime, the economy has continued to strengthen by more than most economists have expected. This, I suspect, is a result of increased federal spending, which almost always occurs during a presidential election year. Growth is great, but a stronger GDP  reduces the need for more monetary stimulus.

 

And let's not forget the inflation fight. September's inflation report, the Consumer Price Index (CPI) fell from plus-2.5 percent to plus-2.4 percent, but core inflation (ex-energy and food) increased from plus-3.2 percent to plus-3.3 percent. The Producer Price Index (PPI), however, came in cooler. The two together equated to a big nothing burger as far as the markets were concerned.

 

However, bond traders are growing concerned that stronger economic growth and additional rate cuts could be a recipe for a revival in inflation. They point to oil prices, a key component of inflation, and a lift in commodity prices, which could keep inflation sticky in the months ahead.

 

The spike in the oil price is based on fears that Israel may hit Iranian oil production, while China's new stimulus program is responsible for the spike in commodities. I believe the rise in oil could easily reverse if the geopolitical situation in the Middle East abates but my crystal ball is exceptionally cloudy in that arena. China's growth, however,  may be a more lasting development depending on how successful the government's fiscal stimulus may be.

 

I don't believe one or two more data points between now and the November FOMC meeting will impact the Fed's decision. But I do believe traders got over their skis in anticipating a series of large interest rate cuts through next year. The Fed certainly did not indicate such a plan was on the table. One voting FOMC member of the Fed recently suggested that he would be happy to skip a rate cut at the next meeting.

 

The bond market is still betting that rates will be reduced in November by another 25 basis points although a 50-basis point cut is now off the table. I expect that this month was the trough in inflation progress. Over the next few months, inflation data may show an uptick. If so, expectations for more cuts will rapidly diminish.

 

Despite these worries, equities continued to plough ahead grinding higher and higher as the week progressed. The third quarter earnings season began on Friday with large bank earnings. Investors seemed pleased with the results. Expectations going into the season are that the rate of gain in earnings overall will be lower than last quarter but will bounce back in the fourth quarter.

 

The Chinese stock market, after a nine-day streak of gains, finally succumbed to profit-taking earlier this week. Global investors were disappointed that further fiscal stimulus programs have not been announced. I think this pullback is healthy. Additional gains are in store for that market,  in my opinion, after a short period of consolidation. I also believe that emerging markets are interesting and cheap versus U.S. stocks.

 

As for U.S. stocks, the averages are extended given the spate of new highs. We are also entering the second week of October with the elections less than a month away. The race is too tight to call. My greatest fear is that we may face a protracted period in which the winners are in doubt. I don't think the markets would take kindly to that environment. 

 

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.