Fed Chairman Jerome Powell delivered a bagful of gains this week for investors. Stocks roared to life as "Santa" came to town. And then the job numbers on Friday spoiled the mood.

 

"The time for moderating the pace of rate increases may come as soon as the December meeting," said Powell in his opening remarks at the Brooking Institute on Wednesday, Nov. 30. The word "moderating" was all the algos needed to hear.

 

It was equivalent to striking a match to a kid's backyard toy rocket. The U.S. dollar fell, stocks across the board exploded and the main indexes racked up gains of 3-4 percent-plus by the end of the day. Commodities also roared higher led by precious metals.

 

Thursday the Personal Consumption Expenditures Price Index, a key inflation data point that the Fed uses to monitor inflation also came in cooler for October. The PCE rose 6 percent in October versus last year and down from September's 6.3 percent annual increase. Overall prices rose 0.3 percent, which was the same monthly increase as in each of the previous two months. It could be that Powell had an inkling that the inflation numbers were improving, which could have contributed to the slight shifting of goalposts this week.

 

However, Friday's monthly jobs report for November came in "hot." Non-farm payrolls came in with a 263,000 gain versus the 200,000 expected. Average hourly earnings on a month-to-month basis rose 0.6 percent versus the 0.3 percent expected. That data may be good for the continued growth of the economy, but also means that the Fed has no reason to relent in its hawkish stance. As a result, markets gave back about a third of their gains for the week.

 

Does that mean we should expect hotter or cooler Consumer Price Index (CPI) on Dec. 9, and Price Producer Index (PPI) data on Dec. 13? Given the inaccuracy of macroeconomic data, I would say that is at best a crap shoot.

 

The most important events that investors face are the OPEC-plus meeting on Dec. 4, and the European Union (EU) Russian oil embargo and price cap on oil the following day. This could prove to be a disruptive event on world energy prices. What happens to the oil price has a direct bearing on future inflation, so financial markets will react to these events.

 

If an EU ban on purchasing Russian oil leads to the removal of up to 2 million barrels per day of oil from the market, we could see a spike in energy prices.  To prevent that from happening, the U.S. and G-7 nations have devised a price cap scheme where that oil can be sold to non-European nations but only at a lower price. The question is the price.

 

The latest number was $62 a barrel cap, but Poland, Estonia, and Lithuania are arguing that the price is still too high. The facts are that if India or China ignore the whole price cap ban, which is a distinct possibility, then what could happen is that most of this spare Russian oil will simply be rerouted to these two large consumers of oil.

 

Bottom line: next week could see some wild swings in oil based on geopolitical headlines from various players so be prepared. 

 

Last week, I wrote that my target for the S&P 500 Index of a high between 4,000-4,100 had been met and it was time to take profits. This week we hit the top end of my range before falling back. Could it climb higher? It could, but it seems to me that market action tells me that we are closer to a top, not a bottom. I will be taking profits as we climb higher.

 

If I am right, what is the potential downside for the markets? I expect a 125-to-250-point (up to 6 percent decline) to as low as 3,700 on the S&P 500 Index. 

 

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.

American workers are making more dollars per hour than they did before the pandemic. That's the good news. The bad news is that inflation is wiping away most of those gains and the rate of wage growth is slowing.

 

Most Americans look at their paychecks today and feel pretty good. However, they realize that after spending on essentials such as food, fuel, education, and health, they realize that their wages are not keeping up with the cost of living. 

 

"Real wages on average are falling, not rising," says San Francisco Fed President Mary Daly, summing up the present state of wage growth.

 

To be sure, there was a one-time surge in salaries back in 2021, which spilled over into the early months of this year, but since then, wage growth has been slowing.

 

Real average hourly wages in the U.S. in the private sector rose at a 3.9 percent rate in the three months ended in October, which is down from a high of 6.3 percent at the end of 2021 and fell further to 5.9  percent as recently as the three months ended in July.

 

In general, the rate of change in wages has been falling for well over a year, while inflation at 7.8 percent remains close to its highest rate in decades. In dollars and cents terms, let's say you are an average worker making $30.06, which was the average wage back in March of 2021. Fast forward to August of this year and now you are making $32.36. Not bad, huh?

 

Now let's throw in the inflation rate during that period, which had risen by 11.81 percent. Let's say it costs you $5,000 per month to pay all your bills, after inflation that monthly nut had now climbed to $5,591.  

 

Over the past year, the Federal Reserve Bank has been doing its best to battle inflation back down to the 2 percent range, but they caution that this is a process that will take time. This week in a speech at the Economic Club of New York, John Williams, the New York Fed president, sees inflation falling to 5.0-5.5 percent by late 2023 as more interest rate hikes restore balance to the economy. How does raising interest rates to reduce inflation and restore economic balance?

 

For one thing, it reduces demand in the economy by reducing discretionary spending, which is an economic buzzword for making it harder to make ends meet if you are a typical worker. Higher interest rates spill over into borrowing rates, which make buying a home, or an automobile, or paying down your credit card more expensive to consumers. So, the tools that the Fed is using to reduce inflation are hurting the labor force, while wages are not keeping up with inflated expenses.

 

One way out of this dilemma for many workers is to job jump. After all, jobs are plentiful right now, so if you don't like the one you have, just get another one. As an added incentive, in this tight labor market, switching jobs frequently comes with another bump up in pay or at least a signing bonus. Some workers I know personally have moved positions two or three times in the last two to three years while upping their total compensation on every move.

 

However, those days may be coming to an end. Fed President Williams, while admitting that the job market remains remarkedly tight, expects the U.S. unemployment rate to rise from 3.7 percent today to 4.5 percent-5 percent by the end of next year. If so, job hopping to keep ahead of inflation might not be as easy to pull off.

 

If it makes any difference, you are not alone. European workers are experiencing a similar gap between wages and inflation even though they are represented by far more unions than here in the U.S.

 

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.

December could be a risky month for the stock market. A spate of inflation data, a European Union Russian energy embargo, and another Fed meeting toward the middle of the month, could determine the state of the stock market.

 

Traders are split between bulls and bears. The bearish view says that we hit the 4,100 level on the S&P 500 Index, and then we begin a decline that continues into next year. The bulls argue that the seasonal factors dictate a continued rally into at least January.

 

Many readers know where I stand. I have been predicting a market rise that could see the S&P 500 hit somewhere in the range of 4,000-4,100. That is the area where we find the 200-Day Moving Average (DMA) for that index. At this point, I am taking my money and running. Why?

 

There are numerous significant data points in December that can send markets up or down. The Personal Consumer Expenditures Price index on December 1, The Group of Seven/EU decision on an embargo of Russian oil on Dec. 5, the Consumer Price Index on Dec. 9, the Producer Price Index on Dec. 13, and the FOMC meeting on Dec. 14.

 

There is no consensus on any of these areas. If the inflation data comes in hotter than expected, stocks go down. If Fed Chairman Jerome Powell remains hawkish at the FOMC meeting, and or, becomes more so, the markets fall.

 

In this week's column, "Is it time to rebuild the Strategic Petroleum Reserve?" I examined the upcoming events of Dec. 5, in which the G-7 plans to further hamstring Russia by placing an embargo on Russian oil in the European Community. It also seeks to place a price cap on Russia's oil, although there is some disagreement on what that price should be. Russia has already warned that it will not sell oil to any nation entertaining such a price cap scheme. If the response to the embargo and price cap on Russian oil results in higher oil prices, the markets would likely decline.

 

Given that the stock market has already run up more than 15 percent since October, it seems sensible to me that a cautious approach is called for. For sure, some of the data may be negative, others positive, but there is no way of knowing that ahead of time. If all the data points end up positive for the market, then it will be a very Merry Christmas and Happy New Year. The point is that the odds at best are only 50 percent that the bulls get the lucky number 7 on each roll of the data dice.

 

From a macroeconomic point of view, it seems to me that we are a long way from achieving the Fed's target rate of 2 percent inflation. The economy, while slowing, is still growing and employment remains healthy. A recession seems certain, but so far elusive. This is not good news for a central bank that needs economic demand to slacken in its fight against inflation.

 

About the best investors can hope for may be a slowdown in the pace of rate hikes. The Fed minutes from the last FOMC meeting buttressed that hope when a number of participants preferred to slow interest rate hikes in December. However, that doesn't mean Jerome Powell will heed their advice.

 

In any case, this week we hit a high of 4,033, less than 70 points from my highest target on the S&P 500 Index. Depending on the data, and especially the PCE data point on Thursday, stocks could hit or even exceed 4,100. It is a coin toss at this point. Invest accordingly.

 

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 nation's Strategic Petroleum Reserve (SRP) has been reduced by more than 25 percent over the last year. That is the lowest level in 40 years. Oil had dropped below $80 a barrel mark this week, causing some critics to argue that it might be time to start building the SRP back up. I disagree.

 

My reasoning centers on a handful of geopolitical events that could send oil prices soaring in the first week of December. To understand how important the SRP might be in that case, one needs to know more about the Biden administration's use of the SRP since 2021.

 

A year ago this month, on Nov. 23, 2021, President Joe Biden announced the release of oil from the Strategic Petroleum Reserve in response to the Ukraine/Russian conflict, which caused o and gas prices to explode higher. The president's stated goal was to lower oil and gas prices while addressing the lack of energy supply worldwide.

 

Since then, Biden's activist intervention in global oil markets has succeeded in reducing U.S. gas prices at the pump, as well as contributing to the decline in oil prices to their lowest level in more than a year. So far, 160 million barrels of oil have been released with another 10 million barrels scheduled to be drained this month. Some say that is more than enough. Maybe, maybe not.

 

To gain some perspective, let's look at the history of the SRP. It was first created by Congress back in 1975 in response to the 1973 oil crisis. For those who are curious, the nation's emergency crude oil is stored in underground salt caverns at four major storage facilities on the Gulf Coast, two sites in Texas, and two sites in Louisiana.

 

The purpose of the SRP was to manage market disruptions such as a war in the Middle East, an oil embargo, or a natural catastrophe. Our energy stockpile has been used by several presidents, most notably during the Iraq/Kuwait War in 1990-1991, Hurricane Katrina in 2005, and the 2011 Arab Spring energy disruptions. The Ukraine War and the subsequent sanctions on Russian-produced oil certainly fit the bill for use of the SRP and thus the release of oil from the U.S. emergency energy storage.

 

Criticism of President Biden's move to employ the SRP as an energy weapon has been harsh and varied. Some Republicans have called his decision reckless because it endangers our energy security at a time when there is so much global conflict and uncertainty. Others accuse him of a blatantly political move.

 

They say his use of the SRP before the midterm elections was simply a ploy to win over voters. If so, it worked. Gasoline prices dropped from more than $5 a gallon to $3.80 a gallon today. Voters may have also been swayed by the decline in pump prices since the GOP failed to score the "red wave" they were expecting. 

 

But to be fair, several presidents besides Biden have released oil from our stockpile during political campaigns. Bill Clinton, for example, did so just before the 2000 presidential campaign between Al Gore and George W. Bush.

 

However, this is the first time a president went on the record in admitting that he was using our petroleum reserves to reduce prices, rather than to bolster supplies. Most economists would laugh at that distinction, since ordinarily if you increase the supply of something, its price will decline over time.

 

To me, the Biden administration's activist interference in the global oil markets may just be the beginning. Until recently, the global price of oil has been in the hands of a few volatile foreign governments and OPEC. But a lot has changed in the American oil patch since the 1970s. The U.S. is now one of the leading producers of oil and gas and a major energy exporter. Pricing power comes with that kind of production.

 

The willingness of the U.S. government to enter the fray and become a price setter instead of a taker via the SRP could become a geopolitical tool and an answer to the OPEC+ Cartel's domination and control of energy prices and supply. The bottom line: by focusing on price, President Biden may be putting the price-fixing cartel of OPEC+, and Russia on notice that there is a new boy on the block.

 

I also believe that the administration's announced intention to start rebuilding the SRP somewhere between $67-$72 a barrel of oil is an attempt at establishing a floor of price support for oil. That may be comforting news to U.S. energy companies. If the oil majors and shale producers believe that the U.S. government is willing to backstop their business at a certain oil price, would that give them added confidence and an incentive to increase U.S. energy supplies? I think so, but now is not the time to start building back our oil reserves.

 

On Dec. 5, 2022, the Group of Seven (G7) and the European Union (EU) are planning to embargo Russian oil. In addition, a G7 plan, intended as an add-on to the EU embargo, would allow shipping services providers to help export Russian oil, but only at enforced lower prices. An embargo like that could take as much as 2.4 million barrels per day of Russian oil off the market. That could increase oil prices dramatically. There is also an added risk that Russia retaliates and cuts off energy supplies to Europe in response.

 

Oil analysts worry that these plans could backfire, at a time when seasonal energy demand is at its highest. OPEC is worried as well. They are rumored (officially denied) to be debating a 500,000 barrel per day increase in production just in case.

 

If the worse happens and oil prices skyrocket higher into the first quarter of 2023, what will be the U.S. response? Will the president stand fast, or will he be forced to order another 90-100 million barrels, of oil, or more to be drained from the SRP? I am betting he would be forced to release more barrels because the alternative could be $120 barrel oil in the months ahead.

 

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.

Thanksgiving is right around the corner and then the Christmas holidays are upon us. Will Santa deliver coal, or will the stock market find gains in their stocking?

 

The bulls are expecting a pretty good market between now and year-end. Historically, the evidence is on their side, although there have been several years when the Grinch stole Christmas, stocks usually gain during the coming holiday season.

 

On the other hand, history has not been as reliable in predicting the market's direction of late. That is understandable, given the continuing presence of COVID mutations, a European War, soaring inflation, and rising interest rates. If the equity market wanted a wall of worry to climb, it surely has one.

 

On the plus side, we have had two inflation indicators, the Consumer Price Index, and the Producer Price Index for October, signaling that if inflation isn't declining, it is at least not rising as fast. As a result, interest rates and the U.S. dollar have also declined a little. All the above has given equities a reason to reach my target area (4,000-4,100). This week, the S&P 500 Index hit 4,028.

 

I expect that we are running out of bull fuel. We could hit the higher end of my range, but if we do, the markets would be rising on fumes and would not likely stay there very long. Does that mean we have to immediately re-test the year's lows? Not necessarily.

 

Over the next week or two, I see increased volatility with a risk of a 100-point pullback on the S&P 500 Index down to 3,850. However, a bounce could happen after that. Slowing consumer demand, worries over Christmas sales by U.S. retailers, and further layoff announcements should dampen enthusiasm for stocks. And then what?

 

We have three inflation points in December. The Personal Consumption Expenditure Price Index (PCE) will be released on Dec. 1. It is this inflation index that carries the most weight with the Fed. It sets up a binary event for the markets.

 

If this number is cooler than expected, investors will believe it confirms that inflation is dropping. Markets would rally if that happened. If it comes in hotter, then we swoon. Either way, we still have the next CPI and PPI numbers to contend with, so prepare for further volatility.

 

On Dec. 9, the CPI is released, followed by the PPI on December 13, 2022. Those could be wild card events -- either to the upside, or the downside. And on Dec. 14, the next FOMC meeting decisions will be announced, along with Chairman Jerome Powell's Q&A session afterward.

 

As you can imagine, the fate of the markets will rest on how all these data points line up.

 

Economists argue that market participants are asking for trouble by resting their hopes on just two inflation numbers. I agree. We are bound to see a lot of fluctuation in the coming months in the inflation data. Rarely, do we see inflation drop precipitously without some exogenous event to trigger a free fall. Economists would expect several conflicting inflation reports, some up, some down, before seeing a new trend form.

 

The Fed has already stated that while they welcome the good news on the inflation front in the short-term, nothing is going to change in their stance. This message was underscored repeatedly last week by a long line of Fed Heads who messaged the markets that interest rates are going to stay higher for longer.

 

So where does that leave us regarding the cherished Christmas rally? I imagine we will see several rapid moves up and down in the markets before the FOMC meeting in mid-December. At that point, I am hoping (but not expecting) that the Fed will be less hawkish. There is a high probability that Powell will walk on that stage and dun his Grinch mask. If he does, it would likely be a "look out below" moment for the markets. In which case, think coal in your stockings. However, given the soaring price of coal worldwide, a little coal in my stocking would not be all that bad.

 

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.