The July 4th shortened week was one where volatility claimed the markets. Interest rates and the dollar rose, sending stocks lower. The job data was the culprit.

 

The media blamed the setback on higher interest rates, as Fed heads cluttered the airways with warnings that the pause is over and higher interest should be expected by financial markets. The point hit home when the most recent data on job growth indicated further strength. On Thursday, the payroll processing firm, ADP, reported 497,000 jobs added in June; the most in over a year. At this point, there are more than 50 percent more job openings than people unemployed.

 

The latest reading on the Supply Chain Management Services Index also ticked up to 53.9 in June, which was higher than the expected reading of 51.2. That led the Atlanta Fed to push up its second-quarter GDP expectations from 1.9 to 2.1 percent.  

 

Even though the manufacturing side of the economy appears to be weakening, the services side of the economic ledger appears to be buoying economic expansion. That could lead to even more job growth as the services sector continues to hire workers to fill the continued demand.

 

On Friday, however, the non-farm payroll data for June came in far lower than expected. It came in at 209,000 job gains versus 240,000 expected, and the unemployment rate was unchanged at 3.6 percent, but average hourly earnings went up 0.4 percent versus a gain of 0.3 percent 

 

None of this is going to make the Fed happy. The difference between the two labor reports was contradictory at best. The wage gains were not. It likely means inflation and the Fed will keep interest rates higher for longer. There is even talk that we may face several more rate hikes instead of just one or two more in the coming months.

 

The debt market has responded by selling U.S. Treasuries in anticipation of that possibility, which has sent the ten-year U.S. Treasury bond above 4 percent for the first time in months. Mortgage rates also hit the highest point of the year with a 30-year fixed rate mortgage at 6.71 percent. That has hurt housing activity this summer as homeowners pulled back from listing homes and rate-sensitive buyers reigned in their purchase plans.

 

There is no question that stocks are extended. This week saw some of the air escape from the bullish balloon that has sent stocks higher since the beginning of the year. Those stocks that were most overbought, like the Magnificent Seven, were not immune from the selloff. I suspect that we face a period of consolidation ahead, which will delay somewhat my expectations for more market gains.

 

The summer months, on average, are usually more volatile since there are fewer players on their computers. Vacations and shorter work weeks leave markets vulnerable to larger moves both up and down. I plan to be on vacation myself in the week starting July 17 so no columns that week, unfortunately.

 

Many strategists are looking for a temporary peak in the markets this month. I agree. I am hoping stocks can move a little higher and they still may, but we are stretched at this point. Corporate earnings are right around the corner. Valuations are stretched and many companies are going to have to show stellar results to support prices. 

 

Inflation data in the form of the Consumer Price Index and the Produce Price Index are due out next week as well. That should offer a chance for stocks to move higher if the numbers are cooler. Hotter results would give traders an excuse to sell. The bottom line, however, is that I believe markets will climb higher in the months ahead, so stay invested. 

 

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 facts are that retail theft is a drag on the U.S. economy. Organized retail theft, smash-and-grab robberies, carjacking, and cargo pilferage are just some of the crimes committed hour by hour throughout the country. Estimates of costs vary but are well above $100 billion per year.

 

There is no definitive source that calculates the actual dollar cost of stealing, but several organizations such as the U.S. Chamber of Commerce and the National Retail Federation have provided guesstimates. The Chamber believes organized retail crime has cost the economy more than $125.7 billion. But there are add-on costs such as $39.2 billion in lost wages, 685,374 in job losses and $14.9 billion in lost federal, state, and local taxes.

 

We have all watched as images of criminals invading retail stores pop up on the evening news. In some cases, a dozen or more brazen criminals overwhelm local businesses carrying off tens of thousands of dollars' worth of merchandise while leaving a path of smashed glass, broken counters, and bruised customers. What we fail to realize is that these criminal acts are part of a highly organized effort conducted by anonymous professional crime players. 

 

Organized retail theft, according to most definitions, is the coordinated theft of merchandise by individuals and groups with the intent to resell these goods by passing them off as legitimate goods to unsuspecting buyers, typically online. The overall masterminds behind these crimes know and exploit local laws. They make sure to steal less than the dollar-amount threshold considered to be felony theft in most jurisdictions.

 

These bosses recruit and employ gangs of individuals to commit numerous thefts, making sure that total stolen remains below that felony threshold. And these are not victimless crimes. Consumers, employees, communities and business owners are caught in the crossfire of these crimes where eight out of 10 retailers report increased incidents of aggression and violence.

 

Car theft is also on the increase across the nation. The price tag for this form of theft totals around $25 billion. More than one million cars were stolen in 2022. This year that number is expected to increase yet again. For carjackers, hot wiring is passe and keyless theft is all the rage. Given the rising prices of both new and used cars, thanks to inflation and supply chain issues, thieves have a super-charged incentive to boost cars.

 

The number of stolen vehicles varies by where you live. Car thefts in 30 major cities have a 59 percent increase between 2019 and last year.

 

California tops the list of states with the most stolen vehicles followed by Texas, Washington, Florida, Colorado, Illinois, Ohio, Missouri, New York, and Georgia (in that order). Vermont has the distinction of least number of cars stolen to date.

 

Some of the more popular models to steal include the Chevrolet Silverado, Kia Soul, Hyundai Elantra, Subaru Legacy, and the Subaru Forester. Other brands include the Honda Civic, Honda Accord, and the Toyota Camry.

 

Next week, I will examine the fastest growing segment of theft in the U.S. — cargo theft. I will also examine what can be done to stop this epidemic of thievery. The answer is at best complex and as usual chock full of politics.

 

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.

U.S. first quarter Gross Domestic Product for 2023 was revised upward this week indicating that consumers are spending like drunken sailors. That's good for America as was the latest inflation data for May.

 

Between January and March of this year, the economy grew at a 2 percent annual pace. That caused the Commerce Department to sharply upgrade its previous yearly estimate of 1.3 percent. Although strong, it has continued to decelerate from a 3.2 percent growth rate in the third quarter of 2022 and a 2.6 percent increase in the last quarter of 2022.

 

Despite rising borrowing costs, the consumer continued to defy expectations. Consumer spending rose at a 4.2 percent annual rate in the first quarter. That is important, given that their spending accounts for 70 percent of the growth in the economy. And as long as the labor market continues to strengthen, workers will continue to spend. This week's unemployment claims declined, bolstering the view that employment is still quite healthy.

 

The Personal Consumption Expenditures Price Index, a gauge favored by the Fed, came in lower in May at 3.8 percent, which was the lowest level since April 2021. While inflation has halved over the last year, it is still high above the Fed's target of 2 percent. It is the reason Federal Reserve bankers continue to pound the table on maintaining their tight monetary policies. Market observers are now expecting another interest rate hike in July, and bets are fifty-fifty on one more hike after that.

 

Economists have continually pushed back the timing on exactly when the economy will dip into recession. Some think that this long-anticipated recession could begin in the third quarter but might well wait until the fourth quarter. There are some estimates it won't happen at all this year.

 

Liz Anne Sonders, the chief investment strategist for Charles Schwab, has argued that we have been in a rolling recession for the last two years plus. Housing and manufacturing, for example, have already suffered downturns. Other areas, such as the services sector, are still growing, but will likely be hit by a slowdown in the future. So rather than look for a formal traditional recession, investors should instead be on the lookout for the next areas to roll over. I think she has it right.

 

Good news on the banking front in the form of the successful stress test by the nation's 23 largest banks lifted the banking sector this week. Each year, the Federal Reserve Bank administers a severe recession scenario to identify if these banks can maintain the minimum capital levels while continuing to provide credit to the economy.  Given the worries sparked by the failure of three regional banks earlier this year, the results were a welcome sign in shoring up investors' worries over the U.S. financial system.

 

Last week, I wrote that I was watching the 4,350-4,320 level on the S&P 500 Index. I was also watching technology for a bottom. The QQQ, which is the symbol for the tech-heavy exchange-traded fund reflecting the NASDAQ Index, had a downside risk of 352. We hit an intraday low on Monday of 4,328 on the S&P 500, and 357 on the QQQs. We bounced from there as I expected, not too shabby for a guesstimate, but calling these levels is more about luck than anything else. So where to next?

 

It is the end of the quarter today, so market action on Friday was all about window dressing. Money managers want to close their books with a list of winners to show their clients so what stocks that worked over the last three months were bid up to dress up results.  I can see more gains into a holiday-shortened week and possibly further upside into the second week of July. We could see 4,600 or so before another bout of profit-taking sets in. Longer term, I am expecting 4,800 on the S&P 500 Index, but we have plenty of time to achieve that target.

 

Have a great Fourth of July; you've earned it.

 

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.

 

Last month, a new term for those stocks that have led the stock market higher this year surfaced on Wall Street. Investors have anointed Apply, Alphabet, Amazon, Microsoft, Meta, Nvidia and Tesla as the new leaders in the equity market.

 

It isn't the first time a group of stocks have captured the imagination and money of the investing community and it won't be the last. FANG, for example, an acronym that represented Facebook (now called Meta), Apple, Netflix, and Google have been a favorite investment group that has rewarded investors for buying and holding over the last decade or so.

 

Through the decades, there have been many such groups that provided outperformance and led to the market. My first experience with this groupthink type of investment was the Nifty Fifty. These stocks represented 50 large-cap stocks that were viewed as stable over long periods. Solid earnings growth was the key indicator to qualify for inclusion in this group. All of them were recommended as buy-and-hold equities.

 

Investors assigned high price/earnings ratios to these favored stocks and, in some cases, they were trading at fifty times earnings or more compared to the long-term market average of 15-20 times earnings. Investors would find it hard to believe some of the names in this list of darlings during the 1960s and 1970s. Dow Chemical, Gillette, JC Penney, Polaroid, Sears Roebuck & Co., Xerox and Joseph Schlitz Brewing Co. were all in demand. The group propelled a bull market of the 1970s and was also credited with causing a decline in the markets, as most of these stocks crashed and burned in the early 1980s.

 

In the late 1990s, Oracle, Intel, Cisco, and Microsoft, dubbed the "Four Horsemen," were the favored group. In the mid-2000s, emerging markets were all the craze. The BRIC nations (Brazil, Russia, India, and China) could do no wrong and lead markets higher on a global basis. The performance of each of these groups outperformed the overall averages consistently before losing favor.

 

Over the last decade-plus, the FAANG stocks (Facebook, Apple, Amazon, Netflix, and Google) rewarded investors and continue to do so today. Since the beginning of the year, the gains in the stock market have been largely credited to the Magnificent Seven that are almost all up 90 percent thus far. Driving these incredible gains is their ability to generate huge profits and reward investors with generous dividends and share buybacks.

 

Investor fascination with artificial intelligence has also provided another reason to invest in these companies, since most of them are considered leaders in generative AI. However, a word of caution is warranted. Technically, the Magnificent Seven stocks are fast approaching price exhaustion. For those who might want to buy into this group, I would wait until prices come back to earth before pulling the trigger. 

 

The good news for equity investors is that in the periods where short-hand acronyms or labels identified a winning set of stocks, bull markets occurred and continued for several years. It could be a coincidence. There is no data to suggest any group's performance can dictate where the markets overall are going next.

 

At best, I would say that the labeling of a new group of winners does reflect a change in mood among the market participants. Investor sentiment seems to have shifted to the bullish side, despite fears of recession, prolonged inflation, and geopolitical risk. I expect it will continue.

 

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.

What goes up, must come down — at least in the stock market. That doesn't mean that the bull market is over. More upside ahead in equities is a strong possibility, but first, we need to bottom.

 

"Stocks are stretched at this point; the rubber band could stretch further, but not right now. I believe next week we might see some downside in the averages (maybe 100 points give or take on the S&P 500), but then up again too as high as 4,600."

 

That was my take on where stocks were going in last week's column. Thus far, we seem to be right on target. Artificial intelligence stocks are leading this bout of profit-taking. Many smaller AI stocks have given back almost half their recent gains. That is as it should be given the extraordinary gains investors have enjoyed in some of these names. The technology area in general led the market's decline, but few areas were safe from this round of profit-taking.

 

A bout of central bank hikes in interest rates around the world contributed to the malaise in stocks, at least according to the news media. The Bank of England increased rates by 50 basis points, and Norway, Switzerland, Turkey, and New Zealand joined in as well. Sweden is expected to do the same next week, and both Canada and Australia did so last week. Over the last six months, almost four dozen countries have done the same.

 

In addition, while the U.S. Federal Reserve Bank announced a pause last week in its rate hikes, this week Fed officials made it clear that their rate tightening regime is not over. Fed Chair Jerome Powell testified for two days before Congress this week. In his testimony before congressional lawmakers, he went to great pains to notify the financial markets that he fully expected at least two more rate hikes in the months ahead.

 

He maintained that inflation was still running too hot and that, yes, there was "certainly a possibility" of a recession. Achieving a "soft landing" in which policy tightens without severe economic circumstances such as a recession, will be difficult, he cautioned.

 

While his remarks were no different than his statements last week after the FOMC meeting, the markets reacted quite differently. Last week it was up, up, and away on Thursday and Friday. This week, it was the opposite. My own belief is that bullish momentum traders had hit their targets in the indexes by Friday (as did I), and central bankers merely gave them an excuse to lock in some great profits.

 

Since the NASDAQ 100 has led the markets higher and is leading them lower now, I would watch that index for clues on what will happen next. The QQQ, an exchange-traded fund, represents that index and is trading around 362. I see a downside risk to 352 on the QQQs, or another 2-3 percent pullback from here. At that point, we will determine if the profit-taking is over or not.

 

As for the S&P 500 Index, I am watching the 4,320-4,350 area. On Friday, the bulls were attempting to defend that 4,350 level. We are down 66 points from last Friday with possibly another 34 points to go for my expected 100-point decline. After that, we should see some upside.

 

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.