Investors were treated with good news on a variety of fronts as October closed and we enter the November-December seasonal period. Both the U.S. Treasury and the Federal Reserve Bank should be credited with most of the positive developments that sent bond prices higher and yields lower.

 

Since September, I was convinced that if bond yields continued to rise, stocks would fall. Last week, however, I advised investors that we were nearing the end of this trend, and "I expect a rebound to begin in November if not sooner."

 

To me, the most important development was the decision by the U.S. Treasury to slow the pace of increases in longer-dated debt auctions in the November 2023 to January 2024 period. The Treasury also expects it will need only one more additional quarter of increases after this to attain its financing needs. They also cut their borrowing estimate for the fourth quarter by $76 billion to $776 billion.

 

Now, while this is still a lot of money it is less than bond investors and the markets overall expected. It also means that by auctioning more shorter-term bills, liquidity in the financial markets increases and that is good for financial assets like stocks and long-term bonds. The result was a drop in long-term yields and a rally in the U.S. 10-year and 30-year bonds. And as I have said, lower yields on the long end immediately trigger a run-up in equities. That was on Nov. 1.

 

The next day, on Wednesday, Nov. 2, the Federal Open Market Committee decided to hold interest rates where they are. That was the second month in a row that the Fed has kept its monetary policy of further tightening on hold. That was no surprise to the markets since the inflation data seems to be under control at least for now.

 

However, the Fed was still holding out the possibility that they could raise again in December if the data warranted it. Chairman Jerome Powell, in his Q&A session after the announcement, maintained the line that they would remain data dependent, but to most observers he appeared less hawkish, if not downright "dovish" in his answers.

 

Traders took this to mean that the raising of interest rates that has been a daily diet for the markets over the last 18 months may be over. That still leaves the Fed's quantitative tightening program (QT) in place. Between the rise in long-term yields over the last few months and QT, it could be that the Fed feels they no longer need further hikes in the Fed funds rate to achieve their inflation objectives. In any case, both bonds and stocks spiked higher since Wednesday.

 

The October U.S. non-farm payroll data also cheered investors. The economy only added 150,000 jobs, as unemployment ticked up to 3.9 percent from 3.8 percent. The unemployment rate now stands at its highest level since January 2022. Remember that negative news on the economy means good news for investors, since the Fed will likely hold off on tightening as the economy slows. Bond yields dropped further as bonds on the long end soared as traders were forced to cover their shorts by buying back U.S. Treasuries.

 

 Many Fed watchers now believe that the U.S. Treasury and its secretary, Janet Yellen, maybe replacing the Fed as the markets' focal point for determining the future path of interest rates. Instead of parsing every word of FOMC members for clues on the Fed's next move in taming inflation, the Treasury's auction plans have taken center stage. That could have some interesting implications for the future of the stock market.

 

Unlike the Fed, Yellen is a politician as a member of the Biden administration's cabinet, which is entering a presidential election in 2024. The stock and bond markets are an integral part of any candidate's election prospects. Putting the two together, we may see the U.S. Treasury pull some rabbits out of the hat that could stack the economic odds for a favorable outcome.

 

Marketwise, we got down to 4,103 last Friday, three points from my target, and have been climbing ever since. The S&P 500 Index has retraced almost 50 percent of the entire three-month decline in six days! 

 

It was a testament to the bullish sentiment that Apple's disappointing earnings, which would have decimated the stock price and pulled the stock market down with it a week ago, has had little impact. A pullback and consolidation would make sense to me after this run and then up again. 

 

We are in a seasonably strong period in the markets (November-December) with bond yields dropping and equities hopping. What could be better than that?

 

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 U.S. government has been borrowing from Peter to pay Paul for decades. That should come as no surprise to most, but the speed by which we are piling up debt to support our spending has become alarming.

 

The federal budget deficit is the difference between how much Washington spends and how much it receives in taxes. That concept should be familiar to all of us who count on our income to support our family's spending. Imagine if the amount you owed (your deficit) doubled from last year.

 

That is what happened to the nation's budget deficit over the last year, to the tune of $1.7 trillion.

 

If you look at the big picture, the U.S. total federal debt topped $33 trillion this year. That amounts to 121 percent of 2022's GDP. Usually, the U.S. deficit expands during hard times for the economy since tax receipts fall. The opposite occurs when the economy grows. However, that relationship has come apart.

 

The U.S. economy has been growing since the pandemic and yet tax receipts continue to fall. Much of the blame for this situation can be laid at the doorstep of various administrations and Congress. Tax cuts by George W. Bush, Barack Obama, and more recently Donald Trump have reduced the amount of taxes coming into the government's coffers.

 

In typical political fashion, the present White House under President Biden has pinned the blame for lower tax revenues on the former president. Trump indeed left the country in far worse shape than his predecessors. His more than generous corporate tax cuts failed to jump-start the economy. Instead of investing in capital formation, corporations used those savings to increase dividends and stock buybacks.

 

Federal spending now accounts for 25 percent of GDP. In defense of government spending, you might say the last few years have been unusual and you would be right. The COVID-19 pandemic triggered a huge spending program to save the economy and voters. In addition, the need to do something about the country's deteriorating infrastructure was finally addressed after years of inaction. Since then, Russia's invasion of Ukraine and the terrorist attack in Israel have added even more pressure to increase spending.

 

But the really big programs that have consumed so much of the government's spending commitments are Social Security and Medicare, which account for almost half of U.S. spending. As more Americans retire, the costs of these programs will continue to escalate. As such, deficits without tax increases are expected to climb.

 

Back in 2011, the Congressional Budget Office (CBO) predicted the fiscal deficit would average 1.8 percent of the economy in the ensuing decade. This past May, in the CBO's latest projections, that number has increased to 6.1 percent of Gross Domestic Product. Altogether, federal spending will account for almost 25 percent of the U.S. GDP over the next decade while tax receipts will account for 18 percent of GDP. If we continue this trend, Penn Wharton School researchers predict that the U.S. could default on its debt as soon as 20 years.

 

Up until now, the financial markets have largely ignored the deficit, and the endless debates and false promises by legislatures who talk a good game but simply move the deck chairs around on a sinking ship once they are in power. The bond market, however, is beginning to take notice.

 

As the nation's borrowing grows larger to finance a growing deficit, bond vigilantes are taking matters into their own hands. They are selling U.S. government bonds, which is pushing yields higher and higher on government debt. It is the private sector's response to Washington's profligate spending and irresponsible deficits. The result is that the credit markets are shifting long-term interest rates higher making it more and more expensive for Washington to continue spending and borrowing.

 

The government is now facing the reality of spending much more in interest payments on our ballooning debt than ever before. In the current fiscal year interest spending should surpass $800 billion, which is more than double 2021's $325 billion number.

 

By 2026 net interest expense should reach 3.3 percent of GDP. That would be the highest on record. If interest rates remain where they are, and fiscal policy continues its spending path. If unchecked, the cost of servicing this debt could be larger than defense spending by 2025, and top Medicare spending by 2026. 

 

I believe the present push by Republicans in Congress to cut spending is both necessary and urgent. It will be painful. It should also be accompanied by tax increases across the board, but that may be too much to ask for given elections next year, but one can always hope.

 

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.

Sometimes good news on Main Street is bad news for Wall Street. Let's start with the good news. The U.S. economy grew at its fastest pace in nearly two years during the past three months. Third-quarter Gross Domestic Product grew at an annualized pace of 4.9 percent blowing away economists' expectations of a 4.5 percent growth rate.

 

The resilient U.S. consumer continued to spend, which has boosted growth, defying those who have been expecting the economy to slow down under the weight of 18 months of interest rate hikes. The bad news is the stronger economy will make the Fed's fight against inflation that much more difficult and therein lies the rub for the stock market.

 

The nation's second-quarter GDP came in at 2.1 percent, so the economy is accelerating not slowing. Despite past predictions of a slowdown that has not occurred, many economists are now predicting that this quarter will turn out to be the peak in economic growth. They point to a restart in student loan payments, the impact of lagging monetary policy, and a weakening worldwide economic backdrop as the negatives that will provide a huge impediment to further economic growth.

 

I remain doubtful, at least until U.S. employment begins to roll over. As long as the job market remains strong, Americans will continue to spend. The Fed knows that as well, which is why Chair Jerome Powell is adamant that he will continue his higher for longer interest rate policy. On numerous occasions, he has insisted that before he can relax this stance, he needs the economy to slow. It is doing just the opposite. That is bad news for the stock market.

 

However, the inflation fight, which has long occupied Wall Street's attention, is now in second place behind the fears that government spending is out of control. It is one of the reasons why we are seeing yields on longer-dated bonds continuing to rise. Sure, we have seen some minor pullbacks in yields, but not enough to make a difference.

 

For some reason, investors like round numbers. We hit a 5 percent yield on the benchmark U.S. 10-year Treasury bond early this week and traders bought bonds in a knee-jerk reaction. But is that the yield that will pay bondholders enough to satisfy their fears of higher deficits? I'm thinking we could go higher, possibly to 5.3 percent-5.5 percent or more.

 

Investor sentiment is really in the doldrums. The election of a new House speaker should have been good news, but it wasn't. Whether Mike Johnson, a far-right representative from Louisiana, can compromise with Democrats is anyone's guess. He is the least-experienced speaker in 140 years and his political stance on a whole host of social and economic issues may make cutting a deal with Democrats difficult at best. Miracles do happen, however, even in the Capital.

 

The AAII sentiment readings are extremely bearish, as is the CNN Fear index, which is almost at panic levels. "Stockmarketcrash" was one of the top ten searches on Twitter this week. Good earnings results from some of the market heavyweights like Amazon and Microsoft have not been able to support the averages. All of the above tells me from a contrarian point of view that we are nearing the end of this bottoming process.

 

Since the Israeli/Gaza conflict and the dysfunction in Washington, I have been extending the period of this equity pullback. Originally, I thought all this mess would have been concluded by the end of the second week in October. At the same time, I increased my downside target for the S&P 500 Index level.

 

As of last week, I was targeting the 4,100 level or possibly a little lower. We were only 37 points above that level before we bounced on Friday. Close but no cigar. I could see a worst-case scenario where the S&P broke below 4,100 by 30-50 points. Either way, I expect a rebound to begin in November if not sooner. Future events in the Middle East, however, will remain a wild card for the markets.

 

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.

Spending on candy, costumes, decorations, and parties is rising. The expected amount Americans plan to spend on Halloween is $12.2 billion in 2023, according to the National Retail Federation NRF). That beats last year's record of $10.6 billion.

 

More Americans than ever are celebrating with 79 percent of people participating, which is greater than last year and exceeds pre-pandemic levels as well. In addition, 76 percent of adult American pet owners plan to put their pets in costumes, according to a PetSmart national survey. The average amount consumers will pay to celebrate the holiday is $108.24 versus $102.74 last year.

 

Candy is still at the top of the agenda for households. They will spend $3.6 billion in rewarding trick-or-treaters at their doors. Those doors, as well as front steps, interiors, and yards, will be decorated with pumpkins, spider webs, skeletons, etc. Those decorations will total $3.9 billion, even more than consumers will spend on candy.

 

Halloween parties are also gaining increased popularity, especially among Gen Z and millennials. The three great elements of such parties are costumes, the food, and the decorations. While today's partygoers may believe they are forging a new trend in entertainment, Halloween parties are simply a blast from the past.

 

In the late 1800s, Halloween parties for both children and adults became the most common way to celebrate the holiday. Parties focused on games, foods of the season, and festive costumes. By the 1920s and 1930s, the holiday had become a community-centered event with parades and townwide Halloween parties as the featured event.

 

So, it's "back to the future" this year as more than 32 percent of American consumers plan to attend or throw a Halloween party. And like days of old, beyond your typical neighborhood get-together, there are long lists of Halloween parties (now listed on the internet) for just about every community in the nation.

 

However, it is costumes that have garnered the greatest spending — $4.1 billion, up from $3.6 billion last year. More consumers than ever (69 percent) are planning to buy costumes this year. Adult costumes saw an 18 percent increase, while children accounted for a 20 percent gain. Spider-Men, princesses, ghosts, witches, and other superheroes still account for the lion's share of children's preferences. This year aside from the traditional stable of vampires, witches and Batman, Barbie and Ken will be top picks for adults.

 

A growing new category for costume demand is pet costumes. The NRF believes consumers intend to spend as much as $700 million on costumes for their pets. Dogs seem to be the target of most owner's costume spending, according to another survey by Honest Paws.

 

The most popular costumes include a pumpkin, a hot dog, a bat, a bumblebee, a spider, and Chucky. Most owners planned to spend under $50 for Fido's disguise, but a third of dog owners admitted that they spent more money on their dog's costume than their own.

 

Another trend that seems to appeal to most costume buyers with pets is matching outfits for both owner and dog. Do not be surprised therefore to see a Batdog and Robin knocking on your door.  Almost 50 percent of owners plan to bring their dog along for trick-or-treating and more than one quarter will be competing in costume contests with their pet.

 

Just a side note on pet costumes. My canines, both past and present, would run for the hills at the drop of a costume hat. Most pets that show similar signs should never be forced to wear a costume. If you absolutely must dress your pet in something, make sure whatever costume you select allows your pet to be able to move and breathe easily. Clothing that resembles a traditional dog vest, or T-shirt that doesn't cover the entire body and head are the best. You may not win that neighborhood costume contest, but your pet will thank you for it, and Halloween for both of you will be far more memorable. 

 

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.

Investors sold stocks, as bond yields reached new multi-year highs. Third-quarter earnings are almost an afterthought in this climate, and geopolitical events did not help either.

 

The 10-year, U.S. Treasury bond hit the 5 percent mark. The 30-year bond has already broken through that number and then some. The higher yields climb, the more investors fear that they will rise even further. As it stands now, the return you can get by putting your money in bonds is becoming more and more attractive versus stocks.

 

This is happening despite the cessation of long-term bond auctions by the U.S. Treasury this week. Short-term bills and notes have been auctioned instead. The next tranche of longer-dated securities won't begin again until November. You would think that with the pressure off yields, longer-term bonds would have rallied but they didn't.

 

The explanation is simple but also troubling. After years of ignoring the growing U.S. deficit, the financial markets are becoming worried that the government's continued spending is rocketing out of control. I have written about this in past columns, but it seems investors are starting to pay attention to the problem at long last.

 

A reader may wonder why it is so hard for politicians to corral their spending. The simple answer has nothing to do with whether we are talking about Democrats or Republicans. Two-thirds of U.S. spending is earmarked for just two programs: Social Security and Medicare. That's it, and no one in their right mind is going to cut back on those programs unless they want to lose their jobs.

 

That leaves a much smaller piece of the pie to squabble over. Liberals want spending to go to social programs and cut the rest. Conservatives insist it is spent on things like defense and investment instead. In a political landscape, where compromise has become a dirty word, the only answer is to keep spending more and more to satisfy the demands of both sides.

 

A great example of the conundrum we all face is President Biden's emergency funding request to Congress this week. The president is asking for $75 billion to aid Israel and Ukraine. There is another $30 billion he wants to fortify border security.

 

So, who among us is ready to say no to that kind of spending? Sure, some might, but most Americans and their representatives in the heat of the moment are going to want to approve those additional funds. But it was no accident, in my opinion, that when the president first announced this additional spending request on Oct. 18, the yield on the benchmark, ten-yield bond spiked even higher and hit a 16-year high.

 

The Chairman of the Federal Reserve Bank Jerome Powell gave little comfort to investors in a speech before the Economic Club of New York on Thursday. Some investors hoped that he might be willing to relax his monetary policies instead of the recent run-up in bond yields. Instead, Powell said inflation is still too high and warned that more interest rate increases are still possible if the economy stays strong, or if the tight labor market does not ease further.

 

The most he said about the recent surge in long-term bond yields was that "we remain attentive to these developments" acknowledging that if this situation persists "it can have implications for the path of monetary policy."

 

As for the continuing saga of failed governance among the Republicans in the House of Representatives, the facts speak for themselves. Rep. Jim Jordan, the radical politician and Trump lackey, has failed in his attempt to claim the position of speaker for a second time. His followers used social media to browbeat and threaten some Republicans into voting for him. That ruse backfired leaving him no choice but to try again on Friday. Once again, Jordan failed to convince his fellow legislators that, somehow, he had changed his stripes.

 

One hopes that he will accept the "three strikes you're out" verdict, but given his nature, he could very well claim the voting was fixed. He has done it before. The country remains in limbo as a result, with no progress in averting a government shutdown or aiding our allies around the world.

 

Last week, I said we were still in a bottoming process. I expected this period should have been over a week ago. It is still not done. I blame the Hamas terrorist attack in Israel for prolonging this process. I warned that we were going to test the low 4,300s on the S&P 500 Index. If the geopolitical events worsened (and they have) we could fall all the way down to the 4,200 area. That is just what we did. 

 

As of noon on Friday, we were trading 35 points above my low-end target. We bounced off the 200 Day Moving Average at 4,233, which was to be expected. Is it almost over, maybe? I still think we could go lower if the geopolitical news gets worse.

 

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.