Markets sink as inflation stays sticky and geopolitical risk heightens

Geopolitical risk, inflation, higher for longer, rising bond yields, take your pick. There are several reasons for the stock market sell-off. The bad news for investors is that after a counter-trend bounce, the selling should continue.

There are at least half a dozen reasons why the markets were down again this week. If you have been following my columns, you know that I have been expecting this decline for weeks. The truth is that this pullback is long overdue. I believe it is a healthy, if painful, development that could last a few weeks.

I am not discounting the reasons for this decline. The attack on Israel last weekend was gut-wrenching. My next-door neighbor was in Jerusalem at the time visiting relatives, and spent Saturday night in a safe room, while we crossed our fingers and waited for some word from him while watching CNN with his wife.

All week investors have been waiting for the next shoe to drop. Thursday night Israel hit back, but with some restraint. Overnight stock futures tumbled, but by Friday morning regained their losses. I believe geopolitical risk will be with us for the next few weeks, keeping markets on edge.

As a result, the dollar, gold, and U.S. bond yields continue to rise. To make matters worse, this week Fed Chair Jerome Powell said that the last three months of higher inflation data will likely delay interest rate cuts further. Some are even talking of a possible interest rate hike.

Pullbacks, corrections, sell-offs, call it what you will, markets are a self-correcting mechanism. One can predict easily that every year, there will be several declines in the stock average that can vary from a few percent to 10% or more. Since we haven't had a real pullback since October of 2023, this one may feel especially painful.

As readers know, I first started looking for this decline back in February, but the Fed's changing stance on when they might loosen monetary policy postponed the decline. In the first quarter of this year, Fed Chairman Jerome Powell, and his band of FOMC members, had lifted investors' hopes that there could be as many as three rate cuts this year if the data cooperated.

That set off a momentum trade in stocks that lasted well into March. As the weeks passed and stocks became more and more extended, I raised my target on the S&P 500 Index to my most bullish line in the sand, 5,240. The index surpassed that level by about 20 points about two weeks ago. Since then, we have sold down until today, the S&P is roughly 5% below the highs.

Stocks have dropped every day this week. The three main indexes are deeply oversold. The technical charts say that we should expect a counter-trend rally, commonly called a dead-cat bounce. Unfortunately, the probabilities indicate that a bounce will not signal the selling is over. I had been forecasting a 7%-10% decline and I am sticking with that forecast. That would bring the S&P 500 Index down to 4,820-4,850.

Bill Schmick is a founding partner of Onota Partners, Inc., in the Berkshires.  Bill’s 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 e-mail him at bill@schmicksretiredinvestor.com .Investments in securities are not insured, protected or guaranteed and may result in loss of income and/or principal.