After two years of monetary tightening, the Federal Reserve Bank is poised to begin loosening its policy. Is the event already priced in or will the stock market celebrate with new highs?

 

It may depend on how deep a cut the Fed is willing to make. In my opinion, in the long run it won't matter unless you are one of those day-to-day options traders who live or die based on the next trade. Nonetheless, in a market that may well hit a new high next week, what the Fed does and how it talks about future cuts will be important.

 

Some believe the Fed should cut one-half of a percent (50 basis points), while others are in the camp that it will only need a 25-basis point cut. Does that matter in the scheme of things? My answer is no. There are arguments on both sides of that decision. I come down on the side of a lesser cut. Anything more might signal that the Fed may be worried that growth and jobs are slowing too rapidly.

 

In addition, the U.S. central bank has preferred to use consecutive smaller cuts rather than big ones. The Fed might also be sensitive to the political environment as well. Although the Fed argues it is a non-political organization, one of the candidates, Donald Trump, has already warned Fed Chairman Jerome Powell (who he appointed) that the Fed should refrain from cutting rates until after the November elections. He said a cut would aid the incumbents in a tight race where the economy is one of the key areas of contention. The facts are that no matter what the Fed does, both sides will claim politics played a hand in the decision.

 

The last inflation data before the meeting came in mixed this week. The Consumer Price Index (CPI) for August registered a 0.2 percent increase, the lowest since early 2021. That was about what economists expected although the core CPI, which excludes food and energy, increased 0.3 percent. That was higher than forecast.

 

At first, skittish traders did not take kindly to that number. In the bond market, the betting on a 50-basis point cut next week plummeted. Stocks fell in the morning but bounced back as traders realized that a 25-basis point cut was still in the cards. The Producer Price Index (PPI) came in mostly cooler for August, which cheered the markets on Thursday, and betting on a bigger cut rose once again.

 

With so many cross currents, the key macroeconomic variables I am watching for direction are the labor market, the dollar, and bond yields. Weaker job growth will be the Feds' chief concern. A weakening dollar will be good for equities unless we see our currency fall out of bed overnight as it did in August during the yen-carry trade debacle.

 

Lower yields in the bond market have provided a cushion for stocks thus far. That should continue unless and until the story changes. If the labor and growth data weaken sharply, for example, that would evoke worries of a hard landing. In that case, yields would continue to drop but so would equities for all the wrong reasons. Treasury bonds would be seen as a flight to safety, while stocks fell on recessionary fears. 

 

Beyond the economic data, the most popular show of the week was the presidential debate. It was entertaining but less informative than Wall Street would have liked. As far as the economy is concerned, nothing of substance was discussed in depth. While many may bemoan the slogan-filled nature of the race thus far, do not be surprised. It is not that kind of race.

 

Few among us are undecided. Those that are, will largely make their decision based on a particular issue. Inflation is coming down, but not enough. Growth is still robust but slowing. Jobs are still available, but there are fewer. Many other issues such as abortions, immigration, crime, etc. may be more important than economic concerns to undecided voters.

 

Unless one or the other candidate pulls ahead substantially in the weeks ahead, markets will remain volatile and in a trading range until the election. My advice is not to be pulled into the day-to-day ups and downs of the market. This week, for example, we saw spikes in sectors such as solar energy (up), insurance (down), pot stocks (up and down), and crypto (up) all based on a positive or negative sentence or two from the candidates.

 

Last week, I suggested that we could see a bounce in stocks. We did. The S&P 500 Index was up more than 3 percent while the NASDAQ gained 5 percent. But remember, as I have cautioned readers for the last few weeks, we are in a seasonally bad time for equities. The final two weeks in September are especially so, and the Fed's FOMC announcement will be on Sept. 17-18. Chances are that markets will hold on to these gains next week at least up until the Fed meeting. However, be prepared for more volatility after that if not before.

 

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.

We enter September with the three major averages close to or above yearly highs. Momentum is still on the side of the bulls. As such, in the next week or so, markets could attempt to scale those heights and possibly better them.

 

It is what happens next that concerns me. The next two months are seasonally the worst period for the stock market. However, investors also expect the Federal Reserve Bank to cut interest rates at their meeting on Sept. 17-18. That is normally a bullish development for stocks. We won't know if the Fed will cut rates, but the markets are betting heavily on that outcome.

 

The macroeconomic data this week certainly reinforced those expectations. Second quarter GDP was revised upward on the back of higher consumer spending from 2.8 percent to 3 percent. This week's jobless claims were flat versus last week and the Fed's favorite inflation gauge, the Personal Consumption Expenditures Price Index (PCE), came in line for July with economists' expectations at 0.2 percent.

 

Between now and the FOMC meeting, the only data point that could make a difference to the Feds' rate decision would be next Friday's non-farm payroll numbers for August. Recall that the last report spooked investors. The number of jobs decreased by 36.3 percent versus the month before. Economists were looking for 175,000 job gains but the economy only added 114,000 jobs.

 

The data sparked fears of a deep recession and calls for immediate rate cuts by the Fed to avert a hard landing.  Since then, investors have explained away the sharp increase by blaming the shortfall on Hurricane Beryl, which decimated the Houston job market. If next week's jobs report does not show another sharp decline, the Fed is expected to cut the Fed Funds rate by 25 basis points.

 

What concerns me is that several market strategists are expecting an even deeper rate cut by one-half percent, followed by cuts every month for the remainder of the year. In my opinion, they are way over their skies unless the jobs data next week is poor.

 

In any event, one of the major concerns of investors this week was the fear that a disappointing quarterly earnings result from Nvidia might sink the markets. While the AI leader posted better earnings and sales, it wasn't enough to satisfy investors. As a result, the company's stock fell roughly 6 percent after its earnings announcement, but the markets overall held their own.

 

There has been a lot of backing and filling in the markets over the last several days. Blame it on the summer doldrums. It feels like the market wants to grind higher, possibly into the FOMC meeting in two weeks. An added variable investors will contend with is politics.

 

After Labor Day, voters normally begin to pay attention to the upcoming elections. It is a time when political promises come fast and furious as politicians and the media make hay while the sun shines. The combination of negative seasonality and election rhetoric could be "a perfect storm" of volatility for the stock market, especially given the level of gains in the market. Many who follow technical charts are convinced that a pullback will occur. It is just a question of when. I agree.  

 

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 good week in the equity market. The bounce back from the 8 percent sell-off at the beginning of the month is but a distant memory. Does that mean we are in the clear for further gains?

 

Maybe. So far, the financial markets have seen a "V" shaped recovery from the lows of Monday a week past. Technically, that is a rare occurrence after a downdraft of that magnitude. And yet, that is exactly what has happened thus far.

 

The gains have been helped by a spate of good corporate earnings, with 80 percent of S&P 500 companies beating estimates. A few benign macroeconomic readings suggested continued economic growth, a lessening of inflation, and a still strong if moderating, labor market. What's not to like about that?

 

It appears the yen-carry trade has been relegated to the back burner. Japanese stocks have recovered most of their losses and the yen has weakened versus the dollar every day this week.

 

On the geopolitical front, the awaited response to Israel's assassinations of several Middle Eastern terrorist chieftains has not materialized. Iran appears to have telegraphed that while it is still considering a response, much will depend on whether a Gaza cease-fire agreement can be hammered out by the combatants.

 

Both the Producer Price Index and the Consumer Price Index for July came in on target or even a little cooler depending on how you parse the numbers. July retail sales were a big surprise rising 0.4 percent, double the consensus of a 0.2 percent increase. That put to bed worries over faltering consumer spending.

 

And once again this week, unemployment claims came in less than expected at 227,000, down from the 234,000 the week prior. Given the data, economists are now calling the disappointing non-farm payroll number of two weeks ago an anomaly possibly caused by fallout from Hurricane Beryl.

 

There is also a bit of excitement and consternation surrounding the election campaigns of both candidates. This is the season of promises where politicians dangle new and tasty carrots before the electorate. Donald Trump has floated the idea of making social security benefits tax-free while arguing that he should have more control over central bank decisions.

 

Kamala Harris unveiled her economic policy initiative on Friday. She is promising to slap price controls and other penalties on price gouging in the grocery industry and make it harder for food producers to acquire distribution businesses like supermarkets and grocery stores. 

 

She also wants to cut taxes for the middle class and expand affordable housing. Both candidates are now talking about making tip income tax-free as well. In the meantime, government Medicare officials have also negotiated lower prices for 10 drugs including some in cancer, blood clots, and diabetes areas for the first time. It may represent a turning point to rein in healthcare costs and could save billions of dollars a year in Medicare payments. Harris is promising to expand this effort in the years to come.

 

On Aug. 22, the yearly Economic Policy Symposium in Jackson Hole, Wyo., will kick off. Federal Reserve Chair Jerome Powell will speak next Friday. Investors will be sure to parse every word of his speech to get his latest thoughts on the interest rate front.

 

Marketwise, we have officially recouped all the downside which occurred at the beginning of the month. Staying invested and/or buying the dip proved to be the right thing to do. There may be more volatility ahead since August into September is seasonally the worst period for the markets. My advice is to keep your eyes on the long term, which seems to be fairly rosy.

 

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.

"Be careful what you wish for" is an often-used quote. In the case of the financial markets, all year long, traders and the Fed wished for a slower economy, less employment, and therefore a decline in inflation. Now that we have it, the markets don't like it.

 

Earlier in the week, the bulls could not have asked for a more dovish Federal Open Market Committee meeting. While the central bank maintained its higher-for-longer stance, it hinted that September could see the first of several interest rate cuts. Jerome Powell, the chairman of the Federal Reserve Bank, said it will depend on economic data over the next several weeks. "If that test is met, a reduction in our policy rate could be on the table as soon as the next meeting in September."

 

But it would not only be the inflation data that the Fed would be eyeing. The Fed has now shifted to a more balanced approach between maintaining employment and reducing inflation. Powell admitted that at this point cutting interest rates "too late or too little could unduly weaken economic activity and employment."

 

In the meantime, other central banks have already cut interest rates. The Bank of England was the latest bank to reduce their interest rates on Thursday. Both traders and the Fed, have been watching the labor market for clues to the health of the economy.

 

As Powell explained in the FOMC Q&A session on Wednesday, "I don't think of the labor market in its current state as a likely source of significant inflationary pressures. So, I would not like to see material further cooling in the labor market." However, that is exactly what occurred one day after that meeting.

 

On Thursday, last week's report on jobless claims rose to an 11-month high with unemployment benefits filings hitting 249,000, up from 236,000 last week. Those numbers are still small compared to the overall number of employed in the nation, but the trend is not your friend if you are worried about a softening labor market and a hard landing for the economy.

 

It didn't help that on the same day the deteriorating health of the manufacturing sector came under the spotlight. Manufacturing has been weak for months. The sector has been below 50 on the ISM Manufacturing PMI, which is the cut-off between a weakening sector and one that is healthy. The ISM Manufacturing PMI for July showed a decrease to 46.8 versus 48.8 expected. The market interpreted that data point as a sure sign of a weakening economy.

 

Coupled with the jobless claims data and the ISM numbers, Friday's non-farm payroll data was also a disappointment. Job gains registered a mere 114,000, which was below the consensus of 175,000 expected. The unemployment rate also spiked higher to 4.3 percent from 4.1 percent in June. Wage growth also slowed to 3.6 percent from 3.9 percent year-over-year.

 

Suddenly, in the space of three days, the mood of the markets swung from Wednesday's "The Fed has it covered" with their wait-and-see data stance, to the "Fed has waited too long to cut."

 

Fed critics have argued for some time that when you begin to see the labor market roll over, it is already too late to avoid a sharp decline in economic activity. Many economists agree with the Sahm Rule, named after a former Fed economist, Claudia Sahm, who believed that when the unemployment rate rises 50 basis points from its low of the past year a recession is almost always underway. That has now happened.

 

The debt market took note by driving the yield on the benchmark 10-year, U.S. Treasury bond below 4 percent first the first time since February. Traders are not only convinced that the Fed will need to cut interest rates soon but are also worried that when they do, it will be too little, too late to stave off a recession. That triggered a rush for safety. Between the drop in yields and the poor manufacturing data, the stock market swooned giving back all of the gains for the week and then some.

 

If you recall my writing a month or so ago, I acknowledged at the time that everything was coming up roses as far as the economic environment was concerned. Nonetheless, my Spidey sense told me to be cautious in July and expect a sell-off. I have found that intuition is sometimes as valuable as a spreadsheet full of data in this business.

 

As for this weeks' recession scare, I come down on the side that one or two data points stacked up against a lot of numbers indicating continued growth in the economy fails to convince me we are heading for a hard landing. But if one needed a trigger to take profits, a recession scare is a good excuse.

 

In any case, the volatility in July has now rolled over into August. This week, stocks have gyrated in both directions, gaining and losing more than 1-2 percent a day in all three averages as well as in the small-cap arena. It is the kind of action one normally sees at the bottom and top of markets and indicates a change in the trend.

 

The S&P 500 Index racked up a 5 percent loss, while the NASDAQ lost double that in July. So far this month, which is usually a bad month for the markets anyway (as is September), we are extending those losses.

 

Last week, I wrote that the pullback was not yet over, but I did expect a bounce, and we got that last week. I believe there may be a bit more downside ahead with a total decline of as much as 7 percent from the high on the S&P 500. We may see that by the end of this week, and I may be conservative. A full 10 percent correction would not surprise me 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.

July, as promised, has turned out to be a month where financial markets have been buffeted by fireworks on various fronts. A gambit of data from inflation to economic growth combined with a new American brand of populism has led to some unexpected market consequences.

 

The good news first. In the second quarter, gross domestic product grew well above economists' expectations at an annualized pace of 2.8 percent, compared to forecasts of 2 percent growth. The "core" Personal Consumption Expenditures Index (PCE), which excludes food and energy, grew by 2.9 percent in the second quarter. That was above estimates of 2.7 percent but significantly lower than the 3.7 percent gain in the prior quarter.

 

On Friday, the monthly PCE data came in as expected edging up 0.1 percent month-over-month in June following a flat reading in May. However, the core index was a bit higher than forecasts at 0.2 percent versus expectations of a 0.1 percent increase. While still an increase, it is the slowest pace of inflation since March 2021. It is doubtful that the data will convince the Fed to change monetary policy sooner than the market expects.

 

On the political front, my prediction that President Biden might relinquish his candidacy in favor of his vice president, Kamala Harris, proved to be true. The impact on the financial markets has been negligible thus far, but the odds of a Trump win have gone down somewhat. As a result, the fervor to buy areas of the market that might benefit from a Republican sweep has subsided a little.

 

I believe that to make investment decisions at this point on who will win or lose the elections is largely fools' gold. Far better that we focus instead on something more tangible like the expectations that the Federal Reserve Bank will likely begin to cut interest rates at their next meeting in September.

 

We will know more about this in the coming week when the FOMC meets again on July 30. While there is only a 6 percent chance that the Fed will cut interest rates at this month's meeting, the odds are almost 100 percent that they will cut interest rates in September. That bet is what has investors buying small-cap stocks, which benefit the most from the loosening of monetary policy.

 

In the meantime, stocks have done what I predicted. The S&P 500 Index declined by 5 percent or so with NASDAQ falling almost double that amount. However, the Great Rotation that I discussed in my last column is alive and well.

 

The Russell 2000 small-cap index outperformed as did other forgotten areas like financials, real estate, and industrials. On the downside, the darlings of the market over the past months, FANG and AI companies were clobbered as did the technology sector overall.

 

You might think that if some sectors were up, while others were down, the overall market would balance out. Not so. Market capitalization is the key. Over the years, the growing weight of this handful of tech stocks in just about all of U.S. equity indexes has been extreme. The entire market cap of the Russell 2000 Index, for example, is equal to the market cap of just one of the FANG stocks. As such, no matter how much small caps gain, they can never make up for the declines in the technology sector.

 

In the short term, where FANG and AI technology go, so goes the markets. On the surface, the carnage in some stocks was nasty, but in the grand scheme of things a mere bump in the road considering the gains we have enjoyed thus far in the stock market this year.

 

The question you may be asking is whether the selloff is over. I sense that we still have more to go, but we could bounce first before rolling over again. This volatility could last until the Fed meeting late next week. At that point, with possibly more visibility on rate cuts, the market could find support.

 

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.