It was a slow week for news but that didn't stop the bulls from pushing the equity markets to new highs. But the number of stocks that are pushing stocks higher are fewer and fewer.

 

Day after day, and week after week. the S&P 600 and NASDAQ have made a series of new highs. Under the hood, however, just about all the gains have been led by ten stocks in the technology sector. Many investors saw no end to the gains and continued to pile into the Magnificent Seven and the AI Five. The stampede has been led by everyone's favorite stock, Nvidia.

 

This leading semiconductor stock now boasts more than a $3.35 trillion valuation. It is now the most valuable company in the S&P 500 Index. Some analysts are predicting the company's valuation will rise to $5 trillion over the next 12 months.

 

Traders were sure that the stock would take a breather after its 10-for-one stock split on May 22, but that was not to be. The shares continued to rise almost every day since then. The Bulls even have a new nickname, "Evergreen," for the semiconductor giant since it rarely has a red day.

 

Nivida and a couple of other stocks like Microsoft, Apple, Netflix, Broadcom, Google, and Meta now account for so much of the NASDAQ 100 and the S&P 500 Indexes, that where they go, so goes the market. The performance of just about everything else is dismal in comparison. Why just AI stocks and their counterparts?

 

Part of the attraction is that Wall Street can justify any price to buy into these stocks because the sky is the limit when it comes to the future of artificial intelligence. Every tech company can either claim to be in AI or will soon claim a higher valuation. It reminds me of the days when a company could lift its share price by adding dot com to its name. 

 

Around the globe, equity analysts keep upping their estimates on how much companies will spend on AI in the years ahead. To them, the internet boom was small potatoes to what unfolds in the AI universe. There is no way to prove (or disprove) these predictions.

 

On Friday, Nvidia's weighting in the $71 billion Technology Select Sector SPDR Exchange Traded Fund (symbol XLK) was expected to substantially increase via a rebalancing of that fund. This additional buying power from XLK had goosed the stock price this week in anticipation.

 

Compared to AI, therefore, the rest of the stock market is a humdrum place. Why buy anything else when all the action is in stocks like Nvidia? To me, however, that is an increasingly risky bet that relies on the greater fool theory that there will always be someone else to buy my stock at a higher price. 

 

In the meantime, the overall market remains supported by traders who are convinced that the Fed will have to cut interest rates multiple times before the end of the year. The Fed, of course, continues to say no way. Over the last two weeks, members of the Federal Open Market Committee have warned the financial markets that there are no immediate plans to cut interest rates.

 

Traders are not buying it. The bulls remain convinced that the central bank will soon see that inflation is trending lower, unemployment is rising, and growth is moderating. While the data still doesn't confirm any of these assumptions, animal spirits tend to ignore the facts sometimes in favor of price momentum. I suspect that if the Fed does not say categorically "There will be no cuts this year," the markets will hear what they want to hear. In the meantime, the idea that a rate cut is just around the corner will continue to drive bullish sentiment. Until it doesn't.

 

Markets are stretched but everyone knows and ignores it. Seasonally, it is a bullish period for the markets. I am riding the market higher but peeling off positions as stocks climb. I expect a pullback in the market anytime now, so be prepared. It won't be anything more than a 3-5 percent decline but it will feel far worse. I think we then bounce before a possible steeper decline in July.

 

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.

 

Stocks hit an all-time high as macroeconomic data supported the view that the rate of inflation was falling, even while the economy continued to grow. However, the Fed said it wants to hold off on interest rate cuts until they get some more data.

 

Both the Consumer Price Index (CPI) and the Producer Price Index (PPI) for May showed cooler inflation data. CPI came in at plus-3.3 percent down from 3.4 percent in April. Prices for some household items such as gasoline and bacon declined.

 

The PPI went down 0.2 percent in May compared with market expectations of a 0.1 percent increase and after a rise of 0.5 percent in April. Prices for goods fell 0.8 percent, the most since October 2023. Most of the decline was due to a 7.1 percent decline in gasoline. However, diesel fuel, eggs, electric power, jet fuel, and basic organic chemicals also saw declines.

 

And as inflation appeared to be falling, weekly U.S. jobless claims unexpectedly surged to a 10-month high. Investors took heart from these numbers and pushed equities to new all-time highs. The technology sector and large-cap mega stocks took the lead.

 

The bullish sentiment among investors was so strong that not even a hawkish Federal Open Market Committee meeting in mid-week could daunt the bulls. Fed officials raised their forecast for inflation this year and kept rates at a 23-year high. They also reduced their expected interest rate cuts for the remainder of the year from three to one with a few members expecting to hike interest rates. Remember that at the beginning of the year, markets were expecting 6-7 cuts.

 

In the Q&A session, Fed Chairman Jerome Powell argued that after the increase in inflation data during the first three months of the year, the policy committee thought it wise to have a wait-and-see attitude. He said that while the CPI inflation number for May was in the right direction, the members wanted to see a string of good inflation reports before cutting interest rates. That could take until the end of the year.

 

Normally, the tone of that meeting would have disappointed traders and triggered a steep decline in the averages. Instead, the S&P 500 Index made a record high, passing 5.400 for the first time. Many market participants don't seem to care if interest rate cuts are delayed as long as the economy continues to grow and inflation declines.

 

It was the technology sector, led by the Magnificent Seven stocks, which garnered the lion's share of the gains with Apple leading the way. Investors chased the stock this week pushing it up to record highs after the company announced new artificial intelligence features, including the integration of ChatGPT in their devices.

 

Most other sectors of the market did not fare nearly as well. Some areas, such as precious and base metals, crypto, and financials, have been consolidating after recent outperformance in the first half of the year. Oil and energy stocks have also trailed most other areas of the market. The International Energy Agency released a report predicting that the world will be swimming in a "staggering" glut of oil by the end of the decade, which did not help energy prices either.

 

Some profit-taking can be expected after the run we have had so far this month. It wouldn't surprise me if we consolidated a bit in the week ahead. If so, I would expect traders to buy the dip. The stock market in July, however, could see a larger pullback than most expect. It would probably be a good time to go to the beach and shut down your computer.   

 

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.

 

This week, bond yields across the board rose on the back of several disappointing U.S. Treasury bond auctions. However, the Fed's key inflation index, the PCE, for last month came in a touch cooler. It helped, but not enough to keep stocks in the green for the week.

 

Three bond auctions this week met with tepid interest from buyers sending bond yields to their highest levels in over a month. The scorecard on government debt sales was 0 for three as two-, five-, and seven-year notes worth a total of $183 billion faced a chilly reception from bond investors worldwide. Who can blame them?

 

As the months pass, the U.S. debt level continues to rise. All most investors can see is a long road ahead of billions of dollars in Treasury bond auctions. The fundraising is necessary to fund the government's multi-trillion dollar spending programs.

 

 U.S. Treasury Secretary Janet Yellen has purposely confined most of the country's need for financing to shorter maturities, rather than auctioning 10- and 20-year bonds.

 

There is a method to that madness since selling billions of dollars in longer-duration bonds would jack up yields and might send the benchmark, U.S. Ten-Year bond above 5 percent from its current yield of 4.50 percent. She knows that would surely pressure equities lower. In an election year, a sitting president would not be happy to see a sinking stock market when he is already in a tight race to regain the White House.

 

And while yields climb, the Fed's policymakers continue to warn the markets that there is not enough inflation progress to warrant a cut in interest rates just yet. However, they continue to assure us that sometime down the road a cut is possible. Some members, like Minneapolis Fed President Neil Kashkari, have gone the other way and suggest that a rate hike is still entirely possible. That leaves investors in limbo.

 

The economic data is not helping either. First quarter of 2024 Gross Domestic Product was revised downward from the already weak growth rate of 1.6 percent to 1.3 percent. Over in the housing market, pending U. S home sales fell much more than expected. Month-over-month decline was minus-7.7 percent versus minus-3.6 percent expected. The shortfall in sales was blamed on the escalating rise in mortgage interest rate loans in April.

 

That data was bound to set tongues wagging as more traders worry about a possible stagflation scenario. They argue that rather than revisiting the 1970s era of full-blown stagflation, a milder version of the same may be in the offing.

 

Readers may recall that the 1970s was a period with both high inflation and uneven economic growth. High budget deficits, lower interest rates, the OPEC oil embargo, and the collapse of managed currency rates were the hallmarks of that period. Not all those conditions are present today. However, some argue that history does not need to repeat itself, but only to rhyme.

 

The Personal Consumer Expenditure Index (PCE) did come in a touch lower than expected. The core PCE, which strips out the cost of food and energy, rose 0.2 percent in April, which was in line with Wall Street's expectations but lower than the 0.3 percent increase seen in March. 

 

Last week, I warned readers that we would see some profit-taking. The S&P 500 Index fell almost 100 points from 5,304 to 5,214 as of Friday morning. This summer, I expect that we will be entering a period of consolidation. I don't see the averages making much headway until the end of August. It won't be all downhill. We could see bounces as markets get oversold, but it will be difficult to achieve new highs.

 

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 had to happen at some point. Gold, silver, and copper prices experienced a steep downturn this week. Profit-taking set in as traders rung the cash register after weeks of gains. However, tech got a boost from Nvidia's earnings.

 

And while tech took the lead, keeping the S&P 500 and NASDAQ up, the rest of the market did not fare as well. The strength in the economy and the early estimates of the Purchasing Managers Index called the flash PMI, indicated that prices were still increasing. The publication of the Federal Open Market Committee notes from the last Fed meeting on Wednesday didn't help.

 

Here's what the Fed members wrote: "Participants observed that while inflation had eased over the past year, in recent months there had been a lack of further progress toward the Committee's 2 percent objective."

 

That was no surprise to the markets given that all week the members of that committee were giving interviews and making speeches arguing the same "higher for the longer" theme. What was new and concerned investors was this: "Various participants mentioned a willingness to tighten policy further should risks to inflation materialize in a way that such action became appropriate."

 

It was the first mention this year by the Fed that an interest rate hike might be on the table. That set investors back on their heels. Higher interest rates are like kryptonite to the markets and especially to commodities such as gold, silver, and copper. It would call into question the gold bull's narrative that we have entered a super cycle for commodities

 

But commodities weren't the only area of the markets that saw declines. China stocks, which have had a similar period of outperformance, succumbed to the same kind of selling. Overbought conditions gave traders here and in mainland China the excuse to take profits.

 

What I found interesting is that several large-cap Chinese companies that are also traded in the U.S., reported amazing earnings and sales. PDD, the parent company of Tumu (a Chinese rival of Amazon here and abroad), for example, announced revenues and earnings that were double the estimates of analysts. Trip.com. Group (travel), Bilibili, (social media), and NetEase (online gaming) are some other companies that had great earnings as well. Yet, their stock prices fell in this downturn.

 

As for the U.S. equity and bond markets, investors had pinned their hopes on the earnings announcement of Nvidia, the number one player in the artificial intelligence space. AI has supported stock prices all year and AI plays have expanded to many areas of the market from utilities to grocery stores.

 

Fortunately, the company delivered better-than-expected earnings, sales, and guidance for the third time in a row. It also announced a 10-to-1 stock split in which shareholders will receive 10 shares for every share of the company they own as of June 7.

 

The good news sent the price of Nvidia up more than 11 percent on Thursday and took the stock market up with it at first, but while Nvidia stayed strong, the averages gave back most of those gains by Thursday's close.

 

Last week, I wrote "I could see 5,340 on the S&P 500 Index," we did reach a new intraday high, of 5,341 on the S&P 500 Index and 16,996.39 on the NASDAQ. However, I also warned that "I expect to see a couple of days of profit-taking, especially in those areas that have seen outsized gains. That would be ideal, reduce overbought conditions and set up for another ramp higher in June."

 

The pullback in commodities and China stocks this week certainly qualifies as a pullback but one that I would buy. As for U.S. markets, I suspect next week we might see some minor profit-taking earlier in the week as traders eye next Friday's Personal Consumption Expenditures Index. The PCE is the Fed's No. 1 inflation indicator. If you are bullish on the stock market, you don't want to see an increase in that data point.

 

I wish all my readers a long weekend but do take the time to remember what the Memorial Day holiday is about. I know I will be remembering my fellow Marines who were left behind in the jungles of Vietnam. Semper Fi! 

 

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.

This week's inflation data heartened investors. Equities and commodities rose while bond yields and the dollar fell. The question is whether the data will convince the Fed to relent on keeping interest rates higher for longer.

 

If we take a long-term view, the Consumer Price Index (CPI) change was minuscule. For April, inflation gains slowed from 3.5 percent to 3.4 percent, while core inflation increased over the last 12 months by 3.4 percent compared to 3.5 percent in March. That's no big deal, and yet, the numbers did break the trend of warmer CPIs over the last three months.

 

The cooler inflation announcement caught investors by surprise since most observers were convinced that inflation would continue the trend of hotter numbers. Readers may recall what I wrote in last week's column:

 

"The ramifications for the equity and bond markets could be serious. A weak inflation number in one or both indexes would be taken positively, I imagine with stocks climbing, possibly to new highs, and bond yields falling. It would also be beneficial for the commodity space and could push precious metals and copper higher. On the other hand, hotter numbers would have the opposite effect.

 

No one knows for sure, but readers aren't paying me for "on the other hand" opinions. So, I will come down on the side of cooler numbers next week. I base my guess on things like used car prices that have come down by about 30 percent thus far in 2024 and are accelerating to the downside. Insurance premium increases have been the major culprit in the hotter CPI data thus far and I am expecting at least a leveling out of price increases in car insurance this month.

 

That was exactly what happened. Stock indexes made record highs, yields fell, and commodities, especially gold, silver, and copper, soared. The question I am asking myself is now that we are above yearly highs on several indexes, are we jumping the gun here? Do you think the Fed is going to abruptly change its stance on one cooler inflation number?

 

I still don't think the data supports a change in Fed policy. The bond market disagrees. Traders are certainly upping their odds (again) for a cut in June, with more to follow. Sure, it could happen, but I won't hold my breath. Frankly, the Fed has already begun the easing process by reducing its Quantitative Tightening (QT). QT occurs when the Fed ups the amount of bonds they sell into financial markets from their balance sheet. That reduces the cash (liquidity) in the system.

 

At the beginning of May, the Fed announced it would slow down bond selling by over half from $60 billion per month to $25 billion. That is roughly equivalent to a 25-50 basis point cut in interest rates. At this point, I suspect the health of the labor market would influence the Fed more than one inflation reading. If unemployment increased suddenly (especially in an election year), the Fed might change its mind. Presently, while job gains have slowed, employment is still at almost historical lows.

 

As far as the markets are concerned, if markets continue to believe that the next move from the Fed will be an interest rate cut, risk assets will continue to gain, while the dollar and yields will decline further. I could see 5,340 on the S&P 500 Index, but I think Nvidia's earnings on May 22 will be crucial to where the market goes next. The entire AI rally and the gains in the technology sector for the year hinge on this AI chip producer. I believe it will set the stage for sentiment and earnings for the remainder of the month.

 

The markets have had a good run over the last two weeks. Is it time for a break? If so, I would call it a pause, where traders consolidate gains, catch their breath, and prepare for the summer. I expect to see a couple of days of profit-taking, especially in those areas that have seen outsized gains. That would be ideal, reduce overbought conditions and set up for another ramp higher in June.

 

June should be a period where markets grind higher. I am expecting a lot of rotation as well. Underperforming sectors will be squeezed higher, and favored areas will see bouts of profit-taking. By the end of August, we could see as high as 5,600 on the S&P 500 Index.

 

By the way, have you checked out the Chinese stock market since my column "China is on a tear?"

 

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.