Now that the debt ceiling fiasco is out of the way, markets are returning their focus to monetary policy. The burning question on investors' minds is whether the Fed will skip a rate hike in their upcoming June meeting.

 

The betting by traders on such a move is vacillating around the 50/50 mark, depending on which Fed Head is talking. In recent days, the market had expected the Fed would lift interest rates once again at its June 13-14 FOMC meeting. This week, however, two policymakers, Fed Governor Philip Jefferson, and Philadelphia Fed President Patrick Harker, expressed their opinions that a pause may be in order unless Friday's jobs report came in stronger than expected.

 

Their words carry even more authority since Harker is a voting member of the FOMC and Jefferson has been nominated by President Biden to serve as the Fed's vice chair. In that position, he would be expected to aid Chair Jerome Powell in developing his policy decisions before FOMC meetings.

 

On Friday, the non-farm payroll report showed the economy remained strong with 339,000 jobs created last month, which was way above the expected gain of 195,000 jobs. However, at the same time, the unemployment rate rose from 3.5 percent to 3.7 percent, while hourly earnings month over month were unchanged at 0.3 percent and hourly earnings on a year-over-year basis dropped to 4.3 percent versus 4.4 percent.

 

The problem with a pause in their program of combating inflation by raising interest rates is that traders will immediately assume that a Fed pause signals an end to further rate hikes. As such, FOMC members are taking great pains to tell markets not to count on that scenario. They say that if they do pause, it is simply a period where policymakers can assess how the economy and the financial sector are weathering past rate hikes.

 

This "hawkish pause," as the market is dubbing it, should not by itself mean much to the equity markets. And the strong labor gains might also convince the Fed that a pause might be premature. But those risks only come into play in two weeks. However, stock players are so short-term that algo and options traders will likely push markets higher in the meantime. They will anticipate the skip until they are proven wrong.

 

Over the last several months, government bond auctions have dwindled somewhat as the limit on borrowing crept closer and closer. Now that Congress is extending the ceiling higher, the government will need to raise more money to continue spending on things like social security payments.

 

In the weeks ahead, I will be monitoring a potential counter-veiling development that could put a damper on equities and a spike in bond yields. The U.S. Treasury needs to raise about a trillion dollars in debt fairly soon. As this supply of bonds hit the markets, yields on debt instruments would rise to accommodate all this extra borrowing. That would be bad for stocks.

 

I should mention the farce that has occupied all our attention over the last few weeks. The debt ceiling agreement is a travesty. Spending cuts amounted to $1 trillion, but far less than that if one reads the fine print in the actual document. As I expected, the June 1 deadline came and went but not by much. It really didn’t matter because the supposed deadline was extended (at the eleventh hour), which magically has given the politicians the extra time needed for the Senate to pass the bill and the president to sign it. 

 

President Biden, House Speaker Kevin McCarthy, and a host of politicians got their hours of airtime at our expense. The country is no better off, and in two years we will probably have to put up with these same clowns doing the same thing yet again.

 

Marketwise, I expect the S&P 500 Index to continue to climb, hitting my target of 4,320 or even higher (maybe 4,400 maximum) as traders chase the market up in anticipation of the Skip.  Monday and possibly Tuesday could be down days (buy the dip) and then most of the week the S&P should continue to gain. Gold and silver also appear to be ending their period of consolidation. Watch the dollar; if it weakens, precious metals and bitcoin should climb higher from here. 

 

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 week before the debt ceiling deadline, members of Congress have adjourned, while a handful of negotiators continue to search for a compromise solution to the impasse. Investors are holding their breath.

 

As many expected, myself included, the politicians are drawing out the drama and will continue to do so until the 11th hour. Both sides have stressed that there will be no default and the market has taken them at their word. Investors have bid up stocks this week in anticipation of a positive announcement.

 

This week, Fitch, one of the big three American credit agencies, has put the nation's debt on a negative credit watch. The agency warned that it may downgrade the U.S. AAA debt rating to AA+ over the debt ceiling fight. It cites the increased political partisanship that is hindering a resolution to the debt limit. In addition, they point to the failure of the U.S. to meaningfully tackle rising budget deficits and a ballooning debt burden.

 

This brings back to mind a similar situation in 2011. At the time, another big credit agency, Standard & Poor's, downgraded the nation's debt to AA+ for the same reasons, despite the two sides coming to a compromise and avoiding default.

 

Politicians from both sides denounced the move, as did the U.S. Treasury, to no avail. It still has not restored its' AAA rating. The agency said their downgrade reflected their view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges. That sounds about right to me, and if anything, the environment has worsened over the last 12 years.

 

Although I have never seen a published dollar amount of the cost to the nation and the taxpayer of that downgrade, I do know that the rating downgrade increased the U.S. government's cost of capital (interest, fees, and yields). The higher costs simply reflect the increased risk lenders are taking in buying our debt. Given the trillions of dollars we have borrowed over the last dozen years, we are talking billions and billions of dollars in extra costs. And here we are again in the same situation. Will Fitch follow Standard and Poor's lead and lower the rating? Time will tell.

 

Throughout the week, yields on bonds have risen in fear of default with the one-month, U.S. Treasury bills now yielding more than 6 percent. Three-, six- and nine-month U.S. Treasury bills are yielding between 5.31 percent to 5.39 percent. The U.S. dollar has shot up as well, and that combination has savaged precious metals and most other commodities.

 

Equities have fared much better — thanks to AI and 10 large-cap tech stocks. Artificial Intelligence (AI) has been around for many years, but the idea has caught fire among traders and investors. Reminiscent of the Dot.Com boom (and bust), any stock that has even a whiff of exposure to AI has exploded higher. Nvidia, a semiconductor company that is at the forefront of chips needed in the AI space, announced spectacular earnings and even better guidance this week. The stock rose 25 percent overnight and carried the technology sectors along with it.

 

But underneath this hyped-up area, most equity sectors of the overall market were at best marking time while the debt negotiations continue. As I predicted, traders are reacting to every word and headline, moving markets up and down. The latest word out of Washington is that President Joe Biden and GOP House Speaker Kevin McCarthy are closing in on a deal.

 

Their idea is to produce a simple agreement with a few key top-line numbers for spending, including defense spending, and let lawmakers hash out the details through the normal appropriations process in the months ahead. That would dispense with a weighty, thousand-page bill that would require legislators to write, read and vote on all in a matter of days.

 

My belief for months is that a deal will get done and the market agrees, otherwise, the market averages would be a lot lower than they are right now.

 

The question to ask is what will happen after a deal is done? I expect markets will spike higher in a relief rally, but then what? The U.S. Treasury is expected to need to raise a lot of money in the form of new government debt sales in the weeks after an agreement. That should send interest rate yields higher and probably put pressure on the stock market. But let's just get through the next week first. 

 

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.

Bears and bulls are battling for supremacy, which is keeping stocks moving in a tight range. The question is which way will the markets break?

 

On the plus side, inflation does appear to be falling, or at least not going higher. Both the Consumer Price Index and the Producer Price Index came in as expected for April. Investors interpreted the data as a bit of a positive in the fight to control inflation. The trend is definitely down compared to last year's numbers.

 

Bears, on the other hand, were encouraged by the rising fears of a default on the nation's debt in less than three weeks. In addition, the ongoing regional bank contagion is alive and well. Pacific West Bank, a regional bank, reported that almost 10 percent of deposits flowed out of the bank's doors last week.

 

The focus on corporate earnings has taken a step back now that the mega stocks have been reported. Results are still coming in better than expected overall, but guidance is checkered. Companies in some sectors are seeing a troubled future, while others claim it is business as usual.

 

Just a handful of stocks (FANG+) have been supporting the equity market for months and that still seems to be the trend. For the markets to move higher, we would need to see both an expansion of the number of stocks that are participating in an up move (breath) and overall market volume must increase as well.

 

Early last month, in a separate column on the debt ceiling, I warned that readers could expect the debt ceiling would begin to concern Washington, the media, and the financial markets. This week was the first meeting of the key players: the president, and leaders of both parties in Congress. I expect the rhetoric to escalate, and fear-mongering will move to center stage. The beginning of the horse-trading process is expected to occur early next week when both sides meet again.

 

For the politicians, it is a huge opportunity to shine among their partisan voters, to appear strong, dedicated to principles, and concerned about the country's future. They won't give up that chance until they absolutely must. That's why this bickering will drag on up to the eleventh hour or even beyond. 

 

Underneath this farce is a simple truth. Imagine a credit card bill, or mortgage payment that is due on June 1. Most people would not even blink in considering whether to pay at least the minimum amount due. Sure, you may have a discussion afterward on how to reduce your spending or refinance a mortgage, but you won't skip a payment. But in Washington politics, that argument is beside the point because it is not about the debt, it is about them and their political future.

 

The sad, sad truth is that without turmoil in financial markets, the politicians on both sides have no incentive to agree. That could mean by next week, or the week after, we can expect to see a period of downside in the markets, punctuated by spikes higher as market participants hang on every word uttered in this increasingly acrimonious debate. That could mean a 10-15 percent decline in the markets between the last weeks of May into June. 

 

I am already getting calls from concerned investors on how to manage through this volatile couple of weeks. For long-term investors, my advice is to do nothing. In the end, the debt ceiling will be passed. Those most against it now will vote for it in the end and then try and hide their vote from their constituents.

 

If you feel you will need some cash in the short term, a three-month CD could be a safe bet. The yield on those instruments is almost 5.25 percent, the last I looked, which is a great rate.  U.S. Treasury bills, notes, and bonds are also an alternative, although, with the risk of government default, some investors are shunning these instruments despite yields on the short end that are 5 percent or more.  In any case, prepare for an uncomfortable few weeks, but we will come out the other side just fine.

 

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 Federal Reserve Bank raised interest again, even as another regional bank saw its stock price collapse. Investors are asking when enough tightening is enough.

 

The key Fed funds interest rate was hiked by another 0.25  percent, which increased its benchmark rate to between 5 percent and 5.25 percent. That was the 10th hike in 14 months and has pushed interest rates to a 16-year high.

 

The stock market sold down after Chairman Jerome Powell made it clear (again) that fighting inflation is the Fed's number one objective. Powell did hold out some hope that this hike could be the last, although that decision, he said, would be data-dependent and be decided from meeting to meeting. Nothing he said was concrete enough for investors to truly believe that a pause in rate hikes is in the offing.

 

The bulls were hoping that the meeting would either result in no interest hike or be a one-and-done event. Neither occurred, which has ramifications for the economy, employment, and the ongoing regional banking crisis. The banks lead the market declines and well they should.

 

Beginning in March, with the collapse of Silicon Valley Bank, the markets realized that the rapid rise in interest rates had created both a danger for many banks and an investment opportunity for the public. Main Street could now buy high-yielding U.S. Treasury bills and CDs instead of keeping their money in checking and saving accounts with little to no returns. I have written extensively on the subject in my columns over the last several weeks.

 

As the Fed continues to raise interest rates, the yield on these alternative investments also rises. The yield on a three-month U.S. Treasury bill, for example, rose from 5.10 percent to 5.25 percent the day after the Fed's interest rate hike. This has had a serious detrimental impact on banks overall and regional banks as more and more investors pull their deposits.

 

But that is not all. The $5.7 trillion commercial real estate sector (CRE) is also in trouble. Thanks to high-interest rates, the Pandemic, and the subsequent trend toward working from home, many urban centers are facing a historically high vacancy rate. It is so bad that many cities are considering converting empty office buildings into living spaces.  This trend is spreading across the nation.

 

Smaller regional banks hold 4.4 times more exposure to the U.S. CRE than larger banks, according to a recent report from JPMorgan Private Bank. Citigroup also found that banks represent 54 percent of the overall CRE market, with small lenders holding 70 percent of CRE loans. Between the drain on deposits, and now the risks in real estate, is it any wonder that the regional bank index has lost 34 percent of its value over the last month?

 

Within hours after the Fed hiked rates on Wednesday afternoon, the regional bank, PacWest, reported that it was considering strategic options including a sale. The bank's stock tumbled 60 percent on Thursday and took the regional bank index and the stock market down with it. Gold, silver, and Bitcoin (all areas I have featured in the last few months) spiked higher in a rush for safety with spot gold hitting a high of $2,085.

 

As I said last week, where the market would finish the week would depend on the Fed's decision on interest rates. In hindsight, Chairman Powell had it right. The non-farm payroll data released on Friday showed that 253,000 jobs were added in April. The unemployment rate dropped to 3.4 percent, while the expectation was that the rate would rise to 3.6 percent.  The Fed wants to see job gains fall, but they are going the other way.

 

The Fed needs to see the unemployment rate closer to 4-4.5  percent percent to reach its inflation target of 2 percent. We are nowhere near that level, so to me, the Fed's stance on monetary policy seems vindicated.

 

So where does all this bearishness indicate to me? For me, I think the markets will bounce back next week. We may even break the range we have been in for almost a month. That is a contrarian call, since most traders are what I called "beared up."

 

I believe we can still see my target on the S&P 500 Index of 4,325 give or take a few points. After that, likely in the second half of the month, I believe we will see a substantial pullback. Precious metals, on the other hand, are likely to now see a bout of profit-taking after a spectacular run.

 

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.

 

All eyes will be focused on May's Federal Open Market Committee meeting (FOMC) this week. Most investors are expecting another quarter-point interest rate increase, and there is an ongoing debate over the possibility of another one in June.

 

Some strategists believe that may be overkill. The fear is that the Fed could break something else if they do. Many already blame the Fed's rapid hiking of interest rates for the troubles within the regional bank area. The value of Silicon Valley Bank's U.S. Treasury bond holdings, for example, fell by billions of dollars as the Fed tightened monetary policy over the last year.

 

And the banking worries continue. This week, a large San Francisco-based bank, First Republic Bank, saw its stock lose 95 percent of its value. In announcing first-quarter earnings results, First Republic admitted that it had lost more than $100 billion in deposits in the first quarter.

 

The collapse of SVP and Signature Bank had prompted a run on its deposits as well. Last month, in a bid to stabilize the bank, a group of 11 big banks deposited $30 billion with the beleaguered institution hoping it would solve the problem. Those hopes have been dashed.

 

First Republic's main business is making large mortgages at low rates to well-heeled borrowers. As such, the bank is buried under a mountain of mispriced loans as interest rates have spiked higher over the last 12 months. To raise cash, they would have to sell off those loans to others at substantial losses, which would only hasten its collapse. U.S. officials are coordinating urgent talks with private-sector banks to come to the rescue. If a deal isn't struck soon the fate of First Republic seems dire at best.

 

In any case, it is not hard to understand why the fear of breaking something else is quite real right now. This week, the Fed will likely raise rates again. As interest rates continue to rise, no one knows how exposed other entities in the financial sector might be. It has put the Fed in between a rock and a hard place.

 

Inflation has not come down far enough to convince the Fed to ease its monetary stance. The most recent Personal Consumption Expenditures Index (PCE), which is the Fed's favorite inflation measure, came in as expected, just a bit cooler. In the past, the Fed has made the mistake of easing prematurely, only to raise rates again as inflation reversed and climbed higher. Better be sure, than sorry would about sum up the Fed's policy right now. 

 

But being sure raises the risks of breaking something, which could have a severe impact on the economy or parts of it like the financial sector. The U.S. economy grew at only a 1.1 percent rate in the first quarter. That was far below the consensus forecasts of 1.9 percent. In the previous two quarters, the economy grew at 2.9 percent and 3.2 percent respectively. It seems clear that the Fed's actions are having the desired effect but is it enough to even pause their rate hikes? That is the question investors are asking.

 

So far, the Fed has assured us that they have the tools to handle both the problems in the regional bank area, as well as the inflation threat. Some think that kind of thinking smacks of overconfidence. One additional issue that is raising its ugly head is the potential summer debt crisis in Washington.

 

The Republican-ruled House has passed a debt reduction package that, if passed, would make deep inroads into the Biden Administration's spending programs. That is their price for increasing the debt limit. The proposal is deemed dead on arrival by the Democrat-held Senate, however. As I have written in the past, in my opinion, the entire issue is simply political theater, with the fate of the nation's credit at risk.

 

If history is any guide, the closer we come to the cliff of default, the more both the bond and equity markets will come unglued. It might require actions by the Fed to calm markets and ensure orderly markets. That could disrupt the central bank’s tightening plans in the months ahead.

 

Marketwise, the volatility I expected last week has kept the indexes in a trading range. We ended the week a little above where we started. First quarter earnings results so far were better than expected. A handful of large-cap companies (Microsoft, Meta, Google, and Amazon) delivered more positive results than negative. The coming week will be all about the FOMC meeting on Wednesday and Apple results on Thursday. The chop should continue, but I am still looking for higher in the short term.