03-28-2021: A Fork in the Road?

I remember, growing up in small rural community where my dad tried to run a farm and a construction company at the same time. That meant there was always more work to do than there was time to do it. It didn't matter the weather or how tired you were, the work never stopped. My dad, who was a workaholic, always seemed to have a bit of a wisdom he would try to impart on my siblings and me.

I can remember him saying... "Son, in life you will find many forks in the road where you have to decide one way or the other. Each path will change your life from that point forward. So, the next time you come to a fork in the road... pick it up."

I never got the meaning of that piece of life's wisdom (many of dad's sayings were hard to figure out), but I have to agree, life is full of forks in the road. Sometimes, they require an immediate decision. Other times, they have more to do with planning for the future.

In that vein, my team and I were discussing where we thought the market was going to go this year. And, while we do not invest capital based on conjecture, we do look for 'early signs' that can give us some insight in how to better interpret the data and trends... or the lack thereof. As you know, the last few weeks have not give us a lot of market "trend" insight. The market has been very frenetic and, basically in Neutral with sharp up and down turns, almost hourly.

As we see it, there are two (at least) potential scenarios:

First, there is Bullish scenario...

  • People are getting vaccinated at a very fast pace.

  • Stores and businesses of all kinds are opening up and will open up more quickly in the near future.

  • We will soon have herd immunity and the pandemic will be behind us.

  • The Fed will keep inflation and interest rates under control.

  • The economy will boom as demand for more goods and services ratchet rapidly higher.

  • Low inflation, low interest rates, full employment, increasing consumer demand, all point toward a big move higher in the market this year.

  • Congress passes a $3T infrastructure stimulus bill and pours those trillions of dollars into the economy

  • The market booms higher.

Then, there is the Bearish scenario...

  • The UK variant of the virus will spread in the US like wildfire, as it has in Europe.

  • Hospitals will reach capacity again and businesses will have to shutter their operations again.

  • The US struggles to get more people vaccinated and herd immunity appears to be at least another year or more away.

  • The Fed loses control of interest rates and rates spiral higher and higher.

  • Inflation begins to skyrocket higher, starting with gasoline and other commodities.

  • Gold booms higher as the market tanks.

  • Unemployment numbers grow dramatically as the second-phase lock-down moves into play.

  • Congress dramatically raises taxes on the investment class, causing investors to find alternatives to the stock market and the demand for shares suffers.

  • The market tanks into a 40% to 70% bear market.

At this moment, the current data tend to favor the Bullish scenario, above. But, that can change in a hurry.

This is why we tend to be a bit hypersensitive to any sell-off in the market. But, this hypersensitivity has not proven to be profitable. This is why we are widening our stops to more normal stop loss trends. This move is intended to keep us in positions longer, but it also increases the downside risk a bit... not a lot... but still a bit more.

More than anything, we need a decent trend one way or the other and in the meantime, we are being very cautious about putting capital to work.

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