Geopolitical risk, inflation, higher for longer, rising bond yields, take your pick. There are several reasons for the stock market sell-off. The bad news for investors is that after a counter-trend bounce, the selling should continue.

 

There are at least half a dozen reasons why the markets were down again this week. If you have been following my columns, you know that I have been expecting this decline for weeks. The truth is that this pullback is long overdue. I believe it is a healthy, if painful, development that could last a few weeks.

 

I am not discounting the reasons for this decline. The attack on Israel last weekend was gut-wrenching. My next-door neighbor was in Jerusalem at the time visiting relatives, and spent Saturday night in a safe room, while we crossed our fingers and waited for some word from him while watching CNN with his wife.

 

All week investors have been waiting for the next shoe to drop. Thursday night Israel hit back, but with some restraint. Overnight stock futures tumbled, but by Friday morning regained their losses. I believe geopolitical risk will be with us for the next few weeks, keeping markets on edge.

 

As a result, the dollar, gold, and U.S. bond yields continue to rise. To make matters worse, this week Fed Chair Jerome Powell said the last three months of higher inflation data will likely delay interest rate cuts further. Some are even talking of a possible interest rate hike.

 

Pullbacks, corrections, sell-offs, call it what you will, markets are a self-correcting mechanism. One can predict easily that every year, there will be several declines in the stock average that can vary from a few percent to 10 percent or more. Since we haven't had a real pullback since October of 2023, this one may feel especially painful.

 

As readers know, I first started looking for this decline back in February, but the Fed's changing stance on when they might loosen monetary policy postponed the decline. In the first quarter of this year, Fed Chairman Jerome Powell, and his band of FOMC members, had lifted investors' hopes that there could be as many as three rate cuts this year if the data cooperated.

 

That set off a momentum trade in stocks that lasted well into March. As the weeks passed and stocks became more and more extended, I raised my target on the S&P 500 Index to my most bullish line in the sand, 5,240. The index surpassed that level by about 20 points about two weeks ago. Since then, we have sold down until today, the S&P is roughly 5 percent below the highs.

 

Stocks have dropped every day this week. The three main indexes are deeply oversold. The technical charts say that we should expect a counter-trend rally, commonly called a dead-cat bounce. Unfortunately, the probabilities indicate that a bounce will not signal the selling is over. I had been forecasting a 7 percent-10 percent decline and I am sticking with that forecast. That would bring the S&P 500 Index down to 4,820-4,850.

 

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.

"One's a dot, two's a line, three's a trend," is how the saying goes. When applied to the inflation data this week, it spelled bad news for the financial markets.

 

Over the last two months, inflation showed increases in both the Consumer Price Index (CPI) as well as the Producer Price Index (PPI). This week, the March CPI data came in warmer than investors had hoped (0.4 percent versus expectations of 0.3 percent). The PPI was slightly below forecasts, but the monthly core index matched expectations. Not good.

 

Economists might say the jury is still out on calling a backup in the inflation rate, but traders shoot first and ask questions later. Stocks fell on the CPI release. The U.S. Treasury Ten-year bond yield breached 4.58 percent and the dollar gained more than one percent. The data squashed any hopes that the Fed would cut interest rates in June.

 

Economists were forced to take a big step back from their rosy forecasts of an imminent loosening of monetary policy. It was a far cry from January when many thought we would see as many as seven interest rate cuts by the end of this year.

 

FOMC committee members have been giving speeches and interviews over the last two weeks. Some have been sounding the alarm. Their message was clear: fewer (if any) rate cuts could be expected unless there was further progress on the inflation front.

 

To be clear, Fed Chairman Jerome Powell has not changed his tune quite yet. He still expects to cut interest rates sometime this year, but exactly when would be data dependent.

 

The bulls, however, have not given up on their rate-cut thesis. They have just pushed back the timing to July or maybe September. I must wonder whether the exact timing of this rate cut, if it occurs, really makes a big difference to the economy.  I will go a step further and question whether the Fed needs to cut interest rates at all given the growth in the economy and the strength in the labor force. By cutting rates too soon, the Fed would create what most fear — a resumption of inflation. Remember, inflation is still out there. It is only the rate of increase that has declined.

 

Some believe that the fix is in. In an election year, the incumbent usually does everything possible to boost the economy. Cutting interest rates would help the cause, so the pressure will mount for the Fed to do something soon. That seems too easy to me. I believe the Fed will do what the Fed's got to do and be damned if there is fallout from the politicians.

 

As for the markets, I have been pleased by the performance of the "catch-up" trade I had predicted at the beginning of the year. Precious metals, especially gold, have hit new highs. Silver has also performed well. Basic materials, especially copper, and some soft commodities such as coffee and cocoa have soared. Energy, Industrials, and financials have also done better than the S&P 500 Index.

 

We hit a high of 5,264 on the S&P 500 Index back on March 28 (about 20 points higher than my target) but since then the averages have drifted lower. I expect markets to continue to consolidate over the next week or so with a good chance of further pullbacks if we break 5,140 on the downside.

 

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.

An important government inflation metric, the Personal Consumption Expenditures Price Index (PCE), for February came in as expected on Good Friday. Since the markets were closed, as investors celebrate the three-day Easter holiday weekend, Monday, April 1, should be interesting.

 

Core PCE rose by 0.3 percent from the previous month. Year-over-year PCE prices rose by 2.8 percent, easing slightly from the 2.9 percent increase in January. The PCE is the Federal Reserve Bank's favorite inflation indicator. As such, it carries a lot more weight when determining whether the central bank will stand pat or decide to cut interest rates in the months ahead. The February numbers will likely not change the current stance of the Fed.

 

Given that both the Consumer Price Index and the Producer Price Index came in hotter than expected in both January and February, investors had worried that the PCE could do the same. It did, but so slightly that next week traders will need another reason to either push equities higher or continue the recent trend of selling large-cap tech and buying other areas like financials, industrials, small-cap, precious metals, and cyclicals.

 

The plot thickens when we consider the changes that have been going on all week behind the scenes. The stock market has just finished another strong quarter. The S&P 500 Index was 10 percent, the largest first-quarter gain in years. As is often the case, pension funds, money managers, and other investors at the end of a robust quarter are expected to adjust their asset allocations to account for the outperformance by equities. As such, pension funds, for example, were expected to sell as much as $32 billion in stocks that had outperformed the most during the quarter and invest the proceeds in the debt markets.

 

At the same time, a large hedged-equity fund, the $16 billion, JP Morgan Hedged equity Fund that holds a basket of S&P 500 Index stocks, along with options on that index, is expected to roll over its options positions on Friday. Given the low market liquidity on this holiday, that rollover could exacerbate or suppress stock market moves on Monday.

 

This week also saw Donald Trump's social media company begin trading on the NASDAQ. The Trump Media & Technology Group's main asset is Truth Social.  Readers may recall that the social media platform was established by Trump following the Jan. 6 insurrection. It was at that time when the former president was booted off social media's mainstream platforms, including Facebook and Twitter. Since then, he has been reinstated on both but has stuck with Truth Social as his main avenue of social communication with his followers.

 

The stock (symbol DJT) of which Trump is the dominant shareholder (58 percent), has exploded in price in its first week in trading and has been called the ultimate Meme stock. Like most such stocks, it is losing money and has little in the way of financials.

 

Theoretically, most shareholders have a lock-up period of at least six months before they can sell their shares. Given Trump's need for cash because of legal proceedings that have gone against him, the company's Trump-friendly board of directors could waive or shorten the lock-up period.

 

That could turn messy, however, because a sale by the majority shareholder would likely depress the stock price. That would allow shareholders to show injury and give standing to lawsuits on behalf of public shareholders. More should be revealed in the weeks ahead.

 

In any case, stocks overall have continued to rise and have traded higher than my best-case forecast of 5,240 on the S&P 500 Index. On Monday, because of all this rebalancing and the outcome of the PCE data, we could see the markets react strongly one way or the other. The best I can say is that April Fool's Day may be nothing to fool around with.

 

By the way, my cataract surgery on my left eye came off without a hitch, which was why there was no column last week. I get my right eye done on April 3, so unfortunately no columns next week either. 

 

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.

February inflation data showed no progress on inflation. That follows the same kind of readings from the previous month. While two months does not make a trend, the disappointing numbers gave investors pause.

 

Both the Consumer Price Index (CPI) and its cousin, The Producer Price Index (PPI), came in warmer than economists had expected. Consumer prices rose 3.2 percent in February from a year earlier but were only slightly higher than economists' expectations of 3.1 percent. The PPI rose 1.6 percent year-over-year, which was the largest gain since last September. Month-over-month, the PPI at +0.6 percent was double the average forecast.

 

These data points should be taken with a grain of salt since a couple of higher numbers should be expected. Few, if any, macroeconomic trends travel in an uninterrupted straight line higher or lower.  Unfortunately, these results practically guarantee that the Federal Reserve will hold off on any plans to cut interest rates.

 

No one was expecting the Fed to cut in March anyway. In Chairman Powell's most recent statements, he indicated March was off the table. But now, the earliest the market can expect a cut will be in June, if then. Markets are now pricing in about a 59 percent chance of an interest rate cut in June. Given that economic growth and employment trends remain strong, some argue that the Fed need not reduce interest rates at all this year.

 

Any hint of no cuts ahead would not be taken kindly by the markets. That is because much of the gains in financial markets, whether in bonds, equities, precious metals, commodities, crypto, etc., have been fueled by investors' expectations that the Fed is planning on reducing interest rates at least three times this year.

 

As such, the FOMC meeting notes will be released on the afternoon of March 20, and I suspect every word will be analyzed with a microscope. Chairman Powell's Q&A session afterward will also be subject to the same scrutiny. I don't expect that Powell will deliver a nasty downside surprise. After all, this is an election year, and while the Fed is supposed to be "non-political," I doubt they would want to upset the economic apple cart and influence one side or the other.

 

As readers are aware, I believe the stock market is in the ninth inning of this rally. This week, the high on the S&P 500 Index was less than 44 points away from my top-of-the-range 5,220 target. I've noticed some changes in the market behavior while we made that new high. The momentum that has been driving stocks since the beginning of the year is beginning to wane and, in some areas, even reverse. The action of late has been wild and there are some signs of short-term topping patterns.

 

The technology sector, for example, which has led the market all year, is beginning to struggle. Semiconductors have been choppy. Nvidia, the quintessential AI stock, is no longer going up 2-3 percent per day. It is now down about 100 points from its all-time high. Some stalwarts of the market like Apple, Google, and Tesla (to varying degrees) seem to be rolling over. Some say that where Apple goes, so goes the market. 

 

In this risk-on environment, the declining dollar has been supporting commodities, especially gold and silver. However, the greenback, which is the world's safest trade, has flattened out and may be starting to bounce as traders worry that lower inflation is not quite in the bag. All of this tells me to be cautious and while we could still climb higher, I would have one eye on the exit.

 

Readers, please be aware that due to two upcoming medical procedures, there will be no columns next week, and again none during the week of April 1.

 

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.

At this point, a day without a new high seems almost abnormal. AI stocks rage higher, joined by weight loss companies like Lilly. The good news keeps rolling in with even Chairman Jerome Powell of the Federal Reserve Bank seemingly more dovish. 

 

The Fed chairman testified before both the House and Senate this week. He indicated that we could expect a couple of interest rate cuts this year if the inflation data continues to weaken. He also said that if it does, the Fed won't wait until inflation hits its 2 percent target before loosening monetary policy.

 

The economy continues to grow, and while there is some evidence that labor growth is moderating in certain sectors, the latest non-farm payroll numbers for February — a gain of 275,000 jobs — were higher than expected. However, the headline unemployment rate hit 3.9 percent from 3.7 percent in January.

 

Bottom line: there are still plentiful jobs available for anyone who wants one. Wage growth, however, is slowing (0.1 percent versus 0.2 percent month over month). That is helping to rein in inflation. The macroeconomic data is helping to boost the good cheer within the financial markets.

 

Even the problems that have beset a large regional bank, New York Community Bank (NYCB), did nothing to dent the armor of the bulls. This regional bank merged with a troubled Michigan mortgage lender, Flagstar Bank, in a $2.6 billion deal last year during the regional bank crisis. The merger pushed the combined bank near a $100 billion regulator threshold, which imposes stiff capital rules on banks over that level.

 

The consensus on Wall Street is that NYCB's increased exposure to the commercial real estate market, plus the new requirements, forced the bank to slash its dividend in January. That sent NYCBs' stock diving, which in turn sparked credit downgrades.

 

This week, as the bank's stock price was in free fall, several investment firms, including Steven Mnuchin's Liberty Strategic Capital, Hudson Bay Capital, and Reverence Capital Partners injected more than $1 billion into the bank in exchange for equity. 

 

A year ago, a related issue (remember Silicon Valley Bank) drove down equity markets. At the time, investors feared that financial contagion might overwhelm the overall banking sector. It didn't. This time around, markets barely blinked.

 

The widening of the breath of the stock markets has also increased investors’ confidence in the rally. Bond yields have fallen, and the U.S. dollar along with it. That has sparked a bull run in gold and in Bitcoin since both are considered currency equivalents.

 

But there is a little more to this story than that. Some economists and stock strategists argue that when the Fed begins to cut interest rates, the dollar is going to tumble, and the demand for alternative currencies like gold and crypto will spike higher. Throw in the fear that the country's out-of-control debt level is going to cause a crisis, and you have the makings for much higher prices. As a result, both Bitcoin and gold hit all-time highs this week.

 

As I wrote last week, we have met my first target on the S&P 500 Index of 5,140. My second higher target was 5,220-5,240. We are already halfway there as of Friday. The precious metals are over-extended and need a pullback as is the rest of the market. My advice: hold on, but not chase.

 

We continue to have at least one day a week where markets suddenly dive by more than 1-2 percent on no news.  Each time, (so far) markets rally back by the next day. Don't be lulled into believing that the dip and bounce strategy will continue to work. Somewhere up ahead there awaits a 7-10 percent correction. It could take until April before that occurs.

 

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.