@theMarket: Turmoil Keeps Investors on Their Toes

Two Mondays in a row, investors have had an opportunity to buy the dip in the stock market. In February there may be even more chances to do so depending on geopolitical developments.

 

For the source of much of this week's volatility, one need look no further than the White House. The number of executive orders has ramped up further. On-again, off-again tariff talks sent traders into despair, and then giddiness.

 

In the few hours between daily press conferences and announcements, markets held their breath with one finger on the buy button and the other ready to sell. If you throw in geopolitical news on topics such as Gaza, Greenland, Panama, Iran, Ukraine, and more, it is no wonder that the currency, bond, and commodity markets are churning as rapidly as the stock market.

 

Tariff fears last weekend saw stock futures on Sunday night swoon. The small-cap Russell 2000 Index futures were down 4 percent at one point. The same thing occurred the previous Sunday night when DeepSeek, the Chinese AI company, triggered a steep decline in technology and other index futures that carried into the next day's trading. But the markets rebounded quickly thanks to individual investors at the vanguard of the dip buying.

 

"Buying the dip" is alive and well among the retail crowd. On Monday, they purchased over $4 billion worth of stock options and equity. There is an entirely new generation of younger traders, forged during the COVID-19 decline in the markets, who have emerged with a different perspective on investing. 

 

Years of easy money by the Federal Reserve Bank and bucketloads of government spending have taught these investors that buying pullbacks was the way to go. Fundamentals matter less and momentum much more. Rapid rebounds in stock prices have encouraged this practice. Combined with what they call the "Trump Pump," animal spirits are lending even more volatility to the markets.

 

I have tuned out much of the political noise since the election and have concentrated instead on the economy. Here is what I am seeing.

 

The dollar is peaking because the threat of tariffs is on hold for now (except for the 10 percent tariff in China). The weaker dollar has driven down bond yields and that combination has been great for gold. Gold is reaching new highs daily. At the same time, the economy seems to be softening a wee bit while inflation is rising a tad.

 

Friday's non-farm payroll report was weaker than expected raising fears that employment is falling. I am expecting inflation to be above 3 percent year over year when the January data is released. That situation is creating a mild form of stagflation, something I predicted would happen this year, but it won't last long.

 

I expect February's inflation will decelerate to 2.85 percent based on the decline in energy we see today, while the economy continues to slow. Lower oil prices will help ease inflation if it continues to fall, which is part of the president's game plan. At the same time, our new U.S. Treasury Secretary Scott Bessent, a successful hedge fund manager, has an entirely different private-sector approach to inflation, interest rates, and economic growth.

 

The wild cards, however, are still unanswered. How will the next round of tariff threats play out? Will China and the U.S. make a deal? Is the European Union next on the list of Trump tariff threats? Do Mexico and Canada come back for a second round of tariffs?

 

I wish I had the answers, but I don't. What is clear is that the financial markets do not like uncertainty. It tends to create volatility of the kind we have been experiencing thus far in 2025. That should continue. The days of straight-up are over for the time being. Instead, we should experience ups and downs for some time. Despite that, I remain positive on the markets so buy the dips. 

 

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.