@theMarket: Choppy markets are set to continue

Every new headline sends markets this way, with traders caught between a rock and a hard place. Geopolitics, tariffs, and economic data need to play out over the next two weeks before a clear direction unfolds.

 

The Iran/Isreal conflict remains in the shooting stage, with both countries rapidly depleting their store of missiles and air defenses. It seems the TACO (Trump always chickens out) trade can also be applied to warfare. Markets fell as President Trump talked tough, threatening Iran with bunker-busting bombs unless the country surrendered unconditionally.

 

Two days later, on Thursday, while the markets were closed, he announced that he was giving peace a chance. He said he would take two weeks to decide on his next course of action. That gives Iran time to find a diplomatic off-ramp to appease the U.S. on its demand to end its nuclear weapons program. Israel, on the other hand, is moving forward with its attacks on Iran's nuclear facilities despite Trump's decision.

 

The oil and gas markets are fluctuating by several percentage points per day. The dollar has also been climbing, while the traditional go-to safe-haven trade of gold is not working at all. Gold, throughout most of this conflict, has been falling while silver has skyrocketed. This is confounding traders, since the opposite is typically expected in times of geopolitical stress.

 

Cryptocurrencies are experiencing a similar decline to gold, which is no surprise. This underscores the argument that digital currencies are not a safe haven but rather speculative assets with a high correlation to equity markets.

 

The Federal Open Market Committee meeting this week, as predicted, decided to sit tight and see what develops. While some investors were miffed that the Fed did not cut interest rates (as President Trump had suggested), most investors were not surprised. Chairman Jerome Powell made it clear that he needed to see how the upcoming tariffs would impact the economy and inflation.

 

Readers are aware that I am in the stagflation camp. I anticipate inflation will rise throughout the end of the year, accompanied by a slowing economy. That puts the Fed in a box where they are damned if they do, damned if they don't.  Cutting interest rates would heighten inflation, but hiking rates would risk tipping the economy into recession. Sitting on their hands and watching how Trump's tariff and tax bill plays out is the only safe course available to them.

 

And speaking of tariffs,  where are all these deals we were promised? Only one has been inked, and that is with Great Britain, where the U.S. has a trade surplus!  How many times must we be assured they are coming in a week or two?

 

In an interesting progression, investors face a series of make-or-break events divided into roughly two-week increments between now and the middle of July. The decision on Iran will come first, followed by the passage (or not) of the Big Beautiful Bill on or around July 4. That may turn out to be the Big Ugly Bill, depending on who you are, but its passage would be a big boost to stocks for at least a day or two.  And then, we have the implementation of reciprocal tariffs (or not) on July 9th. The market expects that TACO man will kick the can down the road for the second or third time. I am losing count.

 

So, where does that leave the markets? As I said, expect a chop fest. Last week, I narrowed my upside range for the markets based on the outbreak of war in the Middle East. Since then, the S&P 500 Index has gone nowhere. Next week, barring a cease-fire and peace between the two combatants, markets will continue to gyrate based on the latest headlines.

 

That leaves the market's range bound and probably short circuits my hope that we could reach 6,100-6,250 on the S&P 500 anytime soon. Now, don't take that as gospel because events could turn on a dime, propelling stocks higher. I just think that the probability of reaching my former targets has lessened. In July, however, I do expect we will be cruising for a bruising that could pull that average down by 400 points or so. 

 

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.