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@theMarket: Is the Market's Holiday Rally on Track?

By Bill SchmickiBerkshires columnist
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.

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.

 

     

The Retired Investor: Inflation Versus Wages

By Bill SchmickiBerkshires columnist
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.

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.

 

     
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