The good news on the economy has been bad news for the stock market. That's been the name of the game for the last several months. This week, we had more of the same.

 

The third and final revision of the U.S. third-quarter 2022 Gross Domestic Product came out on Thursday, Dec. 22. It was revised up to an annual rate of 3.2 percent from 2.9 percent. That's a sizable increase. The engine behind that growth was consumer spending and U.S. exports.

 

On the unemployment front, jobless claims for last week were roughly flat versus the previous week. That indicates that employment is still running hot. Neither of those data points gives the Fed any reason to relax its tightening schedule.

 

That was bad news for the stock market. All the main averages promptly declined between 2 percent-3 percent on Thursday. On Friday, the inflation index most watched by the Fed, the Personal Consumption Expenditures Price Index (PCE) for November, came in as expected (0.2 percent versus 0.3 percent in October), which the markets took in stride. 

 

Investors, however, are so skittish that every data point is an excuse to run markets up or down. As I have warned readers in the past, selecting one or two data points and extrapolating a trend from them is a dangerous game, but that is exactly what the markets are doing.

 

As a result, stocks are ricocheting up and down on each announced data point. This becomes even more ludicrous when you realize all this data is not only highly inaccurate but will undergo revisions that many times are the opposite of the original announcement.

 

The most important event of the week happened overseas earlier in the week when the Bank of Japan finally joined the world's central banks in dumping its loose monetary policy stance of the last few years. After keeping its 10-year Japanese government bond yield below 0 percent, surprised global investors by allowing that yield to move 50 basis points on either side of its zero percent target. That sparked a sell-off in bonds and stocks around the world while driving the yen up and the U.S. dollar down.  

 

Unfortunately, things are looking rocky for that Christmas rally promised by so many talking heads on Wall Street. Many investors believe that because a Santa rally has happened so often in the past that one is just about guaranteed this year. But thus far, I would call this week a Santa Claws event. The problem is that these rallies are often momentum-based, meaning markets already in an uptrend, continue to trend higher. That has not been the case this year. If anything, looking at the year's performance, the momentum has all been to the downside.

 

The AAII Sentiment Survey tracks the opinion of individual investors on where they think the market is going. It is often used as a contrary indicator. This week the index hit the highest level of bearishness among investors in nine weeks at 52.3 percent, while the number of bulls registered was a paltry 20.3 percent. The spread between bulls and bears is negative at minus-32 percent. The dour readings should give bulls some encouragement that at some point soon we may see another relief bounce.

 

I expect that we continue our journey down toward my 3,700-3,800 target on the S&P 500 Index. If we reach that level soon, we could see an up day or three during the upcoming, holiday-shortened week ahead. But whatever upside we may get should not be confused with the primary trend, which is down for the first quarter of 2023.

 

My advice is to set aside the market for the next three days, and instead, focus on family, friends, and loved ones. Merry Christmas and Happy Hanukkah.

 

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 Christmas arrives around the nation this weekend, tardy consumers are hitting the neighborhood Christmas tree lots and farms in droves. Late-coming artificial tree buyers are finding slim pickings at big-box stores as well. This is despite an average price increase this season of between 5 percent-15 percent.

 

Americans will spend nearly $6.6 billion on Christmas trees this season, according to the National Christmas Tree Association (NCTA). NCTA predicts consumers will pay an average of $86.59 for a live tree, and $122.60 for an artificial tree. Many shoppers could pay much more than that.

 

Last year, 75 percent of U.S. households, or 94 million homes, displayed a Christmas tree during the 2021 season, according to the American Christmas Tree Association (ACTA). This year, ACTA predicts Americans will purchase almost 21 million live trees, which is on par with last year's total. In addition, 6.5 million households displayed both live and artificial trees.

 

Supply chain issues had snarled artificial tree sales last year, so retailers ordered early this year and stocked up on inventory. It has turned out that they still sold out early in many locales.

 

As for living trees, there could be shortages of inventory depending on the region. In 2021, live tree farms were walloped by environmental conditions, which continued into this year. Wildfires, lack of irrigation, elevated temperatures, and drought were the main drivers of the loss of young Christmas trees in certain parts of the country. Experts expect climate change conditions will continue to bedevil farms in the future.

 

As a result, whether you choose a live or artificial tree this year expect to pay more. Nearly all of the 55 largest U.S. Christmas tree wholesalers are raising prices this year by as much as 5 percent-15 percent.  Some wholesalers intend to raise prices even more. But don't blame the Grinch, blame inflation — rising prices for diesel, fertilizers, and chemicals. Supply chain issues and labor have contributed to higher prices, in addition to the weather problems for live trees.

 

Despite the prices, and lack of selection, 85 percent of consumers found that Christmas trees are worth it, according to the Real Christmas Tree Board, an industry marketing and research firm based in Michigan. Who can blame them, especially when buying a real tree?

 

For many in society who have become increasingly aware of the environment, Christmas trees can be guilt-free. Just one acre of trees provides enough oxygen for 18 people every day. One Christmas tree alone can absorb one ton of CO2 during its lifetime and with over 350 million trees growing at any one time, the environmental benefits are enormous.

 

So are Christmas trees worth it? My answer is a resounding yes. Just sit back for a moment, close your eyes, and remember the scent of that blue spruce, Scotch pine, or Douglas fir in your living room or den. I can almost feel that sticky sap on the branch, as we hung that special ornament. How much is that worth?

 

And that's not all. Picking out the perfect tree, hauling it home in the car, or through the field, and then wrestling it through the front door has become one of those yearly family traditions most families cherish. The actual decoration of the tree, whether real or artificial, becomes a work of art that even the youngest of us gets to experience and create.

 

I would like to wish all my readers a happy holiday season, with or without a Christmas tree. Take some time off, cherish your family and friends and hug someone.   

 

Anyone seeking individualized investment advice should contact a qualified investment adviser. None of the information presented in this article is intended to be and should not be construed as an endorsement of OPI, Inc. or a solicitation to become a client of OPI. The reader should not assume that any strategies or specific investments discussed are employed, bought, sold, or held by OPI. Investments in securities are not insured, protected, or guaranteed and may result in loss of income and/or principal. This communication may include opinions and forward-looking statements, and we can give no assurance that such beliefs and expectations will prove to be correct. Investments in securities are not insured, protected, or guaranteed and may result in loss of income and/or principal. This communication may include opinions and forward-looking statements, and we can give no assurance that such beliefs and expectations will prove to be correct.

"Don't fight the Fed" is an oft-quoted market saying that has remained sage advice for the past decade or two. Recently, however, it appears investors are thumbing their noses at that advice.

 

This week, Fed Chairman Jerome Powell and his FOMC members released yet another warning that they see a long drawn-out battle with inflation that will last well into next year. Given the decline in bond yields and the rise in equity indexes, the financial markets appear to disagree. Who will turn out to be right has major implications for what happens to financial markets into the New Year.

 

The recent good news on the inflation front — lower monthly Personal Consumption Expenditures Price Index (PCE) and the Consumer Price Index (CPI) data — has convinced investors that inflation is on the run. The expectation that core inflation could fall as low as 2.6 percent by the end of 2023 is the bull case. They argue that global supply chain disruptions were the main cause of the inflation spike. That problem is disappearing quickly and as it does, so will inflation.

 

If so, inflation could fall to the Fed's target rate of 2 percent within the next 12 months. Some investors believe that the Fed will not only need to back off from raising rates but likely begin to cut interest rates to avert a serious recession. As such, the bulls have been bidding up stocks and buying bonds.

 

The Fed is on the opposite end of the spectrum. Chair Powell has remarked on several occasions that headline inflation, as represented by the Producer Price Index and the Consumer Price Index, is not a good indication of the true rate of inflation. Why?

 

It is because energy, durable goods, and shelter are three areas heavily represented in those indexes and are strongly influenced by supply chain disruptions. The Fed is looking more at variables like service prices, which are labor-intensive, and have more to do with aggregate supply and demand. That puts employment squarely in the central bank's cross hairs and they see little in the way of a slowing down in job growth.

 

Despite two monthly declines in the rate of inflation as represented by the CPI, the Fed has raised its forecast for inflation next year to 3.1 percent, and its core inflation (ex-food and energy) forecast to 3.5 percent from 3.1 percent.

 

The Fed also sees meager growth in GDP (plus-0.5 percent), while many economists had been predicting at least a moderate recession beginning in either the first or second quarter of 2023. Now, it appears that there is a growing consensus among a group of bulls who think a mild recession at most will reduce the inflation rate quickly as supply chains continue to recover and expand.

 

There are a couple of flies in that ointment, from my perspective. Even if inflation was solely the result of supply chain disruptions, why are the bulls so sure that supply chain problems will disappear, never to return?

 

China, the main cause of those disruptions, is giving up its zero COVID-19 policies, but as a result, the infection rate among the Chinese population is skyrocketing with a real possibility that supply chains may come under pressure once again. Our own country is not immune to another resurgence of COVID and possible supply chain issues.

 

Omicron BQ, and XBB, are COVID subvariants that are currently causing 72 percent of new infections in the U.S. They are the most immune evasive variants of COVID-19 thus far. Present vaccines and boosters are "barely susceptible" to neutralizing the disease, according to the U.S. Centers for Disease Control. The holiday season might usher in a big spike in infections with all the lost productivity that could entail.  

 

In my opinion, it seems far too early to claim victory on the inflation, interest rate, and growth front. The disappointing FOMC meeting this week may convince investors that stocks are ahead of themselves. We have not been able to break the top end of my target range (4,000-4,100) thus far on the S&P 500 Index. "Don't fight the Fed" seems good advice to me.

 

I am sticking with my cautious forecast and believe that the markets need to pull back to test the 3,700-3,800 level on the S&P 500.

 

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.

After a year where the stock averages have declined anywhere from 7 percent to 30 percent, the last thing investors want is to see further downside. The problem is that a surging stock market is the last thing the Fed wants to see in its battle to reduce inflation.

 

It is common knowledge that the Fed does not want to see a robust equity market. Fed Chairman Jerome Powell and his merry men have never said so explicitly, but they are monitoring the ups and downs of the market closely. When they perceive that price action is getting out of hand, one or more FOMC members step up and try to talk the markets down.

 

Several times this year when the animal spirits of traders and investors have pushed stocks up 10 percent or more, the Chairman has been able to squash the move effectively simply by jaw boning. These actions may be contrary to many investors' long-held belief that a stronger stock market is always good for the economy but that is not always the case.

 

The Fed has done a good job of explaining that inflation is their number one concern when it comes to the health of the economy. That sentiment has been echoed throughout the globe as central bankers everywhere are raising interest rates continuously. Readers should know that tightening monetary policy by raising interest rates and reducing liquidity in the credit markets by selling bonds are the main tools central bankers use to reduce demand.

 

The problem is that thus far, despite raising rates at a historical pace, the economy continues to grow. Employment remains stubbornly higher than expected as well. That combination continues to fuel consumer demand for goods and services. As a result, inflation remains substantially higher than the Fed's target of two percent.

 

But hasn't the stock market declined enough to warrant a more dovish Fed? Not really. Consider that the pre-pandemic low of the S&P 500 Index was 3,387 in February 2020. Since then, despite 2022 losses, the index is still 16 percent higher than that level. For the most part, meme stocks and other speculative assets are still alive and kicking. In every bear market rally thus far, investors have flocked back into these assets, despite the lack of earnings, profits, or even cash flow. In many of these companies.

 

It is only recently that highly speculative assets such as crypto have finally begun to fall substantially, but it took a major financial crisis and bankruptcy to trigger that event. None of this seems to have phased or altered the casino-like atmosphere of today's stock markets. In short, after years of buying the dip, it is taking much longer to convince traders that may not be the best investment strategy. It could require a recession to change that behavior.

 

Most financial professionals are expecting a recession in 2023 thanks to the Fed's tightening of monetary policy. A recession is one of the best ways to reduce economic demand and by doing so achieve the Fed's goal of lowering inflation. I'm hoping for a quick, couple of quarters of a moderate recession that will drive inflation lower without causing too much harm to the country's labor force.

 

So how would a substantial decline in the stock market help reduce inflation?

 

In the U.S., the stock market is normally the bailiwick of those considered well-off. They have enough money to both support their lifestyle and save for their eventual retirement.

 

When financial assets decline, there is less money in the system, so financial conditions automatically tighten.

 

At the same time, a sell-off in equities has a psychological effect on those who are invested. People feel poorer as their 401 (k) or IRA decline. Often, they tend to reduce spending on consumer goods and services, therefore reducing demand (and inflation). As prices decline substantially, savvy savers can also take advantage of fire sale prices. This is an especially good deal for younger retirement savers who can take advantage of a "buy low" period in order to beef up their retirement saving plans.

 

As for those living paycheck to paycheck, a plunge in the stock market means little to them, even if the selloff is caused by a recession. Hourly workers who are laid off will likely find another job quickly, especially if a recession is short and sharp in duration. 

 

Overall, a moderate recession and a cheaper stock market would hurt investors in the short term but help just about everyone in the long term. It would wring out speculative fever among investors, help the Fed accomplish its inflation goals sooner than later, and have comparatively little impact on both the long-term performance of one's retirement account and the stock market.

 

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.

Historically, mid-term election years are notoriously periods of underperformance in the stock market. The post-election year is a different story altogether. Will 2023 be one of those years?

 

The average return for the stock market in the 12 months after elections has been 16.3 percent.

 

2022 will qualify in history as one of those underperforming mid-term election years. To date, the benchmark S&P 500 Index, has lost roughly 20 percent thus far and may end the year even lower.

 

Historically, looking back to 1932, S&P 500 returns have averaged 14 percent in a split Congress and 13 percent in a Republican-held Congress under a Democratic president. The facts are that stock markets do well when there is gridlock in Congress. Neither new spending initiatives nor tax increases are likely to pass a divided Congress. In the aftermath of this election, if the House and or Senate flip to the GOP, the best that can be said is that additional business regulation will be limited and may even be rolled back somewhat in areas such as energy, pharmaceuticals, biotech, and the financial sectors.  

But a rebound in the markets next year is far from a sure thing given the global economic background. We are wrestling with the highest inflation rate in a generation, sky rocketing interest rates, the Ukrainian war, and a worldwide economic slowdown. The International Monetary Fund has cut its forecast for global growth from 3.2 percent in 2022 to 2.7 percent next year. That is the weakest growth rate since 2001.

 

As the global economic pie shrinks, I expect to see a rise in worldwide trading blocs as the world fights for a bigger piece of the shrinking pie. A North-South economic and political axis has been forming for more than a decade with China in the lead in expanding trade and investment in Asia, Latin America, and Africa.

 

Russia has joined this bloc in response to Western economic sanctions, while nations such as India, Brazil, some of Eastern Europe as well as certain energy producers in the Middle East are strengthening economic ties with both Russia and China. Together, these countries represent more than one-third of the world's economic output and two-thirds of its population. As global growth slows, expect trade wars to accelerate between this bloc and a U.S.-led trading bloc. That trade group includes most of Western Europe, Japan, South Korea, and a host of other pro-democratic nations.   

 

A recession seems to be all but guaranteed in 2023 here in the U.S. In a recent CNBC CFO Council survey, more than 68 percent of chief financial officers (CFO) are convinced that a recession will unfold during the first half of 2023. No CFO surveyed believed the country will escape a recession. It is just a question of how severer the recession will be. I believe that will depend on how high the Fed must raise interest rates to bring inflation down.

 

Inflation was identified as the biggest risk facing the economy and businesses by the Federal Reserve Bank. Most Americans would agree with that position. Unfortunately, inflation, now over 8 percent, has been much stickier than most experts expected. As a result, the ongoing central bank tightening of monetary policy that began this year will continue into 2023.

 

The longer inflation remains elevated, the longer and higher interest rates must climb. The main debt instrument the Fed uses in raising interest rates is the Fed funds rate. All other debt instruments key off that rate. Bond investors expect the Fed will ultimately target a Fed Funds rate above 5 percent. The Fed's announced target rate is now between 3.75 percent-4 percent. Bond investors expect the Fed will ultimately target a rate above 5 percent before all is said and done. That means we still have a sizable amount of tightening yet to come.

 

The Fed is counting on higher interest rates to slow demand by reducing economic growth while increasing the unemployment rate. That would hopefully reduce the rate of inflation. Some economists could see inflation fall to 5-6 percent under this scenario.

 

I expect that rising interest rates will result in a slowing economy in the first half of 2023, resulting in a mild recession, and a decline in the headline inflation rate. The financial markets, I expect, will remain volatile as these economic developments unfold. Traders, witnessing a gradual decline in inflation, will jump the gun, bid markets higher, and expect the Fed to ease, only to be disappointed.

 

The Fed will remain steadfast for months, in my opinion, until they are sure their policies are working. This divergent behavior will whipsaw investors. It will likely create a series of vicious bear market rallies only to see chasers caught in nasty bull traps. I expect to see lower highs and lower lows as January and February progress.

 

At some point in the first quarter, fears that the Fed will "over tighten" and force the economy into an even deeper recession will make the rounds on Wall Street as well as in Washington. That will add fuel to the fires of uncertainty and likely make a life for Fed officials difficult, especially if the labor market weakens. We could also see increased stress in financial markets here and abroad, as credit markets grow tighter.

 

U.S. corporate earnings for the benchmark S&P 500 Index currently at $225 will probably take it on the chin. I expect at best, earnings will be flat versus 2022 and may decline to roughly $200 in a worst-case kind of scenario. If you slap a 15 times earnings ratio onto that number, you come up with a 3,000-price level on the Index, compared to the 3,900 level today.  

 

As such, I see a rather nasty first-quarter decline in the stock markets to fresh lows that could take the S&P 500 Index down another 10 percent-20 percent or so from here. I am forecasting a final capitulation in the stock market around the end of March 2023 with a tentative bottom of 3,200.

 

When do I see the Fed pivot or at least pause in tightening? That depends on inflation, but I do believe it will take several months before the Fed will be willing to relax its policies once inflation begins to fall. That hasn't happened yet. Let's say it does happen over the next six to nine months, sometime in the second quarter of 2023.

 

If so, I expect the markets will anticipate this change. The U.S. dollar will begin to retreat, interest rates start to decline, and we should see stocks and bonds bounce in the Spring and throughout the summer. For the year, my guesstimate, which will change for sure as the year progresses, is a target of 4,500 on the S&P 500 index.

 

I would expect to see assets that are negatively correlated to a declining dollar such as materials, commodities, energy, and maybe cryptocurrencies do well. Emerging markets would also benefit as would U.S. and foreign stocks in general. As interest rates decline, there would also be an upside in bond prices across the board as well as bond funds. High-yielding dividend stocks and value stocks would also do well.

 

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.