Investors are increasingly preoccupied with the general elections, which are less than three weeks away. That focus should increase as we go down to the wire, and as it does, so will volatility.  

 

It is getting harder to ignore the election contest. The media, both mainstream and social, spews out a continuous stream of political news. I finally shut down my X account this week because of it. Although difficult, my attention remains focused on the market and not the election.

 

This week, third-quarter earnings have kicked off, and results have been strong thus far. Of the 58 companies reporting thus far, 76 percent have beat estimates. Banks have surprised to the upside. Revenue growth has been tracking at plus-5 percent, within the 4 percent to 5 percent growth rate we have seen over the past eight quarters.

 

Why is that important? Many pros have been arguing that as inflation falls, so will corporate sales, insisting that much of the sales gains have been the result of price increases. That has not happened. As companies roll back prices, revenues continue to grow.

 

The debate on whether the Fed will continue to cut rates and by how much continues to rage among traders. I am firmly in the camp of no more than a 25-basis point cut when the Fed meets again on Nov. 5, just one day after the general elections. The Fed does not need to cut more than that given the strength of the economy and the rate of decline in inflation. However, there does appear to be a change in what the Fed can control in the interest rate arena.

 

Historically, the Fed controls short-term interest rates by raising or lowering the Fed fund's overnight interest rate. Normally, longer-term rates would follow suit in the same direction. But little is normal in today's debt markets. The public sector bond market (the bond vigilantes) has shown that they control the long end of the curve despite the Fed’s machinations. It explains why longer-term yields have risen ever since the Fed cut rates last month.

 

Long-term bond yields have plateaued after several straight weeks of rising. Bond players believe that the Ten-Year U.S. Treasury bond yielding around 4.09 percent may adequately discount both economic growth and the present state of inflation — at least for now. I say "now" because the election outcome may send yields soaring once again.

 

The long list of tax cuts, spending programs, tariffs, etc. made by both party's candidates would add many trillions of dollars to an already mountainous deficit. The non-partisan Committee for a Responsible Federal Budget estimates that Trump would add $7.5 trillion to the deficit, while Harris would add $3.5 trillion. At the same time, both parties are completely ignoring the $35.6 trillion in debt we owe right now. The U.S. now has a debt-to-GDP ratio of about 100 percent.

 

But while politicians of both persuasions continue to ignore that fact, the bond vigilantes do not, nor will foreign bond buyers. Their next move, whether to buy or sell bonds, will be determined by what happens on Nov. 5. The polls indicate a narrow win by one candidate and a mixed Congress.

 

If so, neither party will have enough votes to pass legislation that could add trillions of new dollars to the U.S. debt load. A sweep by either party, however, would change that equation and likely set off another spike in long-term interest rates. That, I believe, would be problematic for the stock market in 2025.

 

In the meantime, while the polls have both candidates at a dead heat, traders are taking their lead from the $2 billion presidential betting market. The Street believes the odds carry more weight since players are willing to bet their money on the outcome.  For example, this week, one of the election betting markets (Polymarket) has seen the odds of a Trump win rise to 58 percent-60 percent. Seven other betting markets show an average of 56.1 percent for Trump versus 43 percent for Harris. As such, many in the stock market are convinced that Trump will win.

 

Traders have responded by bidding up areas of the market that they think would do better under Trump. Inflation would be higher, say traders, so hard assets and precious metal stocks gained ground. Bitcoin and other cryptocurrencies climbed since Trump promised to make America a world leader in crypto. Small-cap stocks that are sensitive to lower interest rates, outperformed as well. Here, the idea is that Trump would likely pressure the Fed to keep reducing interest rates. That would also be good for financial stocks.

 

Balderdash, say I. At the racetrack, betting on the favored horse to win does not guarantee the winner. In the days ahead, one or the other candidate may say something stupid, or make a perceived breakthrough that changes the betting odds or the polls. If so, markets or sectors could reverse on a dime. Don't get sucked into playing that game.

 

On Wall Street, volatility is usually interpreted as meaning selling pressure, but that is not always the case. While markets are stretched, overextended, and expensive, they can remain so for longer than one would expect. One contrarian indicator I watch indicates that bullish sentiment among investors is at the highest level of the year.

 

In this environment, we could see sharp spikes higher as well as dramatic declines lower. Depending upon the election outcomes, the downside range could be as much as 5-7 percent. If the election outcome is called into question, the decline could be steeper. What to do? Nothing. Sit on your hands and watch but if the market falls, I would buy the dip.

 

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.

Mixed inflation data, higher unemployment claims, steeper bond yields, the unresolved Israeli counterstrike against Iran, and jitters over the election kept the equity averages volatile throughout the week. Despite those worries, the S&P 500 Index and the Dow hit record highs.

 

A bullish stock market often climbs a wall of worry. This week certainly qualified. Investors had to contend with a continued rise in yields on the benchmark Ten-Year U.S. Treasury and poor results of a government auction for that bond. The yield this week hit a high of 4.09 percent and has gone straight up ever since the Fed's 50 basis point cut in the Fed funds rate last month. If the Fed is cutting interest rates shouldn't bond yields go down, not up?

 

The answer revolves around bond market expectations. After last month's interest rate cut, the bet that the Fed would give us even more cuts in the months ahead rose substantially. Many traders concluded that the Fed would follow up that first cut with two more half-point cuts in the next two months, and as much as four more the following year. By the time the Fed announced its first cut, bond yields had already plunged, discounting this rosy scenario.

 

In the meantime, the economy has continued to strengthen by more than most economists have expected. This, I suspect, is a result of increased federal spending, which almost always occurs during a presidential election year. Growth is great, but a stronger GDP  reduces the need for more monetary stimulus.

 

And let's not forget the inflation fight. September's inflation report, the Consumer Price Index (CPI) fell from plus-2.5 percent to plus-2.4 percent, but core inflation (ex-energy and food) increased from plus-3.2 percent to plus-3.3 percent. The Producer Price Index (PPI), however, came in cooler. The two together equated to a big nothing burger as far as the markets were concerned.

 

However, bond traders are growing concerned that stronger economic growth and additional rate cuts could be a recipe for a revival in inflation. They point to oil prices, a key component of inflation, and a lift in commodity prices, which could keep inflation sticky in the months ahead.

 

The spike in the oil price is based on fears that Israel may hit Iranian oil production, while China's new stimulus program is responsible for the spike in commodities. I believe the rise in oil could easily reverse if the geopolitical situation in the Middle East abates but my crystal ball is exceptionally cloudy in that arena. China's growth, however,  may be a more lasting development depending on how successful the government's fiscal stimulus may be.

 

I don't believe one or two more data points between now and the November FOMC meeting will impact the Fed's decision. But I do believe traders got over their skis in anticipating a series of large interest rate cuts through next year. The Fed certainly did not indicate such a plan was on the table. One voting FOMC member of the Fed recently suggested that he would be happy to skip a rate cut at the next meeting.

 

The bond market is still betting that rates will be reduced in November by another 25 basis points although a 50-basis point cut is now off the table. I expect that this month was the trough in inflation progress. Over the next few months, inflation data may show an uptick. If so, expectations for more cuts will rapidly diminish.

 

Despite these worries, equities continued to plough ahead grinding higher and higher as the week progressed. The third quarter earnings season began on Friday with large bank earnings. Investors seemed pleased with the results. Expectations going into the season are that the rate of gain in earnings overall will be lower than last quarter but will bounce back in the fourth quarter.

 

The Chinese stock market, after a nine-day streak of gains, finally succumbed to profit-taking earlier this week. Global investors were disappointed that further fiscal stimulus programs have not been announced. I think this pullback is healthy. Additional gains are in store for that market,  in my opinion, after a short period of consolidation. I also believe that emerging markets are interesting and cheap versus U.S. stocks.

 

As for U.S. stocks, the averages are extended given the spate of new highs. We are also entering the second week of October with the elections less than a month away. The race is too tight to call. My greatest fear is that we may face a protracted period in which the winners are in doubt. I don't think the markets would take kindly to that environment. 

 

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 was a week to remember in financial markets. Hurricane Helene, the longshoreman strike, Iran's ballistic missile attack against Israel, American drones shot down by Houthi rebels, and a massive gain in U.S. jobs — welcome to October.

 

All the above happened in just the first week of the month. The stock market has hung in there through all of it. However, the events of the week have given heartburn to investors and traders alike.

 

The massive flooding and rising death toll in Florida and North Carolina were tragic but also negative for overall future growth and employment. The price tag is estimated to be above $34 billion. Insurance stocks did not suffer simply because they no longer cover flood damages in much of those areas. The price tag will need to be absorbed by the nation's taxpayers.

 

The Longshoreman's strike encompasses a shutdown of half the ports in the U.S. from Maine to Texas. Harold Daggett, who leads the International Longshoremen's Association, was insisting on a 77 percent pay raise but settled for less and the strike was at least postponed until early next year. Estimates put the price tag of disrupted trade for the country at as much as $5 billion daily, so we dodged that bullet for now.

 

The geopolitical events that find Israel in an undeclared shooting war with the Houthis, Hamas, Hezbollah, and possibly Iran have also riled markets and sent the dollar and yields higher. It has also supported precious metals and the price of oil.

 

Market participants fear that if Israel were to respond to Iran's latest missile attack, by damaging Iran's energy production, oil prices could spike higher. If so, that would prove inflationary.

 

Those fears may be overblown. Iran currently supplies about 3 percent of the world's oil production. Global oil demand has been slowing as it is. This week, the Saudi oil minister warned Iraq and Kazakhstan that if they ignore their OPEC-directed output cuts, prices could fall to $50 a barrel. next year.

 

In this environment, Saudi Arabia could easily make up for any lost production brought on by an Iran/Israel conflict. Oil could go higher but there is a lot of technical resistance around the $77 a barrel mark.

 

The non-farm payroll for September crushed expectations. The U.S. economy added over 250,000 jobs while the unemployment rate dipped to 4.1 percent. That was more than the 150,000 job gains expected. Wage growth also increased by 0.4 percent. This followed a good report on the ISM services sector. Where does that leave the markets? Disappointed, as far as future rates cut by the Fed.

 

Stronger employment data means less need for sizable rate cuts. If you combine that with the possibility of higher energy prices and therefore more inflation, the bull's case for more rather than less loosening by the Fed becomes that much weaker.  

 

As you know by now, September through October are historically seasonably tough months for the markets. I was expecting September to have a more negative impact on the market. I was wrong. My mistake was in not accounting for presidential election years, which somewhat dilutes seasonal factors in those years.

 

Nonetheless, October has historically been 34 percent more volatile than the average of the remaining 11 months of the year. It has certainly started that way. Although many traders are expecting a decline in the next few weeks, there are plenty of bullish factors that are underpinning stocks.

 

Friday's jobs report is just one example. Next week, on Oct. 10, September's Consumer Price Index data will be reported. I believe that data will show cooler inflation. If so, lower inflation and declining unemployment are not a bad combination.

 

Market breath (advancers versus decliners) is still near the highs. Investor sentiment is about even, neither too bearish nor bullish. About 78 percent of stocks in the S&P 500 Index remain above their 200 Day Moving Average. If we do pull back in the days ahead, I see at most a mild sell-off (barring a full-scale shooting war in the Middle East). I would be a buyer of any dips.

 

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.

A week after the U.S. central bank's policy shift, Chinese authorities unleashed their monetary policy dragon. The move caught world financial markets by surprise and launched the Shanghai Composite index up more than 9 percent in three days.

 

The People's Bank of China (PBOC) launched its largest stimulus package since the pandemic. The PBOC cut interest rates, reduced the reserve requirement ratio, and introduced structural monetary policies to stabilize Chinese markets, which went straight down for months. 

 

Wall Street analysts are overwhelmingly negative on the Chinese market. Investments in Chinese stocks by  Institutional investors worldwide are at multi-decade lows. China's faltering economy, the never-ending wall of American-led sanctions and tariffs by several nations, coupled with the U.S. election promises of even more to come have made the world's second-largest economy practically uninvestable.

 

"Doubtful at best" was the knee-jerk response to the stimulus package earlier in the week. It would not be enough to bail out the economy say the professionals (who have banked big profits on shorting Chinese financial markets). China watchers insisted that fiscal spending was required for a true turnaround.

 

Almost on cue, President Xi Jinping called for even more monetary and "necessary fiscal spending" support on Thursday in a meeting of the Politburo, the second-highest circle of power in the ruling Chinese Communist Party. That sent Chinese markets rocketing higher again and pulled up global markets, especially in Asia along with it.

 

The largest gainers have been in the commodity space, especially copper. This makes sense. A pick-up in economic growth in China, as the world's marginal buyer of commodities, will mean higher demand for everything from precious metals to soybeans, to basic materials to luxury goods.

 

Did this week signal just a short-term trading opportunity, or has China now made a cyclical low? If the latter, the impact (given that China is the world's second-largest economy) could galvanize growth worldwide, especially among emerging markets. It could also fuel global asset inflation. That would put a kink in the Fed's efforts to reduce inflation in the months ahead.

 

I suspect traders will be watching for additional moves in fiscal spending before deciding. In the short term, however, technical charts say there are more gains to come on the upside. For those who want to roll the dice, there are plenty of Chinese exchange-traded and mutual funds. One could also buy an emerging market fund that includes China.

 

In U.S. markets, U.S. jobless claims fell again last week but the data point of the week was Friday's Personal Consumption Expenditures Index (PCE) for August. The Fed's favorite inflation index came in cooler than expected with a gain of 0.1 percent, less than the forecasted 0.2 percent gain. That good news and the revised GDP report for the last quarter (a solid 3 percent growth rate) gave additional evidence of a potential soft landing for the economy. 

 

On the political front, the presidential race is a toss-up, but the thinking is that both the House and the Senate will surely be divided between the two parties. If so, the markets won't care who wins because nothing will get passed in the years ahead. Markets love that kind of situation. Just look at the last two years' stock market performance in the face of a dysfunctional divided Congress. 

 

October begins next week however the seasonal factors that usually influence the performance of the stock market in September and October have been trumped by the Fed's surprise rate cut and now the potential turnaround in the Chinese market. Stocks should continue to perform with some commodities, precious metals, and emerging markets, leading gains. Overall, I see higher levels, maybe 5,900-6,000 on the S&P 500 Index as possible.

 

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 Federal Reserve Bank's half-point interest rate cut surprised investors and traders alike this week. The central bank also indicated that the markets could expect more of the same in the months ahead.

 

The main three averages soared on the news on Thursday and into Friday. New highs went a long way in dispelling my fears that the last two weeks of September would be rocky. The giant-sized rate cut may have at least delayed the downside that usually accompanies this seasonal period in the stock market.

 

It was the first FOMC meeting in a long time where Fed watchers were unsure how much the central bank would lower rates. Historically, a 25-basis point move would be the usual way the Fed begins a loosening cycle.  Anything more might evoke worries that the labor market and the economy were slowing too rapidly. That, many believed, would not be taken well by market participants.

 

Fed Chair Jerome Powell, in his Q&A session after the meeting, went to great pains to convince viewers that was not the case. "I don't see anything in the economy right now that suggests that the likelihood of a recession, sorry, of a downturn, is elevated," he said.

 

If anything, he hinted the Fed probably should have begun cutting interest rates at its last meeting. As such, the 50-basis point cut was simply a "recalibration"  of central bank policy.

 

The policy has now changed from fighting inflation to making sure the job market stays healthy. "The labor market is actually in solid condition. And our intention with our policy move today is to keep it there," he said.

 

This means to me that in addition to inflation data (such as the CPI, PPI, and PCE), investors will begin to equally weigh how well the labor market is doing. That could mean weekly unemployment claims could move markets as could monthly non-farm payroll announcements. The fact that these data points are notoriously inaccurate and prone to large revisions will be immaterial to day traders and big institutional trading desks. And like so many recent government statistics, leaks in this area are becoming everyday occurrences.  

 

In any event, markets will continue to celebrate the changing stance of monetary policy both now and into the future. A target of 6,250 on the S&P 500 Index is possible over the intermediate term, but that does not mean we go straight up from here.

 

Relief that the Fed has our back (at least on the labor front and therefore the economy)  will be a positive and bolster investor sentiment. It should also help to lessen some of the concerns about the upcoming election. As such, it should be no surprise that the Republican candidate for president has already described the Fed's actions as 'a political move.'

 

That does not mean I have changed my mind concerning the risks that markets will be volatile (both to the up and downside) between now and the end of October. It does mean that for now investors and traders alike can put the Fed in the rear-view mirror and focus on the upcoming earnings season.

 

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.