It was a week to remember in financial markets. Hurricane Helene, the longshoreman strike, Iran's ballistic missile attack against Israel, American drones shot down by Houthi rebels, and a massive gain in U.S. jobs — welcome to October.

 

All the above happened in just the first week of the month. The stock market has hung in there through all of it. However, the events of the week have given heartburn to investors and traders alike.

 

The massive flooding and rising death toll in Florida and North Carolina were tragic but also negative for overall future growth and employment. The price tag is estimated to be above $34 billion. Insurance stocks did not suffer simply because they no longer cover flood damages in much of those areas. The price tag will need to be absorbed by the nation's taxpayers.

 

The Longshoreman's strike encompasses a shutdown of half the ports in the U.S. from Maine to Texas. Harold Daggett, who leads the International Longshoremen's Association, was insisting on a 77 percent pay raise but settled for less and the strike was at least postponed until early next year. Estimates put the price tag of disrupted trade for the country at as much as $5 billion daily, so we dodged that bullet for now.

 

The geopolitical events that find Israel in an undeclared shooting war with the Houthis, Hamas, Hezbollah, and possibly Iran have also riled markets and sent the dollar and yields higher. It has also supported precious metals and the price of oil.

 

Market participants fear that if Israel were to respond to Iran's latest missile attack, by damaging Iran's energy production, oil prices could spike higher. If so, that would prove inflationary.

 

Those fears may be overblown. Iran currently supplies about 3 percent of the world's oil production. Global oil demand has been slowing as it is. This week, the Saudi oil minister warned Iraq and Kazakhstan that if they ignore their OPEC-directed output cuts, prices could fall to $50 a barrel. next year.

 

In this environment, Saudi Arabia could easily make up for any lost production brought on by an Iran/Israel conflict. Oil could go higher but there is a lot of technical resistance around the $77 a barrel mark.

 

The non-farm payroll for September crushed expectations. The U.S. economy added over 250,000 jobs while the unemployment rate dipped to 4.1 percent. That was more than the 150,000 job gains expected. Wage growth also increased by 0.4 percent. This followed a good report on the ISM services sector. Where does that leave the markets? Disappointed, as far as future rates cut by the Fed.

 

Stronger employment data means less need for sizable rate cuts. If you combine that with the possibility of higher energy prices and therefore more inflation, the bull's case for more rather than less loosening by the Fed becomes that much weaker.  

 

As you know by now, September through October are historically seasonably tough months for the markets. I was expecting September to have a more negative impact on the market. I was wrong. My mistake was in not accounting for presidential election years, which somewhat dilutes seasonal factors in those years.

 

Nonetheless, October has historically been 34 percent more volatile than the average of the remaining 11 months of the year. It has certainly started that way. Although many traders are expecting a decline in the next few weeks, there are plenty of bullish factors that are underpinning stocks.

 

Friday's jobs report is just one example. Next week, on Oct. 10, September's Consumer Price Index data will be reported. I believe that data will show cooler inflation. If so, lower inflation and declining unemployment are not a bad combination.

 

Market breath (advancers versus decliners) is still near the highs. Investor sentiment is about even, neither too bearish nor bullish. About 78 percent of stocks in the S&P 500 Index remain above their 200 Day Moving Average. If we do pull back in the days ahead, I see at most a mild sell-off (barring a full-scale shooting war in the Middle East). I would be a buyer of any dips.

 

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. economy continues to grow, fueled by generous fiscal spending in an election year, robust corporate earnings, and a consumer willing to keep spending. The Federal Reserve Bank's loosening of monetary policy last month also promises to boost growth.

 

That dovetails with my expectations, at least in the short term. I expect economic growth will continue to show decent numbers when the third-quarter GDP data is released. At the same time, we should see additional modest progress in reducing inflation. September's CPI inflation data, however, could mark the low for this inflation cycle, in my opinion.

 

That is certainly not the consensus view. Wall Street is expecting the Federal Reserve to cut interest rates two more times this year and several more cuts next year. This week, Chairman Jerome Powell attempted to rein in some of those expectations in a speech before the National Association for Business Economics. He promised that the central bank would do whatever it takes to keep the economy in solid shape. However, he warned that markets should not automatically expect interest rate cuts at every Federal Open Market Committee meeting.

 

He said the committee will remain data-dependent and warned listeners that "this is not a committee that wants to cut rates quickly." My advice is to listen to the Fed. The risk I see is that we could see a bump in inflation beginning in the fourth quarter (probably December). I believe the Fed worries about that as well. They know that reducing interest rates is a risk, given the growth in the economy and the still-healthy wage level.

 

I have not mentioned the inflationary impact of the present stimulus efforts in China on materials and other commodities, the geopolitical risk of higher energy prices, nor the possibility of a long strike by union workers at the nation's ports on prices. The Fed, I believe, could be stuck between a rock (stubborn inflation) and a hard place ( avoiding further declines in employment).

 

At the same time, as I wrote in "My economic outlook for 2025" column last week  "I fear we could see declining economic growth — the result of the cumulative impact of the last two years of abnormally high interest rates. This lag effect will outweigh the Fed's interest rate cuts of September and maybe November. I am not predicting a recession, but only a slowdown, a "recalibration" to use the words of Fed Chairman Powell.

 

The plot thickens if you include the dollar and our national debt. A few weeks back (Aug. 29) I wrote a column "How the U.S. Can Manage Its Debt Load," in which I worried that at some point soon it would become necessary to do something about our rising debt load. Historically, the solution to that problem has always been to devalue the dollar. But we would pay the price for that action.

 

A weakening currency is inflationary. The dollar has already dropped 5 percent in as many months and currency traders expect this decline has only begun. It is, in my opinion, just a matter of time (possibly after the November elections), before the world and investors catch on that a devaluation of the dollar is a real possibility. 

 

If I am right, a combination of a declining currency, slowing growth, stubborn inflation, and the onset of easing monetary policy, would spark worries among economists and investors alike over the "S" word — stagflation. Stagflation is an economic situation where increasing inflation, rising unemployment and slower economic growth occur simultaneously. But just imagine how the market would react if inflation indicators like the CPI and PPI see upticks toward the end of the year, while jobs continue to fall.

 

It is not certain, and I know it is not conventional wisdom but that is what concerns me.  And no, I am not expecting a 1970s type of stagflation, but something much more mild.

 

I am not alone in my fears. Jame Dimon, the CEO of JP Morgan, is a man I respect and have followed for decades. He has been sounding the alarm over bullish economic expectations and remains highly critical of the Fed's restrictive policies, which he feels went on for far too long. As for the taming of inflation, as recently as last Friday, he said "I am a little more skeptical than other people. I give it lower odds."

 

So do I.

 

 As such, I looked at what areas do better in such an environment. Assets considered dollar equivalents like gold and silver and other precious metals do well. Some other commodities like copper outperform, as well as emerging markets and Bitcoin.

 

 In the equity arena, utilities, technology, energy, industrials, and consumer discretionary are standouts while financials, telecom, and consumer staples don't do nearly as well.

 

Investment styles such as secular growth, momentum, mid-cap stocks, low beta, and quality outperform, while small caps, dividend plays, value, and defensives underperform. Some fixed-income areas like Municipal bonds, long-dated bonds, and TIPS shine, but stay away from categories like preferred, convertible bonds, high-yield credit, and leveraged loans.

 

Predicting what the economy and inflation will do every year is difficult at best. Trying to call a change as early as December is not for the faint of heart. Right now, Wall Street is so focused on expectations of a steady stream of expected rate cuts and the outcome of the presidential elections that what happens in December seems a long, long way.

 

How long will the economy remain in this mild state of stagflation? Unless the demands of populism are somehow resolved quickly, the future economic environment might indicate more of the same.

 

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.