It was a losing week for stocks. Most of the blame can be pinned on a proposal by the Biden administration to double the capital gains tax on investments. It is not official yet, but investors are counting on an announcement next week.

 

Before you hit the sell button on all those huge capital gains you have accumulated over the last few years, know the facts. Right now there aren't any. What we do know is that Joe Biden ran his winning presidential campaign on increasing taxes on the rich and on corporations. He plans to do just that, so it should not be a surprise to investors.

 

This proposal, if true, would impact the top 0.3 percent of Americans. For those earning $1 million a year or more, he wants to increase the capital gains tax rate from 20 percent to 39.6 percent. That is on top of the 3.8 percent tax on investment income that presently funds Obamacare. If you add in state taxes, the overall capital gains tax would be as high as 52.22 percent for New Yorkers and even higher for California residents (56.7 percent).

 

That would clearly be a steep increase and one that would impact all the stock market, at least temporarily. Just think of the gains some have accrued in the FANG stocks over the past few years. Many high-growth stocks are in the technology space and wealthy investors may want to cash in some of their chips if they truly believe the capital gains proposal would soon be the law of the land.

 

Wall Street pundits, while concerned, are attempting to downplay the suggested tax risk to investors. The level of increase, they say, is simply an opening gambit, a trial balloon, meant to be negotiated downward, if it were to pass at all. The slim majority of Democrats in Congress might make it impossible to get any capital gains tax change to get through.  And, even so, the timing of any tax hike is also in question. Would it be effective this year or next?

 

Market participants are also anxiously watching the global COVID-19 case levels. Countries such as India and Japan are seeing coronavirus cases skyrocket. Here in the U.S., spring coronavirus cases are surging. Back in February, during the last surge, the U.S. was averaging 65,686 new COVID-19 cases a day. Fast forward to today, and we are averaging 64,814 new cases daily. Some states, like Michigan, are breaking all-time records in new cases.

 

You would think that doubling the number of vaccinated Americans would have at least made a dent in the rate of new cases, but at best, all it has done is kept the level of new cases around 65,000 a day. What may be even more concerning is that a new COVID variant has been detected by scientists at the Texas A&M lab that show signs of antibody resistance and more severe illness among young people.

 

The more contagious variants of COVID-19, which have become the dominant strains within the U.S., seem to be the culprit in this case and in the high level of new cases, according to medical experts. However, the good news is that the present administration seems to be doing all it can to get more people vaccinated, provide additional stimulus to the economy, and expand global trade and relations.

 

All this news, as you can imagine, is having an impact on the financial markets. The three averages have pulled back a little this week, but the real story is in the Bitcoin trade. I warned readers last Friday, cryptocurrencies (Bitcoin specifically), were ripe for a correction. Saturday, Bitcoin dropped 15 percent and by the end of this week the price of Bitcoin was below $50,000. Other popular coins such as Ethereum and Litecoin have also declined. Some analysts are expecting as much as a 50 percent pullback in Bitcoin (to $30,000) before the correction is over. 

 

It does appear that momentum is stalling in this space. As I have written in the past, cryptocurrencies are considered speculative assets and not currencies, according to The U.S. Federal Reserve Bank, and other central banks. As such, investing in this area is fraught with risk, no matter how convinced you are in its viability in the long-term. Only those with a strong stomach and staying power should be involved in this space.

 

As for the equity markets, despite a 1-2 percent decline, stocks are in a trading range. As we consolidate recent gains, I expect continued daily rotations between sectors and asset classes. I still think stocks will continue higher in the weeks ahead, but so will volatility.

 

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.

April is usually a good month for markets. Historically, it is one of the three best months of the year for equities. We all know what happens in May ("sell in May and go away") but we will worry about that later.

 

Over in the bond market, the bond vigilantes may have started to doubt their conviction that inflation is a fait accompli and so yields must go up. This week, yields declined a bit, which gave a boost to some sectors (gold and silver, for example), while banks pulled back a little. But Friday's Producer Price Index report for March reversed that. PPI was up 1 percent versus expectations that were only half that, which brings the year-over-year gain to 4.3 percent.

 

After the report, precious metals fell back, banks rallied, and the U.S. dollar gained along with bond yields. But for long term investors these weekly, and even monthly, government reports should be taken with a grain of salt. The Fed has said that over the short-term the inflation rate will rise, but not nearly enough to cause any risk of runaway inflation.

 

This week's sector rotation among the day traders was to sell out of the re-opening stocks and back into large cap technology. Like gold and silver, readers should know that higher interest rates provide a headwind for the technology sector. As such, it makes sense that NASDAQ outperformed both the Dow and the S&P 500 Index this week. But the tech-heavy NASDAQ is still below its old highs, while the Dow and S&P 500 Indexes have been making new highs. I expect that technology overall and the FANG stocks could play catch-up with the other averages this month.

 

The Biden administration's infrastructure proposal also influenced trading. The president's willingness to compromise on the corporate tax rate, plus his invitation to talk with Republicans about the package overall, helped sentiment. That, in turn, pushed the benchmark S&P 500 Index to new highs as well as the Dow. In the meantime, the Russel 2000 small-cap index has taken a back seat to the main averages.

 

In this rotation-prone market, investors have been taking profits in the small-cap arena. There is some justification for this selling. Medical experts have been advising caution over the short-term due to a possible third wave of the coronavirus. This has fueled fears among traders that sporadic shutdowns could occur across America. If so, that could impact smaller companies more than larger concerns.

 

In addition, there has been a noted slow-down in retail participation in the small cap arena lately. Wall Street analysts were predicting that at least half of the latest stimulus checks would find their way into that retail-favored market. That was a bad bet, since the opposite seems to have occurred.

 

Instead, retail investors have paid down debt with their government windfall.  Times are changing as well. As the country gets vaccinated, and more and more new opportunities present themselves (re-opening restaurants, movies, gyms, etc.), individuals are no longer confined to day trading on their computer screens. 

 

I expect stocks to continue to climb this month, supported by good news on the earnings front and the expectation that the economy is gathering steam. Outside of the U.S., Europe and the lesser-developed areas, emerging markets, hold promise. Emerging markets have had substantial corrections during the last two months and seem ripe for buying, in my opinion, especially if the greenback continues to decline.

 

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.

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.

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.

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.