Welcome to a new year of financial markets. But while the dates have changed, stocks continue to disappoint.

 

The S&P 500 Index has been caught in a range with the mid-point around the 3,800 level. Next week, we could see a minor break higher to the 3,920 level, but it probably won't last. That is because Wall Street experts are as confused as the rest of us. Forecasts for 2023 are all over the place with some strategists predicting an up year while others believe the declines of last year will continue.

 

The confusion stems from a variety of unknowns including the path of inflation, interest rates, and the economy overall. Currently, the markets are focused on the labor market, specifically job and wage growth. That is understandable given the Fed is also focusing on this area as a 'tell' on whether their tight money policy is working.

 

However, both wages and jobs data thus far seem unaffected by higher interest rates and the Fed's attempt to slow the economy. That may change soon since we are seeing more and more companies announce layoffs and other cost-cutting actions. Goldman Sachs, Salesforce, and Amazon, for example, announced layoffs this week.

 

This week's non-farm payroll report illustrates the confusion. The number of job gains in December surpassed expectations (223,000 jobs versus 200,000 expected) but the average hourly wage growth fell slightly (from 0.3 percent compared to 0.4 percent expected). The headline unemployment rate, which politicians tend to focus on, declined from 3.7 percent to 3.5 percent.

 

This is the second month in a row where wage gains fell while employment gained. This is the best of all worlds for the Fed's battle with inflation. If jobs continue to grow, but wage gains, which are a big component of future inflation, continue to decline that may give some hope to traders the Fed may not need to tighten as much this year.

 

The macroeconomic data continues to give conflicting signals on economic growth as well. Some sectors appear to be slowing, while others are continuing to grow at a reasonable pace. Most economists believe we will be entering a recession in the first half of the year but how deep and long is subject to endless debate.

 

Other smart people I follow believe we will see a series of rolling recessions among various sectors as the year progresses as opposed to a traditional decline in sectors throughout the economy. If so, any recession will likely be moderate as some areas continue to do well while others sink.

 

Over on the inflation front, the data appears to be indicating further price declines, but how much and how soon is unknown. While everyone has an opinion, no one knows for sure. In essence, both investors and the Fed are in a wait-and-see environment on how monetary policy will impact the economy in 2023. All this conflicting data has created what is called a "chop city" in the stock market where markets gain and lose from data point to data point sometimes on the same day or even hour.

 

Speaking of the market, the other area that will surely impact stock prices will be fourth-quarter corporate earnings, which are just around the corner (Friday, Jan. 13). Most analysts believe that earnings estimates, and future guidance will be disappointing. If so, it will trigger further sell-offs in stocks.

 

In the past, I have written that until the "generals" start to fall, stocks have a long way to go before this decline will be over. The good news is that has begun to happen. The bad news is that these top 5-6 stocks are destroying investors' portfolios and the market with it. The FANG stocks, which had represented 24 percent of the major indexes, are seeing major declines but still represent 19 percent of the overall market. Names such as Tesla, Apple, Google, Microsoft, and Amazon are seeing unrelenting selling, followed by short-lived bounces that indicate to me substantial liquidation from both retail and institutional investors. For the markets to finally bottom these stocks must catch up or even exceed the losses sustained by many other growth stocks.

 

As readers are aware, my forecast over the last month was that the S&P 500 index would trade between 3,700-3,800 through December and into January. That has come to pass. This week's bullish sentiment reading of the AAII Sentiment Survey ranks among the 60 lowest in the survey's history. Bearish sentiment continues to build, which is no surprise given how negative many financial players feel about the markets. Still, as a contrarian indicator, that likely indicates we are due for a bounce soon.

 

I can see the markets rally into mid-next week if the dollar remains weaker, and interest rates remain stable. At that point, Thursday, Jan.12, the Consumer Price Index for December will be the focal point, followed by bank earnings on Friday. Those events could either goose markets higher or tear them down again.

 

Longer-term, I believe that we will see lower lows in February through March 2023 that could take the S&P 500 Index down to 3,200 or lower. Disappointing corporate earnings, a Fed that is unmoved by improving inflation rates, higher interest rates, and a stronger dollar will be the triggers for this. That's the bad news.

 

Sometime in March, however, I think the markets will bottom. We could see a substantial rally into the spring, and maybe even into the summer. I will flesh out that forecast as we go along so stay tuned.

 

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.

In 2022, 68 percent of the total wealth in the United States was owned by the top 10 percent of wage earners while the lowest 50  percent of workers accounted for just 3.2 percent of that wealth. The gap between the haves and the have-nots continues to widen.

 

I was brought up believing that hard work, determination, and pulling oneself up by your bootstraps could guarantee success in America. In my case, as the son of lower-middle-class parents, I have moved up a rung to solidly middle-class. Unfortunately, most Americans have not been able to even do that.

 

As most readers probably know, income and wealth inequality in the U.S. is wider than in almost every other developed country. There are many reasons for this and depending on your political persuasion you may agree or disagree with many of the causes. For example, the facts are that a large wealth and income gap exist across racial groups. Many economic experts explain this as a result of the nation's legacy of slavery and racist economic policies.

 

In addition, the globalization of trade over several decades resulted in shifting jobs and wages out of America and into counties such as China, India, and elsewhere. The failure of the U.S. public and private sectors to adapt to this sea change, as well as to accommodate a technological explosion that left many workers in the dust worsened these trends.

 

U.S. tax policies during this era increased inequality while reducing bargaining power among employees, and both gender and racial discrimination widened the gap further. The 2008 onset of the Financial Crisis, the slow and painful subsequent recovery, followed by the economic trauma of the COVID-19 pandemic simply made a bad situation infinitely worse.

 

COVID-19 and the U.S. reaction to its spread caused the largest spike in unemployment in modern history. Those hardest hit were low-wage workers. At the same time, a boom in the stock market and housing prices benefited the top 10 percent of American earners most of all.

 

Over the years, there have been those who argue that inequality is the wrong target. If everyone is doing better, everyone wins, while entrepreneurship benefits everyone, even if some benefit more than others. The focus, they argue, should be on poverty instead.

 

However, gaining traction requires economic mobility. We know that the percentage of Americans earning more than their parents continues to shrink. Overall economic mobility in the U.S. continues to fall behind most developing nations including Japan, Australia, Germany, France, and Canada.

 

Recently, the Wall Street Journal reports that "wage inequality may be starting to reverse." Over the past two years, stalled technological innovation, the trend toward remote work, and deglobalization have begun to erode some of the advantages of the top earners in the U.S. — at least for now. Labor shortages, aided and abetted by the government's immigration policies, are increasing wages for many in the labor force. It has also contributed to the recent rise in union activity, which is further boosting wages and fringe benefits.

 

However, job and wage growth happen to be in the crosshairs of the Fed's attempt to reduce inflation and slow the growth of the economy. If they succeed, the wages gain of the recent past may go up in smoke and with it a resumption of the long-term trend in inequality.

 

Through the years, I have expressed my worries over growing inequality and its potential threat to our political system. As more and more Americans feel trapped and lose faith in a system that favors a smaller and smaller minority, democracy suffers. The rise of populism and the attraction of authoritarian leaders both here and abroad, I believe, is a direct result of economic inequality. The wider the inequality gap, the less chance this nation has in overcoming its present partisan divide.

 

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 good news on the economy has been bad news for the stock market. That's been the name of the game for the last several months. This week, we had more of the same.

 

The third and final revision of the U.S. third-quarter 2022 Gross Domestic Product came out on Thursday, Dec. 22. It was revised up to an annual rate of 3.2 percent from 2.9 percent. That's a sizable increase. The engine behind that growth was consumer spending and U.S. exports.

 

On the unemployment front, jobless claims for last week were roughly flat versus the previous week. That indicates that employment is still running hot. Neither of those data points gives the Fed any reason to relax its tightening schedule.

 

That was bad news for the stock market. All the main averages promptly declined between 2 percent-3 percent on Thursday. On Friday, the inflation index most watched by the Fed, the Personal Consumption Expenditures Price Index (PCE) for November, came in as expected (0.2 percent versus 0.3 percent in October), which the markets took in stride. 

 

Investors, however, are so skittish that every data point is an excuse to run markets up or down. As I have warned readers in the past, selecting one or two data points and extrapolating a trend from them is a dangerous game, but that is exactly what the markets are doing.

 

As a result, stocks are ricocheting up and down on each announced data point. This becomes even more ludicrous when you realize all this data is not only highly inaccurate but will undergo revisions that many times are the opposite of the original announcement.

 

The most important event of the week happened overseas earlier in the week when the Bank of Japan finally joined the world's central banks in dumping its loose monetary policy stance of the last few years. After keeping its 10-year Japanese government bond yield below 0 percent, surprised global investors by allowing that yield to move 50 basis points on either side of its zero percent target. That sparked a sell-off in bonds and stocks around the world while driving the yen up and the U.S. dollar down.  

 

Unfortunately, things are looking rocky for that Christmas rally promised by so many talking heads on Wall Street. Many investors believe that because a Santa rally has happened so often in the past that one is just about guaranteed this year. But thus far, I would call this week a Santa Claws event. The problem is that these rallies are often momentum-based, meaning markets already in an uptrend, continue to trend higher. That has not been the case this year. If anything, looking at the year's performance, the momentum has all been to the downside.

 

The AAII Sentiment Survey tracks the opinion of individual investors on where they think the market is going. It is often used as a contrary indicator. This week the index hit the highest level of bearishness among investors in nine weeks at 52.3 percent, while the number of bulls registered was a paltry 20.3 percent. The spread between bulls and bears is negative at minus-32 percent. The dour readings should give bulls some encouragement that at some point soon we may see another relief bounce.

 

I expect that we continue our journey down toward my 3,700-3,800 target on the S&P 500 Index. If we reach that level soon, we could see an up day or three during the upcoming, holiday-shortened week ahead. But whatever upside we may get should not be confused with the primary trend, which is down for the first quarter of 2023.

 

My advice is to set aside the market for the next three days, and instead, focus on family, friends, and loved ones. Merry Christmas and Happy Hanukkah.

 

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 Christmas arrives around the nation this weekend, tardy consumers are hitting the neighborhood Christmas tree lots and farms in droves. Late-coming artificial tree buyers are finding slim pickings at big-box stores as well. This is despite an average price increase this season of between 5 percent-15 percent.

 

Americans will spend nearly $6.6 billion on Christmas trees this season, according to the National Christmas Tree Association (NCTA). NCTA predicts consumers will pay an average of $86.59 for a live tree, and $122.60 for an artificial tree. Many shoppers could pay much more than that.

 

Last year, 75 percent of U.S. households, or 94 million homes, displayed a Christmas tree during the 2021 season, according to the American Christmas Tree Association (ACTA). This year, ACTA predicts Americans will purchase almost 21 million live trees, which is on par with last year's total. In addition, 6.5 million households displayed both live and artificial trees.

 

Supply chain issues had snarled artificial tree sales last year, so retailers ordered early this year and stocked up on inventory. It has turned out that they still sold out early in many locales.

 

As for living trees, there could be shortages of inventory depending on the region. In 2021, live tree farms were walloped by environmental conditions, which continued into this year. Wildfires, lack of irrigation, elevated temperatures, and drought were the main drivers of the loss of young Christmas trees in certain parts of the country. Experts expect climate change conditions will continue to bedevil farms in the future.

 

As a result, whether you choose a live or artificial tree this year expect to pay more. Nearly all of the 55 largest U.S. Christmas tree wholesalers are raising prices this year by as much as 5 percent-15 percent.  Some wholesalers intend to raise prices even more. But don't blame the Grinch, blame inflation — rising prices for diesel, fertilizers, and chemicals. Supply chain issues and labor have contributed to higher prices, in addition to the weather problems for live trees.

 

Despite the prices, and lack of selection, 85 percent of consumers found that Christmas trees are worth it, according to the Real Christmas Tree Board, an industry marketing and research firm based in Michigan. Who can blame them, especially when buying a real tree?

 

For many in society who have become increasingly aware of the environment, Christmas trees can be guilt-free. Just one acre of trees provides enough oxygen for 18 people every day. One Christmas tree alone can absorb one ton of CO2 during its lifetime and with over 350 million trees growing at any one time, the environmental benefits are enormous.

 

So are Christmas trees worth it? My answer is a resounding yes. Just sit back for a moment, close your eyes, and remember the scent of that blue spruce, Scotch pine, or Douglas fir in your living room or den. I can almost feel that sticky sap on the branch, as we hung that special ornament. How much is that worth?

 

And that's not all. Picking out the perfect tree, hauling it home in the car, or through the field, and then wrestling it through the front door has become one of those yearly family traditions most families cherish. The actual decoration of the tree, whether real or artificial, becomes a work of art that even the youngest of us gets to experience and create.

 

I would like to wish all my readers a happy holiday season, with or without a Christmas tree. Take some time off, cherish your family and friends and hug someone.   

 

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 OPI, Inc. or a solicitation to become a client of OPI. The reader should not assume that any strategies or specific investments discussed are employed, bought, sold, or held by OPI. Investments in securities are not insured, protected, or guaranteed and may result in loss of income and/or principal. This communication may include opinions and forward-looking statements, and we can give no assurance that such beliefs and expectations will prove to be correct. Investments in securities are not insured, protected, or guaranteed and may result in loss of income and/or principal. This communication may include opinions and forward-looking statements, and we can give no assurance that such beliefs and expectations will prove to be correct.

"Don't fight the Fed" is an oft-quoted market saying that has remained sage advice for the past decade or two. Recently, however, it appears investors are thumbing their noses at that advice.

 

This week, Fed Chairman Jerome Powell and his FOMC members released yet another warning that they see a long drawn-out battle with inflation that will last well into next year. Given the decline in bond yields and the rise in equity indexes, the financial markets appear to disagree. Who will turn out to be right has major implications for what happens to financial markets into the New Year.

 

The recent good news on the inflation front — lower monthly Personal Consumption Expenditures Price Index (PCE) and the Consumer Price Index (CPI) data — has convinced investors that inflation is on the run. The expectation that core inflation could fall as low as 2.6 percent by the end of 2023 is the bull case. They argue that global supply chain disruptions were the main cause of the inflation spike. That problem is disappearing quickly and as it does, so will inflation.

 

If so, inflation could fall to the Fed's target rate of 2 percent within the next 12 months. Some investors believe that the Fed will not only need to back off from raising rates but likely begin to cut interest rates to avert a serious recession. As such, the bulls have been bidding up stocks and buying bonds.

 

The Fed is on the opposite end of the spectrum. Chair Powell has remarked on several occasions that headline inflation, as represented by the Producer Price Index and the Consumer Price Index, is not a good indication of the true rate of inflation. Why?

 

It is because energy, durable goods, and shelter are three areas heavily represented in those indexes and are strongly influenced by supply chain disruptions. The Fed is looking more at variables like service prices, which are labor-intensive, and have more to do with aggregate supply and demand. That puts employment squarely in the central bank's cross hairs and they see little in the way of a slowing down in job growth.

 

Despite two monthly declines in the rate of inflation as represented by the CPI, the Fed has raised its forecast for inflation next year to 3.1 percent, and its core inflation (ex-food and energy) forecast to 3.5 percent from 3.1 percent.

 

The Fed also sees meager growth in GDP (plus-0.5 percent), while many economists had been predicting at least a moderate recession beginning in either the first or second quarter of 2023. Now, it appears that there is a growing consensus among a group of bulls who think a mild recession at most will reduce the inflation rate quickly as supply chains continue to recover and expand.

 

There are a couple of flies in that ointment, from my perspective. Even if inflation was solely the result of supply chain disruptions, why are the bulls so sure that supply chain problems will disappear, never to return?

 

China, the main cause of those disruptions, is giving up its zero COVID-19 policies, but as a result, the infection rate among the Chinese population is skyrocketing with a real possibility that supply chains may come under pressure once again. Our own country is not immune to another resurgence of COVID and possible supply chain issues.

 

Omicron BQ, and XBB, are COVID subvariants that are currently causing 72 percent of new infections in the U.S. They are the most immune evasive variants of COVID-19 thus far. Present vaccines and boosters are "barely susceptible" to neutralizing the disease, according to the U.S. Centers for Disease Control. The holiday season might usher in a big spike in infections with all the lost productivity that could entail.  

 

In my opinion, it seems far too early to claim victory on the inflation, interest rate, and growth front. The disappointing FOMC meeting this week may convince investors that stocks are ahead of themselves. We have not been able to break the top end of my target range (4,000-4,100) thus far on the S&P 500 Index. "Don't fight the Fed" seems good advice to me.

 

I am sticking with my cautious forecast and believe that the markets need to pull back to test the 3,700-3,800 level on the S&P 500.

 

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.