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.

For more than a year, consumers have been contending with higher food prices. The latest read of April's Consumer Price Index, however, gave some hope that relief may be around the corner.

 

Headline inflation rose 0.4 percent last month but a look under the hood revealed that the "food at home index" declined. This was the second month in a row that prices for fruit, vegetables, meat, and eggs among other items, fell.

 

That may be so, but I certainly am not seeing those price declines in my shopping bill. Let's take eggs for example. You may remember that in December 2022, we were paying as much as $5.46 on average for a dozen eggs. The culprit behind those soaring prices was a historic outbreak of avian influenza or bird flu that coincided with the winter holidays. The epidemic killed millions of egg-laying hens. Since then, influenza has subsided and there have been no new cases detected at commercial farms since December 2022.

 

The industry has bounced back since then and as it has the price of wholesale eggs has fallen. At the end of April, the benchmark Midwest Large White Egg price has fallen to $1.22 per dozen. That is a 78 percent decrease in five months. Some produce analysts expect we could soon see egg prices dip further to below $1 a dozen.

 

The average consumer paid $3.45 for a dozen large Grade A eggs last quarter, according to government data. That is down from January's $4.82, but still more than double the $2.05 the prior year.

 

While this may be good news for some consumers, a trip to my local supermarket tells me retailers have certainly not passed on those price savings to customers. Retailers can sell their eggs at whatever the market will bear. Here in the Berkshires, we are way above the so-called "average" egg prices. At Price Chopper, for example, a dozen cage-free Grade A large eggs are going for $5.39 a dozen, while organic eggs are $8.99. That is a markup of 441 percent and 736 percent.

 

I know there are other costs that retailers need to cover — transportation, labor, etc. — and there is always a lag effect between a decline in wholesale prices and the price we pay at the check-out counter. We could see price cuts in the months ahead for eggs and other products but the jury is still out when it comes to beef.

 

Beef prices remain in the stratosphere. There are reasons for this situation. A continuous and extreme series of droughts in the U.S. in recent years has made maintaining cattle herds expensive or, in many cases, impossible to maintain. Herds (including breeding cows) were slaughtered, which has resulted in a growing scarcity of beef products. This year will be the first significant drop in beef production since 2015. Less beef supply usually means higher prices if demand remains the same.

 

There is some evidence, however, that beef prices may have reached a level where consumers are beginning to cut back on their beef purchases. Tyson Foods, which processes 20 percent of the nation's beef, poultry, and pork, saw its first fiscal quarter net income drop more than 70 percent based on weaker results in all three of those product areas. Analysts believe some consumers are substituting more chicken and pork for beef in their diets. Tyson was caught between higher live cattle prices and less consumer demand and was forced to reduce prices somewhat. Will this trend continue?

 

That remains to be seen. Demand for beef usually picks up about now (during the grilling season), so this summer will be key to determining the consumers' appetite for continued purchases of high-priced hamburgers and steak. If so, we can expect meat processors and retailers to charge even higher prices in the fall and winter for meat. However, if the economy begins to slow, consumers might cut back even more on their spending across the board and that could keep beef prices flat or even slightly lower.

 

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.

Nationwide, rents have been climbing since the pandemic, but it is still cheaper to rent than to buy in most of the country. As such, in some states, building houses-to-rent is becoming a trend.

 

Home prices continue to soar with the median sale price of a U.S. home gaining 32 percent in the first quarter of this year from the same time in 2020. Throw in the climb in mortgage interest rates and there is no wonder that a record number of Americans believe it is a terrible time to buy a house, according to a Gallup survey. Renting seems to be the only alternative.

 

But the unfortunate fact is that rents are growing faster than incomes in the U.S. The trend began two years ago and is gaining steam. The reasons are simple. As the pandemic abated, the number of U.S. households grew by 1.48 million. Young adults, who had been sheltering with their parents at record numbers, began moving out and finding their places. Unfortunately, a soaring housing market locked out many of these would-be first-time home buyers.

 

That has forced many to rent while waiting for interest rates and housing prices to decline. At the same time, many local governments and management companies that had limited rent increases during the pandemic began lifting those rent controls. As a result, landlords are jacking up rents to make up for two-plus years of rent freezes just as the demand for rentals has increased.

 

In addition, the trend toward working from home opened opportunities for white-collar workers to move from pricey locations to more affordable areas. That wealthier demographic trend has driven rental prices higher in areas where there was not enough inventory to satisfy this influx of demand.       

 

In the first quarter of 2023, the average renter, according to Moody's Analytics, needs to spend almost 30 percent of their monthly income on monthly rentals. That sounds like a lot, and it is, but that number is down from last year's historical peak when the rent-to-income ratio was higher than 30 percent.

 

Last year there were several urban centers where the burden of high rents was overwhelming incomes. As you might imagine, cities such as New York, Boston, Philadelphia, Houston, Palm Beach, Miami, Los Angles, and Northern New Jersey are experiencing rent increases that are above the typical mortgage payments.

 

Entrepreneurs in the building and construction industry are recognizing the opportunity in the rental markets. Their answer is build-to-rent (BTR) housing. BTR allows the renter to move into a brand-new home without the need for a huge down payment, or a long-term lease. In many cases, that rent includes amenities and professional property management.

 

In most cases, build-for-rent homes are clustered together and form a community like an apartment complex but not always. Depending on the locale, some communities consist of townhouses or cottages, or even detached family houses.

 

Builders like the concept, since the community projects can be put together in bulk and all at once. Construction can be accomplished faster and without checking in with the home buyer, who may have countless questions, changes, and thus delays. Potential landlords like them as well since each house is designed for efficiency, making repairs and maintenance easier.

 

There is a housing shortage in America. Experts believe the nation needs anywhere from 3 to 6 million more homes. Build-to-rent homes won't satisfy that demand overnight, if ever.

 

It is early days in the BTR market since there are only 115,000 units in the construction pipeline throughout the U.S. Arizona, North Carolina, and Texas lead the nation thus far in construction and many municipalities are still struggling with how to zone these communities. In 10 states there is no construction planned at all including Oregon, Massachusetts, and West Virginia, according to the National Rental Home Council. As rental prices continue to climb, however, so too will build-to-rent housing in my opinion and that is a good thing for both builders and renters.  

 

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 only thing that mattered to investors this week was the looming U.S. government debt default. Fortunately, the comments from major players in the debt talks have been largely encouraging. The devil, however, will be in the details.

 

The stated deadline for the passage of raising the debt ceiling is June 1, according to Janet Yellen of the U.S. Treasury Department. Some argue that it is a self-imposed deadline. Depending on several factors, including tax revenues, the U.S. might conceivably stretch its ability to pay its debt as far out as August, but that is no sure thing.

 

In any case, even if the two sides fail to agree on the details there is also the possibility of extending the debt ceiling limit a few weeks for the t's to be crossed and i's dotted. No one is talking about that yet, since Washington deadlines, artificial or otherwise, have the effect of galvanizing politicians to cross the finish line if at all possible.

 

House Speaker Kevin McCarthy said late last week that the House could vote on a debt ceiling deal as soon as this coming week. Both sides have gone out of their way to assure the public that a debt default is not on the table.

 

The discussions are continuing, and the negotiators are keeping the talking points close to the cuff and behind closed doors, which is another positive, in my opinion. The fact that McCarthy is talking directly to two of President Biden's most trusted negotiators is encouraging as well.

 

But every time one side or the other expresses something negative, markets react as they did on Friday when GOP Representative Garret Graves, who is leading negotiations for McCarthy, said "It’s time to press pause because it's just not productive." Market gains evaporated in seconds. Investors should expect more of this volatility next week.

 

Complicating the picture, however, is that both the House and Senate left town on Thursday and the Senate is not expected to be back in session until the last few days of May. There is also a danger that the hardline radical group of Republicans in the House could balk at any compromise hammered out by both sides.

 

In sum, while the markets are betting that a deal will be done on time, the danger is that it won't. If that were to occur, the downside in stocks could be considerable.  

 

The stock market, which has been stuck in a tight trading range for weeks (4,050-4,160), broke above that range and the S&P 500 Index vaulted above the 4,200 level this week. My upside target is still 4,325. Technology, semiconductors, and anything that remotely had something to do with artificial intelligence (AI) continued to lead the markets. 

 

Sectors that had been held back due to the risks associated with the debt ceiling found some strength while your typical safety trade areas such as precious metals, utilities, consumer staples, health care, etc. lost ground.

 

On the Fed front, there seems to be a crack in the monetary mantra that more interest rate hikes are on the way. Several Fed members seem to be advocating for a pause in the rate hikes, while others thought that we still needed at least one more hike. But none of them suggested that a rate cut was on the table any time soon.

 

In the coming week, all eyes will remain focused on Washington. President Biden plans to fly home early from the G7 meeting to shepherd the talks as the clock ticks closer to the deadline. If the politicians can keep control of the narrative and come to a deal, we could see my target met before the end of the month. If not, look out below.