July, as promised, has turned out to be a month where financial markets have been buffeted by fireworks on various fronts. A gambit of data from inflation to economic growth combined with a new American brand of populism has led to some unexpected market consequences.

 

The good news first. In the second quarter, gross domestic product grew well above economists' expectations at an annualized pace of 2.8 percent, compared to forecasts of 2 percent growth. The "core" Personal Consumption Expenditures Index (PCE), which excludes food and energy, grew by 2.9 percent in the second quarter. That was above estimates of 2.7 percent but significantly lower than the 3.7 percent gain in the prior quarter.

 

On Friday, the monthly PCE data came in as expected edging up 0.1 percent month-over-month in June following a flat reading in May. However, the core index was a bit higher than forecasts at 0.2 percent versus expectations of a 0.1 percent increase. While still an increase, it is the slowest pace of inflation since March 2021. It is doubtful that the data will convince the Fed to change monetary policy sooner than the market expects.

 

On the political front, my prediction that President Biden might relinquish his candidacy in favor of his vice president, Kamala Harris, proved to be true. The impact on the financial markets has been negligible thus far, but the odds of a Trump win have gone down somewhat. As a result, the fervor to buy areas of the market that might benefit from a Republican sweep has subsided a little.

 

I believe that to make investment decisions at this point on who will win or lose the elections is largely fools' gold. Far better that we focus instead on something more tangible like the expectations that the Federal Reserve Bank will likely begin to cut interest rates at their next meeting in September.

 

We will know more about this in the coming week when the FOMC meets again on July 30. While there is only a 6 percent chance that the Fed will cut interest rates at this month's meeting, the odds are almost 100 percent that they will cut interest rates in September. That bet is what has investors buying small-cap stocks, which benefit the most from the loosening of monetary policy.

 

In the meantime, stocks have done what I predicted. The S&P 500 Index declined by 5 percent or so with NASDAQ falling almost double that amount. However, the Great Rotation that I discussed in my last column is alive and well.

 

The Russell 2000 small-cap index outperformed as did other forgotten areas like financials, real estate, and industrials. On the downside, the darlings of the market over the past months, FANG and AI companies were clobbered as did the technology sector overall.

 

You might think that if some sectors were up, while others were down, the overall market would balance out. Not so. Market capitalization is the key. Over the years, the growing weight of this handful of tech stocks in just about all of U.S. equity indexes has been extreme. The entire market cap of the Russell 2000 Index, for example, is equal to the market cap of just one of the FANG stocks. As such, no matter how much small caps gain, they can never make up for the declines in the technology sector.

 

In the short term, where FANG and AI technology go, so goes the markets. On the surface, the carnage in some stocks was nasty, but in the grand scheme of things a mere bump in the road considering the gains we have enjoyed thus far in the stock market this year.

 

The question you may be asking is whether the selloff is over. I sense that we still have more to go, but we could bounce first before rolling over again. This volatility could last until the Fed meeting late next week. At that point, with possibly more visibility on rate cuts, the market could find support.

 

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.

As temperatures climb to record highs throughout the nation, the financial markets feel their brand of heat as election fever takes hold with a vengeance.

 

Suddenly, value stocks, which have taken a back seat to the FANG/AI equity gang for months, are coming back into vogue. Semiconductor stocks, which have led the tech market higher for years had their deepest sell-off since 2022. Even Nvidia is suffering a bout of profit-taking.

 

Some are calling it the 'Great Rotation' where traders are taking profits on the concentration trade consisting of a handful of large-cap mega stocks and diving into financials, industrials, materials, and even regional banks. But the prize for the greatest bounce off the bottom had to be the market's unwanted stepchild, the Russell 2000. This small-cap index logged a 12 percent gain in just five days before profit-taking set in.

 

To be fair, some of this rotation has more to do with the expectation that the Federal Reserve Bank will cut interest rates in September. The odds of that occurring among Wall Street bond players are now just short of 100 percent. As such, it is an accepted principle that small-cap stocks benefit the most from lowering interest rates. That is because many of these companies do not make money and must borrow to stay afloat. Lower interest rates also help commodities, especially precious metals, which explains why gold hit an all-time high this week before profit-taking.

 

However, the decline in overseas markets, in China plays, in semiconductor and tech stocks, while gains in cyclical areas, financials, and others can be attributed to the political arena rather than any macroeconomic data or what the Fed said or didn't say. Back in June, I wrote, "We are entering the season where election politics begin to matter to the stock market. It may be that political uncertainty may begin to trump economics." That season is clearly upon us.

 

In quick succession the markets have witnessed the Biden debate debacle, the Supreme Court immunity ruling, Democrat demands that President Biden drop out of the race, the attempted assassination of Donald Trump, and the selection of J.D. Vance as Trump's running mate, former President Trump's nomination at the Republican National Convention, and the release of a Bloomberg interview with Trump that underscored his intent to place 100 percent tariffs on Chinese goods and a warning to Fed President Jerome Powell not to cut interest rates before the election.

 

And if that wasn't enough to keep the algos and computer programmers busy devising new algorithms for their day trading, rumor has it that the effort by Democrats to replace Joe Biden as their candidate may be gathering strength again now that President Biden has come down with COVID. Many on Wall Street believe we could see an announcement of a Biden drop-out in favor of Kamala Harris this weekend.

 

The implications of a Trump versus Biden (or Harris) presidency appear to be monumental on the surface if you listen to the candidates. Regulations might change, which could be good or bad depending on what sectors are impacted. I expect the media, who are in the business of selling more newspapers and as many clicks as possible, will embellish every campaign promise, and every policy suggestion with a whole series of "what-ifs." They need to do that to keep you reading and listening. As for the polls, forget them. The polls are notoriously inaccurate and are simply another method politicians are using to advance their numbers.

 

If you have not done so, I urge you to read my series of columns on regime change and this era of populism that we are now entering in full force. I believe it will help put all the political events of the last few weeks into perspective. It will also give you some guidance on what to expect going forward in the financial markets.

 

The present environment will only become more heated and volatile into November. As such, I must remind readers that campaign promises are not facts. Nor is hope, like despair, an investment strategy. After managing money through a good number of presidential elections, I can state categorically that buying or selling investments based on who wins or loses elections in the U.S. is a bad, bad idea. To do so only guarantees one loser — you.

 

As for the markets, over the last few weeks, my advice was to expect a selloff in the stock market in mid-July. The only question to ask at this point is how deep of a correction are we in for. It doesn't have to be a straight-down plunge. We could bounce and then roll over, bounce again and so on until we see an overall decline of 5 percent-6 percent plus. It could be more, but we will need to wait and see.

 

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 Consumer Price Index was cooler than expected in June, while the Producer Price Index was warmer. Equity traders responded by selling winners and buying losers.

 

CPI inflation fell further than most expected as easing prices for gasoline and other staples like food and new lease rents cooled dramatically. That information might help the level of anxiety people are feeling about inflation. It appears that the price points of most staples have finally flattened out year-over-year instead of constantly going up as they have for the last few years. 

 

Countering that good news, wholesale prices climbed 0.2 percent last month led by prices for services, which offset a decline in goods prices. The May PPI numbers were also revised upwards as well. However, the CPI news trumped the disappointing PPI data on the nation's trading desks.

 

Fed Chairman Jerome Powell's testimony before Congress this week paved the way for the inflation data. On Wednesday, in his testimony before the Senate Banking Committee, he said, "More good data would strengthen our confidence that inflation is moving sustainably toward 2 percent."

 

His semiannual congressional appearance at the House Financial Services Committee a day later was also encouraging. Powell hinted that the environment for rate cuts is approaching citing a jobs market that is slowing down. He also said that the Fed had been heavily focused on inflation but is now getting to a place where the labor market is drawing more of their attention.

 

Recently, the labor market data indicated that the number of jobs is declining. Powell clarified that he and his committee are increasingly aware of the risks posed by a cooling labor market. His comments kept the equity market well-bid for most of the week and the inflation data announcements were simply the cherry on the bull's cake.

 

Based on Powell's testimony and the cooler CPI data, the betting for a rate cut by September skyrocketed to more than 90 percent. Both the U.S. dollar and bond yields plummeted as a result. However, at the same time, a massive shift occurred as momentum and program traders sold down the ten or so large-cap stocks that have driven the averages higher, while buying hand-over-fist areas like precious metals, China, emerging markets, small-cap stocks, industrials, and real estate.

 

All the above areas benefit the most from a declining dollar, lower interest rates, or both. This could be good news for the health of the market if this trend were to continue. I have written about the concentration risk (too few stocks going up) that has gripped the market over the last few months. For the markets to continue to gain, we need to see a broadening out of stocks that are participating in the upturn.

 

If the market were to rotate out of some of its FANG/AI holdings into other equity and commodity areas, there likely would be a period of consolidation and volatility in the markets. I have been expecting higher highs into mid to late July followed by a period of consolidation. As of right now, I am on target and await further developments.

 

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.

It was another good week for stocks following another good month of gains. Granted, in this holiday-shortened week, the volume behind the positive moves was paltry at best. However, many traders will tell you that only the price pays.

 

The macroeconomic data seems to be coming in as the Fed had hoped, with some data showing a slight cooling of the economy and at least two months of better inflation numbers. Although the U.S. economy added 206,000 jobs last month, that was slightly down from 218,000 jobs in May. Average hourly earnings also increased, but below forecast as well. However, the overall unemployment rate did tick up to 4.1 percent, the highest reading in three years.

 

Chairman Jerome Powell appeared satisfied with the state of the economy and inflation when he spoke in Portugal this week at the Forum on Central Banking. He suggested that we are returning to a disinflationary path but "we want to be more confident that inflation is moving sustainably down before we start the process of loosening policy." 

 

His comments barely differed from that same old monetary song the Fed has been singing throughout the year. Nonetheless, the bulls ran with his comments pushing the S&P 500 Index above 5,500 for the first time.

 

Another sign the Fed is on target was the new data released by ADP this week that showed annual wage increases for workers who remained in their same job increased at the slowest rate in nearly three years in June. Wage growth is one of the main contributors to the inflation rate. As such, that may have been good news for Wall Street but bad news for Main Street where consumers are still fighting the high cost of everything.

 

Politics and the election, at long last, appear to have entered the psyche of traders and investors alike. Last week, I warned readers that I expected as much. Two events — the Biden debate debacle and the Supreme Court's ruling on presidential immunity — captured the market's interest. Bond yields rose and the dollar strengthened.

 

The thinking behind these moves was that both events strengthened the probability that Donald Trump would prevail in November. And if he did win, inflation would be much higher thanks to his promise of tax cuts and tariffs. That remains to be seen, but traders immediately attributed the pop in yields to the "Trump Trade."

 

Precious metals and other commodities also jumped on the re-inflation theme although cryptocurrencies declined. At the same time, cannabis stocks were clobbered as investors worried that a Republican sweep of the House and Senate would put an end to any further liberalization of marijuana. Drug companies also took it on the chin, since the pharmaceutical sector has traditionally been the whipping boy for both parties as election rhetoric heats up.

 

The narrowing of the market's gains continues to occur with less than ten stocks accounting for most of the S&P 500 and NASDAQ gains. Concentration risk is higher than it has been in decades. How long can this last is anyone's guess? The index averages are stretched, but we will only know in hindsight when we have reached a breaking point. 

 

As readers recall, I expect fireworks this month with new highs early on followed by a possible downdraft in the latter half of July. However, nothing in the data or the Fed's actions indicates such a sell-off will occur. Sure, the technical charts are screaming a flood of warning signs, but the momentum behind the AI and FANG stocks is still quite strong. For a pullback to occur, the bears need a trigger.  

 

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 good news is that early in this coming month we should see new highs in the stock market. The bad news is that we could also see some downside as well.

 

The equity markets' grind higher throughout June has been achieved by fewer and fewer stocks. Most of the gains have been concentrated in ten stocks or less. There have been a few days where the other 490 stocks of the S&P 500 index managed to mark up some gains, but if you weren't in AI or Fang stocks, you underperformed by a mile.

 

I have mentioned this before in several of my past columns. As we push higher, a feeling of caution seeps into my bones. On the surface, there is nothing that I can put my finger on, and yet my Spidey sense tells me to tread lightly. However, the macroeconomic data does not justify my worries.

 

Inflation, while sticky in some areas, continues to come down. The Personal Consumption Expenditure Price (PCE) for May was unchanged, as expected, while the core index which excludes food and energy, rose 0.1 percent compared to 0.3 percent in April.

 

I recognize that the official inflation data (CPI, PPI, PCE) is not the inflation that normal people are feeling. Grocery prices may be coming down but are still 200 percent higher than they were.  Prices at the pump are still high as is the cost of eating out. Most restaurant prices are so high that one could feed a family for several days on a single tab for two. Rents, insurance, and a bunch of other items are still in the stratosphere.

 

This has led to a slight decline in the rate of consumer spending, especially among lower-income consumers. However, the consumer spending averages have been held up by overspending by those in the upper income brackets. Fortunately, the continued health in the jobs market allows many to still make ends meet (for now).

 

Given the above scenario, the fact that the Fed is still waiting for more definitive data to cut interest rates should not impact the direction of the markets. Many argue that the Fed does not need to cut at all this year given the strength of the economy. They have a point.

 

The deficit is climbing exponentially and interest payments on our debt now equal what we spend on defense. And yet, billions of dollars of monthly Treasury auctions that make up the government's quarterly refunding needs have hardly moved the needle on the benchmark, U.S. ten-year Treasury bond. The U.S. dollar also remains well-bid.

 

What's not to like given the above scenario? The bull case I have laid out should give me comfort that new highs in the market are justified. And maybe they are, but why isn't the market broadening out? Why are investors flocking to only the best, cash-rich, mega companies in the world if everything is so good?

 

Maybe I am looking in the wrong place for clues to the future. I have just finished several columns on populism and its future impact on the country and the economy. From all the responses I received, I have identified one clear message--people are scared. They are afraid of the coming elections, worried about our climbing debt burden, of geo-political tensions, and much more.

 

We are entering the season where election politics begin to matter to the stock market. It may be that political uncertainty may begin to trump economics.  Last night’s disappointing debate performance by President Biden, for example, has many calling for him to bow out. In any case, I suspect that for market participants July will be less about dull markets and long vacations, and more about who said what and when.

 

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.