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.

The bears are prowling the corroders of Wall Street. No one questions that, but rallies in downtrends can be breath-taking. Look for one of those short covering relief rallies in the coming week.

 

Do I know that will happen? Of course not, but when we get as oversold as we are now, the chances are high. If we do bounce in a relief rally it would trace out the first up to the center of my "W" pattern. The bounce won't last long, maybe for a few days or, at best, next week. And then down again. For those readers who may be hoping that at some point we will resume the bull markets of the last decade, give up that notion.

 

I fully expect another low that may match or break the year's low of S&P 500 Index of 3,877 made this week. Readers were forewarned last week that the index could (and did) break my 4,000 targets. There were several reasons for this bearish behavior.

 

The inflation numbers were the key trigger. On Wednesday May 11, 2022, the Consumer Price Index came in hotter than expected at 8.3 percent. For the month, the index gained 0.6 percent. The data disappointed traders who were gambling on a cooler set of numbers that might confirm that inflation was peaking.  But instead of carrying the market up 5 percent, or more, the opposite occurred.

 

The Producer Price Index, which was reported the following day, did come in a bit weaker at a11 percent increase year-over-year, and 0.5 percent for the month. The lack of "inflation peaking" evidence squashed hopes that the Fed might be tempted to go easier in their hawkish policy plans, so markets tumbled. 

 

For many investors a bearish assault on the market's "Generals" was of far more concern. The bears have torn apart the Meme stocks, the Cathy Wood stocks, and every other high-priced, no earnings, kind of security they could sell or short. However, this week traders came after the Generals — Apple, Microsoft, Meta, Amazon, Google and even Tesla.

 

As company after company during the last quarter's earnings season provided poor future guidance in sales and earnings, investors are wondering how long it will take for the Generals to add their voices to this growing chorus. Many investors are not waiting around to find out. Price declines in these individual stocks has had a knock-on effect in the market, since they comprise such a large weighting in the overall investments of so many mutual funds and exchange traded funds. As such, the further they decline, so goes the stock market.  

 

I have been waiting for this kind of behavior, because without it there is no hope that we can find a bottom in the stock market. The problem is that this selling has only just begun for many of these stocks. remember that in many cases, the more speculative stocks are down 60-80 percent from their highs.

 

The Generals are nowhere near this kind of decline. Do I think we will see the price of Apple, for example, cut in half or more? Doubtful, but another 10-15 percent might be a real possibility. That is important since Apple is about 7 percent of the S&P 500 Index, and 13 percent of the NASDAQ Index.

 

As I said, I am expecting a relief bounce this week. It is just another bear market bounce, one of many we can expect as markets search for a bottom. Readers may ask where do I see that bottom?  This week we briefly touched my target of 20 percent on the S&P 500 Index at 3,858. The NASDAQ hit my targets weeks ago and has suffered further declines. 

 

I expect we will need to retest that 3,858 level on the S&P 500 Index level. If it holds, I might feel confident that we have made an interim low that could last out to September. That said, May, I believe, is the month to pick up some good bargains as we continue to dip and bounce in this "W" formation. I am hoping that by June, we can see a better market with some hope of putting together a string of higher highs for two months or so.

 

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.

Market participants heard from members of the Federal Reserve Bank this week. Their intention is clear: bringing down inflation will take precedence over everything else in the economy. The message went over like a lead balloon.

 

You would think that most investors would have received that message by now.  I know that I have been warning readers of this outcome since last year. But for most market participants this seems to be a shock given the positioning in the stock market this week. It was nothing short of tumultuous.

 

We started the week by retesting the lows we put in for the year. The S&P 500 Index hit 4,062 on Monday, May 2, just 10 points higher than the previous low. 

Stock indexes subsequently careened higher into Wednesday's FOMC meeting, expecting that whatever announcements on Fed tightening had already been discounted. That triggered a "buy on the news" event. It was the same strategy traders used after the last Fed meeting in March that saw stocks gain for weeks afterward.

 

The maneuver worked again — at least for the day. The indexes soared well over 2 percent-3 percent between the time that Fed Chairman Jerome Powell started his press conference at 2:30 and the markets close at 4 p.m.

 

Did he say anything that could have triggered such a move? The only comment that could be construed as new information was Powell's intention to limit monthly interest rate hikes to 50 basis points or less, rather than the 75 basis points or higher many investors expected. On Thursday, May 5, the markets tore down the entire gain and then some. Friday, we continued the downward spiral. What happened?

 

One can only guess that investors were spooked by how much monetary tightening is going to negatively impact the economy and earnings. Investors are now asking at what price level markets should be trading given the unknown future. Obviously, investors determined that level should be lower. How much lower?

 

My own target has already been met for a third time (as of Monday's and again Friday's retest of the lows). Can it go even lower? Yes, some strategists have targets as low as 3,650-3,750 on the S&P 500 Index. In a market where the VIX index is still trading above 30, the swings in markets are such that we can easily overshoot on the downside to those levels.

 

We are now in a period of bottoming that will look like a sloppy "W" pattern that will play out into sometime in June. I suspect it will take a few days for investors to come to an agreement on at what index level stocks represent better value. That level could be around my target low, or somewhat lower.

 

Take that time to pick and choose where you want to "Play in May" as I said last week. I expect that over the next two weeks we could see the 4,370 level on the S&P 500 Index and then down again into early June and then up again. If you can't stand that kind of heat, stay out of the kitchen.      

 

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 first quarter 2022 earnings season kicked off this week with mixed results. Thus far, the standouts were Netflix and Tesla. The two companies' results could not have been more different, but in the end it didn't matter.

 

Netflix disappointed, reporting its first loss in subscribers in recent memory, while investors were expecting a gain in subscriber growth. There were many reasons for this including the loss of 700,000 Russian customers as a result of the Ukraine War. At last count, the stock lost 37 percent of its worth in three days and took the NASDAQ index down along with it.

 

Tesla, the eclectic vehicle darling, hit a homerun after the close on Wednesday, April 20, when it beat earnings, sales, and forward guidance results. Thursday it soared 9 percent on the opening and took the NASDAQ back up by more than 1 percent, but not for long. By the end of the day, the markets reversed dramatically (thanks to statements from Fed Chair Jerome Powell).

 

All of that reveals the nature of the markets today. In this example, two mega-stocks had the power to move entire markets dramatically based on one quarter's earnings results. But it also illustrates what could happen to the global equity markets if the top five or six U.S. stocks happen to fall out of favor. That could happen if the Federal Reserve Bank decides to deliver a hawkish surprise to investors at their May 3-4 Federal Open Market Committee (FOMC) meeting.

 

I keep harping on the importance of this coming meeting, because, depending upon the results, stocks could easily retest, or break the lows we hit in March 2022. If, on the other hand, the FOMC members, led by Chair Jerome Powell, decided to be less hawkish (meaning less quantitative tightening and fewer interest rate hikes), we could see markets soar in a relief rally. Of course, such a rally wouldn't last too long because investors would quickly realize a dovish stance would likely mean higher inflation.

 

Suffice it to say, the risk ahead could be substantial. The stock market turned down on a dime on elevated volume when Fed Chair Powell said on Thursday, "I would say 50 basis points will be on the table for the May meeting." 

 

Markets are expecting such a move but still lost over 1 percent-2 percent on his simple statement which illustrates how the Fed trumps everything else. Anxious investors are waiting to see what else may be coming in the monetary arena in the weeks ahead.

 

On April 6, William Dudley, the former president of the New York Fed, in a Bloomberg guest column on inflation and Fed policy said, "It's hard to know how much the U.S. Federal Reserve will need to do to get inflation under control. But one thing is certain: To be effective, it'll have to inflict more losses on stock and bond investors than it has so far."

 

That statement has reverberated throughout the financial markets ever since. Of course, it is only one man's opinion, and Dudley is no longer a member of the central bank. Yet, I find it interesting that there were no comments from Fed members dismissing his conclusions after they were published.

 

As Berkshire Money Management's Allen Harris said a week ago, writing in the Berkshire Edge, "Dudley may no longer be a member of the Fed, but I believe he is communicating a message from them." Harris believes "the Federal Reserve is OK slowing down the economy to fight inflation, even if it crushes the stock market."

 

As readers are aware, I have been cautious throughout most of this year. I remain cautious. As I wrote several weeks ago, we could see a substantial decline in the stock markets in late April, early May based on Fed tightening.

 

One caveat to my May call could be that the markets sell down before the May FOMC meeting. If so, we could see a "sell the rumor, buy the news" event, just like we witnessed after the last FOMC meeting in March, when the Fed first raised the Fed funds rate by 25 basis points.

 

Now that I have you all spooked, however, let me give you the good news. I would be using any decline to buy stocks. I believe we could see a healthy rebound after that selloff that lasts through the better part of the summer. So, rather than "sell in May and go away" this year, I plan to "stay in May and play."

 

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.

Inflation is climbing at the highest rate in 40 years. Gas prices at the pump are giving consumers a bad case of sticker shock and food, well we all know about that. So why are economists talking about peak inflation?

 

U.S. consumer inflation, as measured by the Consumer Price Index (CPI), reached 8.5 percent in March 2022. The producer Price Index, which measures the cost of inputs for companies, jumped to 11.2 percent in March. On the surface, both numbers are dreadful, but economists look behind the headline numbers for hints of what areas when up and what went down.

 

The month-to-month rate of core price increases slowed in March and declined for core goods. Core goods are an aggregate of prices paid by urban consumers for a typical basket of goods, excluding food and energy. Used car and truck prices, for example, which are a large part of core goods fell by 3.8 percent. Used car prices, as most readers know, have skyrocketed in the past year and have been a major contributor to higher inflation.

 

Traders decided the data leaned toward a cup half full and bid stock prices up. At the very least, they decided, inflation expectations were at least contained. That is important since inflation expectations play an important role in how we set prices and wages. Investors are hoping that the pace of core price increases slowed down last month could be an indication that a peak could be in the offing.

 

However, one swallow does not make a summer, nor does one data point make a trend. My own opinion is that we should see a peak in inflation sometime before the second half of the year. That has been my expectation since the beginning of the year. It is based on a loosening of some of the supply chain shortages that we have been battling since the onset of the coronavirus pandemic. We may be seeing an early signal of this expected pivot.

 

U.S. jobless claims held close to multi-decade lows this week. Initial jobless claims last week were 185,00 which are still near a 54-year low set earlier this month. Think back to April 2020 at the height of the pandemic when in a single week in April jobless claims hit 6.1 million. U.S. Gross Domestic Product (GDP) is still growing but slowing. The Conference Board is expecting a 3 percent growth rate for 2022, which is still above trend.

 

From a macro point of view, the economy despite the inflation rate, still looks in pretty good shape. The fly in the ointment, for both Wall Street and Main Street, is the high inflation rate. The worry from investor’s standpoint is can the Fed manage a soft landing and at the same time stop inflation in its tracks. Any indication that inflation is slowing could mean the Fed may not need to be as hawkish in the months ahead.

 

Last week, I was expecting a bounce in the market once stocks re-tested the 4,400-4,500 level on the S&P 500 Index. This week both sides of that level have been broken with no clear winner. We are still testing that range and closed on Friday at 4,392, slightly below my range.

 

True to form, I am expecting the volatility in the equity and bond markets to continue into next week. Earnings season is again upon us, and while I am expecting some decent results, the forward guidance is crucial. My best guess is that we are up in the beginning of the week and then down once again to end it. As we get closer to May, I am still expecting another dramatic decline, but I would be a buyer of that sell off.

 

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.