The long-awaited downturn in the U.S. economy may be nigh. A litany of weakening macroeconomic data this week is pointing to a slowdown in growth over the next few quarters.

 

Many in the financial markets, including me, have been anticipating this decline. I have predicted a moderate recession beginning sometime this year for many months now.  I am not alone. Many expect a much harder landing.

 

That will depend on the Fed. If the U.S. central bank continues to raise interest rates and is willing to forge ahead with further quantitative tightening, then Gross Domestic Product will fall further. The decline will only stop when the Fed stops. 

 

This week, the economic data has been uninformedly negative. The Manufacturing Purchasing Management Index PMI), the Institute for Supply Management (ISM) manufacturing data, February factory orders, the JOLT data (job openings), jobless claims, ADP employment, etc. — all indicated a downturn is coming.

 

The only data point that did not decline was Friday's non-farm payroll report jobs for March, which came in at 236,000 job gains (versus expectations of 238,000). That was basically in line, although the headline unemployment rate declined from 3.6 percent to 3.5 percent. The Fed will likely interpret that number to mean that their work is not done yet. They are hoping to see unemployment rise, although they dare not say so. Can you just imagine the response in Congress to a Fed statement stating they want more Americans to lose their jobs? 

 

The typical recession indicators are performing as they should. The dollar continued its decline, and yields on interest rates fell across the board.  Many growth sectors in the stock market sold off, while defensive areas such as health care and utilities climbed.

 

And then there was the performance of precious metals. Gold broke above $2,000 or ounce and June futures in gold reached $2,037. The all-time high in gold is $2,070, which was reached back in August 2020. I believe it is simply a question of time before that barrier is breached. Silver gained as well but has a long way to go before reaching its historical high.

 

Readers may want to revisit my explanation for gold's recent performance in my March 23, 2023, column "Gold as a haven." I wrote "…unlike bonds and stocks, gold has one redeeming factor in times of economic slowdown, financial instability, and geopolitical tension. It does not carry the risk of an issuing entity collapsing, such as a bank or a government."

 

In my experience, most investors focus exclusively on gold as an inflation hedge. They fail to understand that the price of gold is influenced by several factors such as inflation, interest rates, the direction of the dollar, demand from central banks and commercial jewelry, as well as safety. While I continue to be bullish on gold this year, I do not subscribe to the "up, up, and away" optimism of many gold bugs.

 

I could easily see gold, falling back to $1,950/ounce in the short term if the dollar were to bounce higher. That said, the momentum that drove it higher this week should continue but it will be a wild ride and not for the faint of heart. The point is that a 2-3 percent position in gold for aggressive investors makes sense, but don't bet the farm on it.

 

As for the overall markets, expect the trading range that we have been experiencing for months to continue. We hit 4,100 on the S&P 500 Index, a big resistance level, and chopped up and down without making any real progress. This coming week, I expect more of the same until Wednesday's Consumer Price Index for March is released. A cooler number will bolster markets, a hotter print will not be taken kindly. A Happy Easter and Passover to all.   

 

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Times are changing and, with them, many of the values Americans have held close and dear for generations. Money has become increasingly important, while traditional concepts such as patriotism, children, and religion are taking a backseat. 

 

A new poll I read over this weekend set me back on my heels. When asked about their values, 43 percent of Americans polled say money as a value is very important to them; more important in fact than traditional values such as having children, community involvement, religion, or patriotism.

 

The survey, conducted by a non-partisan research organization at the University of Chicago called NORC, and the conservative, Fox-owned, Wall Street Journal, revealed these eye-popping changes in the attitudes of Americans over the past 25 years.

 

For example, back in 1998, 70 percent of respondents said patriotism was important to them, while 62 percent felt religion was important. Those attitudes scores have plummeted with only 38 percent for patriotism, and 39 percent in favor of religion. The importance of community involvement dropped as well (from 47 percent to 27 percent), while the importance of having children and hard work has also fallen. The only area that saw an increase in the survey was the value of money.

 

If even some of these results are accurate (the margin of error was 4.1 percent), America is in trouble.

 

For many, that comes as no surprise. The division between Americans is wider than it has been in many decades. We have seemingly entered a period of hyper-polarization where people are becoming increasingly isolated. The pandemic contributed to that isolation severing our attachment and reliance on the community in many cases.

 

At the same time, trust in institutions is at all-time lows in the U.S., according to Gallup polling data. Corporate America, the media, the internet, Congress and the presidency, organized religion, hospitals, and even schools can no longer be relied upon when you need them. You are on your own, which makes money that much more important.

 

Over the last 25 years, several gut-wrenching events have assaulted our value system. The list is long: the World Trade Center terrorist attack, the 2008-2009 financial crisis, recession, several wars, the loss of U.S. jobs due to globalization, growing income inequality, ongoing religious scandals, the rise of American populism, the fracturing of political parties into divisive camps, rising civil disobedience, mass shootings, and of course the pandemic. 

 

Since then, supply chain disruptions, spiking inflation, higher interest rates, and a weakening banking system have rounded out the list of disruptions that have changed our lives forever.   

 

Is it any wonder that tolerance for others has fallen to 58 percent from 80 percent in just four years? Is it any surprise that community involvement has fallen off the cliff when the color of your skin or ethnicity is increasingly used to separate and segregate, rather than encourage what we have in common?

 

The very definition of some of our values is up for debate. Many are subject to new interpretations. Patriotism to the radical right means something altogether different from the patriotism that influenced my decision to join the Marine Corps and serve in Vietnam. I am sure organizations like Black Lives Matter, the Proud Boys, or Oath Keepers have very different views of what community involvement means to them.

 

And while all age groups including old fogies like me, saw their priorities and values change, younger Americans have even less attachment to the values that were (and still are) central to my life. I am sure that the rise of individualism and sense of entitlement that the media has fostered, and to some extent glorified, has impacted many of the values of younger generations. Patriotism, religion, having children, and community involvement scored much lower among young adults under 30 years of age compared to seniors, while the value attributed to money was higher.

 

The value of money is measured by what people are willing to exchange for it, and how much of it there is. Today, governments print money by boatloads, and yet demand keeps increasing. It seems more Americans than ever are willing to sell the soul of their nation in exchange for it.  One can only hope that sometime in the future Americans can be convinced to buy back into the traditional values that made America what it was.

 

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 NASDAQ 100 index jumped more than 20 percent from its December 2022 lows. The textbook definition indicates that when a market does that, it officially leaves a bear market and enters the bull market territory.

 

A handful of stocks can be credited with not only pushing the tech sector higher but also dragging the rest of the market up with it. I'm sure you can guess the names — Meta, Apple, Netflix, Google, and Microsoft — they all did yeoman's work in the first quarter.

 

In my opinion, the motivation for crowding into these stocks can be explained with a single word — fear. Fear of financial contagion. Fear of a gathering recession. Fear of a Fed that may have overstayed its role as an inflation fighter. All these companies represent a place to hide out. They have little debt, strong cash flows, and solid business models.

Fear is also the reason investors have flocked to gold and precious metal miners.

 

Throughout history, whenever there has been a question of financial stability in the banking system, gold seems to shine. The fact that the government and the private sector have rushed to assure all of us that the system is stable, and a few bank failures are nothing to get upset about was commendable and expected. But has it assuaged the market';s worries that we have yet to see another foot to fall in this sector? No, depositors are still moving money out of smaller banks

into larger banks and into U.S. Treasury bills, money market funds, and out of checking and saving accounts.

 

On the positive side, the recent banking crisis has forced the Fed to pump money into the credit markets. That has caused the equity markets to rise as the liquidity in the financial system increased. The flow of billions of dollars from the central bank into the banking sector has effectively put the Fed's quantitative tightening program on hold for now.

 

In addition, many investors are convinced that the regime of interest rate hikes is over.

 

They point to the impact the Fed's rapid rate rise over the last year has had on the banking system. Further hikes could translate into even more bank failures, which is something the Fed will need to avoid. As such, the next move by the Fed will be to cut interest rates and do so before the end of the year.

 

Quarterly window dressing by large institutions has also been a factor in the market's rise.

 

Every quarter, money managers try to present their clients with a list of equities and funds they own. It never hurts to have a lot of last quarter's winners on the list even if the securities were just purchased. It is what it is.

 

I am still thinking we have room to run here on the S&P 500 Index. In the next few weeks, my upside target of 4,370 could be achieved but it won't be a smooth ride. Near-term resistance on the benchmark index is right here, around 4,100. Investors for behavioral reasons are attracted to or repelled by round numbers. The 200-day moving average (DMA) has held like a champ throughout this period, which is an encouraging sign.

 

All the averages, however, are fairly stretched, so a stalling out and a bit of selling should be expected in the near term. One area that has shown exceptional strength is the precious metals area, especially gold, and silver. Aggressive investors in the short-term might want to dapple in these commodities if there is a pullback in price next week. It would not surprise me to see gold hit a new high in the next month or so.

 

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 present banking crisis has brought back memories of the 2008-2009 global financial crisis. So far, the financial contagion has been corralled, thanks to swift government action. The winners and losers, however, have changed.

 

Most readers are familiar with the term "too big to fail." It refers to the financial theory that asserts that certain corporations, particularly banks, and some other financial institutions, are so large and so interconnected that their failure would be disastrous to the greater economic system. As such, these entities must be supported by governments when they face potential failure.

 

Back in the day, when Britain ruled the world, the government had a hands-off attitude toward failing banks.  Over time, Parliament began to realize that the cost of bank failures in the Commonwealth was far greater than supporting them. Through the years (and many successive financial crises later), more and more governments worldwide began to get involved earlier and with more aggressiveness to avert bank failures.

 

Here in the U.S., we learned our own lessons during the Great Depression when 9,000 banks failed taking with them $7 billion in depositors' assets. In the 1930s, remember, there was no such thing as a Federal Deposit Insurance Corp. (FDIC). The life savings of millions of Americans were wiped out by these bank failures. Years later, the New Deal legislation reformed and bolstered the framework of the financial sector in America.

 

While we still pride ourselves in believing in free markets and private capitalism, the reality is that a great many industries in the U.S. are private-public partnerships. A case in point is the banking industry. In the U.S., the government needs banks to create money and foster economic growth. The banks need the government to prevent bank runs and act as a lender of last resort. It is a symbiotic relationship.

 

The Great Financial Crisis almost tipped us into a second, worldwide depression.  The government's actions, or should I say reactions, to the crisis were ad hoc at best. Lehman Brothers went through a chaotic bankruptcy. JP Morgan was arm-twisted into buying a rival for an amount that kept its bondholders intact. Other institutions were kept alive through huge capital injections that left both shareholders and bondholders intact. 

 

None of these public actions truly solved the problems that got the banks into hot water in the first place. It required many years, and cost billions of extra dollars, before those issues were solved. At the same time, there was an enormous backlash by the tax-paying public against the bank bailouts and the government's actions to protect shareholders and bondholders. Since then, both banks and governments have learned several lessons.

 

The intervention in Europe to save Credit Suisse, and the U.S. actions in the case of Silicon Valley Bank (SVB) and Signature Bank were aimed at strengthening the overall financial system rather than leaving it weaker. Signature Bank was shut down. At Credit Suisse and SVB, senior executives were fired, while both bondholders and shareholders lost money.

 

On the other hand, the banks that acquired these troubled banks are ending up with hefty gains on their balance sheets. Both banks were effectively sold at a negative sale price, which was the difference between the amount that the acquiring bank is paying for its new assets and the book value of those assets.

 

It seems clear that the lessons learned from the Financial Crisis are that in the event of a bank failure, bond and shareholders' risk capital can, and in this case, did go to zero. Protecting depositors and the financial system has now become the top priority of the government and the banking system. And that is as it should be.

 

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.

In the face of uncertainty over the fate of regional banks, the U.S. central bank hiked interest rates and said they would continue with their program of quantitative tightening.

 

Stocks fell and bonds rose after the FOMC meeting on Wednesday, however, the real drama was elsewhere. U.S. Treasury Secretary Janet Yellen was testifying before a Senate Appropriations subcommittee at the same time as the Fed meeting. She told lawmakers that she has not considered or discussed "blanket insurance" for U.S. banking deposits without approval by Congress.

 

Many traders in the markets had just assumed that since the government had made all depositors whole in both Silicon Valley Bank and Signature Bank, all depositors would be bailed out. Yellen made it clear that was not the case. That statement shook investors' confidence once again, given that there has been a continued outflow of deposits from smaller regional banks to the large money center banks.

 

Readers should know that the FDIC insures those with deposits of $250,000 or less, but that's the limit. To change that regulation, Congress would have to act. That would take time and in the hyper-partisan atmosphere of the present Congress, it is doubtful that the limit would be changed.  

 

Interestingly, those who listened to Fed Chairman Jerome Powell's answers in the Q&A after the FOMC meeting took away what they wanted to hear. Many in the bond market, for example, now believe that there will be no more interest rate hikes and that the Fed will begin to cut rates before the end of the year.

 

The financial issues that are plaguing the banks, they believe, will result in less loan growth across the entire financial sector. That will in turn slow the economy and put added pressure on the inflation rate. In other words, the regional bank crisis will do much of the work for the Fed going forward.

 

On the other hand, more and more economists are convinced that we are on the verge of an economic slowdown that will result in at least a mild recession. The Fed's continued tightening, which has already caused some breakage (regional banks) will go too far and risk a hard economic landing.  That in turn will cause corporate earnings to decline and with them the stock market.

 

My take is that nothing has changed after the FOMC meeting. Jerome Powell said he could pause further rate hikes, if necessary, but "rate cuts are not in our base case." He did not say we won't see further interest rate hikes in May and June. He did say that the issues in the banking sector were real, however, and triggered a credit crunch with significant implications for the economy and the markets.

 

To be clear, no one, not even the Fed, knows which scenarios will turn out to be correct, or maybe some of each will occur in some form or another. The point is that we are in an environment where every headline has the power to move markets up or down by more than one percent or more daily.

 

I said that will result in a choppy market, which will keep the major averages in a trading range. This week, the 200-day moving average (DMA) trendline of 3,934 on the S&P 500 Index was tested once again and bounced. Upside resistance is hovering around 4,012. That range will ultimately be broken when enough data points give the market a new direction.  

 

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.