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@theMarket: Equities Struggle as Oil And Bond Yields Continue to Pressure Stock Prices
One look at the U.S. dollar's continued climb should tell you all you need to know about the war, inflation, bond prices, and the present gloomy sentiment of most Americans. What strikes me most is how little confidence any of us have in the U.S. economy. And yet, the S&P 500 Index hovers just below all-time highs while technology makes new highs.
As we enter the last quarter of 2026, a long calendar of market-moving events lies before us. Foremost on that pile is what, if anything, Iran will do to disrupt the midterm elections. They have already made substantial progress, if the polls are any guide. Despite the administration's best efforts, oil prices (think diesel and gasoline) remain at uncomfortable levels.
This is despite news reports that oil is now flowing at pre-war levels out of the Middle East. Between new routes, more tankers with Navy escorts passing through existing waterways, and fewer military incidents, oil flow is recovering. Why, you might ask, isn't that good news reflected in a deeper pullback in oil prices?
One reason is that it costs more to deliver energy to its destination. Longer waterways, ship-to-ship transfers, pipelines, and trucks rather than tankers add extra costs. Pre-war, those costs were around $4 a barrel. Today, the same quantity of oil costs more than $18 a barrel.
In addition, global traders are maintaining a hefty war premium on energy prices between now and after the elections. Even more so since a whole parcel of Marines and carriers are heading for the Gulf. Barring some real breakthrough between the parties (signed, sealed and delivered), we can expect higher prices at least until then.
There was some good news announced on Friday, thanks to the president's request that Europe and the G7 free up 120 million barrels of diesel fuel and oil. The G7 has agreed to release 100 million barrels of both from storage on Friday. That has sent diesel prices down, at least temporarily, and oil prices fell by 3.1 percent to below $90 a barrel on the news.
During the week, higher inflation expectations pushed bond yields higher. The government's 30-year bond was above 5.65 percent, and the 30-year mortgage rates are now over 7.28 percent. The benchmark U.S. Ten-year Treasury had surpassed 5.30 percent, a level where many traders expected a "top" in yields. They were right.
Trump's pre-election moves to lower fuel prices, combined with a weaker non-farm jobs report, created the perfect storm to force the bond vigilantes to cover their bond shorts. The last indication I saw for the yield on the 10-year Treasury was just below 5.25 percent. That is a big move in the bond world! You have to hand it to Trump, Bessent, and Warsh; they know how to engineer the results they want in the financial markets.
Kudos to Kevin Warsh for this week's Personal Consumption Expenditures (PCE) Index, the Fed's No. 1 inflation indicator. PCE inflation dropped to 3.4 percent, its lowest level in six months. Most of the good news came from a change in how the index is calculated. Prices for software, some accessories, and money management fees were pared back to give a more "accurate" reading.
Readers may recall I wrote about these expected changes, which were instituted by Stephen Miran, former chief of Trump's Council of Economic Advisers, who resigned to join the Fed as a Trump appointee. My prediction that his work would be released and provide a better read on inflation before the election proved accurate.
The non-farm payroll report for September released on Friday (leaked overnight) was weaker than expected. The economy added only 29,000 jobs (88,000 expected), and August's upside surprise of 162,000 was revised to 133,000 jobs. Weaker job numbers mean less chance the Fed hikes rates in October, which means higher stock markets.
However, I warned readers more than a month ago not to trust government-released statistical data. I expect more of the same as government data becomes more politicized. I wouldn't be surprised if the next CPI and PPI data for September, released in the middle of this month, show an improvement. If so, discount it entirely.
As for the markets, the Nasdaq is clearly supporting the markets. Outside of the AI trade, most stocks have been falling. Readers know I had been cautious from August into September. During that time, the equal-weight S&P 500 was down 6.6 percent, while the S&P was flat, the small-cap Russell 2000 lost 8.9 percent, the Dow fell 6.6 percent, and the Transports fell 15 percent. The Nasdaq, however, was up 2.5 percent. Friday's bounce saved the averages from going negative this week. However, Nasdaq gained almost 1 percent.
I expect that the administration will take out all the stops to keep markets supported between now and the midterms. See this week's maneuvers: hyping the president's "Super Intelligence" conference, easing diesel and oil prices, yields "topping," and economic data (PCE and jobs). Clearly, technology in general, and AI stocks in particular, will lead the charge 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.
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.
@theMarket: Bonds Are Breaking Bad But Equities Shrug It Off
PITTSFIELD, Mass. — Bond market volatility has thrown investors for a loop as yields across the board have risen to multi-year highs.
Oil prices are also gaining, forcing global central banks into a higher-for-longer interest rate posture. Equity investors simply yawn.
Thirty-year Treasuries hit 5.44 percent — a 20-year high. The 10-year registered 5.23 percent while shorter-term maturities all registered multi-year highs. Meanwhile, as diesel fuel broke $6.50 a gallon, Brent crude was above $106 a barrel, while U.S. WTI oil was trading above $94 a barrel.
And yet despite the backup in yields, the stock market finished the week with gains. On Monday, the Nasdaq hit a record high and finished the week up more than 1.5 percent. There was "talk" on Tuesday that Americans and Iranians would reach an agreement while meeting at the U.N. General Assembly's 81st session. Oil and gold prices fell; bond yields did as well.
And then came Wednesday. Let's start with the release of last month's Purchasing Managers Index (PMI) — both the Manufacturing and Services PMI were much better than expected, revealing rising demand and costs. The results signaled a stronger economy ahead but with rising costs.
This was followed in the early afternoon by a failed $70 billion, five-year Treasury auction. Buyers went on strike. To attract interest, the rate promised on the bonds had to be raised. Yields on existing bonds exploded higher and ended the day at 5 percent. It was the worst auction since 2018. This was followed by another ugly auction of the seven-year on Thursday, which pushed yields even higher.
Is it any wonder that during a talk at a housing conference, Federal Reserve Gov. Michael Barr was quoted as saying "more tightening will likely be needed." Several other Fed heads echoed those sentiments during the rest of the week. By Friday, the 10-year benchmark government bond was 5.21 percent, with most bond vigilantes eyeing 5.30 percent in the days ahead.
As for that peace deal, hope springs eternal over in the stock market. I am still dumbfounded that markets believe these White House peace-around-the-corner claims that bubble up every time the markets threaten to fall. The pullback in energy prices reversed by Wednesday.
The Iranians claim they want to return to the Memorandum of Understanding terms to negotiate some truce. That seems to be the extent of the three-hour meeting between Trump's son-in-law and the Iranian president. With the midterms around the corner, the administration appears desperate to at least hold the line on oil prices for the next few weeks. And oil is the key to the stock market.
The administration is working as hard as they can to keep stocks from falling before the election. They hope that people will vote with their pocketbook. In this case, with strong returns in their retirement accounts, more people will vote for the status quo than not.
In the case of a truce in the Middle East, it is up to whether Iran's real leaders, the cadre of hardline Revolutionary Guard bosses, are willing to play ball. Those bad guys were probably disappointed this week when the GOP-controlled Senate continued to rubber-stamp the president's war.
The Republicans narrowly defeated legislation which would have demanded an end to the war. Meanwhile, diesel prices continue to climb, hitting $6.52 a gallon. Diesel is actually above $8 in California. Nationwide, diesel powers almost everything that moves or is made.
By the time the smoke cleared on Friday, prediction markets priced in the probability of another rate hike in October and December at more than 60 percent. That puts the Fed between a rock and a hard place. If they raise rates, it will increase interest rates on the short end of the curve.
That is where the U.S. Treasury auctions offer most of our government fixed-income instruments to finance our increasing debt load. A rise in rates will cost us more in interest payments, which is the amount the nation pays to borrow money. If they don't raise rates, then inflation continues to accelerate.
The tremors from the climb in U.S. bond yields have reverberated around the globe, pushing bonds higher this week in Japan, Australia, and New Zealand. Europe has followed suit, with German, French, Italian, and Greek fixed income yields moving higher and higher.
So, with yields breaking bad, why is the equity side of the equation holding up so well? The S&P 500 Index is less than 1.5 percent away from all-time highs. But looks can be deceiving. Remember that the large mega-cap stocks, the AI hyperscalers, represent almost 40 percent of most equity indexes. Higher bond yields would least impact these companies because of their strong cash flow and prospects.
Under the hood, almost 70 percent of the S&P 500 constituents are already at least 10 percent below their 52-week highs and in correction territory. That amounts to the most extreme breadth divergence in 10 years. Rising yields hurt small businesses the most. The small cap Russell 2000 Index is where the carnage is occurring. That index is down more than 5 percent over the last month. The bulls argue that there is no cause for alarm.
The PMI data shows a growing economy thanks to the multi-trillion-dollar expansion in investment capital fueled by AI. As such, rising interest rates are a natural function of a growing economy. All this investment is driving corporate earnings across the economy.
What does it matter if the borrowing rate moves up a percent or so when the payoff from AI investment in the years to come will be multiples of that cost? As long as AI continues to grow, the stock market will grow with it. So say the bulls.
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.
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.
@theMarket: Markets Cheer Fed Rate Hike
Yes, you read that right. For the first time in a long while, stocks celebrated what has historically been a reason to sell stocks the day after a rate hike. There are reasons why, and inflation is at the top of the list.
Historically, the S&P 500 Index has risen on only 35 percent of days when the Fed raises rates. The vote to raise rates was unanimous, with all 12 FOMC members voting to tighten. Fed Chair Kevin Warsh made it clear in his post-announcement remarks that he is not happy with the pace of the inflation fight.
The nation has been saddled with rising inflation for five years, and indications suggest the FOMC doesn't see inflation reaching its 2 percent target for another two years. Although he didn't say it, the market now believes this isn't a "one and done" hike. Most believe yesterday marked the start of a new interest rate hiking cycle.
The betting is that there will be at least two more hikes, if not more, in the months ahead. I looked back to find out how stocks behaved during similar cycles over the past 30 years. In the first several months, equities typically struggle for a few months before regaining their footing about 4 months later.
Two exceptions to this rule stand out. In 1997, the index gained 8 percent in the first two months as the dot-com boom began its climb. I see similar behavior today, thanks to the AI-driven environment. In March 2022, the opposite occurred, with the initial hike precipitating a negative period of more than 12 months and a 25 percent decline.
If I pull back and look at performance over the last century, the S&P 500 Index has risen during nearly every Fed rate-hike cycle, in eight of the last nine major tightening periods between 1971 and 2022.
If you have been reading my recent columns on the bond market, you know two issues were on the table going into this meeting. Would Trump-appointed Kevin Warsh bow to his boss and refuse to raise interest rates, casting the Fed's independence into doubt? And would a Fed interest rate hike further exacerbate climbing bond yields on the long end of the curve?
We now know the answer — no. It appears the president reconciled himself to his appointee's action because of a "very tough board," even though he insists U.S. interest rates should be 1 percent or less, according to his social media posts. That goes a long way to putting to bed the independence narrative.
As for yields, the benchmark 10-year Treasury bond yield fell from 5.01 to 4. 95 a day later. Whether that was due to a decline in oil prices or a little more confidence that the Fed was "doing something" about inflation remains to be seen. One day does not make a trend, but at least bond yields didn't go up (although by Friday the 10- year was back to 5 percent).
If there was ever a time to raise rates without risking negative repercussions to the jobs market and the economy, it is now. Both areas have proved strikingly resilient this year in Warsh's estimation. "Geopolitical developments," which is Warsh speak for the Iran War, have fueled a re-acceleration in inflation. This is driven by higher energy prices filtering through a broad range of consumer goods and services across the economy.
Given that inflation data will continue to accelerate through the next two months, I can see the narrative build among market participants that even more interest rate hikes will be necessary to quell inflation. That would be a mistake. It could result in the Fed tightening rates at a time when the economy begins to slow, thanks to a re-rating of the AI trade and the end of the administration's efforts to grow the economy before the midterm elections.
This week, the Fed's hike saved the stock market. Friday was a triple witching day when $7 trillion of options expire. I would discount any moves up or down in the market as a result since it is purely a bookkeeping event in the financial markets. Markets are balanced on a knife edge and next week could go either way depending on the path of oil prices, bond yields, and the Trump/XI summit.
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.
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.
@theMarket: Bonds Indicate Growing Dissatisfaction With Monetary & Fiscal Policy
While the stock market has declined only a few percentage points from its all-time highs, bond markets worldwide are reacting differently to higher oil prices, inflation, and government debt.
Japan's 10-year sovereign bond yield is almost at 3 percent, and the 30-year is above 4 percent. Australia's 3-year surged as much as 20 bps to 5.05 percent — it's highest since 2011 — and New Zealand's 2-year jumped 25 bps. Europe's yields are no different, but it is here in the U.S. that most concerns investors.
One could characterize the back up in bond yields and fall in bond prices across the globe as a buyers' strike from fixed income investors. Clearly, higher oil prices are part of the equation. Both WTI and Brent crude prices topped $100 a barrel this week.
Inflation, as I predicted, is moving higher, as reflected in the Producer Price Index (PPI), with the main culprit being August's increase in energy costs. Year over year, the PPI advanced 5.4 percent. The Consumer Price Index was not much better. It was a hotter number than most expected. As I have cautioned readers, that rebound in inflation will continue through at least September, if not longer. I can easily see inflation at 3.75 percent by the end of the fourth quarter.
We all know why oil is where it is, so I won't waste space recounting those facts. On top of that, the Trump administration's new and existing tariffs have driven up the price of everything — especially groceries. Diesel fuel, a major cost in transporting goods, is now above $6. This week, it didn't help that the president is promising $5,000 to every American if they deliver a GOP majority in both houses of Congress. That will add more than $1 trillion to our debt load.
This is at least the fourth time Trump has promised cash to Americans, and while the party faithful may believe him for a fifth time, few else will take him seriously. However, even suggesting it in the face of $40 trillion in national debt caused yet another spike in bond yields. The benchmark U.S. 10-year Treasury was above 4.93 percent while the 30-year hit 5.34 percent. Bond investors are clearly demanding higher real returns on their bond purchases, and they are getting them. Both the 10-year and 30-year auctions this week proved that. Given inflation forecasts, I expect more of the same.
So far, the U.S. Treasury Secretary Scott Bessent's attempt to rein in long-term bond yields has failed. At the same time, betting markets are wagering an 80 percent probability that the FOMC will raise rates after its Sept. 15-16 meeting. There is also a 90 percent chance that if not September, December will see a hike. That may happen, but I don't see how that will help the situation and may cause more problems in the months ahead.
Since the rise in inflation has been caused by the Iranian war, increased government spending, and higher tariffs, raising the short-term Fed funds interest rate will not address any of these issues. I suggest readers read my recent columns on bonds for further explanations.
At most, a Fed hike might reduce credit on the margin, which would impact AI, the very lifeblood of the equity market advance year to date. The AI revolution requires capital, and a hawkish move by the Fed will only curtail that borrowing (or at least make it more expensive).
Thus far, September is shaping up to be a difficult month for stock investors and certainly for those who hold bonds as I cautioned. This week the S&P 500 Index fell four days in a row only to bounce on Friday.
Life will get even more difficult if the Fed raises rates next week, but it is between a rock and a hard place. If they do nothing, bond vigilantes will likely keep dumping bonds because the Fed is sitting on its hands while inflation runs rampant.
If they do decide to hike rates, the stock market will most certainly take a real hit, as expectations for continued rises in equity earnings will need to be throttled back. The return of 7-plus percent mortgage rates will also not sit well with Main Street, nor will the fact that wages over the last six months have not kept pace with inflation.
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.
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.
@theMarket: Higher Bond Yields Keep Markets in Check
The continued concerns over oil prices, inflation, debt/deficit, and renewed hostilities in the Middle East kept a lid on equities in these last days of summer. Despite all the fear and loathing over higher long-term bond yields in the last week or two, the markets are only down a few percentage points from all-time highs.
As readers are aware, I have been cautious in August and September, although I would see any consolidation as a buying opportunity. That said, there are more than enough concerns plaguing the market at the moment to make anyone cautious.
Oil almost $90 a barrel again, a re-engaged, shooting war of sorts in the Middle East; bond yields at highs not seen in years; and, of course, the midterm elections, which are now only 60 days away. It is the last event that keeps me looking over my shoulder the most.
It bears repeating that during the last three midterm elections in 2014, 2018, and 2022, the S&P 500 fell more than 10 percent during either August or September. All three times the sell-off occurred during the third week of the month. That doesn't mean it will, but it might.
In the meantime, the U.S. Treasury will begin buying back bonds beginning today, Sept. 4. And like clockwork, the bond vigilantes pushed up yields on long-dated Treasury bonds until the middle of the week before taking profits yesterday. Stocks, precious metals and the dollar all fell as a result.
While the financial media wailed and gnashed their teeth at this predicament, bond traders (of which there are few dummies) prepared to take profits and cover their shorts. Why take the risk that Treasury Secretary Bessent orders his guys to step in and start buying bonds beginning Friday or over the weekend? For those who missed it, take a gander at my latest columns on the bond market for more background on the present situation in that world.
That brings us to Friday, and the results of the latest non-farm payrolls report for August. With earnings results mostly over, and most trading desks with a "do not disturb" poster on their computer screens this week, the number took on added importance. Even though everyone knows by now the number will be inaccurate and subject to large revisions.
The job gains for August were 162,000, much better than the 50,000 forecasted. Wow! What a surprise, good employment numbers just two months before elections! Markets took the number in stride even though it builds the case for an interest rate hike by the Fed. I am still doubtful that will happen, although the Fed probably sees what I see — higher inflation data in the future.
The announcement that the U.S. will purchase one-fifth of Venezuela's crude oil reserves through a private company run by a buddy of the country's dictator (with a checkered past) was no surprise to me. I guess it is better than just stealing 20 percent of their oil reserves.
Back in November of last year, in "The Return of Gunboat Diplomacy," I argued that President Trump had his eye on obtaining Venezuela's vast oil reserves as opposed to wanting regime change and the end of the non-existent smuggling of Fentanyl into the U.S.
I am ignoring all the social media posts about how this will bring down gas prices and refill the Strategic Petroleum Reserve (SPR) lickety-split. It won't. If you read my November column, you will understand that it will take years and many billions of dollars to repair Venezuela's energy infrastructure and further develop that country's oil reserves.
In addition, the crude coming out of Venezuela is heavy oil. Our SPR was built for light and medium crude. That's going to be a problem. Is the deal worth doing? Yes, and we will do it — provided both countries agree to cooperate over the coming decade.
We have had a difficult past with that country's leaders and their oil wealth for a long time. U.S. oil companies have pumped massive amounts of wealth and expertise into the Orinoco Basin only to see a series of expropriations, takeovers by the state, graft, bribes, and you name it. It's a risk, but that was the strategic objective of our gunboat diplomacy last year and could over time double our own oil reserves.
The three-day Labor Day weekend marks the end of Wall Street's summer. It would not surprise me to see a little government action in the days ahead to bolster bond prices, with yields hovering at the top of their range. On the energy front, the summer driving season is coming to an end. That may relieve some of the price pressure on gas prices.
As for the markets, they will still be there on Tuesday, so focus instead on relaxing, fun, and the family. Happy Labor Day.
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.
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.
