This week, the Federal Reserve Bank hiked its inflation forecast and reduced the growth target for the economy this year. Despite this news, traders termed the March FOMC meeting a "dovish pause," although it did not help the stock market.

 

The upshot of Chairman Jerome Powell's Q&A session on Wednesday afternoon after the FOMC meeting was that as far as the future is concerned, the Fed would need to wait and see just like the rest of us. In the meantime, the bank decided to slow its quantitative tightening program. That was interpreted as dovish by most Fed watchers since it does add liquidity to the credit markets.

 

Powell did say tariffs would probably add to the inflation rate (from 2.5 percent now to 2.8 percent). Although for the most part, he believed these measures would be "transitory." The rate of economic growth would also fall from 2.8 percent in 2024 to 1.7 percent this year.

 

Those forecasts, while not what I would call a full-fledged period of stagflation like we experienced in the 1970s, are akin to my own expectations. I would call it a brief bout of stagflation but with a small "s." I see a quarter or two of slower growth and a smidge higher inflation rate, but I do not see these trends remaining in place for the full year.

 

"I don't know anyone who has a lot of confidence in their forecast," admitted Powell, but the median of Fed officials still expect two rate cuts this year. However, their conviction on where things are heading is weak, and understandably so. After many years in the driver's seat, the Fed is now in the back seat as far as the economy is concerned.

 

Fiscal policy as interpreted by Donald Trump is now calling the shots. Depending on how badly the coming tariff war develops, the administration's overall trade policy, spending cutbacks, immigration restrictions, and deregulation, we could see a recession.

 

However, if tariffs turn out to be simply a negotiating tactic, as many expect, tax cuts do get passed, and somehow the deficit falls then growth could resume, inflation remains in check, and the markets could live happily ever after. I give 50/50 odds on these economic outcomes.

 

I hate "on the other hand" statements, but sometimes, they are what they are. Whether your cup is half full or half empty, I suspect, depends on your political persuasion. As Powell said, "I mean, it's really hard to know how this is going to work out." My sentiments exactly.

 

Unfortunately, the financial markets do not do well when faced with the unknown. As such, the present turmoil in the markets should continue. About the best I can say is that we should expect the daily 1-2 percent swings in the equity market to slow down a bit after this week after Friday's multitrillion-dollar options expirations. That does not mean the downside is over. The fate of the markets remains dependent on the news coming out of the White House.

 

Behind the scenes, the top men at Treasury and  Commerce and Trump's economic adviser, Kevin Hassett, are working hard to reduce the impact of the coming tariffs before the deadline. Scott Bessent, the U.S. Treasury secretary, appears optimistic they can work a deal between the U.S. and our largest trading partners to roll back tariffs before the April 2 deadline. If so, that would go a long way to alleviate the downside pressure on the markets.

 

At its low, the S&P 500 Index has been off by a little more than 10 percent. Since then, we have bounced, as I expected, but we could still retest those lows or even break them. Sentiment among market participants couldn't be worse. That makes me suspect there might be some light at the end of the tunnel. Of course, I could be wrong and that light at the end of the tunnel could be a freight train. Let's see what happens.

 

The Trump administration's economic policies have placed a target on the back of most foreign nations. As for the economy, a slowdown, if not a recession, seems to be around the corner. As such, overseas investors have little reason to remain in America's financial markets.

 

Foreign investors represent about 17 percent of the overall holdings in the U.S. equity market and about the same in the bond market. Over the last 15 years, as I wrote in my previous column, American markets were the only game in town. While our share of the world's economy was only 27 percent, our share of the world's total investments was 70 percent.

 

America was perceived as being the safest place on Earth to put your money. Our currency, Treasury bonds, and stock markets are the strongest and most lucrative around the globe. In the last 80 days, however, thanks to American policy shifts and a growing realization that our debt and deficit are coming unstrung, foreign investors have been having second thoughts. 

 

At the same time, the administration's about-face in geopolitical terms has not only caught the rest of the world by surprise but has also called into question the future security of many of our allies including Mexico, Canada, Japan, Korea, and the European Community.

 

For the first time in years, there have been compelling arguments for shifting focus from the American financial markets to elsewhere. Is that a good or bad thing? It is always nice to be number one but too much of a good thing can be a negative. One must credit the president for this global shift in thinking.

 

As Scott Bessent, the U.S. Treasury secretary said last weekend about U.S. markets in an NBC interview, "I can tell you that corrections are healthy. They're normal. What's not healthy is straight up." Neither he nor the president has ruled out a recession this year.

 

Trump's tariff plans have caused a wave of self-examination. He has forced countries to re-think who besides the U.S. could offer better and more stable terms of trade in the future. His reciprocal tariffs that are going into effect in April have spurred other countries to stop talking and start planning a defense. Without his sudden about-face in U.S. support for Ukraine and rapprochement with Russia, I suspect Europe would have carried on taking our support for their economies and security for granted for another 50 years.

 

These nations now realize that there has been a generational change sweeping America. It is not only Donald Trump who demands a different approach to trade, politics, and security. In this new era of populism, more than half of all U.S. voters not only applaud his policies but want even more change. It has finally hit home to the rest of the world that MAGA was always about "Making America First" by beggaring everyone else.

 

Trump has provided a wake-up call for the EU and others. Last week, Germany's plan to massively increase spending, just announce has triggered a sea change in European policy making. Canada, who in some respects has acted like a back-water subsidiary of the U.S. for decades, has suddenly found its voice, as has Mexico.

 

China, after several years of declining growth, has used the U.S. trade and security initiatives as a reason to not only stimulate their economy and reach out to other countries to form trade and military alliances but also galvanize the government and private sector. Many in China believe Donald Trump's governance style has much in common with their leader, Xi Jinping. They applaud his efforts to steer the American government closer to their own authoritarian central model.

 

In the last month, money is fleeing U.S. markets and going home. Trump's policies have increased the total value of all businesses in China and Hong Kong by 20 percent and decreased business values in the U.S. by 10 percent. Money is fleeing US markets and going home. Chinese equities are up double digits this year, while the German stock market gained 17 percent, Italy up 15 percent, Spain 14 percent, and emerging markets are up 8 percent.

 

Extreme valuations may also be a factor in the recent move by foreigners to "take their money home." Based on price-to-book value and enterprise value, the U.S. premium to non-U.S. markets is above the 95th percentile and has continued to climb until now. The growth premium for U.S. stocks is what helped to justify those valuations.

 

If growth were to slow, as both the government and investors believe is happening now, U.S. valuations become a headwind. Investors everywhere may no longer be willing to pay lofty prices for less growth.

 

In addition, for America to maintain or increase its share of the world's private-equity market capitalization, which is growing every year, more and more of the world's capital would need to be allocated to the U.S. Given the policies of deliberately slowing economic growth, increasing unemployment, a falling dollar, and an expanding debt problem, why would any foreign investor want to increase their capital allocation to the U.S.? This point was driven home by this month's Bank of America Global Fund Manager Survey. It revealed the second-largest decline in U.S. growth expectations by professional investors ever as well as the largest drop in U.S. equity allocation in the history of the survey.

 

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 market's decline has been one of the fastest in history. The fall has been fueled by the Trump administration's economic policies. The question most investors are wrestling with is what to do about it.

 

Looking back on this period in a year or two, I guarantee that most investors will have trouble remembering exactly what happened. There is nothing abnormal in this decline thus far except its speed. It is a simple garden variety pullback, which occurs at least once a year if not more. It is the price of doing business for equity investors and savers with tax-deferred retirement accounts.

 

Given that, the decline is probably a good thing for an over-extended market on the upside. Stocks normally take the escalator up and the elevator down. In the pain game, I believe fast is better than slow when dealing with the emotional side of investing. Hopefully, the markets will bounce before too many more negative emotions surface.

 

I say that because emotions are your greatest enemy when investing. It would be a rare reader indeed who isn't feeling worried and stressed right now when dealing with the market. The S&P 500 Index is down more than 10 percent, NASDAQ minus-17 percent and the Russell 2000 minus-18 percent.  Is it time to bail?

 

No. The time for that decision is past. A month ago, taking some off the table may have made sense. Today it doesn't.  "But what if it goes down even more?" Let it, at worst you are halfway through a 20 percent correction but more likely on the eve of a turnaround.

 

Tom Lee, the founder of FSInsight, and a frequent guest on CNBC, reminds us that since 1928 going to cash and missing the 10 best days in a year reduces returns from 8 percent annually to minus-13 percent.

 

September 2022 was the last time investors were this pessimistic, according to the American Association of Individual Investors (AAII).

 

At the end of February, the proportion of investors identifying as bearish reached 60.6 percent.  Historically, when this has occurred, the average subsequent 12-month return has been 24 percent.

 

How can you resist that desire to sell? Stop looking at your accounts. Watching your portfolio daily in a down market is behavioral suicide. Don't do that.

 

So enough with the pep talk. Instead, the market had some good news this week for a change. The Consumer Price Index (CPI)  and the Producer Price Index (PPI) came in cooler than most expected. I say "most" because my forecast of weaker inflation numbers proved accurate. Next month's data will show a 2.4 percent CPI, which will be weaker again. The following month should show a decrease as well. However, given the markets' focus on tariffs and Trump's economic policies, the inflation news did not matter to investors.

 

I expect the unemployment rate will rise as the administration reduces the number of the 3 million federal government workers. If you combine that trend with a slowing economy that is also being engineered by President Trump and his motley crew, we will have developed a perfect storm. That will provide a gateway for the Federal Reserve Bank to begin cutting interest rates once again.

 

Remember the Fed has two areas of responsibility: fighting inflation and maintaining employment. Chair Jerome Powell has already stated several times that the Fed now considers employment the focus of monetary policies. The bond market is already betting on a rate cut as early as May or June, with more to follow. That should be good for the stock market, which usually begins to discount events six months out.

 

Over the last few weeks, I have warned investors to expect as much as a 10-12 percent decline in the S&P 500 depending on the president's actions. He has delivered on that assessment and thus the markets decline. He continues to rile markets and therefore the potential for additional downside remains.

 

The latest University of Michigan consumer sentiment numbers dropped another 10 percent in March. Trump has now admitted his policies will cause at least a slowdown in the economy, higher unemployment, and as for inflation, who knows?

 

The president promises this will all be worth it for those who have faith. Depending on your political bent, you either believe him or not. The stock markets, however, do not deal in faith. The data says stagflation, which has been my prediction for several months. What does well in that environment is foreign markets that do not suffer from the same malady, bonds, and precious metals. This week, gold hit record highs, China and Europe climbed higher, and bonds did much better than stocks. 

 

As for the overall market, it is Trump-dependent, and the president has shown that he is no friend of the stock markets. Wall Street strategists and technicians are looking for at least a dead cat bounce. That is certainly possible given that we still have three weeks until the April 2 reciprocal tariffs are implemented. Who knows, the president might lose his voice in the meantime, change his mind on the tariffs or something may occur out of left field that we aren't expecting.  

 

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 has been a great run. For 15 years, the U.S. stock market has been the envy of the world. Led by the FANG stocks, global investors could not get enough of American stocks — until now.

 

By the end of 2024, global investors had committed more capital to America than ever before. At the same time, the dollar traded at a higher value than ever since the world abandoned fixed exchange rates 50 years ago.

 

While America's share of the global economy was 27 percent, its stock market represented 70 percent of the worldwide stock market. Since 1992, every year China has grown closer to the U.S. as the world's biggest economy. China's GDP has grown 6.5 times as fast as America's, but U.S. stock returns have been 3.5 times as high. China, which makes up 17 percent of the global Gross Domestic Product, has captured less than 3 percent of worldwide market investments.

 

This has not always been the case. At the beginning of the 20th century, for example, the U.S. accounted for less than 15 percent of global equity markets. Since then, we have improved with gains throughout the 1950s and 1960s. Japan at one point in 1989-1990, caught up with our gains but quickly reversed while we continued to gain. 

 

U.S. markets have outperformed all other markets in eight of the past 10 years. And the global market for private-sector investments, which includes equity and credit, is huge. Some companies estimate it is more than $100 trillion. 

 

In the first decade of this century, our ranking fell during the financial crisis but shot up as productivity growth boomed. Productivity is creating more output with the same amount of labor. Over the last five years, American economic output per hour worked rose almost 9 percent despite the COVID-19 setback.

 

The dominance of U.S. returns was also helped by a variety of other factors such as accelerating earnings by U.S. corporations improving profit margins, and cleaner balance sheets. In addition, U.S. firms have had greater success expanding overseas. Prior to 2010, 30 percent of U.S. corporate profits were generated overseas. That number has since expanded to 40 percent.

 

Another reason for U.S. outperformance is our ability to take risks. America has been a fertile ground for business formation and risk-taking is part and parcel of starting a new business. 

 

But regardless of how efficient Corporate America and the private sector overall are, it has had enormous support from the government. While America went on a debt spree, Europe, for example, practiced austerity. All that government spending boosted corporate profits considerably.

 

In 2025, however, the mood toward American dominance has soured. Just weeks ago, U.S. investors were hailing Donald Trump's second term as the beginning of America's golden age. His blend of tax cuts and tariffs would accelerate economic growth and boost American dominance once again. Next week, we will focus on the risks that could reverse our No. 1 position in capital markets.

 

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 latest worry to plague Wall Street is lower growth and rising inflation. What is worse, the tariff war that President Trump insists will lead to a "golden age" for America is proving to be a nightmare for financial markets.

 

"There will be a little disturbance, but we are OK with that," the president admitted Tuesday evening in his address to Congress. His mission that night was to sell America on his vision of a new economy of high tariffs, low immigration, low taxes, and low regulation. Main Street is buying that message, with approval ratings of almost 70 percent of those who watched the address. Unfortunately, global financial markets are not so trusting.

 

This disparity should not surprise readers. Those who accept my argument that we are in a new era of populism understand that many Americans want massive changes to our political and economic systems. To these younger generations, this president is fulfilling his promises and quickly for the first time in decades. For those invested in financial markets, however, Trump's actions are hard to predict and seem to shift at a moment's notice.

 

While Trump's "tariff on, tariff off," strategy might be meaningful to Mr. Miyagi, Donald Trump is no Karate Kid. His shifting trade policy is not only causing wild 1-2 percent daily swings in the stock market but is making any kind of business and financial decisions for those in the corporate sector impossible. "Whiplash" would be an understatement.

 

Stagflation has suddenly become the leading story in the financial media. The world's economic community argues that tariffs are inflationary. The more tariffs the president levies, the higher the inflation rate. At the same time, Trump's efforts to cut government spending, which accounts for 27 percent of annual GDP, will slow economic growth. The reduction of a sizable number of federal jobs will increase unemployment and we are beginning to see that in the data.

 

This scenario has the markets and the business community ready to abandon ship. I believe the markets are overreacting, at least on the inflation front. As readers know, I expect a decrease in inflation indicators over the next few months. This is largely due to the steep decline in energy prices.

 

Lower oil prices are exactly what Trump promised to do and will go a long way in keeping inflation in check. Unfortunately, slowing economic growth is also the most efficient and fastest way to reduce inflation, which is another promise he made to the country. No pain, no gain certainly applies to the fight against inflation whether we like it or not.

 

This is why my stagflation forecast has proven accurate. Reducing the size of government in a country where government has become such a large part of economic growth by definition slows the economy.

 

Wall Street's belief that President Trump uses the stock market as a barometer of his progress as he did in his first term, needs adjusting. This time around he has made it clear that getting the yield on the benchmark, U.S. 10-year Treasury bond lower is his focus. He has made progress on that front as well.

 

Whether or not you believe the status of global tariffs is fair in U.S. trade terms is immaterial. Most of the country and its leaders believe it is unfair, and tariffs are the way to right that wrong. Whether you realize it or not, tariffs are a tax. Businesses and consumers pay that tax, and the government pockets the money. Given that the top 10 percent of earners in the U.S. account for just about 50 percent of consumer spending, the brunt of the tariff tax falls on them. That makes it a progressive tax.

 

Donald Trump is a master marketer. Only he could sell the country on as much as a 25 percent tax increase via tariffs and have you be happy to pay it. He knows there is no better way to slow spending while increasing tax revenues quickly. Whether you love or hate him, he is an instrument of change in a country that largely demands it. He is doing the job he was elected to do thus far, just not in the way that most of us would have preferred. 

 

The U.S. stock market has given up all its post-election gains. The U.S. dollar is falling as is the yield on the ten-year U.S. Treasury bond, which helps mortgage rates. Global investors are cashing in their American chips and moving those funds to emerging markets, Europe, China, and other parts of Asia.

 

The China exchange-traded fund, FXI, is up 24 percent since inauguration day while the S&P Index fund, SPY, is down 7 percent. Nivida, the most sought-after U.S. AI play is down 22 percent, while China's Alibaba is up 71 percent. I could go on, but you get the point. The performance of foreign stock markets has left U.S. equities in the dust. Investors who were convinced that a Republican election sweep heralded a booming U.S. stock market with American AI, the best play to buy in 2025 are instead nursing mounting losses.

 

The S&P 500 Index is down about 7 percent and has penetrated its 200-day moving average. The tech-heavy NASDAQ is down more than 11 percent and small caps are 15.4 percent lower. That is not a good sign.

 

I wrote last week that investor sentiment readings were extremely bearish. Today, fear and angst increased to levels not seen since 2022. Some are predicting as much as a 10 percent pullback. It is certainly possible and long overdue. The fate of the equity markets lies squarely on the shoulders of Donald Trump.

 

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.