Investors are steadfastly optimistic about economic prospects and continue to buy stocks knowing more stimulus spending is on the way. Analysts’ also see little risk interest rates can rise and the puny returns of Debt securities offer little competition for stocks.

Amidst rising stock prices and greater volatility three factors give caution for the excessive bullishness: the rise in speculative trading most apparent in companies in the electric vehicle market through “blank check” Special Purpose Acquisition Companies or SPACs, the addition of short positions in overvalued companies by Hedge Funds and Wall Street expecting to buy them back at a cheaper price, and the vigilante counter-trades to make the “Shorts” pay by running up stock prices on them—crowd purchases of shorted stocks to force losses as vengeance against Wall Street elites. These factors may very well mark a market top. The question is what will be the trigger for market correction?

We are closely monitoring Fed & Treasury interventions for potential answers. Last week the Fed pulled $7.5billion in liquidity out of the market, but the week before they added a whopping $81 billion by purchasing bonds. Monthly bond purchases have been above average since the pandemic and the Fed’s balance sheet is now at $7.2 Trillion. When the Biden administration releases the Covid stimulus funds and the Infrastructure bill passes the next quarter there will be upward pressure on interest rates, particularly on the long maturity end of the yield curve. The Fed will have to take further monetary actions to keep interest rates low to spur economic growth but that will adversely impact the Dollar but help US exports. The key question is how to prevent an asset bubble in stocks and real estate while creating more economic equality without causing a market correction that would kill the animal spirits that fuel investment. Higher capital gains and asset taxes are likely but not until we have sustained economic growth.

Inflation is also possible, but without greater productivity and strong demand the US will remain in a deflationary environment. In the near term the pandemic is the most serious obstacle but right behind it is the need to boost employment, address the disparity in incomes and pay down the national debt. Biden’s “Catch 22” is that stimulating growth by deficit spending is essential but increasing taxes to pay may reverse the gains made. Monetary policy decisions provide insight into what large institutional investors see ahead. Money flows confirm their decisions and with these we can know where the market will move.

We are seeing greater volatility with larger price swings. Fed interventions to moderate them occur regularly. Because the whole world needs more growth, jobs, and more trade we remain biased toward stocks yet cautious monitoring for events that could trigger a correction. For the first half of 2021 another tell-tale sign will be Congresses willingness to compromise and do the people’s business rather than being constantly divisive. Time will tell but we do not look like we are off to a good start and that too may have market implications. Risk management is key and that is precisely what those advocating buying and holding an Index fund will once again realize. No management means no Risk Management—not the savviest way to invest.