The 90-day reprieve on tariffs has given markets a boost. This week, equity indexes briefly turned positive for the year. Are there more gains ahead?

 

Further upside in stocks is dependent on the next moves out of Washington. For now, tariff fears are on the back burner. Fewer tariffs imply less of a hit on the economy. That has convinced many brokers and money managers to backpedal on their recession predictions. Investor attention has now swerved to Congress and the passage of Trump's "Big Beautiful Bill."

 

The president's spending bill is beginning to take shape, although the time to passage continues to slip. The original idea was to extend the tax cuts of Trump's first term and reduce spending primarily by slashing Medicaid and "billions" in DOGE cuts. And, if possible, throw a few extra tax deductions to those in the country that need them the most. The House bill taking shape is a far cry from that idea.

 

If passed in its present form, the House Reconciliation package would add $5.2 trillion to the country's debt. Boost deficits over time to $3.3 trillion. Push annual interest costs on government debt to $2 trillion while increasing the debt-to-GDP ratio to 130 percent. And this is after $2.5 trillion in offsets are applied.

 

That is not what the bond market wants to hear. As such, is it any wonder that the yields on Treasury bonds have spiked higher in the last week? Whether this kind of legislation will ultimately see the light of day or saner heads prevail is what I am watching. Factions among the GOP are feuding on how much to increase the SALT cap on mortgage tax exemptions from the present 10 percent to some higher number. A handful of politicians from wealthy states threaten to torpedo the bill if they don't get their way.

 

It appears seniors will be screwed. Trump's campaign promises to end the double taxation on Social Security is out, although taxes on overtime may survive. So far, there is decidedly nothing beautiful about this version of the bill. It promises the same reward-the-rich and soak-the-poor legislation that has been popular among both parties for the last 40 years. Whatever the outcome, its passage will likely be a purely Republican affair, with Democrats abstaining. How that will square with voters in an era of populism remains to be seen. 

 

The Consumer Price Index and the Producer Price Index came in cooler than most expected for last month. The Street was looking for higher numbers, but readers know I had the opposite view. However, that trend toward weaker inflation numbers may have ended. The imposition of tariffs is already impacting prices.

 

Remember that the effective rate of tariffs, even if reciprocal tariffs were dropped, would still be 15.6 percent. That is the highest rate of tariffs (taxes) Americans will be required to pay since 1938. As such, higher inflation will show up in the numbers in the months ahead.

 

Consumer sentiment numbers are still falling even as the stock market climbs. The bulls believe that, at this point, Trump's tariff initiatives are nothing but bluster. In which case, there will be no recession nor decline in earnings estimates, and with Congress back to its old spending habits, the sky is the limit for equities. Many technical analysts are turning positive as well.

 

The bears, of which there are many, still cling to the idea that this three-week bounce in the averages is just that, a bear market bounce. They believe markets will roll over and re-test the lows or break them because of a tariff-crippled economy and rising inflation.

 

My guess is somewhere in the middle. I could see a new trading range develop with another 150-plus points tacked onto the S&P 500 Index, call it 6,050 to 6,150 on the high end. On the low end, 5,770 is the long-term trend line on this index. That seems about right as we await further developments on the tax bill, tariffs, and the economy.

 

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 America's Pope Leo XIV  begins his reign at the head of the world's smallest country, this Catholic sovereign city-state's financial and economic challenges wait to be addressed. It may take more than American ingenuity to accomplish that.

 

Located in Rome, the Vatican encompasses 110 acres with a population of under 1,000 souls. However,  despite its size, the Vatican has had an outsized impact and influence on the financial world thanks to its investments in real estate, banking, and private enterprises.

 

Those new to the inner workings of the Catholic Church should know there is a difference between the Vatican and the Holy See. The Vatican is the physical area where the Holy See resides. The Holy See is the governing body of the nation. If you were to enter a financial contract with the territory, it would be with the Holy See.

 

The Holy See generates revenues from a variety of sources. It collects donations from the faithful worldwide (called Peter's Pence, a term dating back to the 8th century), as well as from interest and investments. Many of its investments are in real estate, where it holds land and churches around the globe.

 

Historically, the Holy See has primarily invested in Italian industries but has kept its stakes below 6 percent. Over the years, it has also expanded purchases overseas, but always in proven companies within strong industries. It also invests in stocks and bonds where it takes a long-term, buy-and-hold investment philosophy. However, as a faith-based entity, it will not make investments in companies that go against church values.

 

In contrast to the Holy See, Vatican City derives revenues from a few small industries. It employs a labor force of 4,800 people who interact with millions of tourists annually. These travelers visit the Vatican, its museum, the Sistine Chapel, and St. Peter's Basilica. The Vatican is thought to do a thriving business in admissions and sought-after sales of stamps, coins, and publications. How much exactly is a tightly kept secret.

 

Finally, the Institute for the Works of Religion, known as the Vatican Bank, rounds out the church's financial picture. Pope Pius XII founded this private bank in 1942. It has been the most controversial of the church's assets, plagued by scandal, accusations of mismanagement, money laundering, and fraud. 

 

In 2022, Pope Francis tried to clean up the bank's tarnished image. He strengthened the bank's role as the exclusive manager of the Holy Sees's financial assets and connected institutions. He followed that up in 2023 by overhauling the Vatican's oversight, auditing, and supervision functions of the bank and its employees. In 2023, the bank claimed $33.2 million in income and managed $5.9 billion in client assets.

 

It wasn't easy, and he fought every step of the way from within. The specifics of the church's finances have always been shrouded in secrecy, even from the pope himself, and tradition is difficult to change, especially within the church hierarchy.

 

Pope Francis hired outside managers to circumvent those barriers and implement his reforms. Most of these hires have since resigned, stymied by roadblocks thrown up within the church bureaucracy.

 

Next week, we will examine the state of finances within the Catholic Church today and the challenges the new pope will need to overcome to win the day for his worldwide congregation.

 

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.

One country down, only 194 more to go. This week, the announcement of a "framework" for President Trump's first trade deal and the first high-level meeting between the U.S. and China encouraged investors.

 

Wall Street's enthusiasm was somewhat tempered, given that the United Kingdom was an easy deal to make. The terms of trade have always favored the U.S., where we have run a capital trade surplus for years. We have long exported far more to the UK than they have sold to America. Nonetheless, it did provide movement on the tariff question that has troubled the markets since "Liberation Day."

 

On the China front, U.S. Secretary of the Treasury Scott Bessent will meet with his counterpart in Switzerland this weekend; on Friday, President Trump floated the idea of a possible decline in U.S. trade tariffs to 80 percent, which he said "seems right." It was a clear message to the Chinese that he wanted to de-escalate his trade war.

 

The administration is reportedly lining up deals with several other countries. India, South Korea, Japan, and Australia are in the queue, although the timing is still a question mark. India would have been first out of the box, but the government's attention has been focused elsewhere over the past two weeks. The delay in an announcement is due to the present hostilities between India and its neighbor, Pakistan.

 

Given the news on tariffs, this month's Federal Open Market Committee meeting came and went with hardly a blip. The Fed announced that they were going to sit on their hands for the foreseeable future. Chairman Jerome Powell made it clear just how uncertain the future was, particularly in relation to the Trump administration's policies and their potential impact on inflation, the economy, and employment.

 

None of this was a surprise. Few on Wall Street had expected anything more from the Fed than the word "uncertain" when describing Fed policy in the future. In the meantime, stocks climbed higher while precious metals, the dollar, and interest rates continued to be volatile. Gold traders were whipsawed as bullion prices have swung in $50-$100 increments daily this week. The U.S. dollar, which has been in freefall for a month, has also been erratic, while bond yields are in a trading range lately with no significant moves either way.

 

Both foreign and domestic traders believe the U.S. dollar will fall further. As such, they are looking at currency alternatives to place bets. Gold was the first go-to asset, but speculation has driven the price too far, too soon. Cryptocurrencies appear to be an acceptable alternative for the time being. Bitcoin reclaimed the $100,000 price level on Thursday and seems destined to climb to the old highs at around $120,000.

 

Last week, I wrote, "For markets to continue their recovery, we need to see the following. A peace deal, the tariffs disappear, China and the U.S. come to a trade agreement, the Fed cut rates, and/or no recession." I forgot one more option: the successful passage of Trump's tax bill, which could significantly impact the market dynamics.

 

Any two of the above will be enough to stave off a re-test of the lows. Thus far, we have made progress on the tariff front (U.K., China, etc.). However, tariffs will not disappear altogether. It appears that no matter what, a 10 percent tariff on imports is here to stay.

 

I would guess the possibility of the passage of Trump's "Big Beautiful Bill" is high, given that the Republican Congress now functions as a rubber stamp on the wishes of the president. We will not see a recession this year, although I see a decline in GDP in the second quarter to plus-1.3 percent and plus-1.28 percent for the third quarter, which fits with my stagflation scenario.

 

As I keep reminding readers, markets are heavily influenced by Trump's decisions. This week, his statements gave stocks and other assets a boost. We did breach 5,700 on the S&P 500 Index intraday before falling back but have yet to reach my short-term target of 5,750.

 

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 lifeblood of emerging markets has always been their exports within a framework of robust global trade. The advent of U.S. tariffs worldwide has placed these countries between a rock and a hard place.

 

The rock is clearly the size and extent of U.S. tariffs. These new tariffs have dwarfed the imposition of levies during the first Trump presidency. Back then, the U.S.-China trade war benefited some emerging market (EM) countries by attracting increased foreign direct investment and manufacturing as alternatives to Chinese trade.

 

It also meant increased exports in some cases, especially in agricultural products. In response to the U.S. tariffs on their goods, China hit back by raising their own barriers to U.S. imports. China reduced agricultural imports from the U.S. and increased its purchases of soybeans from Latin America.

 

In addition, since the last trade war, foreign direct investment into key emerging markets such as Mexico, Vietnam, and Indonesia have steadily increased. A large part of this new investment came from China and Hong Kong. Faced with a continued rise in U.S. tariffs and restrictions under the Biden presidency, China relocated some of its manufacturing to regions that had avoided U.S. tariffs. This allowed Chinese exporters to end run tariffs and continue selling to the U.S. market through other countries. Trump 2.0 is closing that loophole.

 

However, China has upped its trade game in response. As tariffs bite and domestic demand remains subdued, China pivots away from U.S. trade. Chinese imports into the U.S. have declined from 21 percent in 2018 to 14 percent in 2023. That total has dropped further since then. Economists estimate that total trade with the U.S. today only accounts for 2 percent of China's Gross Domestic Product. To compensate for the American market shortfall, China has turned its attention to exporting its excess capacity to other developed markets in direct competition with other EM exporters.

 

At the same time, imports from China have exploded higher throughout emerging markets. And it is not just intermediate goods that make up more of the advanced products they routinely re-exported to America. Final goods from China are now flooding into EM countries, which are displacing local industries and jobs.

 

This surge of "Made in China" imports has forced several countries to raise tariffs (with the urging of the U.S.) on Chinese imports. Their domestic companies simply could not compete against this flood of cheaper-than-cheap imports.

 

In desperation, Mexico has raised tariffs on textile and apparel imports from China to 35 percent. Thailand and Malaysia have levied a 7 percent and 10 percent value-added tax. Even Russia, which relies on China's trade, recently imposed restrictions on Chinese auto imports for the same reasons.

 

Many EM nations acknowledge that China still plays a crucial role in their medium-term growth and development, especially in Asian countries. This places them in a hard place to preserve their domestic industries while maintaining good relations with the world's No. 2 economy.

 

And yet, Southeast Asia nations were also among the hardest hit on "Liberation Day." On July 4, when the 90-day temporary reduction expires, that region's tariffs will skyrocket to almost 50 percent. That will be a devastating blow to EM economies. Many economists predict that the gross domestic product among EM countries could be cut in half if those tariffs are implemented.

 

The implicit message from both of the world's leading economies is that emerging markets should decide which side to back. The rock and the hard place for many nations will be choosing between the U.S. and China. Retribution for picking the wrong partner could be costly on several fronts.

 

Chinese President X Jinping calls on his trading partners to "uphold the common interests of developing nations." He argues that the "Global South," a term referring to a collection of countries (that now number 134 nations), should pull together. This so-called "Group of 77," mainly in the southern hemisphere, are considered developing or less developed countries than those in the Global North.

 

These nations, mainly in Africa, Asia, Latin America, and Oceania, often have lower income levels or share common political and economic interests. Many of these countries are now developing trade and other strategic alliances, often with the support of China.  

 

In contrast to China, the U.S., over the last 100 days, has made it clear that "America First" means just that on both the geopolitical and economic front. Relationships between America's traditional allies and trading partners have been upended.

 

Given the U.S. backpedaling in its support for Ukraine, Canada, Mexico, and others, many nations worldwide, including those in emerging markets, have concluded that while powerful, the U.S. has become an unreliable partner. They walk a fine line between these two powers and have little room for error.

 

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.

Wednesday's release of the nation's first-quarter Gross Domestic Product stunned investors since it was the first quarterly decline in the economy since 2022. Looking beyond the headline number, however, the results told a different story.

 

At first blush, the minus-0.3 percent decline in GDP sent stocks lower, with the NASDAQ down 3 percent on the day at one point. The culprit behind the numbers was a 41.3 percent rise in imported goods and services. If we import more than we export, as we did substantially in the quarter, the economy's growth decreases.

 

The surge in imports began after the November 2024 elections and continues today. These higher imports result from President Trump's intention to levy tariffs on all our trading partners. U.S. corporations have been scrambling to get ahead of these tariffs by ordering products before the deadline. Trump's second 90-day reprieve has only heightened the trend toward importing even more goods from overseas.

 

The decline in GDP  was also the first substantive instance where the "hard" economic data matched so-called soft data. Over the last three months, the University of Michigan sentiment numbers, the AAII Institutional investor surveys, and consumer confidence polls have indicated that investors and consumers are growing steadily more negative about the economy and market.

 

The president was quick to cast the blame for the disappointment on the prior administration, although, to my knowledge, neither Biden nor candidate Harris had any intention of waging a tariff war. He also indicated that if the economy weakens in the second quarter, he will blame Biden again.

 

However, if the president had just looked under the GDP hood, he might not have been so quick to duck the blame. If you strip out the import data, the economy grew by 3 percent. Private business investment was up while government spending fell. Business equipment and machinery investment rose 22.5 percent. That is a powerful upswing.

 

The Trump administration could have taken credit for that result. Trump promised that when Congress passes his "One Big Beautiful Bill," he would give business and factory investment a 100 percent immediate depreciation write-off retroactive to Jan. 20, 2025. That means the cost of these purchases would be tax-deductible in year one instead of being stretched out and deducted over the life of the equipment. How much of those purchases were related to avoiding tariffs and how much was a genuine willingness to invest in America will likely show up in the data in the months ahead.

 

In addition, the Fed's favorite inflation indicator, the Personal Consumption Expenditures Price Index (PCE), came in weaker than expected, indicating that inflation has not increased, at least for now. I expect April's Consumer Price Index to be weaker still.

 

Jobs, on the other hand, is a different story. U.S. jobless claims rose to a nine-month high, but Friday's non-farm payroll employment report drew the market's attention. The number beat estimates, coming in at 177,000 jobs gained compared to 138,000 expected. That helped markets rise to top off a good week of gains.

 

Some on Wall Street are betting that a weaker economy, steady inflation, and the threat of rising unemployment might be a sufficiently worrisome combination for the Fed to alter its wait-and-see point of view. The bond market has upped its probability that the Fed will cut rates at least four times this year. It could provide cover for Fed Chair Jerome Powell to give in to the president's continued pressure to cut interest rates now instead of waiting. 

 

Last week, the market could continue to rally, providing quarterly earnings came in better than expected. Fortunately, that is what happened. We have made progress. I could see 5,700-5,750 before a pullback occurs on the S&P 500 Index. That is a mere 50-100 points away.

 

In the meantime, my warning to wait before chasing gold proved to be the correct call. I expected at least a 10 percent correction in the yellow metal, which would take the price down to $3,150.

 

For markets to continue their recovery, we need to see the following. A peace deal, the tariffs disappear, China and the U.S. come to a trade agreement, the Fed cut rates, and/or no recession. That's a long list, so let's say just two of the above need to happen for further gains.

 

A June Fed cut is a good bet, and China said on Friday that it is at least willing to talk to the U.S. on trade at this point. A Russia/Ukraine deal and/or a U.S. recession remain a 50/50 bet. I am afraid some tariffs are here to stay. If none of the above occur, we remain in a 500-point trading range (5,200-5,700) on the S&P 500. Until these issues are solved, we remain Trump-dependent. 

 

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.