As temperatures climb to record highs throughout the nation, the financial markets feel their brand of heat as election fever takes hold with a vengeance.

 

Suddenly, value stocks, which have taken a back seat to the FANG/AI equity gang for months, are coming back into vogue. Semiconductor stocks, which have led the tech market higher for years had their deepest sell-off since 2022. Even Nvidia is suffering a bout of profit-taking.

 

Some are calling it the 'Great Rotation' where traders are taking profits on the concentration trade consisting of a handful of large-cap mega stocks and diving into financials, industrials, materials, and even regional banks. But the prize for the greatest bounce off the bottom had to be the market's unwanted stepchild, the Russell 2000. This small-cap index logged a 12 percent gain in just five days before profit-taking set in.

 

To be fair, some of this rotation has more to do with the expectation that the Federal Reserve Bank will cut interest rates in September. The odds of that occurring among Wall Street bond players are now just short of 100 percent. As such, it is an accepted principle that small-cap stocks benefit the most from lowering interest rates. That is because many of these companies do not make money and must borrow to stay afloat. Lower interest rates also help commodities, especially precious metals, which explains why gold hit an all-time high this week before profit-taking.

 

However, the decline in overseas markets, in China plays, in semiconductor and tech stocks, while gains in cyclical areas, financials, and others can be attributed to the political arena rather than any macroeconomic data or what the Fed said or didn't say. Back in June, I wrote, "We are entering the season where election politics begin to matter to the stock market. It may be that political uncertainty may begin to trump economics." That season is clearly upon us.

 

In quick succession the markets have witnessed the Biden debate debacle, the Supreme Court immunity ruling, Democrat demands that President Biden drop out of the race, the attempted assassination of Donald Trump, and the selection of J.D. Vance as Trump's running mate, former President Trump's nomination at the Republican National Convention, and the release of a Bloomberg interview with Trump that underscored his intent to place 100 percent tariffs on Chinese goods and a warning to Fed President Jerome Powell not to cut interest rates before the election.

 

And if that wasn't enough to keep the algos and computer programmers busy devising new algorithms for their day trading, rumor has it that the effort by Democrats to replace Joe Biden as their candidate may be gathering strength again now that President Biden has come down with COVID. Many on Wall Street believe we could see an announcement of a Biden drop-out in favor of Kamala Harris this weekend.

 

The implications of a Trump versus Biden (or Harris) presidency appear to be monumental on the surface if you listen to the candidates. Regulations might change, which could be good or bad depending on what sectors are impacted. I expect the media, who are in the business of selling more newspapers and as many clicks as possible, will embellish every campaign promise, and every policy suggestion with a whole series of "what-ifs." They need to do that to keep you reading and listening. As for the polls, forget them. The polls are notoriously inaccurate and are simply another method politicians are using to advance their numbers.

 

If you have not done so, I urge you to read my series of columns on regime change and this era of populism that we are now entering in full force. I believe it will help put all the political events of the last few weeks into perspective. It will also give you some guidance on what to expect going forward in the financial markets.

 

The present environment will only become more heated and volatile into November. As such, I must remind readers that campaign promises are not facts. Nor is hope, like despair, an investment strategy. After managing money through a good number of presidential elections, I can state categorically that buying or selling investments based on who wins or loses elections in the U.S. is a bad, bad idea. To do so only guarantees one loser — you.

 

As for the markets, over the last few weeks, my advice was to expect a selloff in the stock market in mid-July. The only question to ask at this point is how deep of a correction are we in for. It doesn't have to be a straight-down plunge. We could bounce and then roll over, bounce again and so on until we see an overall decline of 5 percent-6 percent plus. It could be more, but we will need to wait and see.

 

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.

Starting Sept. 23, there is good news for savers who want a fair shake when looking for investment advice. Let's hope that the new Department of Labor rules are here to stay.

 

If the DOLs are enacted, more professionals than ever before will be required to act as fiduciaries when clients pay them for investment advice on Individual Retirement Accounts IRA). This will add another level of protection to an instrument that for many represents a lifetime of retirement savings.

 

What, you might ask, is a fiduciary? It is someone responsible for managing money or property for someone, who must put that client's interests ahead of their own. Such a person (or organization) is legally and ethically obligated to act in the best interests of another person or entity.

 

Many people fail to understand that the rules governing financial professionals vary, depending on where they work and what products they sell. They just assume that a 'trusted adviser' is just that. The goal of the legislation is to minimize conflicts of interest and to end the practice of selling goods and services that simply line the pockets of the seller at the expense of the buyer. Through the years, I have seen this done more times than I care to count with upper management in many Wall Street firms encouraging the practice and rewarding the perpetrators with fat bonuses.

 

In my own career, there were times that I was not required to act as a fiduciary, but I adhered to the letter of the law anyway. As a registered investment adviser at my former firm, Berkshire Money Management, it was a requirement. In my opinion, the financial services business is built on trust and anything that furthers that goal makes absolute sense to me.

 

This is not the first time that the DOL has attempted to update ERISA, the federal retirement law that was first enacted in 1974. That law governs the gambit of retirement savings vehicles.  For more than a decade, the financial services sector has managed to delay or remove legislation through three successive administrations. I recall writing about this back in the Obama administration in 2016 when stringent rules appeared to be on the verge of implementation, only to be tossed out by the Trump administration two years later.

 

This time around some of the loopholes in the existing rules have been addressed. In the past, for example, before being deemed a fiduciary, a financial professional had to meet a five-part test. One part of that test stated that advice must be given regularly. If a recommendation was only given one-time, as in the sale of an annuity or advice on what to do with the lump sum rollover of a 401(k) at retirement into an IRA, then the fiduciary rule did not apply. It may not sound like much of a difference, but the rollover market alone was worth almost $1 trillion last year.

 

The new rules would also include just about all financial professionals and the products they sell. Stockbrokers and insurance brokers would join the ranks of investment managers required to act as fiduciaries. It would also cast a wide net of product offerings, everything from stocks, bonds, mutual funds, annuities, and other insurance products, even illiquid real estate investments.

 

To screen for conflicts of interest among products and people, financial professionals would be required to have "policies and procedures in place to manage conflicts of interest and ensure providers follow these guidelines." 

 

I have long been an advocate of requiring the entire financial services industry to embrace the role of fiduciary in all their dealings with the public. However, that has not been the case thus far within the industry. This time around, I am hoping the new rules will stick, but I have also learned not to underestimate the financial services sector's lobbying power.

 

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 Consumer Price Index was cooler than expected in June, while the Producer Price Index was warmer. Equity traders responded by selling winners and buying losers.

 

CPI inflation fell further than most expected as easing prices for gasoline and other staples like food and new lease rents cooled dramatically. That information might help the level of anxiety people are feeling about inflation. It appears that the price points of most staples have finally flattened out year-over-year instead of constantly going up as they have for the last few years. 

 

Countering that good news, wholesale prices climbed 0.2 percent last month led by prices for services, which offset a decline in goods prices. The May PPI numbers were also revised upwards as well. However, the CPI news trumped the disappointing PPI data on the nation's trading desks.

 

Fed Chairman Jerome Powell's testimony before Congress this week paved the way for the inflation data. On Wednesday, in his testimony before the Senate Banking Committee, he said, "More good data would strengthen our confidence that inflation is moving sustainably toward 2 percent."

 

His semiannual congressional appearance at the House Financial Services Committee a day later was also encouraging. Powell hinted that the environment for rate cuts is approaching citing a jobs market that is slowing down. He also said that the Fed had been heavily focused on inflation but is now getting to a place where the labor market is drawing more of their attention.

 

Recently, the labor market data indicated that the number of jobs is declining. Powell clarified that he and his committee are increasingly aware of the risks posed by a cooling labor market. His comments kept the equity market well-bid for most of the week and the inflation data announcements were simply the cherry on the bull's cake.

 

Based on Powell's testimony and the cooler CPI data, the betting for a rate cut by September skyrocketed to more than 90 percent. Both the U.S. dollar and bond yields plummeted as a result. However, at the same time, a massive shift occurred as momentum and program traders sold down the ten or so large-cap stocks that have driven the averages higher, while buying hand-over-fist areas like precious metals, China, emerging markets, small-cap stocks, industrials, and real estate.

 

All the above areas benefit the most from a declining dollar, lower interest rates, or both. This could be good news for the health of the market if this trend were to continue. I have written about the concentration risk (too few stocks going up) that has gripped the market over the last few months. For the markets to continue to gain, we need to see a broadening out of stocks that are participating in the upturn.

 

If the market were to rotate out of some of its FANG/AI holdings into other equity and commodity areas, there likely would be a period of consolidation and volatility in the markets. I have been expecting higher highs into mid to late July followed by a period of consolidation. As of right now, I am on target and await further developments.

 

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.

Tariffs in America have been used to accomplish specific goals throughout history. Until the Civil War, tariffs were a revenue generator for the government. After the Civil War, they were used to protect U.S. industries and during the Great Depression, tariffs evolved as a negotiating tool between nations, especially after World War II.

 

In the postwar years, tariffs built stronger trade relations between nations. Reciprocity rather than protectionism or revenue was the guiding principle behind our trade negotiations with other countries and economic regions. That idea still holds sway under certain circumstances, but tariffs have become an offensive policy tool as well.

 

I remain convinced that tariffs are simply another tax that corporations and consumers pay to finance the policy goals of the government. Many may believe that tariffs are worth the price if it means more jobs for Americans but that has not been the case. The overall loss of jobs because of tariffs far outweighs the gains in tariff-protected industries, especially in a situation where retaliatory tariffs are levied on the U.S.  

 

Tariffs in today's world are being used by both political parties to accomplish an even greater spectrum of goals than simply job protection. Under the former administration, tariffs were both a weapon to help revive the domestic manufacturing sector as well as to reduce American dependence on China in a variety of economic sectors.

 

Since then, under President Biden, the goals of tariffs have been broadened further to include national security, and self-sufficiency, and to support our efforts in the green energy transition.

 

His approach is better, he claims, because it is targeted and selective. It also involves convincing allies to join him to coordinate tariffs on Chinese goods.  He argues his tariffs on foreign electric vehicles and solar panels allow our U.S. producers to gain a foothold in this area. The restrictions on semiconductor imports are both an attempt to build up the country's self-sufficiency in an area that is important to both military defense and increase made-in-America manufacturing in areas such as artificial intelligence. He has also restricted what U.S. industries can sell to China, especially in the technology sector.

 

 Former President Trump has doubled down on his first-term tariffs. He has advanced ideas that would include a new 60 percent tariff on all Chinese imports, plus a 10 percent across-the-board tariff on imports from around the world. He has also reached back into America's past when tariffs were revenue generators. His idea is to use tariff revenue to replace the income tax.

 

I do applaud him for a novel idea. However, it would require a huge increase in tariffs to accomplish such a feat. To put this into perspective, when tariffs were the main source of government revenues, federal spending was about 2 percent of GDP. Today that number is 23 percent. Total individual income generates more than $2.2 trillion in federal revenues while total import revenues are less than $100 billion. The required increase in tariffs would stifle trade and likely precipitate a worldwide recession.

 

I also suspect that Trump may be using the threat of higher across-the-board tariffs to exact concessions from both China as well as the rest of the world. He has done it before and could do it again and our trading partners know it.

 

In any case, all these tariff efforts by both parties are playing well with American voters whether Republican, Democrat, or independents. It appears that few care that we are already paying $230 billion in tariff-related price increases. A further 60 percent tariff on Chinese goods would increase prices by another $230 billion.

 

On an individual level, the Peterson Institute for International Economics calculates if Trump carried through on his promises the average middle-income family would pay $1,700 a year in higher prices on top of the $1,000 per annum they are already paying.

 

I don't think Preside Biden's tariff schemes are any better despite his selective approach. However, what I think isn't important. It is up to an informed electorate to decide if tariffs are the way to go.

 

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 another good week for stocks following another good month of gains. Granted, in this holiday-shortened week, the volume behind the positive moves was paltry at best. However, many traders will tell you that only the price pays.

 

The macroeconomic data seems to be coming in as the Fed had hoped, with some data showing a slight cooling of the economy and at least two months of better inflation numbers. Although the U.S. economy added 206,000 jobs last month, that was slightly down from 218,000 jobs in May. Average hourly earnings also increased, but below forecast as well. However, the overall unemployment rate did tick up to 4.1 percent, the highest reading in three years.

 

Chairman Jerome Powell appeared satisfied with the state of the economy and inflation when he spoke in Portugal this week at the Forum on Central Banking. He suggested that we are returning to a disinflationary path but "we want to be more confident that inflation is moving sustainably down before we start the process of loosening policy." 

 

His comments barely differed from that same old monetary song the Fed has been singing throughout the year. Nonetheless, the bulls ran with his comments pushing the S&P 500 Index above 5,500 for the first time.

 

Another sign the Fed is on target was the new data released by ADP this week that showed annual wage increases for workers who remained in their same job increased at the slowest rate in nearly three years in June. Wage growth is one of the main contributors to the inflation rate. As such, that may have been good news for Wall Street but bad news for Main Street where consumers are still fighting the high cost of everything.

 

Politics and the election, at long last, appear to have entered the psyche of traders and investors alike. Last week, I warned readers that I expected as much. Two events — the Biden debate debacle and the Supreme Court's ruling on presidential immunity — captured the market's interest. Bond yields rose and the dollar strengthened.

 

The thinking behind these moves was that both events strengthened the probability that Donald Trump would prevail in November. And if he did win, inflation would be much higher thanks to his promise of tax cuts and tariffs. That remains to be seen, but traders immediately attributed the pop in yields to the "Trump Trade."

 

Precious metals and other commodities also jumped on the re-inflation theme although cryptocurrencies declined. At the same time, cannabis stocks were clobbered as investors worried that a Republican sweep of the House and Senate would put an end to any further liberalization of marijuana. Drug companies also took it on the chin, since the pharmaceutical sector has traditionally been the whipping boy for both parties as election rhetoric heats up.

 

The narrowing of the market's gains continues to occur with less than ten stocks accounting for most of the S&P 500 and NASDAQ gains. Concentration risk is higher than it has been in decades. How long can this last is anyone's guess? The index averages are stretched, but we will only know in hindsight when we have reached a breaking point. 

 

As readers recall, I expect fireworks this month with new highs early on followed by a possible downdraft in the latter half of July. However, nothing in the data or the Fed's actions indicates such a sell-off will occur. Sure, the technical charts are screaming a flood of warning signs, but the momentum behind the AI and FANG stocks is still quite strong. For a pullback to occur, the bears need a trigger.  

 

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.