New highs continue as equities ignore the inflation data and focus instead on the prospects of the next administration. Wall Street consensus is that the upside in stocks should continue at least until the new year.

 

As a contrarian investor, I often disagree with the consensus view but not this time. Last week I explained how global money flows usually support the markets and create the Santa Claus rally. This period of good cheer and higher prices should extend into mid-January.

 

This week, the most recent data on inflation confirmed my fears that we have not seen a bottom in inflation. Back in September, I predicted that inflation would begin to rise again, and it has. The Consumer Price Index (CPI) gained 0.3 percent for November and 2.7 percent compared to last year. The Producer Price Index (PPI) rose 0.4 percent, up from gains in both October and September.

 

Wall Street economists pointed out that if you exclude food and energy, the PPI was almost in line with expectations, but it was still an increase. Sometimes I think the Fed, financial analysts, and economists live in another world.

 

Why they exclude two of the most vital elements for Americans — food and energy — in calculating the inflation rate is beyond me. One PPI category finished consumer food, which is processed food ready to be sold to consumers, was up 31 percent! Of course, they will say those categories fluctuate too much to be proper indicators.

 

Tell that to those who need to fill up at the pump to get to work. Tell that to Joe Biden and Kamala Harris who lost the election because the progress on inflation they touted was nowhere to be seen in the grocery aisles. If tariffs under the new administration raise food prices further, there will be hell to pay.

 

In the meantime, I expect we will see even higher inflation in the data for December and into January. You would think that with this backup in the inflation numbers, the Federal Reserve Bank might at least pause cutting interest rates at their meeting next week on Dec. 18. However, that doesn't seem likely. The bond market is betting (with a 95 percent probability) that the Fed will cut interest rates again by one-quarter of a point.

 

It was why stocks continued to climb this week despite the inflation numbers. The NASDAQ composite had its first-ever close above 20,000. The S&P 500 Index is only a few points away from 6,100, which would be another all-time high for that index. It seems clear to me that investors are counting on both the Fed and Donald Trump to support the stock markets in the coming months.

 

At this point, most traders believe the Fed while cutting rates in December will then stay on hold until at least March. Traders are also counting on the "Trump Put" to support stocks. Since Donald Trump is known to use the stock market as the leading indicator of his progress, he will do whatever it takes to keep the market supported and on an upward trajectory. That remains to be seen. It indicates to me how giddy the markets have become since the election.

 

One variable I follow is the NFIB Small Business Survey. Small businesses represent 99.9 percent of all U.S. businesses. These small firms employ over 46 percent of all private sector workers and contribute 43 percent to Gross Domestic Product. The index gives me a good read on the economy overall.

 

Last month, the NFIB index jumped 8 points to 101.7. That is the highest level it has reached in almost five years. Prior to last month, the index had remained below its 50-year average of 98 for 34 months. At the same time, the uncertainty index which hit an -all-time high of 110 in October, fell by 12 points after the election. It gets better.

 

The net percentage of businesses expecting higher sales volumes rose by 18 points, its highest level since February 2020. Critics might argue that it is just one data point and not a trend. That is true, but the same thing happened after Trump was elected for his first term. Small business sentiment spiked higher after the 2016 election and continued to increase for two more years.

 

One troubling indication of the market's health is breadth, which is the number of stocks going up versus those going down. In December thus far breadth has been falling and getting worse. In November the rally in stocks had broadened out as financials, consumer discretionary, and industrials as well as small caps joined the bull market. That was a good sign.

 

Since then, seven sectors have fallen, and the equal-weighted S&P 500 has fallen sharply this month.

 

As readers know, the performance of the benchmark S&P 500 Index is largely dependent on the heavy weighting of a handful of large-cap mega stocks (FANG & AI). If this trend continues, it means that as we move closer to Christmas the market's gains become more precarious as fewer and fewer stocks participate.

 

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.

Each year from roughly the end of the second week of December through the second week in January the stock market rises most of the time. This year, expect a similar occurrence.

 

There are plenty of explanations for why this occurs. Many believe it is simply the good cheer the holidays bring to the markets. Others point to the additional spending triggered by holiday shopping, while some argue it is because institutional investors buy stocks before going on their Christmas break. 

 

For me, it comes down to the flow of funds in and out of financial markets. Every year, for many reasons the flow of funds into the financial markets increases at the end and the beginning of each year, especially when the stock market delivers outsized gains like they have this year.

 

Think about it. Money managers saw gains of 20 percent-25 percent in 2024 in equity markets worldwide worth roughly $100 trillion or more. That means that there is now another $25 trillion-plus in gains that are available for investment. Where does that money go?

 

Unless you and everyone else cash in all your chips and put them under your pillow, you would expect your investment adviser to reinvest that money into the stock market. If, as many believe, the future looks rosy, at least in the U.S., managers would like to put that money to work sooner rather than later.

 

But that is just the beginning. In December and January, the lion's share of bonuses are paid to employees worldwide. Most of that money will go straight into bank accounts, savings accounts, investment accounts, etc. That flow of funds will also find its way into financial markets.

 

Then, there are those contributions to all those tax-deferred accounts: (401)Ks, 403(B)s, IRAs — held by 50 percent of the American workforce. Much of these money flows hit the financial markets in the next month or so.

 

Many other pools of capital that are a bit more exotic also expire at the end of the year and begin again in January. These instruments like structured products, equity derivatives, yearly, long-dated options expirations, credit spreads and more have one thing in common — leverage. Every year, you take your winnings from last year, borrow money against them, and buy even more of whatever instrument you decide will make the most profits. This creates even greater flows of capital.

 

In a matter of weeks, this river of electronic capital flows into the financial system and washes up on the shores of various markets. A large portion will end up in the stock market. These flows should continue until the middle of January before ebbing once again.

 

This does not happen every year, but since 1950 December has been an up year 74 percent of the time as measured by the S&P 500 Index. That number climbs to 83 percent (in election years 100 percent) when the S&P 500 Index is up more than 10 percent in the first half. Many simply chalk the gains up to "seasonality" without recognizing the powerful underlying currents that create this holiday phenomenon.

 

In any case, last week the S&P 500 tacked on another 50 points reaching the 6,100 level. Bitcoin finally passed the $100,000 mark before backsliding. And November's non-farm payrolls bounced back from a flood and strike-depressed performance in October.

 

This coming week all eyes will be on the last Consumer Price Index data before the Fed's Dec.18 meeting. I expect a hotter number which may (or may not) convince the Fed to pause before cutting interest rates again. I believe it won't matter in the broader context of money flows to a market that seems destined to continue to climb.

 

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.

Scott Bessant at Treasury, threats of day-one tariffs on trading partners, and calls for another end-of-year rally buoyed markets. It is a seasonally bullish time for the equity markets with Christmas around the corner.

 

By now, you have probably heard that hedge fund manager Bessant will take the reins at the U.S. Treasury in January. Markets cheered that news. Most market participants believe Bessant is the man best suited for that post. Investors hope he will be market-friendly and a voice of moderation in the new Trump administration.

 

But before Bessant or anyone else gets carried away with the idea that Trump has lost that loving feeling he has for tariff diplomacy, think again. The president-to-be fired a broadside at China, Mexico, and Canada on Monday threatening 25 percent on all products from Mexico and Canada as one of his first executive orders. That is a big deal since exports to the U.S. account for 27 percent of Mexico's economy and 21 percent of Canada's.

 

And just for good measure, he will slap an additional 10 percent tariff on Chinese goods above any additional tariffs he puts in place. I found it interesting that he seemed to go easy on America's number one bashing boy, Xi Jinping, in his broadside. There are rumors that negotiations over tariffs and other issues are already underway with China. If so, I suspect it would be at the urging of  Trump's unofficial everything buddy, Elon Musk. 

 

Musk's EV company, Tesla, has its largest and most productive factory in China and would lose big time if relations go any further south between the two countries.

 

As for Mexico and Canada, Trump's threats were not just about economics. He is promising new tariffs on both nations unless they curb the flow of illegal drugs into the U.S., especially fentanyl. China is the main producer of fentanyl, while America's closest trading partners, Canada and Mexico, have become major conduits for the distribution of this drug into the U.S. He also insists that illegal immigrants are turned back before crossing our borders.

 

Two days later, after a conversation with the new Mexican President, Claudio Sheinbaum Pardo, which Trump described as a "very productive conversation," the problem was solved. "She has agreed to stop Migration through Mexico, and in the United States, effectively closing our Southern border," wrote Trump in a social media post. They also discussed illegal drugs as well. We await the response from Canada.

 

If these announcements evoke a certain amount of deja vu among readers, get used to it. In the Trump 1.0 version, the markets were treated to a daily diet of new tariffs, restrictions, exemptions, threats, bluster, temper tantrums, etc. Trump 2.0 should be even more entertaining. Trump will be Trump, that's for sure.

 

This latest tariff announcement had Wall Street, the media, as well as economists throughout the globe, immediately singing from their same old song sheet: higher inflation and slower growth. The first reaction to the news was a drop of more than 2.3 percent by the Mexican peso against the dollar. The Canadian dollar dropped by 1.4 percent. Since Trump's election, the peso year-to-date has fallen more than 4 percent and the Canadian dollar almost 3 percent. How does that goose inflation? It doesn't.

 

Think about it. If a country's currency adjusts downward to offset a tariff increase (as most of the world's currencies are attempting to do this year against the dollar), there are no meaningful inflation consequences at the macroeconomic level. If the price of a Mexican imported T-shirt at Walmart drops 10 percent because the peso is cheaper against the dollar, a 10 percent tariff on that T-shirt ends up at the same price to holders of dollars.

 

Of course, I am describing a perfect economic world. Real-life tariffs, currency devaluations, and their impact on imported goods and products could spell inflation in some areas and deflation in others.

 

Tariff threats are one of the main reasons why the U.S. dollar keeps rising. It is part and parcel of what happens on the economic front in an era of populism. Tariffs make other countries poorer and ours richer. It is how to make America great again, or at least wealthier, through a beggar-thy-neighbor mercantilist approach. 

 

The problem, however, is that over the last eight years, many of our trading partners have also been swept up in populist movements. Foreign voters have created their versions of MAGA and will not take our new government's threats lying down. Tariffs levied by us will immediately be met by tariffs by them.

 

There is no right and wrong in Trump's approach, especially when you consider the number of deaths (75,000 deaths per year) due to fentanyl in the nation. Our drug policies to date have failed to stem the rise of this drug addiction or convince foreign exporters to find another market for their product.

 

The same could be said for stemming the flow of illegal immigrants. Democrats, Republicans, and independents alike have decided that illegal immigration is one of their top grievances. As such, this populist generation says that doing something is a far sight better than wringing hands while hoping that the bankrupt policies of the past will somehow begin to magically work. For better or worse, we as a nation are past that.

 

Hitting countries where it hurts (in their pocketbooks) is not a new approach. It is quite old. History will tell you it was the economic name of the game in Western Europe from the 16th to the 18th centuries. It is called mercantilism. Mercantilist policies included tariffs, subsidies, import quotas, and restrictions on foreign labor. They were designed to accumulate wealth, protect domestic industries, maintain employment, and bolster state power. At the time, it increased conflict among nations. Sound familiar?

 

As for the markets, most participants were unfazed by the tariff threats. During Trump's first term, those statements would send markets into a swoon. But stocks stayed firm and traders focused on other things. After the first four years, we have been there and done that.

 

We enter December at record highs. We could see a minor decline over the next week or two. It would be just profit-taking and a chance to buy the dip.  At that point I expect the year-end rally to take over into January.

 

Last week, traders made profits from the Trump trade. This week they reversed their positions. I expect further upside into the Thanksgiving holiday.

 

The market's performance was even more impressive considering the disappointing earnings from the number one AI player, Nvidia. The semiconductor giant reported stellar third-quarter earnings this week, but they were just not good enough to keep the stock's upside price momentum going.

 

Company management said supply chain issues reduced the growth rate in sales to the slowest in seven quarters. All that means, in my opinion, is that revenue will be boosted down the road when the bottlenecks are resolved. But in this market, no one is willing to wait around for that. The damage to the stock price was minor.

 

However, Alphabet did tumble more than 6 percent after the Department of Justice (DOJ) moved to break up its vast technological empire. The DOJ asked a judge to force Google to sell off its Chrome browser. Short-term traders dumped the stock.

 

To me, the chances that anything will come of this action anytime soon is just about zero. There is even a question of whether the incoming administration will pursue the case at all. Yet, it continues to sell off. This is the world of short-term equity markets that we live in. Long-term investors can profit from some of these trader temper tantrums.

 

The biggest story in financial markets this week has been the steady climb in Bitcoin and everything crypto. Last week I mentioned that Bitcoin should see $100,000 in short order. Early Friday morning it topped $99,452. Bitcoin has turned out to be the Trump Trade.

 

A prominent crypto lawyer is evaluating potential candidates to succeed Gary Gensler as Chair of the U.S. Securities and Exchange Commission. This added fuel to the fires that have lighted up all things crypto. Gensler, who has been the main impediment to the further development of the cryptocurrency market,  announced he will be resigning on January 20th even though his tenure runs through 2026,

 

 Two of the strongest candidates, Brian Brooks and Paul Atkins, are leading crypto advocates. Appointing the right candidate could convince many more economic actors that the time has come to get involved in this area.

 

Gold has also reversed from a near 10 percent pullback since the election results although other metals have not fared as well. The Biden Administration's pivot in allowing Ukraine to use US missiles in Russia has caused a surge in geopolitical risk and a rush into gold as a safe-haven asset. Russian President Vladimir Putin has long said that using long-range, Army Tactical Missiles (AT-ACMS) would represent the crossing of a red line.

 

Traders have also begun to have second thoughts about the chances for further interest rate cuts by the Fed. The odds are no better than 50/50 at this point that the Fed will cut rates again in their December meeting. Worries that inflation may worsen under the new administration have convinced the bond market and possibly some members of the Federal Open Market Committee that holding off for the moment on rate cuts may be the wise move.

 

I have been warning readers that I expect the Consumer Price Index to show further gains in inflation this quarter. That turned out to be true in the last month, and I suspect we will see the same again in the next report.

 

 Momentum, rotation, and volatility; there was something for everyone over the last few days. I expect that to continue. Technology is no longer the only game in town and this week's top gainers — energy, crypto, gold, industrials, and financials — are proof in the pudding.

 

Markets are stretched but have been in that condition for a while now. Thanksgiving week is usually a good time for equities, so we could see stocks grind higher until the beginning of December. At that point, a pull-back wouldn't surprise me. Happy Thanksgiving to one and all.

 

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 5 percent gain in nine days on the benchmark S&P 500 Index was met by profit-taking. Traders booked gains in Trump trades as some had second thoughts about continued upside. Who can blame them?

 

The conviction by many that happy days are here again (or will be by next year) sent markets through the roof in a frenzy of FOMO-generated trades. Technology took a back seat for a change as small-cap stocks soared on the belief that tariffs would force consumers to buy made-in-America products from American companies.

 

Smaller capitalization companies are distinctly American and are listed on the Russell 2,000 Index. Traders know that a good 40 percent of these companies make no money and bought them anyway. Hope springs eternal when it comes to the future economic prospects of the economy under a second Trump administration.

 

Semiconductors stocks which have led the markets higher for a long time did not participate. Poor earnings guidance from several big companies, plus fears that tariffs and China bashing could reduce prospects even further, triggered a wave of selling. Even Nvidia, the poster child of AI, felt some of this cold downside draft.

 

That may change next week, however, when the company is scheduled to report earnings.   Most analysts believe it will be another stellar quarter for this semiconductor darling. It had better deliver or things could get ugly in Stockville.

 

The precious metal and commodity areas have also seen a wave of selling as both the US dollar and interest rate yields have climbed just about every day since the election. That combination of higher rates and the dollar has historically acted like kryptonite to gold and silver.  You might say a strong dollar is the result of Trump's election, and you would be correct, but it may not be for the reason you think.

 

As I wrote last week, foreign countries are devaluing their currencies against the dollar as fast as possible. They are doing so in anticipation of across-the-board tariffs that Trump has promised to levy on their exports into the U.S. They do so to lessen the impact of this policy on their exports.

 

The cheaper their currency, the cheaper their imports will cost American buyers. So, when tariffs are tacked onto these rock-bottom prices, it will simply mean prices return to where they were before his election. No harm no foul.

 

Bond prices are falling, and yields are climbing higher as the dollar strengthens. Two reasons come to mind. Trump's stated policies (tariffs, immigration, spending) will be inflationary. Second, economic growth may be stronger as well. That combination of higher growth and inflation will typically mean that bond buyers demand more returns to stay with bonds when they could get higher returns in the stock market.

 

Both the Consumer Price Index and the Producer Price Index came in slightly hotter than the consensus estimates for last month. Readers may recall that was my forecast given a few weeks ago. I believe the next data points in December could also show higher inflation. It may be the reason Fed Chair Jerome Powell said Thursday that the central bank saw no need to hurry to cut rates further.

 

Of all the great gains among asset classes since the election, Bitcoin has been the big winner, in my opinion. It is the gold standard of the now dominant generation, the Millennials. As an alternative to the dollar and the political/economic system of their parents, it is the preferred currency of populism. As a first stop in its climb to new heights, my target is $98,700, which is not unique. Wall Street overall is forecasting $100,000 for bitcoin by the end of the year. It could go higher, and probably will if you believe in cryptocurrency and are willing to wait for further developments sometime next year. Bitcoin has come of age, as have its owners.

 

I noticed that there is a small but growing army of crypto bulls who are upping their price targets over the next two quarters. This always happens in parabolic moves like this.  What I have learned over the years is if you are making money rapidly and it seems so easy (as it does right now in crypto) that is the time to be most on guard for an abrupt reversal  If that happens, just remember that you could easily see $83,000-$80,000 on a pullback in the blink of an eye.

 

My advice is to beware what may be false narratives. The stories that are being spun about the impact of future policies on certain industries and sectors should be taken with an ocean full of salt. On Friday, for example, health-care stocks were decimated because Robert F. Kennedy Jr., who holds unorthodox views on healthcare, was appointed to head the Department of Health and Human Services. Earlier in the week, defense stocks were sold because of fears that the newly created Department of Government Efficiency will hurt the profitability of government contractors. Do not get caught up in this frenzy both good and bad.

 

As for the overall market, I counseled that election results could fuel both upside and downside. In other words — high volatility. We have experienced the upside and now we get to experience a little of the opposite. Over the next two weeks, we could see further declines. If so, I would put money to work on 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.