"Don't fight the Fed" is an oft-quoted market saying that has remained sage advice for the past decade or two. Recently, however, it appears investors are thumbing their noses at that advice.

 

This week, Fed Chairman Jerome Powell and his FOMC members released yet another warning that they see a long drawn-out battle with inflation that will last well into next year. Given the decline in bond yields and the rise in equity indexes, the financial markets appear to disagree. Who will turn out to be right has major implications for what happens to financial markets into the New Year.

 

The recent good news on the inflation front — lower monthly Personal Consumption Expenditures Price Index (PCE) and the Consumer Price Index (CPI) data — has convinced investors that inflation is on the run. The expectation that core inflation could fall as low as 2.6 percent by the end of 2023 is the bull case. They argue that global supply chain disruptions were the main cause of the inflation spike. That problem is disappearing quickly and as it does, so will inflation.

 

If so, inflation could fall to the Fed's target rate of 2 percent within the next 12 months. Some investors believe that the Fed will not only need to back off from raising rates but likely begin to cut interest rates to avert a serious recession. As such, the bulls have been bidding up stocks and buying bonds.

 

The Fed is on the opposite end of the spectrum. Chair Powell has remarked on several occasions that headline inflation, as represented by the Producer Price Index and the Consumer Price Index, is not a good indication of the true rate of inflation. Why?

 

It is because energy, durable goods, and shelter are three areas heavily represented in those indexes and are strongly influenced by supply chain disruptions. The Fed is looking more at variables like service prices, which are labor-intensive, and have more to do with aggregate supply and demand. That puts employment squarely in the central bank's cross hairs and they see little in the way of a slowing down in job growth.

 

Despite two monthly declines in the rate of inflation as represented by the CPI, the Fed has raised its forecast for inflation next year to 3.1 percent, and its core inflation (ex-food and energy) forecast to 3.5 percent from 3.1 percent.

 

The Fed also sees meager growth in GDP (plus-0.5 percent), while many economists had been predicting at least a moderate recession beginning in either the first or second quarter of 2023. Now, it appears that there is a growing consensus among a group of bulls who think a mild recession at most will reduce the inflation rate quickly as supply chains continue to recover and expand.

 

There are a couple of flies in that ointment, from my perspective. Even if inflation was solely the result of supply chain disruptions, why are the bulls so sure that supply chain problems will disappear, never to return?

 

China, the main cause of those disruptions, is giving up its zero COVID-19 policies, but as a result, the infection rate among the Chinese population is skyrocketing with a real possibility that supply chains may come under pressure once again. Our own country is not immune to another resurgence of COVID and possible supply chain issues.

 

Omicron BQ, and XBB, are COVID subvariants that are currently causing 72 percent of new infections in the U.S. They are the most immune evasive variants of COVID-19 thus far. Present vaccines and boosters are "barely susceptible" to neutralizing the disease, according to the U.S. Centers for Disease Control. The holiday season might usher in a big spike in infections with all the lost productivity that could entail.  

 

In my opinion, it seems far too early to claim victory on the inflation, interest rate, and growth front. The disappointing FOMC meeting this week may convince investors that stocks are ahead of themselves. We have not been able to break the top end of my target range (4,000-4,100) thus far on the S&P 500 Index. "Don't fight the Fed" seems good advice to me.

 

I am sticking with my cautious forecast and believe that the markets need to pull back to test the 3,700-3,800 level on the S&P 500.

 

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.

Fed Chairman Jerome Powell delivered a bagful of gains this week for investors. Stocks roared to life as "Santa" came to town. And then the job numbers on Friday spoiled the mood.

 

"The time for moderating the pace of rate increases may come as soon as the December meeting," said Powell in his opening remarks at the Brooking Institute on Wednesday, Nov. 30. The word "moderating" was all the algos needed to hear.

 

It was equivalent to striking a match to a kid's backyard toy rocket. The U.S. dollar fell, stocks across the board exploded and the main indexes racked up gains of 3-4 percent-plus by the end of the day. Commodities also roared higher led by precious metals.

 

Thursday the Personal Consumption Expenditures Price Index, a key inflation data point that the Fed uses to monitor inflation also came in cooler for October. The PCE rose 6 percent in October versus last year and down from September's 6.3 percent annual increase. Overall prices rose 0.3 percent, which was the same monthly increase as in each of the previous two months. It could be that Powell had an inkling that the inflation numbers were improving, which could have contributed to the slight shifting of goalposts this week.

 

However, Friday's monthly jobs report for November came in "hot." Non-farm payrolls came in with a 263,000 gain versus the 200,000 expected. Average hourly earnings on a month-to-month basis rose 0.6 percent versus the 0.3 percent expected. That data may be good for the continued growth of the economy, but also means that the Fed has no reason to relent in its hawkish stance. As a result, markets gave back about a third of their gains for the week.

 

Does that mean we should expect hotter or cooler Consumer Price Index (CPI) on Dec. 9, and Price Producer Index (PPI) data on Dec. 13? Given the inaccuracy of macroeconomic data, I would say that is at best a crap shoot.

 

The most important events that investors face are the OPEC-plus meeting on Dec. 4, and the European Union (EU) Russian oil embargo and price cap on oil the following day. This could prove to be a disruptive event on world energy prices. What happens to the oil price has a direct bearing on future inflation, so financial markets will react to these events.

 

If an EU ban on purchasing Russian oil leads to the removal of up to 2 million barrels per day of oil from the market, we could see a spike in energy prices.  To prevent that from happening, the U.S. and G-7 nations have devised a price cap scheme where that oil can be sold to non-European nations but only at a lower price. The question is the price.

 

The latest number was $62 a barrel cap, but Poland, Estonia, and Lithuania are arguing that the price is still too high. The facts are that if India or China ignore the whole price cap ban, which is a distinct possibility, then what could happen is that most of this spare Russian oil will simply be rerouted to these two large consumers of oil.

 

Bottom line: next week could see some wild swings in oil based on geopolitical headlines from various players so be prepared. 

 

Last week, I wrote that my target for the S&P 500 Index of a high between 4,000-4,100 had been met and it was time to take profits. This week we hit the top end of my range before falling back. Could it climb higher? It could, but it seems to me that market action tells me that we are closer to a top, not a bottom. I will be taking profits as we climb higher.

 

If I am right, what is the potential downside for the markets? I expect a 125-to-250-point (up to 6 percent decline) to as low as 3,700 on the S&P 500 Index. 

 

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.

December could be a risky month for the stock market. A spate of inflation data, a European Union Russian energy embargo, and another Fed meeting toward the middle of the month, could determine the state of the stock market.

 

Traders are split between bulls and bears. The bearish view says that we hit the 4,100 level on the S&P 500 Index, and then we begin a decline that continues into next year. The bulls argue that the seasonal factors dictate a continued rally into at least January.

 

Many readers know where I stand. I have been predicting a market rise that could see the S&P 500 hit somewhere in the range of 4,000-4,100. That is the area where we find the 200-Day Moving Average (DMA) for that index. At this point, I am taking my money and running. Why?

 

There are numerous significant data points in December that can send markets up or down. The Personal Consumer Expenditures Price index on December 1, The Group of Seven/EU decision on an embargo of Russian oil on Dec. 5, the Consumer Price Index on Dec. 9, the Producer Price Index on Dec. 13, and the FOMC meeting on Dec. 14.

 

There is no consensus on any of these areas. If the inflation data comes in hotter than expected, stocks go down. If Fed Chairman Jerome Powell remains hawkish at the FOMC meeting, and or, becomes more so, the markets fall.

 

In this week's column, "Is it time to rebuild the Strategic Petroleum Reserve?" I examined the upcoming events of Dec. 5, in which the G-7 plans to further hamstring Russia by placing an embargo on Russian oil in the European Community. It also seeks to place a price cap on Russia's oil, although there is some disagreement on what that price should be. Russia has already warned that it will not sell oil to any nation entertaining such a price cap scheme. If the response to the embargo and price cap on Russian oil results in higher oil prices, the markets would likely decline.

 

Given that the stock market has already run up more than 15 percent since October, it seems sensible to me that a cautious approach is called for. For sure, some of the data may be negative, others positive, but there is no way of knowing that ahead of time. If all the data points end up positive for the market, then it will be a very Merry Christmas and Happy New Year. The point is that the odds at best are only 50 percent that the bulls get the lucky number 7 on each roll of the data dice.

 

From a macroeconomic point of view, it seems to me that we are a long way from achieving the Fed's target rate of 2 percent inflation. The economy, while slowing, is still growing and employment remains healthy. A recession seems certain, but so far elusive. This is not good news for a central bank that needs economic demand to slacken in its fight against inflation.

 

About the best investors can hope for may be a slowdown in the pace of rate hikes. The Fed minutes from the last FOMC meeting buttressed that hope when a number of participants preferred to slow interest rate hikes in December. However, that doesn't mean Jerome Powell will heed their advice.

 

In any case, this week we hit a high of 4,033, less than 70 points from my highest target on the S&P 500 Index. Depending on the data, and especially the PCE data point on Thursday, stocks could hit or even exceed 4,100. It is a coin toss at this point. Invest accordingly.

 

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.

Thanksgiving is right around the corner and then the Christmas holidays are upon us. Will Santa deliver coal, or will the stock market find gains in their stocking?

 

The bulls are expecting a pretty good market between now and year-end. Historically, the evidence is on their side, although there have been several years when the Grinch stole Christmas, stocks usually gain during the coming holiday season.

 

On the other hand, history has not been as reliable in predicting the market's direction of late. That is understandable, given the continuing presence of COVID mutations, a European War, soaring inflation, and rising interest rates. If the equity market wanted a wall of worry to climb, it surely has one.

 

On the plus side, we have had two inflation indicators, the Consumer Price Index, and the Producer Price Index for October, signaling that if inflation isn't declining, it is at least not rising as fast. As a result, interest rates and the U.S. dollar have also declined a little. All the above has given equities a reason to reach my target area (4,000-4,100). This week, the S&P 500 Index hit 4,028.

 

I expect that we are running out of bull fuel. We could hit the higher end of my range, but if we do, the markets would be rising on fumes and would not likely stay there very long. Does that mean we have to immediately re-test the year's lows? Not necessarily.

 

Over the next week or two, I see increased volatility with a risk of a 100-point pullback on the S&P 500 Index down to 3,850. However, a bounce could happen after that. Slowing consumer demand, worries over Christmas sales by U.S. retailers, and further layoff announcements should dampen enthusiasm for stocks. And then what?

 

We have three inflation points in December. The Personal Consumption Expenditure Price Index (PCE) will be released on Dec. 1. It is this inflation index that carries the most weight with the Fed. It sets up a binary event for the markets.

 

If this number is cooler than expected, investors will believe it confirms that inflation is dropping. Markets would rally if that happened. If it comes in hotter, then we swoon. Either way, we still have the next CPI and PPI numbers to contend with, so prepare for further volatility.

 

On Dec. 9, the CPI is released, followed by the PPI on December 13, 2022. Those could be wild card events -- either to the upside, or the downside. And on Dec. 14, the next FOMC meeting decisions will be announced, along with Chairman Jerome Powell's Q&A session afterward.

 

As you can imagine, the fate of the markets will rest on how all these data points line up.

 

Economists argue that market participants are asking for trouble by resting their hopes on just two inflation numbers. I agree. We are bound to see a lot of fluctuation in the coming months in the inflation data. Rarely, do we see inflation drop precipitously without some exogenous event to trigger a free fall. Economists would expect several conflicting inflation reports, some up, some down, before seeing a new trend form.

 

The Fed has already stated that while they welcome the good news on the inflation front in the short-term, nothing is going to change in their stance. This message was underscored repeatedly last week by a long line of Fed Heads who messaged the markets that interest rates are going to stay higher for longer.

 

So where does that leave us regarding the cherished Christmas rally? I imagine we will see several rapid moves up and down in the markets before the FOMC meeting in mid-December. At that point, I am hoping (but not expecting) that the Fed will be less hawkish. There is a high probability that Powell will walk on that stage and dun his Grinch mask. If he does, it would likely be a "look out below" moment for the markets. In which case, think coal in your stockings. However, given the soaring price of coal worldwide, a little coal in my stocking would not be all that bad.

 

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.

It should have come as no surprise, but it did. Investors were poised for a slightly less hawkish Jerome Powell but were once again disappointed by the Federal Reserve Bank chairman.

 

Chairman Powell and his Federal Open Market Committee's decision to maintain a course of rising interest rates for longer punctured this most recent bear market rally. The three major indexes dropped more than 2 percent and continued to fall for the remainder of the week.

 

There was nothing new in the FOMC statement, nor in Powell's remarks afterward in the Q&A session. To some observers, he seemed even more hawkish than usual. Sure, he conceded that at some point, the Fed might pause in their tightening but not yet, and a pause would not mean a pivot toward a more dovish stance anyway.

 

How many times will the Fed have to reiterate its stance before the markets get it? If there is money to be made in promising hope without reason, traders will continue to suck investors into these bear market rallies. However, there may be other more interesting areas that an investor might want to consider.

 

For example, those who have been hiding in cash, or those who may be losing their shirts invested in equities, may want to consider purchasing some U.S. Treasuries. One-through-five-year notes are yielding between 4.87 percent and 4.44 percent. Granted, that is only giving you about half the present inflation rate, but even the Fed is expecting the inflation rate will come down over the next 12 months. In the meantime, you are at least earning something, instead of losing more money in the stock market.

 

Another suggestion might be to consider Series I Bonds, which are U.S. savings bonds that protect you from inflation. You earn both a fixed rate of interest and a rate that changes with inflation. Twice a year, however, the government resets the inflation rate for the next six months. Nov. 1, 2022, for example, was the last day you could have purchased an I Bond that was giving you more than 9 percent. That rate has since dropped to 6.89 percent for the next six months and will likely see a comparable drop six months hence. You must keep I Bonds for one year after purchase.  

 

Now that doesn't mean you should go out and sell everything and pile the money into U.S. Treasuries. But investing some money in short-term debt might be a smart investment. I would at least ask your investment advisor about the possibility if you haven't done so already.

 

So, is this latest rally over? Not necessarily, but if the markets are going to continue to move up, at least for another week or two, it will have to be on something other than Fed policy. About the only bullish event in the U.S. that I could see that would trigger another rebound would be the results of next week's mid-term elections. 

 

As of today, Republicans are expected to take back the U.S. House, and maybe the Senate. If so, a two-year period of paralysis will likely descend again on our government. Historically, financial markets have liked that kind of political standstill. No new major legislation would likely be passed. That means taxes will not rise, nor would spending increase, except on the margin. Predictability is the grease that oils the wheel of market gains, all things being equal.

 

Rumors that China may be considering lifting its Zero-Covid policy propelled the markets higher on Friday. If this rumor, which is based on a news story from Bloomberg News, turns out to be true, that could give a major growth boost to world economies. China’s economy has been disrupted by their frequent openings and closings of cities, factories, ports, etc. based on virus outbreaks. A change in policy could boost demand, imports, exports and impact many companies worldwide. However, even if the rumor is true, a full reopening of the Chinese economy wouldn’t happen until March 2023.

 

Could that outcome trigger a rally in the markets for a couple of weeks? Probably, and we might be able to put together a bullish scenario that could see my target of 4,000-4,100 met on the S&P 500 Index achieved. I warned investors that this relief rally would be different and so far, it has been — lots of ups and downs. In the meantime, equities are still at the mercy of interest rates, the strong U.S. dollar, and geopolitical events.

 

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.