The Biden administration is wrestling with whether to ease some of the Chinese import tariffs on billions of dollars of Chinese goods. If they do, it would mark the first step in reconciling the trade differences between the world's two largest economies and could even nudge down the inflation rate.

 

The trade war is now over four years old and substantial tariffs remain. "To what end," some may ask, as certain deadlines approach. The first tranche of the Section 301, China imports tariffs on $34 billions of goods, is set to expire this week. Another $16 billion worth of tariffs will expire on Aug. 23 followed by $100 billion of tariffs on Sept. 4.  

 

 You may recall that back in 2018, former President Donald Trump imposed a series of tariffs on a host of Chinese products totaling more than $450 billion. In response, China imposed their own tariffs on American goods. From there, as the rhetoric reached new heights, each side escalated the tariffs, encompassing more and more goods at higher and higher penalties.

 

Since China represented the United States' largest agricultural export market, China focused their retaliatory tariffs in that area. The U.S. Department of Agriculture found that the tariffs reduced U.S. exports of agricultural products by $27 billion from 2018 to 2019.

 

The damage ultimately was so bad that the federal government was forced to give farmers nearly $30 billion in taxpayer money just to compensate for lost sales to China. Overall, the tariff war caused U.S. exports to fall by 9.9 percent, while reducing GDP by 0.04 percent, according to the National Bureau of Economic Research.

 

The tit-for-tat escalation ultimately led to a "Phase One" trade deal between the two countries, signed with great fanfare by Trump in January 2020. The agreement required China to sharply increase its purchases of U.S. goods as a precondition for the president to remove the new tariffs. The agreement was a total flop. China, during the first two years of the deal (2020-2021), purchased only 57 percent of its commitments. China purchased $289 billion of U.S. goods, instead of the $502 billion promised.  

 

A partial explanation for such a big miss was the COVID-19 pandemic, which affected trade between almost all nations. In addition, supply chain disruptions had a meaningful impact on other U.S. products such as automobiles and aircraft exports. Weakening demand for imports overall, as China's economy declined, has also been a contributing factor.  

 

Bottom line: if one looks at trade between the two nations overall, China's purchases are below the level they were before the trade wars began.

 

The United Nations Conference on Trade and Development found that the trade war was simply a lose-lose for both countries. The tariffs were supposed to protect American industries, but they have hurt the U.S. economy instead. If there had been no trade war, U.S. exports between 2018 and April 2022 would have been $129 billion more, according to a Washington-based research group, Americans for Free Trade.

 

Unfortunately, the Phase One agreement did not end the tariffs, but only prevented them from going higher. The average tariffs on goods affected is still about 20 percent on each side.  Not only did the tariffs on Chinese parts, components, and materials not make our manufacturing sectors stronger and more competitive, it also did the opposite.

 

Our companies needed those Chinese intermediate products (now on the tariff lists) to manufacture finished goods here. Companies found that without them, competing with companies in Japan and Europe, which continued to have access to those cheaper Chinese inputs, made our products more expensive in the open market. Our companies continued to lose market share globally as a result. Those losses continue today.

 

Some may question why President Biden has continued Trump's misguided policies, despite the damage it has caused the U.S. economy, while doing little to hurt China's economy. The simple answer is politics.

 

Being "tough on China" is a popular stance among Americans, even if it means a weaker economy. If you throw in China's growing authoritarianism, suppression of human rights, oppression of minorities, and military ambitions in Asia, the Biden administration would need some strong counter arguments to justify an easing of tariffs.

 

Given the rising inflation rate and cooling economy in the U.S., President Biden may now have the political cover to roll back some of those tariffs. President Biden is hoping that reducing tariffs would lower the costs of everyday merchandise to consumers. Unfortunately, economists are expecting that tariff reductions will only have a modest impact on inflation, but in my opinion, every little bit helps when inflation is topping 8 percent.

 

This week, the U.S. Treasury Secretary Janet Yellen, and China's Vice Premier Liu He, held talks focusing on economic policy and relieving global supply chains. Words such as "pragmatic," "constructive," and "substantive" seemed to indicate that some movement on tariffs is in the offing. Let's see what develops throughout the week.

 

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.

There are roughly 817,000 unique and different programs available via streaming services in the U.S. The median streaming household pays for three to four such subscriptions costing between $20 and $30 per month. Most consumers claim the choices are overwhelming and cumulatively expensive, so why don't they plan to do anything about it?

 

Those were the findings of a Nielson report titled "State of Play" published in April 2022 that analyzed the state of streaming entertainment in America. The number of programs (movies, series, specials, etc.) has increased by 26.5 percent since the beginning of 2020.

 

The amount of content that we couch potatoes have consumed has also increased by 18 percent since 2021. To put that in perspective, in just one month (February 2022), Americans consumed 169.4 billion minutes of content. Obviously, there is a strong correlation between the amount of content available, and the amount we consumed.

 

Personally, there isn't a day that goes by that I am not bombarded with ads on television, radio, the internet, and emails from one streaming service or another. Most of them promise a week or so of free viewing and then automatically bill me each month via credit card for as long as forever. Honestly, when I examine the offerings, I discover that much of what they offer is old shows and series with one or more new series thrown in that were popular once upon a time.

 

Nielson says almost half of all users they surveyed felt overwhelmed by the quantity of programming available. I concur. My list of shows on the four services I subscribe to continues to build to the point that it would probably take me a year of constant binging to get through it all!

 

So, with all of this content, you would think that I would cut back, discontinue a service or two, and save some money. But true to form, no matter how much I complain, I have no plans to cut back, or reduce the amount of streaming content I consume each night. And that is exactly what most of those surveyed by Nielson said as well. A full 93 percent of respondents said they planned to either keep the streaming services they had or add more over the course of the next year.  

 

If you asked me right now how much I pay a month and over the course of a year for my subscription services, I couldn't tell you. How about you, can you even guess? It turns out that almost a third of U.S. consumers underestimate how much they spend on subscriptions by $100 to $199 per month, according to a study by market research firm, C+R Research. 

 

It is also true that many people (42 percent) have forgotten that they are paying for a streaming service that they no longer use. I am guilty once again. My wife and I enjoy foreign films, so about four months ago, we decided to fork over another $6.99 a month for a British service. We watched maybe one or two shows and that was it. Because we charged the fee to our credit card, the amount was automatically debited, making it easy to go unnoticed. Since 86 percent of consumers have at least some, if not all, of their subscriptions on autopay, I suspect many readers have similar experiences. TV and movie streaming came in third, after mobile phone and internet charges as the most forgotten types of subscriptions.

 

Way back when, if you recall, cable companies offered preset packages to subscribers that included several premium services in addition to network television for a bundled price. In a similar move back to the future, many of Nielson's surveyed consumers (64 percent) said they would be interested in bundling competing streaming services to save money if they could choose the streaming services they want. It seems to me that as winners and losers begin to become apparent among streamers some sort of bundling will make economic sense. In the meantime, I will probably continue to complain about, pay for, and accumulate additional services.

 

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.

"Certainly a Possibility." 

 

Those were the words of Federal Reserve Chairman Jerome Powell during testimony to the U.S. Senate banking Committee on Wednesday, June 22. Investors took his warning in stride, instead of plummeting. That may indicate markets are ready for another relief rally.

 

Powell thought the U.S. economy was strong enough to roll with the Fed's punches of higher interest rates, and a shrinking balance sheet without too much trouble. It was the outside factors — the Ukrainian war, China's COVID-19 policy, and supply chain problems — that complicate the outlook. Avoiding the "R" word was largely out of the Fed's control, he said, "it's not our intended outcome at all, but it's certainly a possibility."

 

Granted, it wasn't as if fears of a recession were a new concept among investors. For the past few weeks, as the Fed made clear they were pursuing an even more aggressive series of interest rate hikes to combat inflation, investors began to worry that the Fed's action might tip the economy into recession.

 

This fear has weighed heavily on stocks in various hot sectors like energy and materials, which have fallen considerably in price. Oil has dropped from $123 a barrel to almost $100 in the last two weeks with energy stocks falling faster and further. Natural gas prices have also dropped substantially, despite the actions of Russia to cut off natural gas to the European Community.   

 

Defensive stocks in areas like utilities, health care, consumer durables, and telecom were bought instead. As were U.S. bonds, which are sending yields lower. That makes sense. If the U.S. does slip into recession, there will be far less demand for energy and other commodity inputs to fuel economies. In recessions, investors usually hide out in higher yielding areas where hefty dividends support stock prices in areas which people need, (not want) to purchase.

 

I pay attention when investors receive bad news (such as a potential recession forecast from the Fed), and the markets hold in there as they did this week. After all, Chair Powell had two days of testimony in front of Congress and plenty of opportunities during the Q&A sessions to tank the markets, but that didn't happen, even though he was no less hawkish in his forecast. That leads me to believe that the markets may have discounted the worst — for now.

 

Rest assured, I still believe we have a lower low in front of us sometime before the end of September. But that does not mean we can't see a face-ripping rally of 10 percent in the short-term. As a contrarian indicator, the AAII Sentiment survey, which measures bullish/bearish sentiment among institutional investors, just registered the 25th lowest bullish and its sixth highest bearish sentiment reading in its history.

 

Many traders are expecting just that kind of event to occur over the next week or two. There are several technical reasons that make bounce higher a high probability. There is the rebalancing of funds by large institutions (bonds into equities) that occurs at the end of a quarter after severe selloffs. Many hedge funds are ending the quarter net short and will also need to rebalance.

 

There will also be the usual flow of new funds into pension plans that will need to be invested. Finally, a huge number of put options will expire at the end of the month. They will need to be either liquidated or rolled over to a future month. This could set the markets up for another oversold bounce.

 

We have had several of these rallies thus far in 2022. The S&P 500 Index gained 6 percent in four trading days, 11 percent in 11 days, and 8.7 percent in 9 days, while losing 19 percent overall. Bear market rallies typically get back 70 percent of the losses of the prior move lower with over a quarter of the rallies gaining back over 100 percent.

 

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 stock market does not perform well in the year leading up to midterm elections. This year's election may just add to the overall woes besetting equities.

 

Historically, the average annual return of the benchmark S&P 500 Index in the 12 months before the Nov. 5 election is 0.3 percent, versus the historical average of 8.1 percent in non-midterm years. In 2022, of course, with the S&P 500 down more than 20 percent, those historical numbers look pretty good. Unfortunately, volatility also tends to rise before and after midterm elections.

 

But this year is different, you might say, since we are witnessing the first European war in decades, as well as the highest inflation rate in 40 years. And let's not forget the continued existence of the coronavirus, a pandemic the world has not seen in more than a hundred years.

 

While all of this is true, it does not contradict the data. For more than a century, the second year of the four-year presidential election cycle has always been the weakest in performance, so investors should brace for an even worse year than most.

 

Consumer sentiment is in the dumps and a growing list of issues — political, social and economic — are plaguing voters. The economy is giving off conflicting signals. It is still growing, although that growth is moderating. But right now, U.S. GDP remains strong enough to keep employers hiring and wages rising, but for how long?  

 

Two big negatives are posing a growing threat to the economy; inflation and the Fed's determination to fight it through tighter monetary policy. Both elements are impacting the wealth effect of American voters. Higher interest rates are hurting the stock market, and with it the average Americans retirement portfolios. Housing prices, another bright spot for homeowners, are also leveling off as mortgage rates climb. The two combine to inflict a general feeling of diminishing wealth among many households. We are feeling poorer.

 

 Inflation adds to that feeling. At the gas pump and in the supermarket, skyrocketing inflation has dramatically increased the cost of living for most voters. Workers are finding that recent pay raises are not covering the effects of inflation on the family budget. 

 

 What is worse, more and more economists are beginning to worry that the Fed's monetary tightening will ultimately lead to a recession sometime soon, whether this year or next. If so, the macroeconomic data will likely make that apparent just in time for the lead up into November's mid-term elections in 2022.

 

The makeup of the Congress and the Senate adds even more uncertainty to the midterm equation. If we look back at midterm elections since 1934, the president's party has lost at least 30 seats in the House and four seats in the Senate. There are only three years in history where the president's party gained seats. Democrats cannot afford to lose any seats in the Senate and few seats in the House if they hope to maintain their majority. At this point, history is against that happening.

 

Investors tend to dislike uncertainty and like the status quo within their governments. The stakes are high. If the Democrats hold firm in both houses of Congress, the chance of new legislation (and possibly new taxes) becomes a higher probability. If Republicans win one or both Houses, gridlock becomes the likely result within government. In that case, investors can expect little in the way of new legislation or downside surprises. Either way, we can be sure that the markets will be anything but calm leading up to Nov. 5.

 

Of course, there are a host of social issues, which may help determine the outcome. However, the economy usually takes precedence over all else in voters' minds. In any case, readers can expect that politicians on both sides of the aisle will be sure to add to the market's volatility in the months ahead. Starting now.

 

The Consumer Price Index (CPI) surged in May 2022 as gas prices continued to run higher. These results came as a downside surprise to a stock market that has been falling most of the week.

 

Friday's CPI number for May 2022 reflected an increase of 1 percent, compared to "hot" estimates of 0.3 percent in April 2022. On a year-over-year basis, the gain was 8.6 percent, which is a 40-year high in the CPI. Gasoline prices were a key driver of inflation last month, although Owners' Equivalent Rent (OER), which accounts for about a third of the CPI, also gained. The problem going forward is that analysts expect gasoline prices will continue to rise in this summer's driving season. If oil continues to rise, the stickier inflation will be.

 

This strong inflation result sets the stage for next week's June 15 FOMC meeting. It will be the first 50 basis point increase in the Fed funds rate in decades. Investors have been fully informed of the coming rate hike (and another one in July 2022), as well as the on-going reduction in the Fed's balance sheet.

 

Supposedly, the markets have fully discounted this event, but there is always a risk that during the Q&A session with Fed Chairman Jerome Powell after the meeting, he says something more hawkish than investors expect. I am betting that he will do nothing to add risk (more downside) to an already skittish market. If so, that could give markets a lift.

 

Throughout the week, central banks around the world continued to raise interest rates and telegraph their plans to tighten even more as global inflation climbs. Christine Lagarde, the president of the European Central Bank (ECB), joined the crowd on Thursday indicating that the ECB plans to raise interest rates above zero for the first time in a decade by September 2022.  

 

The ECB will raise rates by half a percentage point, followed by a planned quarter-point rise in July 2022, which is a bigger increase than expected. ECB officials are becoming increasingly concerned that higher wages, higher oil prices, and supply chain issues could lead inflation to become entrenched. Sound familiar?

 

Most of Wall Street expected that inflation may have peaked (and it still may in the months ahead), but the CPI threw a monkey wrench into this theory. The U.S. dollar has reversed course as a result and climbed higher over the last few days. I have advised readers to keep an eye on the greenback as an indication of where stocks might go. Right now, the two have an inverse relationship, so dollar up, stocks down.

 

I was dead wrong in my expectations that we could see a substantial rally in the stock market. Instead, we have dropped throughout the week as a barrage of interest rate hikes by central bankers throughout the world pressured stocks lower and the U.S. dollar higher. And now we face the Fed next week.

 

As I write this (Friday morning, June 10), the S&P 500 Index has tested and held at 3,900. If we break this level by more than 20 points, we could see a re-test of the lows (3,810). I suspect that we will bounce today instead. From a technician's point of view, into next week, depending on how the market closes for the week, we may see a down Monday to re-test the lows we put in today and a rebound on Tuesday into Wednesday. At that point it is up to the Fed, which way the markets go. I am hoping the direction is up.

 

I wanted to give readers a heads-up that I am taking the latter part of next week off, so there will not be a column next week. I'll be back at my post the following week for sure.

 

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.