The market hates uncertainty. This is not the first time you have heard that...nor the last as it’s one of the truest statements in all of investing, says Steve Reitmeister, editor of Reitmeister Total Return.

When the path forward is uncertain, investors become more cautious. And that is the simplest explanation for what is happening now which I don’t believe gets cleared up for 3 to 6 months. In the meantime, the market will become more volatile with a modest downside bias. This leads me to reduce our portfolio to only 65% long the stock market.

Why not take more money off the table? Because still don’t believe it changes the fact that it’s a long-term bull market. It just seems like this is a natural place to press pause for a while and wait for a clearer green light to move forward. Thus, don’t want too much money out of the market when primary trend is still bullish and it could start running without warning.

The specific trades to get us there are shared at the end. For now, I think it’s best to stay focused on the bigger picture.

What is Uncertain?

I could create an incredibly long list of uncertain things. Never a shortage of those given that economics itself is a soft science with uncertain outcomes. Yet we will narrow it down the 2 that are really the central conversation at this time:

  • Why Are Long Term Rates Rising Again???
  • Tariffs: What Will Be the Final Outcome?

These are real game changers with a wide range of possible outcomes. Thus, a natural time for investors to pause in order to see how things play out. But they never really press pause as that is far too subtle. It is more about volatility and a changing of the odds every time new information comes out. Since early in the cycle, then downside more likely than upside which is why we are applying this dose of caution in our approach.

Why Are Long Term Rates Rising Again???

At first it was easy to assume that the stickiness of inflation and thus the delays in future cuts by the Fed was the reason for the 10-year rising. That was a fine adjustment at first...but the longer it goes on, it points fingers towards a more sinister cause...that being the long run fear of having too much government debt. The possibility of a debt crisis has been a CERTAINTY in my mind because of the basic economics discussed in the article above. It has always more a matter of WHEN it would happen. And that might not be for 20-50 years...or it may be tomorrow. Yes, it’s that complicated as are most other Black Swan type events.

Because it could happen at any time is why I have a weekly calendar reminder every Tuesday to keep an eye on Global Bond Rates with a focus on other largely indebted countries that would likely fail first like Italy, Portugal or Singapore. Maybe even Japan. Simply don’t need to panic until at least 1 domino is starting to fall. To be clear, no domino is falling at this time...just a swelling of long-term Treasury rates which has other possible meanings...or it could mean precisely that investors want a better rate of return for the higher risk involved with a government with a debt AND spending problem that never seems to get better.

One more thing I should mention on this front. I recently moved 10% of my portfolio out of the stock market and bought a 7-year Fixed Annuity Index (which is the longest period they would agree to as I would have taken it to infinity if they would allow). The reason for this is that too much of my family’s net worth is in the stock market which will go in the toilet when debt crisis comes to town. So too will bond investments. So beyond cash and gold this was the best idea of how to protect against a potential catastrophic event and still have some upside if all remains well.

Why not larger allocation to annuity? Because as stated above, this debt crisis problem might be 20-50 years down the road. So, 10% is enough for now and can always increase when risks increase.

Now let’s shift too...

Tariffs: What Will Be the Final Outcome?

The more I read this weekend to get my head around current market conditions...the more I realized this is likely the bigger question mark for investors. Truly such a wide range of outcomes because the policies bandied about during the campaign were so outrageous as not to be believable. The posturing since then has not really softened and thus investors are confused as to how this plays out including the risk of higher inflation (because higher tariffs = higher costs to US consumer). Or trade wars. Or…?

Let’s imagine that at best this is resolved in the Spring of 2025 with Summer being more likley. Now picture all the headline risks between now and then? Each salvo from the US or trade partners (namely China) would have serious ripple effects to the market. Meaning it likely gets worse before it gets better. In the end I think it will be just fine.

That is why I am still bullish in the long run. But for next 3-6 months the uncertainty discussed above needs to become more certain before the next bull run starts again.

Trades to Make Today

As noted above we are coming down to 65% long the stock market. This will be accomplished by selling 4 of our recently weakest positions...or those like MHO and KRE that would only get weaker the longer that bond rates remain elevated.

  • Sell all shares of M/I Homes (MHO) - because of its bond rate sensitivity
  • Sell all shares of Regional Banking ETF (KRE) - ditto as MHO
  • Sell all shares of Mercury General (MCY) - from the 1/10 note we needed to sell. Even though progress was made on the fires this weekend fears of high wind conditions early this week may be devastating. Yes, at some point shares may bounce…or perhaps things keep getting worse and worse. Thus selling today and washing our hands of this mess seems the best strategy.
  • Sell all shares of Adobe (ADBE) - This is the hardest one for me as I think the 20% drop on less than a 1% decline in earnings estimates is criminally insane. I wouldn’t blame anyone for keeping some shares of ADBE tucked away in the back of their portfolio as reward greater than risk at this price.

SMIZ was very close to being sold. But in the end decided to go with selling KRE. Because if rates stay high for a lot longer, then the banking group will underperform. But yes, owning SMIZ is marginal at this time...but will be the long-term winner when the bull market resumes. So probably hoping to ride it out til then.

Closing Commentary

Yes, we all want certainty in our lives. But there are plenty of times when that is not in the cards in our investment lives especially when you combine economics + politics + investor reactions. Those are 3 soft sciences rolled together to create a myriad of possible outcomes.

Typically, this level of uncertainty comes with extra volatility and a downward bias. Certainly, the case so far. This puts today’s precautionary steps into the right light.

When conditions change...we will change along with it. Just don’t expect anyone to magically ring a bell to note the start of the next bull run...or when to prep for the next bear. It is more of a case of preponderance of the evidence which sometimes you don’t know that time has arrived until the train starts pulling out of the station.

At 65% long we won’t miss on much upside if that starts to happen. Nor be overly harmed if things slip further south like towards the 200-day moving average currently at 5,576.

For now, the future continuation of the long-term bull market is the most likely outcome. As always when the facts change...so too will our strategy. Mostly likely that change is uncertainty fading away paving the way for the next leg higher for which we will want to put more of our cash to work in the best-looking stocks.