The stock market does not perform well in the year leading up to midterm elections. This year's election may just add to the overall woes besetting equities.

 

Historically, the average annual return of the benchmark S&P 500 Index in the 12 months before the Nov. 5 election is 0.3 percent, versus the historical average of 8.1 percent in non-midterm years. In 2022, of course, with the S&P 500 down more than 20 percent, those historical numbers look pretty good. Unfortunately, volatility also tends to rise before and after midterm elections.

 

But this year is different, you might say, since we are witnessing the first European war in decades, as well as the highest inflation rate in 40 years. And let's not forget the continued existence of the coronavirus, a pandemic the world has not seen in more than a hundred years.

 

While all of this is true, it does not contradict the data. For more than a century, the second year of the four-year presidential election cycle has always been the weakest in performance, so investors should brace for an even worse year than most.

 

Consumer sentiment is in the dumps and a growing list of issues — political, social and economic — are plaguing voters. The economy is giving off conflicting signals. It is still growing, although that growth is moderating. But right now, U.S. GDP remains strong enough to keep employers hiring and wages rising, but for how long?  

 

Two big negatives are posing a growing threat to the economy; inflation and the Fed's determination to fight it through tighter monetary policy. Both elements are impacting the wealth effect of American voters. Higher interest rates are hurting the stock market, and with it the average Americans retirement portfolios. Housing prices, another bright spot for homeowners, are also leveling off as mortgage rates climb. The two combine to inflict a general feeling of diminishing wealth among many households. We are feeling poorer.

 

 Inflation adds to that feeling. At the gas pump and in the supermarket, skyrocketing inflation has dramatically increased the cost of living for most voters. Workers are finding that recent pay raises are not covering the effects of inflation on the family budget. 

 

 What is worse, more and more economists are beginning to worry that the Fed's monetary tightening will ultimately lead to a recession sometime soon, whether this year or next. If so, the macroeconomic data will likely make that apparent just in time for the lead up into November's mid-term elections in 2022.

 

The makeup of the Congress and the Senate adds even more uncertainty to the midterm equation. If we look back at midterm elections since 1934, the president's party has lost at least 30 seats in the House and four seats in the Senate. There are only three years in history where the president's party gained seats. Democrats cannot afford to lose any seats in the Senate and few seats in the House if they hope to maintain their majority. At this point, history is against that happening.

 

Investors tend to dislike uncertainty and like the status quo within their governments. The stakes are high. If the Democrats hold firm in both houses of Congress, the chance of new legislation (and possibly new taxes) becomes a higher probability. If Republicans win one or both Houses, gridlock becomes the likely result within government. In that case, investors can expect little in the way of new legislation or downside surprises. Either way, we can be sure that the markets will be anything but calm leading up to Nov. 5.

 

Of course, there are a host of social issues, which may help determine the outcome. However, the economy usually takes precedence over all else in voters' minds. In any case, readers can expect that politicians on both sides of the aisle will be sure to add to the market's volatility in the months ahead. Starting now.

 

The Consumer Price Index (CPI) surged in May 2022 as gas prices continued to run higher. These results came as a downside surprise to a stock market that has been falling most of the week.

 

Friday's CPI number for May 2022 reflected an increase of 1 percent, compared to "hot" estimates of 0.3 percent in April 2022. On a year-over-year basis, the gain was 8.6 percent, which is a 40-year high in the CPI. Gasoline prices were a key driver of inflation last month, although Owners' Equivalent Rent (OER), which accounts for about a third of the CPI, also gained. The problem going forward is that analysts expect gasoline prices will continue to rise in this summer's driving season. If oil continues to rise, the stickier inflation will be.

 

This strong inflation result sets the stage for next week's June 15 FOMC meeting. It will be the first 50 basis point increase in the Fed funds rate in decades. Investors have been fully informed of the coming rate hike (and another one in July 2022), as well as the on-going reduction in the Fed's balance sheet.

 

Supposedly, the markets have fully discounted this event, but there is always a risk that during the Q&A session with Fed Chairman Jerome Powell after the meeting, he says something more hawkish than investors expect. I am betting that he will do nothing to add risk (more downside) to an already skittish market. If so, that could give markets a lift.

 

Throughout the week, central banks around the world continued to raise interest rates and telegraph their plans to tighten even more as global inflation climbs. Christine Lagarde, the president of the European Central Bank (ECB), joined the crowd on Thursday indicating that the ECB plans to raise interest rates above zero for the first time in a decade by September 2022.  

 

The ECB will raise rates by half a percentage point, followed by a planned quarter-point rise in July 2022, which is a bigger increase than expected. ECB officials are becoming increasingly concerned that higher wages, higher oil prices, and supply chain issues could lead inflation to become entrenched. Sound familiar?

 

Most of Wall Street expected that inflation may have peaked (and it still may in the months ahead), but the CPI threw a monkey wrench into this theory. The U.S. dollar has reversed course as a result and climbed higher over the last few days. I have advised readers to keep an eye on the greenback as an indication of where stocks might go. Right now, the two have an inverse relationship, so dollar up, stocks down.

 

I was dead wrong in my expectations that we could see a substantial rally in the stock market. Instead, we have dropped throughout the week as a barrage of interest rate hikes by central bankers throughout the world pressured stocks lower and the U.S. dollar higher. And now we face the Fed next week.

 

As I write this (Friday morning, June 10), the S&P 500 Index has tested and held at 3,900. If we break this level by more than 20 points, we could see a re-test of the lows (3,810). I suspect that we will bounce today instead. From a technician's point of view, into next week, depending on how the market closes for the week, we may see a down Monday to re-test the lows we put in today and a rebound on Tuesday into Wednesday. At that point it is up to the Fed, which way the markets go. I am hoping the direction is up.

 

I wanted to give readers a heads-up that I am taking the latter part of next week off, so there will not be a column next week. I'll be back at my post the following week for sure.

 

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.

Only recently have investors' focus shifted from $120 a barrel of oil to the soaring price of natural gas. Given the many uses of natural gas, from heating and cooling and generating electricity to the production of plastics and petrochemicals, the direction of prices could be critical to our economic well-being.

 

On Wednesday, June 8, 2022, natural gas prices fell over 10 percent after a fire at a Texas liquified natural gas (LNG) export terminal shut down the Freeport LNG facility for at least three weeks.  The terminal accounts for 16 percent of U.S. export capacity. Gas prices fell because for a brief time, that gas will flow into the domestic market depressing prices in the short term.

 

Thus far in 2022, Henry Hub natural gas futures are trading at $8.23 Metric Million British Thermal Unit (MMBtu) down from $9.44 MMBTU but still up 10 percent, which is a fourteen-year high.  Many analysts believe the present price rise is unsustainable, but summer heat, export demand, and a robust hurricane season may continue to pressure prices higher. 

 

The Federal Energy Regulatory Commission (FERC) estimated that U.S. demand for natural gas would outpace supply this summer. FERC expects that U.S. demand for natural gas production will increase by 3.4 percent over the summer, compared to a projected 4.8 percent increase in consumption during that same period.

 

Overall, a drop in the U.S. supply of natural gas in storage is driving the price gains and the prospect for storage gains is dismal at best. How did the U.S. end up in this predicament? Blame the pandemic or regulation or both. There was a large decline in production in 2020, when extraction of gas, oil and most fossil fuels fell off a cliff. Many small gas producers went out of business during that period, while larger companies trailed off production to protect profit margins. Government regulations did their part as well. Wall Street bankers also wanted more dividends and stock buybacks and less production from the gas companies that survived the downturn. 

 

As supply dwindled, demand for U.S. exports of liquefied natural gas (LNG) continued to increase to record levels. This year (2022), the U.S. has become the world's largest exporter of LNG. However, the majority of the world's LNG supply is sold under contract. Many of these contracts are decades long. As a result, most of the U.S. LNG supply is already spoken for. No one counted on the Ukraine War.

 

As Russia invaded Ukraine, the price of natural gas in Europe exploded higher. Traders initially thought Europe's price hikes would have an impact on this side of the pond. But over time, higher European prices had only a minor impact on the price of natural gas here in North America. As gas markets go, the U.S. is an isolated market. The U.S. natural gas market produces 97 billion cubic feet per day (BCFD) of natural gas, which is just enough for domestic consumption with another 12 BCFD available for LNG exports.

 

However, President Joe Biden has since promised to supply more natural gas to Europe to replace Russian fossil fuels. The problem with this pledge is that no one knows where the additional supplies are going to come from. There is little LNG available and even if there were it is extremely difficult to re-route LNG from one region to another.

 

One might think that with rising prices, why not simply increase production? That is easier said than done. Labor and material shortages, in addition to a more cautious approach to drilling (as a result of finance and regulation), have conspired to bring on some production, but at a much slower rate. In February 2022, monthly production hit 115.2 BCFD, but that was down from 118.7 BCFD in December 2021. Since then we have seen a steady decline. Average gas production output in the lower 48 states fell to 94.7 BCFD in June 2022 from 95.1 BCFD in May 2022.

 

As a result, storage levels are 18 percent lower than last year, and 16 percent lower than the five-year average. The way gas storage works, some storage historically is left unused in preparation for the winter when more gas is normally consumed. That is not happening this year. And all the above supply constraints could be exasperated by climate change.

 

The National Weather Service is already warning of another summer season of record-breaking heat waves in the Southern states. That wave has already commenced in places like Texas, Oklahoma and Louisiana. The nation's utilities, which are charged with supplying the electricity necessary to run all those air conditioners, have switched in times past to coal for power, but coal is now even more expensive than gas.

 

We have not even spoken about this year's hurricane season (June 1 to November 30, 2022). Historically, major hurricanes have disrupted both oil and gas production, refining, and delivery in many areas of the U.S. NOAA's Climate Prediction Center (a division of the National Weather Service), is predicting above-average activity this year with between 14 to 21 named storms on the horizon.

 

At the very least, I would suspect that down the road we will all be paying higher utility bills. As utilities grapple with higher natural gas costs, it will take some time to pass the costs through to the consumers. Depending on how tropical the summer gets, those higher monthly bills could persist well into the winter.

 

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.

Thus far, the markets in June seem poised for a further bounce higher. That does not mean we are in the clear throughout the summer, but let's take it one month at a time. Here is what I see.

 

Between now and June 17, 2022, I am betting for another move up in the equity indexes. We could see a rally that takes us up to the 4,300 -4,400 level on the S&P 500 Index. It will likely be the kind of surge that floats all boats higher as it rises.

 

The stocks that have been hurt the most this year would be prime candidates to outperform. China, emerging markets, energy, materials, retail, transportation, small caps, tech, mines, metals and even the Kathy Wood stocks will benefit. I have been predicting this move higher since early April 2022. I believe it has become the consensus view.

 

The energy for such a move is based on the mistaken belief that the Fed will prove to be less hawkish than the Federal Open Market Committee (FOMC) statements have led us to believe. To me, that argument is as wobbly as a three-legged chair. It is also why I don't expect that we are up, up and away for the rest of the summer. At best, the months of July 2022 through August 2022 should exhibit some sideway actions. However, I don't see the markets making a lower low (3,500 on the S&P 500 Index) until sometime in September 2022.

 

On June 1, quantitative easing (QT) began. The process of draining off some of the Federal Reserves Banks' $9 trillion balance sheet will take months to accomplish. Remember, this is in addition to the Feds' plan to raise interest rates by 50 basis points in June 2022 and again in July 2022. Some analysts believe QT could be equal to raising interest rates by another 100-basis points or more.

 

I believe investors have yet to discount this new and unique tranche of monetary tightening. You see, hiking interest rates is tangible, quantifiable and has happened many times before. It is an event that is visible and is almost immediately will be translated into a higher prime rate, followed by a rise in mortgage rates.

 

QT is less visible, a stealth tightening if you like, that will work though the credit system withdrawing liquidity as it travels and builds throughout the economy in various ways during the next few months.

 

I expect investors will only realize its impact when they see the effect it will have on housing, economic growth, consumer spending, and corporate earnings. That data will be apparent by late June, or early July, and buttressed by the second quarter corporate earnings season.

 

The problem I see is that all of the above areas are already slowing. And while inflation may have peaked, it is still high and will continue to be so. It's already stressing consumers. QT will stress them further. This will raise the risk in investors' minds that the Fed "has gone too far."

 

Investors are laser-focused right now on inflation slowing and potentially hoping for a "two and done" interest rate scenario from the Fed.  As such, I see the next few weeks as a sweet spot. A time before investors realize what is ahead of them.

 

This week, J.P. Morgan CEO, Jamie Dimon, announced that he is preparing this largest of U.S. banks for an economic hurricane, which he sees on the horizon caused by the Fed and the Ukraine War. He then advised that investors should do the same. And yet, the same company's Head of Global Research, Marko Kolanovic, is bullish and thinks that his boss is wrong. Who is right?

 

My answer is both. Short term, Marko can see the S&P 500 Index hit the 4,300-4,400 level. After that, Jamie carries the day. 

 

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.

Despite the carnage caused by firearms, the business of manufacturing, marketing, and selling guns to Americans is thriving. What is worse, it appears that efforts to control and regulate the industry may only increase sales.

 

During the start of the COVID-19 pandemic (2020-2021), gun purchases accelerated. More than 5 million adults becoming first-time gun owners compared to 2.4 million in 2019, according to a survey published by the Annals of Internal Medicine. Approximately half of all new gun owners were female, and nearly half were people of color. Month after month, sales of guns have surpassed 1 million units for 33 months in a row.

 

This year (so far), monthly sales of guns have been off slightly. In April 2022, 1.5 million firearms were sold, which was a year-over-year decrease of 20.7 percent, while long guns or rifles fell by 18.8 percent. However, if past behavior is any indication gun sales will likely surge in the months ahead. It is one reason why publicly traded gun stock prices are flat-to-up despite the horrible news of the last two weeks.

 

The facts are that mass shootings like the ones in Uvalde, Texas, or Buffalo, N.Y., motivate more Americans to buy guns rather than to give them up. Throughout the last several years, the three highest months for gun sales occurred in December 2012, after the Sandy Hook Elementary School shooting in December 2015, after the mass shooting in San Bernardino, CA. in March 2020 as a result of the Covid pandemic. There were also gun sale spikes in June 2020 as Black Lives Matter protests erupted after George Floyd's murder.

 

The most-cited reason for owning a firearm in the wake of high-profile shootings and massacres is personal security. "Self-defense" seems to be an overriding motivator for most Americans. Opponents of this behavior argue that more guns at home only increase the potential risk to the 11 million household members that are newly exposed to lethal firearms, including an estimated 5 million children.

 

As a Vietnam veteran, I am convinced that guns as a form of self-defense is a fallacy. Unlike hunter safety courses, which teach new gun owners how to safely use rifles or bows in hunting wildlife, Americans (except veterans and law enforcement) have little to no training in the far more deadly skill of killing or wounding another human being.

 

Learning that skill required, in my case, more than 18 months of sophisticated training using live fire. Even then, repeated firefights were vital in learning how to survive, reduce instances of friendly fire, and accomplish the objective of self-defense or offense.

 

In my life, I have only met a handful of men and women, who have received and have maintained those skills. My brother, for example, who lives in Delaware, has an arsenal of guns, and has never hunted, and yet enjoys shooting up old cars with his state trooper buddies. I remind him abandoned autos don't shoot back, but he ignores my arguments.

 

However, there is also another important factor in generating increased gun sales — regulation. As I write this, Congress is once again demanding something be done to reduce gun violence. And as usual, most Republican congressmen and senators display few signs that they will vote for any new gun regulation. Gun control has become a partisan issue, just as important as abortion in many circles.

 

The more vocal politicians become over limiting or hindering the purchase of firearms, the more gun advocates feel threatened that their second amendment rights might be reduced or taken away entirely. The result is usually a rush to buy and stockpile even more guns "just in case."

 

Frustrated with the stalemate in Washington, many individual states are attempting to take action where they can to reduce gun violence. Other states are pushing to reverse or strengthen voters' gun rights in response. Roughly three in five state legislatures are Republican-controlled and are determined to make guns even more accessible to their citizens.

 

 For example, one of the country's largest banks. attempted to distance itself from the firearm industry after a mass shooting in Parkland, Fla., which left 17 dead. Texas, in response, passed a new law that bars state agencies from working with any firm that decimates against companies or individuals in the gun industry.

 

The law requires banks and other professional service firms to provide the state written affirmations that they are complying with the law. Banks could be subject to criminal prosecution if they don't comply. In addition, banks worry about their bottom line, since Texas is one of the nation's largest bond issuers, with $50 million in annual borrowing, generating $315 million in fees last year for financial firms.

 

The facts are that in a country where one third of Americans own guns, don't blame the politicians for their lack of new regulations on guns and gun violence. They are simply following the wishes of their voters. Just recognize that three out of ten of your neighbors, regardless of whether you live in a blue state or red state, may disagree with additional gun controls.

 

And don't dismiss gun owners as a bunch of red-neck, no-nothings. There are countless, male and female professionals — doctors, lawyers, financial planners, etc. — that own and collect guns. As such, while my heart breaks for the slaughter that we see perpetrated by Americans with guns on an almost on a daily basis the solution eludes us. One suggestion might be to require insurance when purchasing a gun, like the existing practice of requiring insurance along with the purchase of an automobile.  It would avoid the Second Amendment controversary and probably reduce those willing to pay yearly insurance for each firearm they own.

 

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.