In the good 'ol days, when the stock market relied on a real economy and had the propensity to tell us what it thinks the economy will be doing in 6 months, investing was far more predictable and far less dependent on political entities... like the US Federal Reserve. But... alas... those days are gone.
Today, the market booms or busts based on whether a far-from-omniscient, unregulated, unaudited, non-governmental organization, called (euphemistically) the US Federal Reserve, decides the fate of the economy simply by deciding how many hot checks it can write that are automatically covered by the US Treasury and how interest rates are set.
As you might imagine from my verbiage above, I am not a big fan of the Fed one way or the other, but we are where we are and the facts are that the Fed controls the stock market trend (at least for now).
Tomorrow, the Fed Chair, Jerome Powell (JaPo) will tell us one of two things:
Everything is fine and inflation is transitory and transitory means at least 6 months to a year. If that is what JaPo says, then I suspect the market will like what it hears and will continue its bull-trending ways. Outcome: Boomsday
Or... if JaPo says, inflation my 'not' be transitory and that means the Fed will begin looking at lowering their unprecedented QE program and start raising interest rates, the market will probably NOT like what it hears and the next major correction will ensue. Outcome: Doomsday
Conventional wisdom (you know... the collective wisdom of market pundits/analysts/reporters and their guesses) says the Fed will do nothing to stop the market from moving higher.
A small, but vocal, set of contrarian voices are saying that the Fed is not only wrong to keep the status quo, but are egregiously wrong; and, if they (the Fed) do not start putting on the brakes, this overvalued market will only last for a short time before "Doomsday" occurs despite what the Fed can or cannot do in the not-too-distant future.
We are prepared for either outcome and here is exactly what we are doing in that regard:
We have stops in place for all holdings that will fire quickly if the market tanks tomorrow afternoon. If (and only if) the downtrend continues and confirms a correction is in play, we will move into inverse ETFs that move up as the market moves down.
We have capital to put to work if the market sees the Fed is going to continue to dump trillions of dollars into the economy (via the US Treasury) and declares "Boomsday" has arrived.
While I do think the Fed is building an artificial stock market based on flawed assumptions of inflation, economic rate of recovery, supply-chain disruptions, and consumer demand coming out of the Covid-19 lock-down, I suspect (guess) that the Fed will err on the side of political pressures rather than economic realities, and will say all is well and no changes in QE or interest rates for the foreseeable future... the "Boomsday" scenario.
If tomorrow sees the beginning of the next Boomsday leg in the market, focusing on stocks that do well in rapidly growing inflation scenarios is a good idea.
If tomorrow sees the beginning of the next Doomsday leg in the market, we will want to be on the opposite side of the inflation trade.
A lot hinges on JaPo's remarks tomorrow afternoon.
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