Rising yields, oil, and the dollar prove too much for the stock market

As we enter the second week of the month, September is living up to its reputation as a bad time for stocks. No matter the reasons, stocks should see further declines in the week ahead.

There are several villains in this sell-off besides seasonal factors, however. Bond yields continue to climb with the Ten-year, U.S. Treasury bonds hitting 4.30% at one point this week. Place the blame on Treasury Secretary Janet Yellen and the government. She continues to auction billions in Treasury bills and bonds to replenish the Treasury's general account. That avalanche of new issues is driving up yields and squashing bond prices.

Then there are oil prices. A barrel of West Texas crude was closing in on $90/barrel this week. That has re-ignited fears that the rate of inflation is going to start climbing once again. Remember, oil is still the fuel that runs the world's economy. OPEC+ seems bound and determined to keep the price as high as it can to balance its budget. All the cartel members, (even Russia) have agreed to extend production cuts until the end of this year.

And let's not forget China's faltering economy and its rocky relationship with the U.S. After months and months of blacklisting Chinese companies like Huawei, the Chinese chip maker, and mobile phone company, China is striking back. And what better target for payback than Apple?

This week China announced that they have banned the use of iPhones for central government officials as well as employees of state-run companies. To put that in perspective, Apple generates about 17% of iPhone sales from China.

The Chinese are not stupid. They know Apple is the number one company in the world and is held in countless mutual funds, exchange-traded funds, and individual portfolios throughout the U.S. How better to play tit-for-tat than to hurt American investors in their pocketbooks?

Apple shares plummeted on the news, taking the tech sector and the market down with it. At the same time, Huawei has built an advanced 7-nanometer processor to power its latest smartphone. It is in direct competition with Apple to win back Chinese consumers and so far, it is succeeding.

In the meantime, the U.S. dollar continued its eight-week climb to its highest level since March. The continued strength in the U.S. economy, while other nations like Europe and China experience faltering growth, has kept the greenback strong. This is hurting overseas trade. A stronger dollar makes it tough for U.S. exporters to compete overseas.

Last week, I warned investors to tread carefully in September. Thus far, I have been proven right. I do expect this shallow sell-off to continue into next week, but then we should see a bounce. We may re-test the August lows (around 4,330 or so on the S&P 500 index), but that remains to be seen. Holding that level would be positive. If not, we could face another 5% decline before bouncing back. 

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.