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@theMarket: New Quarter, New Market

By Bill Schmick
iBerkshires Columnist
As traders and institutions put to bed the first quarter, several concerns loom large in the weeks ahead. How things play out over that time period will have important implications for the averages, given that they are not far from their all-time, historical highs.
 
What will the Fed do in May? Will Washington pursue tax cuts and if so, will there be opposition?  What will first quarter earnings look like and how will markets react to all of the above? Let's look in my crystal ball, shall we?
 
Wall Street analysts expect corporate earnings to be higher by as much as 10-11 percent. That would be a big change from the recent past, where dismal guidance and feeble results have been the name of the game. If the numbers match or beat expectations, that could be good for stocks.
 
Next up, the central bank, what are its intentions between now and June? The betting is that there is little chance that the Fed will raise rates again between now and then. If so, chalk up another positive for the markets.
 
Then there is the Washington wild card where all sorts of things could go right or wrong, depending on a fractured Republican party and a mercurial administration. Last week's debacle, centered on the belly flop that was the House's attempt to "repeal and replace" Obamacare has set people thinking and worrying about the future.
 
I'm thinking that we may still need a few more days/weeks of consolidation before markets begin to climb. We have already brushed my first downside target for the S&P 500 Index at 2,323. Many times markets will re-test the lows before traders are satisfied that "the bottom is in," so don't be surprised if that occurs. As I have written before, this congestion is a good thing.
 
It's about time some sanity returned to the markets. Investors were way too optimistic about the extent and timing of Donald Trump's campaign promises. By the price action, one would have expected that all the things Trump promised would be delivered in his first 100 days. No never mind that he never said that, or event hinted that would occur.
 
Remember, however, that the short-term swings in the stock market are no longer controlled by human "thinkers and doers." While the "thinkers" appear gone forever, the "doers" are still around — in the form of superfast computers and algorithmic software programs. These robots account for over seventy percent of the daily volume spewing out thousands of buy and sell orders at the simple mention of a word or topic.
 
"Trump tweets health-care reform" or "House fails to pass" is all that is necessary to tack on (or off) a percentage or more of value in any stock, index or market, anywhere in the world. In the last quarter, an avalanche of such comments kept the robots spewing out orders, the majority of which were buys. No never mind that little in substance was accomplished during that period.
 
Part of the problem lies with the president's method of communicating with the public. Neither Wall Street nor Main Street is familiar with this sort of governance. In the past, when the leader of the largest most powerful nation on earth, said something publically, it was taken as gospel. The assumption was that mountains of research, discussions and thought crafted every word and punctuation mark of a President's words.
 
As such, we could all rely on those words as sacrosanct. It was the way policy could be telegraphed not only to American citizens but to the world at large. In the case of investors, it sometimes signaled a change in direction that could be acted upon with the surety that, good or bad, that whatever the change, it was here to stay.
 
That is not how things are done under this president. Yet, few seem to recognize this. In my opinion, President Trump's tweets should be taken for what they are: simple "High Fives," messages meant to keep us in the loop, more hopes and dreams, than signed and sealed policy statements. It will also take time for our newbie president and a Congress that hasn't been in the majority since 2007, to figure that out as well. At some point, but not necessarily at the same time, traders and investors will hopefully stop reacting to tweets and wait instead for more substantive actions before pulling the trigger. Time and patience are the key words here.
 
Bill Schmick is registered as an investment advisor representative and portfolio manager with Berkshire Money Management (BMM), managing over $200 million for investors in the Berkshires.  Bill's forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquiries to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.
 
     

@theMarket: Fed Rate Hike Sets Stage For More

By Bill Schmick
iBerkshires Columnist

This week the Federal Reserve hiked interest rates again. That's two times in as many quarters. Back in the day, the markets would have swooned. This week they did the opposite. What gives?

The short answer is investors believe both the economy and inflation are beginning to accelerate, so the Fed has every right to reduce the gas and ease its foot off the monetary pedal. There is, after all, no need to keep interest rates at historically low levels at this point.

That's good news, after buoying both the economy and the financial markets through several years of anemic growth and worries over deflation. It is one explanation for why the stock market has climbed to record highs. Another would be that with Donald Trump in the White House and Republicans a majority in Congress, most investors believe only good things are ahead of us on the economic front.

So tell me something I didn't know. Well, for starters these interest rate rises (with more to come) signal a new economic era in this country and possibly the world. After a race to the bottom in bond yields worldwide, our central bank has now reversed course. It is only a matter of time, I believe, before the rest of the world's central bankers follow suit.

Historically, rising interest rates have provided headwinds for the stock markets. Looking back, about the best that can be said was that stocks do OK for the first two years in a rising rate environment, as long as interest rates rise gradually and each rise is moderate. Call it the "goldilocks" version of the economy where higher rates are offset by greater growth and moderate inflation.

Over time, even that scenario usually comes unglued as economies begin to overheat; inflation climbs and bankers need to become even more hawkish to subdue these animal spirits. Normally, the result of this rate rising is a recession, sometimes mild, sometimes not, depending on how well a central bank can predict the economic future.

At this point, you may realize that managing an economy as large as ours (no never mind managing all the world's economies) is definitely an art and not a science. In times past, central bankers have gotten it very wrong (and sometimes right), but not without a lot of luck thrown in for good measure.

Why the lesson on rising rates? Because from here on out the main risk to the economy and the stock market is not Donald Trump. It is interest rates. Thanks to the Fed, we avoided another Great Depression eight years ago. Since then, with no help from the Federal government, they have single-handedly steered the economy back to a recovery. There is no reason to doubt their abilities.

But Janet Yellen would be the first to admit that she and her board of governors are not infallible. They are feeling their way through this process of normalization. That's financial-speak for disengaging from an overly heavy hand on the economic throttle. It is a process of turning over some of the responsibilities for economic growth to both the free markets and, hopefully, a more responsive government.

So far the markets approve of the way the Fed has handled the first two rate hikes. But it is early days. We have at least two more such hikes waiting in the wings this year. The risk is that there may be more, or that the size of each hike grows. Let's hope that they get it right.

Bill Schmick is registered as an investment advisor representative and portfolio manager with Berkshire Money Management (BMM), managing over $200 million for investors in the Berkshires.  Bill's forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquiries to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.
     

@theMarket: Mushy Markets in March

By Bill Schmick
iBerkshires Columnist
Investors took a break this week from the ongoing Trump rally, even as the pace of change in Washington seems to be accelerating. Both the financial downside and political upside should be positive for your investment portfolio overtime.
 
The minor consolidation I have been expecting in the stock market began this week. The averages have pulled back a little, but the S&P 500 Index, for example, has lost less than one percent from its all-time highs. That's not exactly the end of the world ...
 
I see a meandering two steps back, one step forward, kind of market with the downside risk somewhere between 2,300 and 2,330 on the S&P 500 Index. That would equate to about a 4 percent move. As pullbacks go, that would be minor and necessary given the stupendous gains we've seen since November. 
 
Some readers, mostly Trump-haters,(and there are a lot of them in this neck of the woods) have asked why I am so positive on the markets right now. It's simple: hope is a powerful motivator for stock market investors. So far, that hope has been justified. 
 
The repeal of Obamacare was one of the new president's major campaign pledges. This week, Congress began work on repealing and replacing the Affordable Care Act (see yesterday's column "America's Road Toward Universal Health Care.")
 
Not bad, for a president who has only been in office for 49 days.
 
His trillion-dollar infrastructure project campaign pledge was this week's focus in the Oval Office. Work is also progressing on federal cost-cutting, while regulation after regulation is coming under scrutiny from cabinet members/businessmen who, by their very nature, hate waste and inefficiency. 
 
Bottom line, this guy is not only doing what he promised to do in the campaign, but he appears to be doing it with a single-minded purpose. So those who can be at least neutral about this president, (a hard place to be in this divided and polarized nation) he gets an "A" for effort.
 
Friday's non-farm payroll report, the first employment data that can be attributed to the Trump administration, came in much better than expected — 227,000 jobs versus an expected 175,000 gains. It appears that more than just stock market investors are hoping for a better environment. American small-business owners, who are responsible for the lion's share of U.S. employment, are among those who hope for a better business climate under Trump.
 
The question will be whether that employment number will convince the central bank to raise short-term interest rates next week. Although the headline numbers look great, the Fed usually looks at details such as whether wages also rose. They didn't. The economy, meantime, is still not growing at an accelerated pace. The Atlanta Fed actually reduced its first quarter GDP growth rate from 1.3 percent to 1.2 percent this week.
 
The Fed Funds Futures market is telling us that bond traders are nearly certain that a rate hike will occur on March 15. I believe that at least part of the reason markets have turned mushy this week is in reaction to this event. Rising interest rates, no matter how small, concern investors greatly. I believe that rising interest rates, not Trump, are the main obstacle to further gains in the stock market this year.
 
But as long as central bank policy remains moderate, with small rate hikes, spaced widely apart, the stock market can adjust and continue to climb. If, however, the Fed becomes more aggressive, for whatever the reason, then all bets are off.  
 
Bill Schmick is registered as an investment advisor representative and portfolio manager with Berkshire Money Management (BMM), managing over $200 million for investors in the Berkshires.  Bill's forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquiries to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.
     

@theMarket: Markets Are Priced for Perfection

By Bill Schmick
iBerkshires Columnist

What a week for stock investors! All the main averages and most of the minor indexes registered historic highs. No question, Donald Trump has been good for the markets. The question is when will investors begin to take profits?

Calling a top (or a bottom) in the markets is notoriously difficult. Granted, over the years I have been lucky and managed to catch a turn or two once or thrice. As readers know, once we hit 2,330 on the S&P 500 Index, I expected and still do expect some profit-taking. That doesn't mean you should panic nor do anything more than raise a little cash.

My strategy is to re-employ that cash as we pull back. The timing of such a move is always more of an art than a science. Think of it as a process. Sell a little today, a little more tomorrow, and so on. I'm not looking for a big pullback, maybe 4-5 percent. After the market declines, use the same kind of technique to buy back stock. But don't go overboard because I believe the Trump Rally still has legs.

What, you might ask, has our new president accomplished in order to justify this ongoing rally? Well, aside from a flurry of executive orders that have reversed some of the prior president's executive orders, not very much. But it is what he has promised that has investors drinking the Kool-Aid.  

The litany of tax cuts, infrastructure spending, Obamacare overhaul and an end to onerous rules and regulations has given investors hope. Analysts and pundits are fueling those feelings by drawing up all sorts of "what-if" scenarios that promise good days ahead.

Material, building, construction and defense sectors have skyrocketed in price because of promises of increased defense and infrastructure spending. Forecasters see a big jump in corporate earnings if taxes are cut. As for the impact of less regulation, that is expected to have a beneficial impact on business spending and capital investments.

If the election was about "Making America Great Again" why are overseas markets going up as well? Wasn't President Trump going to launch devastating trade wars with the rest of the world, sending us all down the drain? Others were/are sure that World War III is right around the corner, now that there is a "wild man" in the White House. Yet, global stock markets are going up as well.

One explanation may be that overseas players believe Trump's bark is nowhere near his bite. So far that has proven to be the case. Others are taking heart, hoping that his example will lead to changes in their own countries. One could argue that Brexit began a populist movement worldwide that rejected the status quo, the rule of the few over the many and a revival of capitalism. A case in point is the rise of yet another Trump-like politician in France, where Jean-Marine Le Pen, the far-right candidate of the National Front, looks set to gain even more popularity.

While all of this movement may be intoxicating to market participants, we need to see a little more beef before justifying the present levels of stock prices. I have no doubt that the new administration will get much of what they want done, but it will take time. The market has just gotten a little ahead of itself right now.

Bill Schmick is registered as an investment advisor representative and portfolio manager with Berkshire Money Management (BMM), managing over $200 million for investors in the Berkshires.  Bill's forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquiries to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.

     

@theMarket: Market Stalls at Record Highs

By Bill Schmick
iBerkshires Columnist

Stock market averages made another batch of new highs this week only to fall back in what may be buyer exhaustion. If the trend continues, investors may be looking at a 4-5 percent decline from here.

It is too early to tell, because one day does not make a trend. We could easily experience a rebound next week, but I would still consider the present levels of most indexes ripe for a fall. My column last week pointed out that we are now in a "danger zone." Sure, the markets could continue to grind higher but every additional point just sets us up for an overdue correction.

Since all eyes and ears are on Washington, progress on President Trump's agenda is dictating where the markets will trade. Every television appearance and tweet by President Trump simply adds to investor expectations. At this point, investors expect that tax cuts, a wholesale revamp of rules and regulations, plus a multitrillion-dollar infrastructure spending plan is just around the corner. It is not.

For those of us who understand the pace of reform in the nation's capital, it would be best to take a longer-term approach to Trump's agenda. It appears, for example, that health care will be the first area our legislatures will be addressing this year. That does not mean that one day soon Congress will vote on a soup-to-nuts replacement of the Affordable Care Act.

Instead, expect to see a flurry of piecemeal changes over the course of many months. Lawmakers will attempt to address the failings of the present health system without disrupting those who are already members of the Obamacare insurance scheme. That will not be an easy task.

Steve Mnuchin, the new secretary of the Treasury, tempered investors' expectations this week that tax reform would also be a done deal any day now. Instead, he promised "significant" tax reform before the congressional August recess. In my opinion, that is still a wildly optimistic deadline for something that has been talked about, but not acted upon, for many years. And yet, naïve investors were disappointed by the new time frame.

Prospects for infrastructure spending, another of the president's policy initiatives, appears to be fading into sometime next year. That is understandable, given the need to balance the desire to get Americans back to work again with the impact that spending will have on an already-bloated deficit.  

Of course, the problem with that kind of disappointing news is investors have already bid up material, commodity and building stocks to outrageous price levels over the past two months. Given that market participants today are notoriously short-term in outlook, there is a risk that speculators will dump these stocks now and revisit them later (hopefully at a lower price).

And if they do, what's to stop traders from taking down the entire market simply because there may be a time delay between investor expectations and the implementation of Trump's agenda? You can see the risk, and it is one reason that I have turned cautious in the short-term.

Do I believe, like some, that Donald Trump won't be able to pull off his program? No, I don't, but I am realistic about the time required to accomplish his goals. There may simply be a disconnect between what investors are expecting and what I believe can be accomplished in the short-term.

Bill Schmick is registered as an investment advisor representative and portfolio manager with Berkshire Money Management (BMM), managing over $200 million for investors in the Berkshires.  Bill's forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquiries to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.

     
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Bill Schmick is registered as an investment advisor representative and portfolio manager with Berkshire Money Management (BMM), managing over $200 million for investors in the Berkshires. Bill’s forecasts and opinions are purely his own and do not necessarily represent the views of BMM. None of his commentary is or should be considered investment advice. Anyone seeking individualized investment advice should contact a qualified investment adviser. None of the information presented in this article is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM. Direct your inquiries to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com Visit www.afewdollarsmore.com for more of Bill’s insights.

 

 

 



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