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.

 

 

"Quantitative Easing" or QE, may be a more familiar concept to readers, since we have been experiencing some form of QE (monetary stimulus) since the Financial Crisis of 2008. QT is the opposite. The Fed first tried to reduce its balance sheet back in 2018-2019. The stock market had such a hissy fit that the double-digit melt down that ensued convinced the central bankers to back down in their attempt to normalize their balance sheet. By the end of 2018, the Fed was allowing $50 billion/month to run off its balance sheet. Market turbulence erupted almost immediately and by March 8, 2019, the Fed under Jerome Powell, turned the money spigots back on and reversed the easing that "no longer seemed necessary." The crisis was over, and so was QT.

 

The problem, however, is that investors have become accustomed to the low interest rate environment that the Fed engineered through asset purchases and low interest rates. It has become an essential prop holding up equity values, which have climbed higher and higher.

 

Every time the Fed has sought to drain liquidity from the banking system, the stock market has reacted by staging a Taper Tantrum. There was one in 2013, another in 2019 and we are in one now.

 

Fast forward to the coronavirus pandemic when the Federal Reserve Bank bought a massive $3.3 trillion in U.S. Treasuries, and $1.3 trillion in mortgage-backed securities to support the markets. Those Fed purchases have not only contributed to the massive gains in the stock market in 2021, but also contributed to the present explosion in the inflation rate.

 

On April 6, the FOMC minutes of the Fed's March 15-16, 2022, meeting became available. The notes showed deepening concern among members that inflation had broadened throughout the economy. Most policymaker were prepared to raise interest rates in May by 50 basis points and continue these half-percentage-points hikes in coining policy meetings.

 

They also supported a second try at reducing the Fed's holdings of Treasury bonds. Up to $60 billion per month of U.S. Treasury bonds will be sold as well as reducing $35 billion per month in mortgage-backed bond holdings. That is nearly double the Fed's QT program from 2017 to 2019. By reducing the balance sheet, while moving the short-term, Fed funds rate higher in 50-basis-point increments. The Fed is again taking away the punch bowl for equity investors.

 

The news may have shocked most investors, but unfortunately it was part and parcel of why I have remained relatively bearish throughout the year thus far. Will investors double down on dumping equities or will they calmly go to the slaughter ahead?

 

I fear that an even worse sell-off may be ahead of us sometime in May 2022 when the Fed begins implementing QT.  The stock market has been practically straight down most of the week on news of this plan. I advised readers last week that the stock market had become too "frothy" after the bear market rally of last month. I wrote that we could see a pullback to "between 4,400-4,500 level on the S&P500 Index." We have accomplished that, and I am now looking for a relief rally that should continue for a week or two. After that, we face earnings season and the next Fed meeting. Strap in.

Speculation is not quite rampant but it's getting there. Volume is tailing off and the short covering that has boosted this market higher is fizzling. These are signs that beg for a nice sharp pull back that is overdue.

 

As I have been suggesting (hoping) over the last two weeks, negotiators from Russia and Ukraine are making progress. Investors are beginning to hear more positive statements from both sides. A combination of factors are pressuring negotiators to cut a deal that would be acceptable to both heads of state. I expect that to happen soon.

 

Remember that we are now approaching planting season in the Ukraine. The spring thaw will also make mobility difficult for the invading forces. The Russian army seems to be pulling back in some areas but bolstering its forces in others. I suspect that has more to do with the Russians' strategic intent to capture and hold areas that contain Ukraine's most valuable energy resources.

 

The stock markets' "fear" trades have already begun to dissipate as evidenced by the slide in oil prices. The red-hot price rise in wheat and fertilize stocks are selling off, and gold is faltering as well. But notice that all this good news on the geopolitical front during the past week has not moved the overall averages up by much. That is a tell-tale sign to me that the good news may have already been discounted and it may be time to take some profits on some of the gains we have enjoyed recently.

 

Of course, the flattening of the yield curve, which inverted for a brief time on Tuesday and Thursday, March 29-31, had the bears jumping up and down. A flurry of bearish commentators lined up to solemnly predict the curve will invert further and a recession is right around the corner when it does. What is an inverted yield curve, you might ask, and why is it so important?

 

According to Investopedia, "An inverted yield curve occurs when short-term debt instruments have higher yields than long-term instruments of the same credit risk." An inversion is the first sign that the long-term growth prospects of the economy are in trouble and have preceded every U.S. recession in the past 50 years. Typically, a recession has followed in the two years after an inversion of this measure.

 

However, before you leap into the lifeboat, remember the same thing happened in August 2019. I warned readers at the time not to jump ship, because I believed the condition was temporary. It was, and I think this time around the same thing may happen. If, over time, all the short term, versus long-term, debt instruments — one month, three-month, one-year, two-year, five-year, versus 10-year, 20-and-30 year — were to invert, well then that would be a horse of a different color. We are not there yet.

 

But my optimism concerning the longer-term prospects of the economy doesn't necessarily translate into the short-term prospects for the stock market. I believe that the financial markets are still not out of the woods. This relief rally off the lows is a bear market bounce in my opinion. It has further to go, but a day or two of pullback next week would be helpful. Unless the S&P 500 Index closes between 4,400-4,500 today (Friday, April 1), I expect next week we will work off some more of this froth.

 

Sometime in late April or May, we may see a return to the bottom once again. Why do I believe that when the latest data show unemployment dropped to 3.6 percent? A combination of persistent inflation, a slowing economy, expected tepid corporate earnings, and an even more hawkish Fed will simply be too much for the markets to take on board.

 

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.

Commodities continue to run. Interest rates are hitting new highs, and stocks are holding their gains from last week. Nothing has changed on the geopolitical front and all eyes are once again focused on the Fed and its next meeting in May. What else is new?

 

Stocks have been surprisingly resilient this week in the face of dire predictions that a recession is just around the corner. Many investors, and those who preach to them, are convinced that the Federal Reserve Bank is intent on hiking interest rates to a level where the economy will collapse as inflation continues to spike. One Citibank research team is now predicting 50-basis point increase in the Fed funds rate in May, June, July and September with a 25-basis point hike to follow. I am not in that camp.

 

You might remember back in December 2021, when I warned readers that Wall Street analysts would begin predicting a stagflation scenario sometime in the first quarter of 2022. Their conclusions are understandable, given the macroeconomic data, but I suggest that you take their predictions with a grain of salt.

 

Today, it is fashionable to say that the Fed has lost its credibility. Granted, their stance on inflation which they described as "transitory" proved to be wrong. I believe that global supply side shortages due to the coronavirus pandemic contributed to that miscalculation. It seems to me that estimating the extent of those shortages was, and still is, impossible for anyone to predict.

 

But that does not mean that the Fed is no longer creditable. Fed Chairman Jerome Powell and his FOMC members must thread the needle between raising interest rates to quell inflation, but not enough to hurt the economy. I don't envy their position, but I remain confident that they can do it, if anyone can. What I don't want to do is listen to forecasts from analysts with little or no experience in the areas of inflation and/or rising interest rates.

 

The war in Ukraine is now more than one month old. What Vladimir Putin believed would be a three-day war has resulted in a disaster of alleged war crimes, high casualties, and few Russian victories. The sanctions imposed by the West are beginning to bite and NATO is fast at work shoring up their defenses in Eastern Europe. It is a tinderbox looking for a match.

 

As such, headlines are still the main market movers with percentage point gains and losses commonplace. As I have written, if the VIX, the so-called fear gauge, continues to stay above 20 these big moves will continue. The good news is that VIX is now below 22 — down from more than 30 — two weeks ago.

 

I am keeping my fingers crossed, praying that a cease-fire could be in the offing soon. It appears that negotiations are progressing, although not as fast as most would like. Weather may play a part in bringing the two sides together. It is almost time for the sowing of wheat in Russia and Ukraine and without it, the world's population in many developing areas will suffer.

 

In addition, the change in weather will also bring a thawing of the land in Ukraine. Rivers will rise, rain will fall, and the frozen earth will turn to mud. It will become a nightmare of logistical problems for the Russian invaders as it did for the Germans in World War II. 

 

As for the stock market, given a 6 percent spike in almost as many days a week ago, a brief period of consolidation is to be expected for a day or two next week. If the S&P 500 Index can't get above the 4,530 area in the next day or two, I would expect the three main averages could give back some of their recent gains. That would be a dip to buy, because I still see the S&P 500 Index closer to 4,600 by the third week in April 2022.

 

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.