Markets turned higher this week on news of the government shutdown on Oct. 1. It isn't the market's first rodeo in this area, so most investors are taking the long view.

 

The facts are that every government shutdown in history has been followed by a government reopening 100 percent of the time. Present betting indicates that this one could last anywhere from 10 to 29 days, but Oct. 15 seems the most popular bet.

 

It wasn't too difficult to predict this government shutdown. Both parties sought the drama, hoping to galvanize their partisan constituencies. Thus far, only the media, politicians, and federal employees have expressed much concern about the fallout. For Wall Street, the absence of specific key economic data, such as today's lack of the jobs report, is uncomfortable and inconvenient but not dire.

 

At a time when so much depends on timely information, such as the Consumer Price Index and non-farm payrolls reports, the market is in the dark to some extent. The Fed, for example, is expected to cut interest rates again at the October meeting, but that depends on the job data. No data means less confidence. Of course, the last few months of labor reports from the Bureau of Labor Statistics have been nothing to write home about, so missing a report or two may not be all that disastrous.

 

My conspiracy theory of last week has proven more accurate than I suspected. I wrote that a shutdown would likely occur, sending the dollar and bond yields lower still, which are tactical goals of U.S. Treasury Secretary Scott Bessent. Better still, the president wants to cut spending in what he sees as liberal programs of the Democrats. So far, he has axed $8 billion in funding for green energy projects in 16 blue states, as well as $18 billion in infrastructure projects in New York. In addition, the shutdown provides him with an opportunity to reinvigorate his court-stalled DOGE agenda by firing more government employees.

 

All of this can be accomplished in a shutdown while blaming the Democrats every step of the way. I am surprised that the Democrats fell for it, but politics is not my bailiwick. Given their experience thus far under a second Trump administration, they must question whether discussions with Republicans without this shutdown would ever yield a compromise solution.

 

I do understand their desire to safeguard the health and well-being of millions who depend on Medicaid and Obamacare. And I do believe that Trump and his Republican legislators are worried about the optics of these issues as well, going into elections despite their tough stance today. Much of these spending cuts and firings, if they occur, will be overturned in the courts anyway, but it is the narrative, not the substance, that counts among voters today.

 

As for investors, they are much more interested in the government's continued commitment to opening the floodgates of state capitalism. This week, it was all about Big Pharma. In exchange for reduced drug pricing, along with company commitments to invest in the U.S., Trump offered tariff relief on pharmaceutical imports.

 

Pfizer was first to tip the scales by cutting drug prices on a host of older drugs in its pipeline. The president is also expecting more investment announcements from companies in that sector that will further his goal of relocating drug manufacturing back to the U.S.

 

However, that is just the tip of the iceberg. The administration is working on deals across as many as 30 industries, talking to dozens of companies that the government deems critical to national or economic security. The flurry of activity encompasses various segments of the economy, from semiconductors and quantum computing to non-tech areas such as energy, shipbuilding, battery production, critical minerals, and now pharmaceuticals. The administration maintains a list of 54 crucial minerals it is targeting, which is updated almost weekly. Six more minerals were added this week, along with potash, the most recent addition.

 

Interest in equity stakes in companies now includes foreign companies as well. For example, the U.S. government has offered to purchase equity in Australian critical mineral companies as part of a funding package aimed at expanding its supply and reducing its reliance on China.

 

At the same time, the proliferation of new tariffs on industry and/or specific products has replaced the more sweeping country-wide levies that are now being adjudicated in the courts. As I advised readers in past columns, the courts may slow the tariff war but not end it. A "Plan B" is already in progress. In preparation for a possible defeat of his use of the Emergency Powers Act, these new tariff efforts will follow a more traditional route.

 

Section 232 of the Trade Expansion Act of 1962 authorizes Trump to impose tariffs or quotas on imports if the product or industry is deemed to threaten national security. They are not subject to challenge. It is the reasoning behind his announcements of fresh investigations into lumber, movies, semiconductors, drugs, trucks, jet engines, and commercial aircraft, among others. The list can go on forever.

 

If these investigations determine that the products are a threat (and they will, since the investigators are all Trump supporters), tariffs are sure to follow. While these tariffs would be far less sweeping than his reciprocal tariffs, they offer significantly stronger legal protection. The race is on to accomplish all of this before the mid-term elections.

 

Stocks, bonds, commodities, and other assets continue to gain. The global bull market remains alive and well, with new highs almost daily. October, as we all know, is a dangerous month for the markets from a historical and seasonal perspective.

 

The risks are that this shutdown could provide the volatility that traders need to justify a sell-off if it lasts too long or takes an unexpected turn for the worse. Another concern is that the Fed might hold off on reducing rates again at the end of the month until it sees more data. I give that a lower probability.

 

However, on the other side of the ledger, there is a high probability that the Fed will cut interest rates again this month. Quarterly earnings announcements are also forecasted to be robust. My conclusion: stay invested, hedge a little if you feel worried, but otherwise ride the inflows higher.

 

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.

Investors experienced a rare occurrence this week. All three main averages were down for three consecutive days. That was a good thing.

 

Readers are aware that the markets have been in a melt-up mode for the last few weeks and are both overextended and overbought. Under these conditions, any excuse, no matter how flimsy, can trigger a bout of profit-taking. A government shutdown could provide the turbulence for a much-needed market sell-off.

 

With only five days to go before such a potential event, investors are getting nervous. Doubly so, because the administration is asking federal agencies to consider mass firings (not just layoffs) if the shutdown happens, this is thought to be a political tactic to get Democrats on board in passing another budget continuing resolution. If so, it has fallen flat, as Democrats say, "Bring it on."

 

A lengthy shutdown would likely send the dollar lower still, and with it the yields on government debt. It just so happens that those are two critical tactical goals of the U.S. Treasury Secretary, Scott Bessent. He is struggling to sell billions in government debt without raising interest rates. A shutdown could help him there. Better still, the president could blame the Democrats for the shutdown, his firing of government employees, and a weaker dollar and yields. It may also help his pressure campaign against the Federal Reserve Bank.

 

Now that the FOMC meeting and subsequent interest rate cut are behind us, investors have immediately jumped to the conclusion that further cuts will take place through the end of the year. As it stands today, the betting on Polymarket indicates a 79 percent chance of a 25-basis point cut in October and a 68 percent chance of a similar size cut in December.

 

Now, Chairman Jerome Powell did not promise further cuts, although several Trump-appointed members of his committee continue to advocate for more cuts. The Personal Consumer Expenditures Index, released on Friday, indicated that inflation was rising, but moderately so. However, it is the employment data that most believe now takes precedence over inflation in the Fed's thinking. The jury is still out on labor weakness.

 

That brings us right back to the possible shutdown scenario where more job losses would add further pressure on the Fed to cut rates. If all this sounds like a conspiracy theory, rest assured, it is. I just figured I should add my two cents' worth to the conspiracy theory.

 

What happens when the Fed cuts rates in a growth economy? If one looks back through history, the stock market did exceptionally well. This week, the government's significant revision of its previous estimate for second-quarter growth bolstered the case for further growth.

 

Readers may recall that the first-quarter growth rate was an anemic 0.6 percent, caused by Trump's trade wars. Since then, the period from April to June, which was initially thought to have gained 3.3 percent, has now been upgraded to 3.8 percent due to an increase in consumer spending. For the first half of the year, the economy averaged  1.6 percent, which was not great, but is still much better than initially thought.

 

Tuesday will mark the end of the quarter. It would be highly unusual (but still possible) that we escape a downturn in October. Investors indeed evaded that happening in September. Even if we did have a pullback, it could be negligible compared to the gains we have accumulated this year. Remember that the anticipation of imminent monetary easing by the Fed can give a powerful boost to any stock market. The declining dollar and the relatively moderate range in bond yields to date have been the main macroeconomic trends supporting higher stock and commodity prices. Adding the Fed's easing into the equation, markets could see further upside ahead.

 

My call on precious metals has been remarkably successful, and now platinum is demanding its turn in the spotlight. China has performed well, as have emerging markets, AI plays, and increasingly speculative stocks on the ledger. Crypto, however, has given up some of its gains after substantial increases earlier in the quarter. Some argue that what happens to cryptocurrency happens to the stock market, but with a lag. 

 

I see some elements of the kind of stock action I experienced during the Dot-com bubble. Remember, however, it took many more months before that frothy exuberance ended in disaster. Don't chase, stay invested, and expect pullbacks.

 

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.

Investors await next week's Fed meeting. The markets have already baked in a 25-basis-point interest rate cut. The wild card will be if the Fed cuts even more than that. The latest economic data make that less than a coin toss.

 

The Consumer Price Index for August hit the highest monthly reading since January, with the 12-month inflation rate up from a low of 2.3 percent in April. And yet, the August Producer Price Index showed a 0.1 percent decline, which was below the anticipated 0.3 percent increase.

 

At the same time, initial jobless claims on Thursday surged this week by 27,000, reaching the highest rate since October 2021. In addition, the government's non-farm payroll revisions for the last year resulted in a net loss of 911,000 jobs. The stock market hit new highs on the news. However, the sudden spike in jobless claims was due to Texas floods last month.

 

These opposing trends leave the Federal Reserve Chairman Jerome Powell in a pickle. Does he bend to the will of the president, a growing group of Fed board members,  and the markets that are yammering for several interest rate cuts, or does he hold back and wait for more data? Investor sentiment indicates that inflation is within "acceptable" tolerance levels, while employment is not.

 

Now, unemployment at 4.3 percent remains at what economists consider full employment. The administration's draconian immigration policies could at least partially explain the weakness in the jobs data. But I also recognize that the implementation of artificial intelligence into the workplace is beginning to impact hiring numbers, especially among college-educated job seekers. The risk that job growth may lessen in the months ahead may justify at least one interest rate cut, but no more.

 

My Consumer Price Index inflation forecast proved accurate as annual inflation accelerated to 2.9 percent in August, after holding at 2.7 percent in both June and July. This time around, housing prices were the culprit, while tariffs were not a factor. Further rate cuts would reinforce my expectations that inflation will continue to climb through the end of the year.

 

One wild card in that equation could be the Supreme Court ruling in November on Trump's emergency powers tariff case. A decision against him would likely unravel or delay much of the future price pressure that existing tariffs are creating. I suspect the Fed would want to at least wait until then before moving on to further monetary loosening. Markets appear to be entering a melt-up stage. The Fed is potentially beginning a cutting cycle while the economy is in a moderate growth phase. Nothing could be more bullish if this turns out to be true. We will know more on Wednesday when the Fed meets, and Chairman Jerome Powell gives us the central bank's latest view of both inflation and employment.

 

Worldwide, most equity markets are overbought but could remain that way longer than most can imagine. At this point, my advice is to stay invested, enjoy the ride, but expect a pullback.

 

I will be on vacation next week, so there will be no columns while I am away.

 

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 first week of September saw record highs in the stock market, but bad news on Main Street had investors rethink their investment case. The payroll report had a lot to do with that.

 

The non-farm payrolls report for August, released on Friday morning, was another downside surprise following last month's disappointing report. Employers added just 22,000 jobs for August, far fewer than forecast, while the headline rate of unemployment rose to 4.3 percent.

 

Economists were looking for an already subdued gain of 73,000 new jobs. Even worse, the downward revisions to the employment numbers for past months continued to show additional losses. All in all, over the last three months, the U.S economy created fewer than 8,000 new jobs — the worst record since December 2020.

 

Readers may recall that our president fired the head of the Bureau of Labor Statistics and replaced her with a loyalty pick after last month's data. Will he do it again? Unfortunately, changing personnel cannot conceal the obvious: job growth under Donald Trump is much less than the markets had hoped. I expect that losses will continue in the months ahead.

 

However, I do not expect these labor losses to herald a recession. The fundamental issue behind these numbers is immigration, or lack thereof. I have written in the past that job gains because of our immigration policies have buoyed the job market ever since the pandemic. Trump has reversed these policies at the behest of American voters. And now we must live with the results.

 

The good news is that it has all but cemented expectations that the Federal Reserve Bank will cut interest rates at its Sept. 17 meeting. It is simply a question of how much.

 

Given the choice between staving off further unemployment or reducing inflation, the Fed has opted for preserving jobs, at least for now. And while I continue to believe inflation will rise with the Consumer Price Index for August hitting 2.7 percent, 2.8 percent for September, and by as much as 3.1 percent by the end of the year, markets don't care quite yet. The latest sentiment data has an increasing chance for as many as three rate cuts in total by the end of 2025. I find that doubtful in the face of my inflation expectations.

 

So, what happens if I am right and the expected September rate cut turns out to be a one-and-done move by the Fed? I suspect equity markets are not going to like that one bit. Politically, President Trump will take to the airways with increased vehemence, threatening to bring fire and brimstone down on the Fed, and another uproar will ensue, and then life will go on.

 

But let's not get ahead of ourselves. Stephen Miran, the president's choice to replace Adriana Kugler as Fed governor, testified before the Senate Banking Committee confirmation hearing on Thursday. He passed muster and will likely take a seat on the Fed's board in the weeks ahead.

 

Miran testified during the hearing that he thought "Independence of monetary policy is a critical element for its success." Stocks moved higher on his words, although honestly, what did anyone expect him to say? How would "Senators, I am committed to doing whatever the president decides on interest rates during my four-month tenure on the Fed, while still working for the president," have played out before a political body already nervous over the president's move to pack the Fed with his people?

 

In anticipation, equities moved higher. Suddenly, the prevailing sentiment that the president was being given a bad rap for his words about the Fed changed. He really didn't intend to nominate "yes" men, after all, said the spinners. It's all about the narrative these days, isn’t it.

 

Moving on to "Trump's Tariff Troubles," I suggest you read yesterday's column on the subject. The Court of International Trade had announced last week that the president had exceeded his authority in using the Emergency Powers Act to levy reciprocal tariffs on our trading partners. This was after a lower court's decision weeks ago that said the same thing. Surprise, surprise, the administration immediately petitioned the Supreme Court to reverse the decision. In any case, the tariffs will still stand until October. After that, it is anyone's guess. However, that is over a month away, and markets have their hands full simply focusing on whether the Fed will cut by 25 or 50 basis points.

 

I envision a scenario where investors will seek further justification next week for the Fed to cut three times this year, with the first cut expected to be 50 basis points, based on the job market numbers. Markets will be anxious awaiting the Consumer Price Index, to be announced on September 11. It should be hotter than expected. If so, based on the CPI data, three cuts "for sure" become two "maybes." By the time the next CPI numbers (also hotter) roll around, it will be clear that inflation is rising, while job growth is slowing. That will put both investors and the Fed in a bind with no good choices.

 

In this environment, it is no wonder that September can be choppy, especially in the next two weeks. I advised readers to expect it, and so far, the month is living up to its reputation.

 

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.

Fed Chairman Jerome Powell kicked off his speech at the annual Jackson Hole Economic Policy Symposium by admitting that the economic outlook may warrant a change in the Fed's tight money policy. That was Fed speak for it is time to cut interest rates. Markets soared on the news.

 

Economists will debate endlessly whether Powell's sudden turnaround reflects the mounting pressure by the administration on the Fed to cut interest rates or worries that unemployment may be rising. In the meantime, all the main averages were up more than 1.5 percent as I write this.

 

The assumption (more than a 90 percent chance) is that this first-interest rate cut will occur on Sept. 17, the date of the Fed's FOMC meeting. The question most are already asking is how many more cuts are in the cards between that meeting and the end of the year. The market believes two more cuts will occur. The next series of economic data points, released before their next meeting, will determine that.

 

If inflation data comes in higher than expected, then there may be only one cut in September. Readers know that I am expecting hotter inflation readings to continue through the end of the year. Powell seems to be aware of that as well. He said the risks from inflation remain "tilted to the upside." Like me, he also believes that tariff-related inflation pressures "are now clearly visible."

 

Balancing out the inflation risk, however, is the growing unemployment risk. Job risk became a factor after the Bureau of Labor Statistics revealed that unemployment had been ticking up for the last three months. Most analysts believe that the July non-farm payrolls report will also show weakening job growth. The onset of tariffs has made the job of managing monetary policy tricky at best.

 

Suppose that is the case, why cut interest rates at all? Therein lies the rub. Ostensibly, the fear of further job losses. However, the pressure by the Trump administration to remake the Federal Reserve Bank is growing by the day. By September, if Congress votes to approve Stephen Miran, the president's chair of his Council of Economic Advisors, to the Fed, at least three members of the FOMC will be Trump appointees.

 

This week, Trump made it clear that he plans to fire Fed Governor Lisa Cook if she doesn't resign. If so, and he replaces her as well, he will have four out of 12 FOMC members in his pocket. If his efforts fail, it is likely that the president, unless somehow appeased in the short run, will continue to find cause, reasons, or excuses (manufactured or otherwise) to continue his persecution of the remaining Fed members not under his control. From Powell's point of view, the political circumstances might justify a "hawkish" cut next month to alleviate the pressure. Sort of a cut in time to save nine (FOMC members).

 

Before Friday, the S&P 500 was down 2.2 percent this week, while the NASDAQ was lower by 4 percent. That was the second week in four that markets sold off only to bounce back. However, under the hood, those sectors and stocks that have driven the market's gains over the last few weeks were trashed.

 

Investors sold momentum names like Palantir, Tesla, and Nvidia. Other artificial intelligence names took it on the chin, falling by double digits. Some software stocks were down more than 20 percent. Wall Street bears have long argued that valuations in the AI space are absurd. Companies with little to offer investors beyond some mention of AI in their company name or business saw their stock price triple and quadruple in a matter of weeks.

 

Bulls say valuations don't matter. No one knows how AI power will transform the world's economies, but they believe that the AI potential must be measured in megatrillions of dollars. Given that thesis, it was a shock when Sam Altman, the CEO of ChatGPT, one of the movers and shakers behind AI, joined the fray.

 

He said this week that the billions of dollars flowing into the AI arms race risk causing a bubble comparable to the dot-com crash of the early 2000s. "Are we in a phase where investors as a whole are overexcited about AI? My opinion is yes. Is AI the most important thing to happen in a very long time? My opinion is also yes."

 

But Powell's comments on Friday effectively dismissed all these misgivings as investors rushed to buy the dip. Interest rate-sensitive sectors and stocks lead the charge higher. Small-cap stocks, as represented by the Russel 200 index (3.87 percent), outperformed. The dollar fell almost a whole percentage point since expectations of lower U.S. interest rates mean a lower dollar. As such, both gold (plus-1 percent) and silver (plus-2.28 percent) as well as  cryptocurrencies also chalked up some significant wins.

 

The last few weeks of mild corrective actions have now given way to higher stock prices and possibly another attempt to regain former highs. I could see the S&P 500 Index tack on another 75 points or so to 6,550-6,570. Are we out of the woods and on our way to the moon? Not yet, I see another decline once we reach my target sometime in September.  

 

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.