It is a time when financial strategists and economic experts forecast what will happen in the coming year. Since most of Wall Street is trying to sell you something, prepare for a positive outlook from most firms.

 

On practically the same date last year, I wrote that strategists were predicting the 2024 S&P 500 Index targets ranged from 4,200 to 5,500. Given that over a long period, the S&P 500 has delivered around 10.13 percent yearly returns since 1957, and 9.19 percent over the last 150 years, forecasts that mimic those returns should be ignored.

 

Those forecasts told me the authors had no idea where the market was going.  As such, they just took the historical average gain as their forecast, and very few were bearish for 2024. 

 

Overall, Wall Street did get the direction right, but the S&P 500 Index gained more than double their best forecasts. Most forecasters also expected the dollar to continue to decline, and interest rates as well. Neither happened. Given the track record, I would also take 2025's forecasts with a grain of salt. 

 

This year, the target range for the S&P 500 ranges from 6,400 to 7,007. This implies a return between plus-5 percent and plus-15 percent. The average of those two extremes is of course 10 percent. Need I say more? Unlike others, I usually refrain from forecasting where the S&P 500 will end up 12 months from now. There are just too many factors that can change my outlook along the way. So instead, I will focus on the risks and rewards I see for the markets.

 

Inflation is one of my chief concerns. I expect the inflation rate to hit 2.9 percent next month and climb higher into the summer. That means to me that the markets should not expect the Fed to cut interest rates again for quite some time. That removes one major support for the markets.

 

I do expect the economy to continue to grow but at a slower pace. As such, corporate earnings should grow along with the economy. In that environment, I do think that small-cap stocks will finally have their day in the sun. That is not a unique position. Most analysts in the financial community are recommending small-cap outperformance as well.

 

On the political front, Donald Trump will be inheriting a strong economy, a robust employment picture, a strong dollar, reasonable interest rates, and a flattening inflation rate from the Biden Administration. It is his to build upon or to squander. He will also face a historical debt burden that he will be forced to confront at some point.

 

The prevailing sentiment among investors is that the incoming president will benefit the economy due to his stance on deregulation, efficiency, lower taxes, and lower interest rates. Despite his promise to levy blanket tariffs on the world, most U.S. traders believe that his threats are at most a negotiating tactic.

 

I hope so. The rest of the world doesn't think that will be the case. Going into 2025, several major nations have already watched their currencies fall 8-9 percent against the dollar. That indicates to me that they think the tariff threats will be real and will bite, at least in the short term.

 

I would expect that if the dollar does continue its climb in a tariff war, then Bitcoin, and possibly gold and other precious metals, will do so as well.  That does not mean that cryptocurrencies will go straight up from here. I am looking for a deep Bitcoin pullback to the $86,000 to $74,000 range first.

 

As for the market's overall performance, it would be rare to have another year like the last two years. That doesn't necessarily mean markets would be down, but a less robust performance would not surprise me. Equities usually have a period of consolidation beginning in the last part of January.  I would watch out for that.

 

In addition, in populist periods in the past, stock market performance between presidential election years has been dismal at least in the Sixties into the Eighties. However, right now, the Santa Claus rally is once again in play.

 

The end-of-year flow of funds into equities is alive and well and should continue to support the market at least into January. During this period, Santa has delivered to the market a 1.3 percent gain on average since 1950. Happy New Year.

 

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.

Last week, billionaire Stephen Feinberg of the private equity firm Cerberus Capital Management was selected to fill the No. 2 spot at the Defense Department. That brings the number of billionaires who have agreed to join Donald Trump's second term to an even dozen. Should you be worried?

 

The wealth and business background of these individuals have sparked concerns that the next four years will favor business interests and those of the wealthy above all else. If we include Trump, Elon Musk, and Vivek Ramaswamy, the total thus far would be 15. At last count, U.S. News and World Report estimated that the total net worth of these billionaires as of Dec. 10 was more than $382 billion. That would be equivalent to the Gross Domestic Product of 172 different countries.

 

The Departments of Treasury, Commerce, Education, Interior, and Defense will be run by these wealthy individuals as will the Small Business Administration and NASA. In the $100 million to megabillion-dollar net worth range, are another group of ambassadors, advisors, the energy secretary, and the head of the Social Security Commission.

 

The facts are that American politicians have always been wealthier than most Americans. That is true in other countries as well. For wealthy individuals serving one's country may truly be altruistic since government jobs are thankless and underpaid for the work required. Service is also a massive step down from what these people can and do make in the private sector. However, it is also true that wealthy lawmakers usually favor pro-business policies.

 

In the recent election, 150 billionaire families spent a total of $1.9 billion supporting both presidential and congressional candidates, according to a study by Americans for Tax Fairness. That was a 58 percent increase over what was spent in 2020. The lion's share of that money went to the Trump campaign ($568 million), compared to $127 million to Kamela Harris. Those figures underestimate the real totals since many donors conceal their identity when funding political causes. Elon Musk alone is thought to have contributed as much as $277 million to the Trump effort in 2024.

 

Some critics believe that the entire trend in political spending by the one percent is an effort to shape the terms and future of American democracy in their favor. They point to Trump's running mate, Senator and now Vice President-elect JD Vance, a protégé of billionaire Peter Thiel, as an example.

 

Last week's controversy over Musk, the head of the proposed Department of Government Efficiency (DOGE) is a case in point. Musk, who holds no elected office, mounted an 11th-hour protest over the bipartisan congressional deal designed to fund the government for a few more months.

 

What had begun as a clean and simple piece of legislation two weeks ago, became a free-for-all by legislators on both sides to attach additional spending for pet projects. Musk pointed that out on social media and demanded the agreement be revised.

 

The political blowback from House members was immediate. Both Republicans and Democrats called press conferences. Some (mostly Democrats) accused "President Musk" of sticking his nose where it doesn't belong. The criticism continued, despite Trump's backing of Musk's arguments. How dare a civilian interfere with the work of elected officials! 

 

In any case, a compromise was put together quickly and the legislation passed, but much of the pork in the bill was dropped. The politicians claimed victory. Musk and Trump lost, according to the media but I have a different take. It seems to me that we, the people, won. Why?

 

We all know that this kind of wasteful spending happens all the time in Washington. It is hidden from the public and usually attached (and buried) in a bill of something important that both sides can defend such as disaster relief. Over time, this or that boondoggle or bridge to nowhere is revealed, and we shake our heads over the duplicity of it all. "Something must be done," we mutter in outrage, but nothing ever is. We shrug our shoulders and over time go on about our business. The politicians are counting on this. And yet, over the last few decades, we became increasingly less happy, than angry until today the entire political system is in doubt.

 

The difference this time was that one of these billionaires not only blew the whistle on the practice but had at his fingertips a vast avenue of communication called X to announce it to the world. Was it unorthodox? Absolutely. It may take similar actions and/or out-of-the-box thinking to change a fossilized system where we all talk about a good show but take no action.

 

I would counsel readers to avoid  jumping to conclusions because many of these appointees are wealthy and not from "acceptable" backgrounds in government. That does not mean I approve of all the former president's appointees no matter how much money they may have. Far from it. Nor did I approve of all of Biden's appointments.

 

But nothing says that a team of billionaires will automatically promote a business-as-usual attitude toward the problems facing this country. Franklin D. Roosevelt was a man from a wealthy family. He gave us the New Deal, shepherded us through the Great Depression, and led our country to victory through a World War.

 

To many, Michael Bloomberg, another billionaire Wall Streeter, did the impossible. He changed the face of New York City, straightened out its finances, and served three terms as mayor. Yes, some said he was arrogant and insensitive to the poor but there has never been a mayor like him to this day.

 

Many argue that these rich people lack experience in government service. That may be a good thing. They will make plenty of mistakes, but billionaires learn fast. In comparison, those public/private/ lobbyists/politicians who have spent their careers moving in and out of government service are the people who have brought the country to where it is today. These politicians often seem to have only one remedy for what ails us as a nation — more of the same.

 

 We face a crisis today and it doesn't take a rocket scientist to figure that out. Voters in this populist era are angry. They are demanding major changes in both our political and economic systems. A return to a time when robber barons exploited the government for their ends will last as long as an ice cream cone in July. The rank-and-file of Americans will not take kindly to getting shafted once again.

 

Remember that most of those billionaires boot-strapped their way to where and what they are today. They know what it takes to succeed in the private sector. Can they apply their tools to the public sector? That remains to be seen, but I will at least give them the benefit of the doubt.

 

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 Open Market Committee cut interest rates again on Wednesday and reduced the number of interest rate cuts next year. That decision dismayed investors and triggered a run for the exits in the stock market. Will this government Grinch decision ruin the chances of a Santa Claus rally?

 

Wall Street labeled the central bank move a "hawkish cut." Prior to the meeting, most investors were expecting that the Fed would pause after this month's rate cut of 25 basis points. Given that events unfolded as expected, why did the Dow lose over 1,000 points in two hours?

 

Inflation is the short answer. You may recall in last week's column I commented that stock traders were choosing to ignore the back up in the  rate of inflation over the last three months. It is something that has concerned me for months as readers know. I remarked that others were so focused on the wonderful promise of a second Trump administration that inflation just didn't seem to be a problem.

 

That changed this week. The Fed finally admitted that their inflation forecasts for this year were not coming through. Several members of the committee began to back away from easing further.

 

In the Q&A session after the Fed meeting, Chairman Jerome Powell made it clear that their inflation target of 2 percent may not happen for another year or two. Until it does, he warned we should expect further declines in interest rates to occur at a slower pace. As a result, the FOMC has halved the number of rate cuts they expected to approve in 2025 from four to two and maybe not even that many.

 

His decidedly negative remarks immediately took the wind out of the market's sails. The Dow was not alone in its fall. Both the S&P 500 and NASDAQ declined  2-3 percent as well. Thursday saw what I would call an anemic dead cat bounce and on Friday the markets rebounded.

 

Friday was another one of those triple witching days in the options markets which occur four times a year. Given the sheer dollar value of these occurrences, markets can be unusually volatile. A total of $6 trillion in options of all kinds expire Friday. In addition, the S&P 500 Index and other indexes will be rebalanced as well. This rebalancing can cause significant shifts in trading volumes and volatility as well.

 

 All of this is occurring in a week when the Fed triggers an overdue pullback in the averages. One of the clearest signals that something was amiss was breathe. Breathe is the number of stocks going up versus the number going down. Negative breathe had been increasing for the last 14 sessions as just a handful of stocks were keeping the markets positive. It is usually a sign that a pullback is coming and sure enough we are in one now.

 

My mistake was failing to take action and instead counting on the seasonal factors to win out over breathe. Does that mean the Santa rally will be skipping the U.S. market this year? Not necessarily. Although I now believe we could fall further, it does not have to happen next week. We could bounce next week into the New Year before heading lower again.

 

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.

 

Jan. 20 is just around the corner. It is Day One in the tariff wars that our next president is intent on launching. The corporate world is trying to dissuade him from that course of action, with no success. 

 

It is an economic fact that the cost of tariffs is passed on to the consumer. If tariffs are high enough, some imported products simply cease to be available, which can cause supply chain interruptions. At some point, buyers balk at paying higher prices. When that happens, tariff costs hit business profit margins directly. Everyone loses.

 

In the last column, I explained why Donald Trump is adamant that tariffs are the only way to turn around the trade imbalances that have plagued our country as far back as the aftermath of World War II. In his first term, Trump's tariff policies were partially successful but not without a cost. Some countries hit back with their tariffs. Our farmers were hurt so badly that Trump was forced to authorize multibillion dollars in direct aid to keep many farmers afloat. Yet, the MAGA math indicates that whatever harm is done will be worth it in the long run.

 

However, an important element in this equation is being ignored by Trump and many economists. We will use Germany as just one example. As the powerhouse of Europe, Germany has been enjoying large trade surpluses with the U.S. for many years. Back in the heyday of mercantilism (16th-18th centuries), a country would take these trade surpluses and convert them into piles of silver and gold that would sit in their monarch's coffers for years. That is not the case today. 

 

Germany, as well as China, Japan, and most other European nations have much higher savings and investment rates than we do in the U.S. Why should that matter? Because instead of hoarding their cash profits on trade (the modern-day equivalent of precious metals), they have been taking their current account trade surpluses and recycling those capital flows back into the U.S. and other countries. Those flows find their way into building new plants and equipment in the U.S., creating jobs, investing in our technology, and purchasing our stocks and bonds. 

 

This flow of funds allows the American consumer to continue to save less and spend more. The risk is that by raising tariffs, we reverse this process. These offending nations would see their current account trade surplus go down as their exports to the U.S. slowed. That means they would have less capital to invest back in America.

 

I see other differences between the Trump approach and the mercantilists of old. Back in those days of colonial expansion, currencies did not represent the value they do today. Only gold and silver were considered stores of wealth. Today, nations can do more than just raise tariffs in response to a burgeoning tariff war. 

 

Since Trump has already telegraphed his intent to levy tariffs on America's trading partners, exporters have already acted by using their currency to lessen the impact on their trade balance. How — by reducing the value of their currencies against the dollar.

 

If Mexico, for example, is hit with a 10 percent tariff on exports and allows its currency to depreciate versus the dollar by 10 percent, the price to importers remains the same. No harm is done, and it is business as usual. This is why the U.S. dollar has been strengthening against just about every currency all year.

 

Another area where Trump departs from the mercantilist model is government control. He believes in the heavy hand of government as far as trade is concerned, but he is in the opposite camp where rules, regulations, and taxes by the same government are concerned. Unlike the nations of old, he does not believe that wealth is finite, nor should it be measured by the amount of gold, silver, or even crypto that a nation holds.

 

That puts him at odds with the core belief that supported mercantilism. As for acquiring colonies, his policy appears to be both nationalist and anti-imperialistic. Trump has shown himself to be against foreign entanglements and has no interest in acquiring territory (unlike China, Iran, Russia, and other quasi-mercantilist societies). He does not see it as America's role to right every wrong or spend money or American lives on people and causes which he believes has nothing to do with our interests.

 

That does not mean he plans to withdraw America from the global scene as many might fear. The U.S. is just too big an entity to accomplish that. Instead, because of his mercantilist leanings, if other nations want us to intervene then they must be prepared to pay for that privilege. He has made that point with Taiwan, and with the countries that comprise NATO, and will do so at every opportunity, in my opinion. 

 

 Many voters see our new president as a strong leader. They applaud his desire to wield more power and authority than others have done in his office. Given the present populist era where distrust of government and our economic system are at historical highs, this is not surprising.

 

Although he has a soft spot for pomp and circumstance and may envy autocratic leaders, he seems less interested in power for power's sake. Time and again, the mercantilist in him, appears to support one conclusion: if there is an advantage to be had (whether in finance, economics, or policy) by simply cutting a deal, that is what he will do.  

 

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.

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.