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.

Have you ever wondered how much your time and effort were worth as a stay-at-home spouse? Chores like child care, laundry, home repairs, and meal preparations rarely come with a bill attached, but what if they did? You may be about to find out.

 

All the above chores plus many more, from driving the kids to school or soccer practice to treating illnesses among family members are critical to the functioning of the U.S. economy. However, none of that essential work is measured.

 

ScienceDirect defines household production as "the production of goods and services by the members of a household, for their consumption, using their capital and their unpaid labor."

 

The concept is recognized worldwide (including the U.S.), as an alternative economy to the labor market. In many nations, the household economy absorbs more labor and at least one-third of the physical capital used in the market economy. Because this work isn't tracked through marketplace transactions, it is excluded from U.S. Gross Domestic Product (GDP). Three years ago, thanks to the labor dislocations spawned by COVID-19, the Department of Labor decided to change that. 

 

As part of an initiative to come up with a major new input to their understanding of consumer expenditures, the DOL commissioned a group of economists at Bard College to figure out how the government could put a dollar and cents value on household activity. Overall, the survey examined how much Americans spend on everything that costs money. It excludes activities that don't cost money but do cost time.

 

Last month, the resulting Integrating Nonmarket Consumption into the Bureau of Labor Statistics Consumer Expenditure Survey was published by four researchers, Ajit Zacharias, Fernando Rios-Avila, Nancy Folbre, and Thomas Masterson. Chief among their findings was that women performed 78 percent of the total value of unpaid production in 2019.

 

I'm betting that most readers are not surprised that women are responsible for the lion's share of household production. What is as important is that the study promises to give the country insight into how worthwhile this unpaid labor is but is also critical to the continuing functioning of the economy.

 

For years, mainstream America argued unpaid work was not an economic issue. Sadly, I still hear it all the time (mostly by men) that it is a woman's moral duty, borne out of love, to take care of the household. During the pandemic, I wrote several columns on women as the unsung heroes throughout the lockdown. To me, they were the engine that kept the economy running.

 

So many of them were expected to not only continue to work at home, or even in the office while assuming the additional burdens of at-home education, child care, homemaking, etc. But it goes beyond that effort.

 

There is a thing called cognitive labor as well. It is invisible but requires an enormous amount of effort, especially in periods of societal crisis like in the pandemic. A Harvard sociologist, Allison Daminger, breaks it down into four parts: Anticipating needs, identifying options for meeting those needs, deciding among the options, and monitoring the results. It is how shit gets done in most households and I believe women do most of it.

 

The Bard economists looked at realms of data from the Census as well as other sources to determine how Americans spend their time. They then paired this data with DOL numbers on how much each work category costs. How much, for example, is the going rate for six hours of child care? What are the wages for the typical caregiver? Was the rate higher for simply reading to a child versus supervisory work?

 

Other areas from laundry to cooking and everything in between were studied and included in the research. The object was to convert the hours spent on tasks into a measurable value. They also looked at the unpaid contribution of members outside the household like grandparents, sisters, or aunts.

 

The DOL is hoping that this additional data will bring all of us closer to determining the true cost of living for Americans. It could also explain and give further insight into the pay gap between genders and the lower labor participation rates between men and women. For example, people tasked with household production have fewer hours for paid work, on average, and can be expected to earn lower incomes as a result.

 

The next step will be for the DOL to evaluate the methodology of the report, and if that passes its' economic litmus tests, they intend to add a household production measurement to its consumer expenditures data by next year.  In America, it is all about the buck. Unfortunately, most of us measure one's worth by this dollar and cents metric. Putting a price tag on household production would provide a great leap forward to appreciating those of us who toil without pay in the interests of the family.

 

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.

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.