They say you can't keep a good market down. That is proving to be the case thus far in 2023. Every dip continues to be bought and the technical charts indicate there may be more upside ahead.

 

I was expecting that January's bounce in the averages would reverse in February. So far, I have been wrong. I did provide some caveats. For example, I recognized that my forecast had become the consensus view, and that made me uncomfortable. I also wrote back at the end of January that if the Fed moved into a more dovish stance "my prediction fails to materialize, and the market continues to grind higher, we could ultimately see 4,370 on the S&P 500 Index, which is another 300 points higher from here, before all is said and done."

 

The S&P 500 this month climbed as high as 4,195. Presently, profit-taking is relieving some of the overbought conditions in the short term. However, profit-taking becomes something more serious if we break 4,070. So far, we have held that level. 

 

The practice of buying dips is also back in vogue. In case after case during this earnings season, companies that reported disappointing results have seen their stocks fall at first, only to be bid up within hours or days. Markets overall are doing the same thing. Short, sharp selloffs are almost immediately followed by gains. The technology index is leading, while the largest gains in stocks are from those companies with little to no fundamentals.

 

For those who like to follow the technical charts of the markets, most technicians would say the indexes remain bullish. Targets for the S&P 500 Index vary, but in the short-term 4,200-4,300-plus seems to be entirely possible.  

 

In past columns, I have written that the options market is now the main mover of stocks. Investors can buy one option which gives the owner the right to buy or sell 100 shares of a stock for a limited period. Over the past several weeks, one-day options represent more than 60 percent of all options trades. In short, welcome to the casino.

 

Each day, speculators buy zero-day-to-expiration call (or put) options and profit from fast moves in a stock like Tesla. They then cash in by the end of trading on the same day. It has little to do with fundamental things like earnings and prospects for a company and it is certainly not an investment. How long can this practice continue — until something changes? Remember also that the implied leverage in options works both ways. Stocks can move down just as rapidly as they have moved up.

 

One of the chief macroeconomic drivers for the equity markets has been the decline in the U.S. dollar this year. Higher interest rates normally mean a strengthening currency. If interest rate yields remain stable or decline in the U.S. (as they have been doing lately), while other countries continue to raise their interest rates, then the dollar weakens. That is what has been happening now for several weeks.

 

Global currency traders are betting that the U.S. Central Bank is closer to pausing interest rate hikes in their program of tighter monetary policy. If the Fed doesn't cooperate with that assumption, the dollar could resume its rise. That would be bad for stocks. 

 

I still think the markets are getting ahead of themselves. If we do hit 4,300 or more on the S&P 500, we would be up 12 percent for the year. If you add in dividends, it is probably closer to 15 percent. The market would then be trading at 19.5 times earnings. That appears a little too expensive for me unless the bulls are right — the Fed pivots and begins to cut rates by this summer.

 

I am hearing just the opposite. Some Fed watchers are upping their target for the terminal interest rate the Fed is targeting from 5 percent to 6 percent. Some Fed officials are now hinting that might be necessary to get inflation down to their target 2 percent rate. If so, that flies in the face of investors' expectations that the fed won't be raising interest rates after their March meeting. No one knows for sure, which gives the markets a window of opportunity to continue to rally.  

 

My take is that if the technical charts are right, and the markets continue to rise, I am happy to go along for the ride, but I wouldn't be chasing stocks at this point.

 

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 of the silver linings of the pandemic was an explosion of startups throughout the nation. After a 40-year decline, entrepreneurship rose from the ashes, and contrary to expectations continues to thrive today. What is behind this trend?

 

In 2020, the early days of COVID-19, as unemployment skyrocketed and businesses shut down by the thousands, 4.3 million new business applications were filed, according to the U.S. Census Bureau. That was one million more than in 2019.

 

The following year (2021), 1.8 million companies were formed, which was a record. Last year, the numbers dropped a little to 1.7 million applications, but still up 28 percent from the pre-pandemic days. Funny enough, the worst event of the last 100 years, COVID-19, was the trigger for this economic renaissance.

 

The pandemic was an unparalleled global catastrophe. As such, some of those pandemic start-ups were born out of necessity. The U.S. unemployment rate hit double digits. More than 30,000 businesses shut down. Waves of unemployed, with no prospect of finding another job in the lockdowns that swept the nation, started a business simply to survive.

 

At the same time, a surge in migration out of the infected urban centers to more rural, less populous areas, resulted in a surge in business startups. At the same time, the trend in work-from-home exploded.

 

Professional and technical services were two of the top sectors where entrepreneurs staked a claim, accounting for 23 percent of the net increase in all startups, according to the Economic Innovation Group (EIG), a Washington-based think tank. Another area that blossomed was support services for the elderly and disabled, a demographic group that was devastated by the virus. That area experienced a 13 percent growth rate.

 

One of the reasons that galvanized entrepreneurs of every age to try their hand at a new business was a decline in the barriers to entry. It turned out that starting a new business on the internet, for example, was much easier than they were back in the Financial Crisis of 2008. Entrepreneurial neophytes planning business startups now have widely available broadband, even in many rural areas. There is also a much greater digital fluency in all things internet, and a mature and dynamic e-commerce marketplace. Those strengths make website creation, marketing, and online sales far easier to establish.

 

I should also give the government its due in its response to the economic fallout created by COVID-19. The Pandemic relief checks, for example, went a long way in providing the seed money for many of these new ventures. Of course, we now blame the government for spending too much during this period and igniting inflation, yet no one I know has offered to refund those checks to the federal government.

 

The question is whether the pandemic fallout has somehow reinvigorated the creative juices of all these modern-day Horatio Algers, or is this just a flash in the pan?

 

The relative steadiness in new business applications since 2020 indicates that this trend may be here to stay. When one looks at all sectors, rather than just those that were booming during the pandemic years, we find start-ups rising across most sectors. Only four out of 19 sectors, according to the Census Bureau, saw 2022 applications below pre-pandemic levels.

 

Across the nation, the southern United States experiencing the largest boom in startups, while the Northeast has the smallest. It is also encouraging that entrepreneurs were able to shake off the impact of a spike in inflation and threats of recession throughout last year. What we don't know is how many of these new businesses are simply part-time, side jobs earning a few bucks to supplement existing salaries.

 

As a guess, a survey conducted by Venture Forward, a multi-year research program from GoDaddy to quantify entrepreneurial activity, indicated that roughly 39 percent of micro business founders said their enterprise was a supplemental source of income. However, 67 percent of them would like to see their start-up become their full-time job.

 

The key to a flourishing future economy is greater economic dynamism. Those entrepreneurs that can flourish by providing new jobs, greater innovation, and productivity advancements could drive this nation's long-term growth. We could be on the verge of a much-needed shot in the arm from this group. I am betting on their success, how about you?

 

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 gains of January are extending into February. Leading the gains are those stocks that suffered the worst declines last year. Can this runaway breakout in the averages continue?

 

The critical trigger that could have broken the markets has come and gone. The Federal Open Market Committee occurred on Wednesday, ending with another quarter-point hike in the Fed funds rate. The bears were convinced that Fed Chairman Jerome Powell would come out swinging with a hawkish monologue. It didn't happen.

 

In the Q&A session, Powell kept to the line that another rate hike is probable, headway against inflation is encouraging, and the central bank is on track to achieve its monetary goals.

 

"We can now say, for the first time, that the disinflationary process has started. We can see that," Powell said in answer to a question.

 

That sentence was worth more than a one percent gain on the S&P 500 Index and more than 2 percent on the NASDAQ in the last hour of the day on Wednesday, Feb. 1. For those who are scratching their head wondering why markets should be rallying in the face of a mild recession, continued higher interest rates, declining corporate earnings, and gloomy guidance from many corporate managements, the answer is simple.

 

Markets discount events six to nine months into the future. If the Fed feels confident in winning its inflation battle, then we are likely heading toward the end of additional interest rate hikes. That means the pressure on the economy and corporate earnings should begin to wane. The bull case is that by late summer, or sometime in the fall, we could see the end of the tightening regime of the Federal Reserve Bank.

 

Bulls say that at that point, the Fed might begin to loosen policy. I don't think that is in the cards, but simply a cessation of tightening would be enough for stocks to rally. Stocks that would benefit the most from such a scenario are growth stocks, with no earnings, but plenty of future potentials. These are the Kathy Wood stocks that were decimated last year. That group of equities has been soaring since the beginning of the year.

 

It is also the reason that so many companies that have reported disappointing earnings saw their stocks decline at first, but then swiftly recoup losses and forge higher. The reasoning behind those moves is that the present hit to profits and sales will likely disappear and be replaced by better earnings in the quarters ahead, so any dips should be bought.

 

Is there any guarantee that this bullish scenario will come to pass? Of course not, but for now the most recent data (CPI, PPI, PCE) support a continued decline in inflation. Yields on a variety of bonds from U.S. Treasuries, Corporate, and junk bonds have declined as a result. The only fly in this goldilocks scenario has been the continued strength of the economy and the continued strength in the labor market.

 

At the end of the week, a spate of disappointing earnings results from three of the largest companies in the world — Apple, Amazon, and Google — seemingly dented the upward momentum in growth stocks. Those results were followed by the non-farm payrolls report on Friday morning that featured a blowout gain of 517,000 jobs. Economists were expecting 188,000-plus new jobs at best. The unemployment rate dropped to 3.4 percent versus the 3.6 percent expected.

 

Markets declined on the news, but it was not a rout by any means.

 

Last week, I wrote that my bearish case for the markets in February might not be correct. A bearish decline had become the consensus view, something that always makes me uncomfortable. The evidence seems to indicate stocks want to go higher from here not lower in the short term. Let's see what happens.

 

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, Congress increased the amount an individual can contribute to an Individual Retirement Account (IRA) as well as a 401(k), 403(b), and most 457 plans. If you have not already, it is time to increase your contributions for 2023 to take advantage of this opportunity.

 

If you missed it, the Internal Revenue Service (IRS) announced in October 2022 the largest-ever annual increase in 401(k) contributions. It boosted the maximum contribution limit by $2,000 to $22,500 for 2023. For those over 50 years old, an additional "catch-up" contribution will rise by $1,000 to $7,500. As for the contribution limits for an individual IRA, an additional $50 in contributions to $6,500 from $6,000 last year was implemented. The catch-up amount, however, remains the same at $1,000.

 

The IRS also raises the income threshold for which tax deductions for IRA contributions will be phased out. For those who are not aware, at a certain level of income, you can still contribute to a tax-deferred account, but you don't get a tax deduction when you do. The new income bar will be set at $73,000 to $83,000 for individuals and single heads of households, and for married couples filing jointly, the new threshold will be $109,000 to $129,999 for married couples.

 

These are generous benefits, and they are occurring at just the right time. Unfortunately, many savers may be hesitant to take advantage of this gift. There is a tendency among those saving for retirement to reduce or postpone contributions to their retirement accounts when the equity markets are declining, or inflation is rising. Allianz Life, a Minneapolis-based insurance company, found in a recent survey that 54 percent of Americans reduced or stop contributions to their retirement savings.

 

On the surface, with trillions of dollars wiped out of retirement savings, I can understand this hesitation. Human nature is such that the first reaction in a down market to putting more money in the markets is not to. With the average retirement account down 20 percent in 2022, I often hear "Why put good money after bad in a market like this?"

 

The answer is that the best time to invest is when the markets are going down, not up. Furthermore, at least for those saving through a 401(k) or similar plan, contributions are made monthly and usually on autopilot. That means as the markets decline each month you contribute your cost basis on a particular fund or stock is going down — not up. That means you are getting a better price month after month on your investments and buying more shares at the same time.

 

"Yes," you may say, "but the total amount in my retirement plan is going down." That's true, but for how long?

 

Remember, this is money that you are saving for retirement. It is not money you will be spending next week or next year. Consider this: Since 1928, the benchmark S&P 500 Index has suffered through 21 bear markets, or, on average, one every 4.5 years. The typical bear market lasted 388 days or a little over one year. That means that every five years or so you get the opportunity to buy the market at a great price.

 

This year, you are getting a double whammy: the savvy saver is not only getting to buy at a great price, but Uncle Sam is allowing you even more tax-deductible money to spend in the form of increased contributions to your retirement plans across the board.

 

 If the bears are correct, sometime in this first quarter, the stock market may plummet once again. If it does, I suspect markets will rebound and likely go higher from there. Still not convinced then consider it this way; let's say you are in the market for a top-of-the-line, new car. Suddenly, your local dealership announces a sale on the auto you want at a 30 percent discount off the list price and offers you a credit on top of that, plus a guarantee that the car will appreciate over the next 15 years. would you buy it?

 

Hopefully, you have already increased your contributions for 2023. If you haven't, I suggest you call your back office and arrange to increase your monthly contributions right now. In the years to come, you will thank me for it. 

 

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 economy grew faster than most expected in the fourth quarter. Unemployment continues to remain tame and corporate earnings, while not stellar, have been good enough to support financial markets this week.

 

Good news on the economy has been bad news for the stock market at least since the Fed has been tightening interest rates. The reasoning has been that stronger growth and employment would feed the inflation rate forcing even further tightening by the U.S. central bank and ultimately choking off the economy.

 

Now that inflation appears to be coming down, a bullish case is building that says we might get away with just a mild (as opposed to a full-fledged) recession. If so, corporate earnings would slow, but not fall off a cliff. Unemployment would rise, but not decidedly so, and a quarter or two of flat to slightly down GDP growth could suffice to continue pushing inflation lower. I call that the Goldilocks Scenario.

 

This week's macro data appeared to support that theory. U.S. fourth-quarter Gross Domestic Product for 2022 came in higher than expected at 2.9 percent versus an estimate of 2.6 percent. But that was down from the third quarter's 3.2 percent gain. Unemployment claims for the last week of 2022 fell by 19,000 to a seasonally adjusted 204,000. However, the number of temporary jobs, which usually leads to the overall unemployment rate is starting to decline.

 

The Fed's favorite inflation gauge, the Personal Consumption Expenditures Price Index, (PCE) came in a bit cooler in December. And corporate earnings, while not great, are still good enough for most stocks to maintain price support.

 

Most readers know that the quarterly earnings reports are a dance where the Street reduces earnings estimates low enough that most companies can "beat" estimates. Future guidance is therefore the focal point for investors. Coming into this week, traders were positioned for a "worst-case" scenario for most earnings announcements.

 

Microsoft is one of the most important stocks in the equity universe. It announced so-so earnings, but the stock leaped higher by 6 percent after the announcement because it could have been much worse. In the discussion after the announced results, however, management guided investors to expect fewer sales and profits in the quarters to come. The company's stock swooned in the after-hours. It dropped even further the next day and took the entire market down with it.

 

Traders decided at some point during the next day that the bad news was fully discounted and preceded to bid the stock back up to close even on the day. The same exercise occurred several times throughout the week on many stocks that announced earnings. On a macro level, the same thing happened on Thursday after the positive GDP quarterly data was announced. The markets spiked higher, but then gave it all back as the "good news is bad news" crowd reasserted themselves. In short, investors are grabbling to find a happy medium between the strength in the economy, the Fed's intentions toward future tightening, and the proper level for the markets given these unknowns.

 

It had been my view that the stock market could retest or even break last year's lows as early as February. I had predicted this unraveling as far back as early November of last year. It has now become the consensus view, which has made me increasingly uncomfortable.

 

If the bearish view were to come true, equities, as well as commodities and precious metals around the world would decline, interest rates would spike higher, and the U.S. dollar would skyrocket. I believe that would be a fantastic generational opportunity to buy the dip. Materials, gold, and silver as well as miners, would be high on my list of areas to accumulate. China and emerging markets would also be up there. 

 

If, on the other hand, my prediction fails to materialize, and the market continues to grind higher, we could ultimately see 4,370 on the S&P 500 Index, which is another 300 points higher from here, before all is said and done.

 

In the end, it all comes down to what the Fed will decide to do in its February FOMC meeting next week. The problem is that the higher the markets climb, the more dovish the Fed would have to be to support the market.

 

A continuation of their hawkish stance will disappoint the markets while sending the U.S. dollar and interest rates higher. If they moderate their message and hint at a possible pause to assess the results of past tightening, markets will continue higher. I wish I had a crystal ball, but I don't. However, either way, in the longer term, it seems that we end up in the same place, which is higher going into the second half of the year.

 

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.