We live in a country that has been focused on instant gratification for decades. And as a world leader, the U.S. has infected the rest of the world with that culture of instant gratification.
Before the 1950s, televisions and fast food were scarce, and the internet and cellphones didn’t exist. Now these innovations are an integral part of the lives of people worldwide. It seems like almost all major technological innovation has been done to quicken our every action and help us realize our every desire.
For example, malls were first created to satisfy our retail shopping needs. No longer would Saturday be spent with my mom driving between stores separated by miles. Now we could buy everything we need in one small area.
But soon that was not instant enough. One of the first malls in the nation, Northland Center, which was built near my childhood home in Detroit in the mid-1950s, has now been bulldozed.
Over the years, shopping has “evolved,” replacing the mall with Kmart, and then Walmart, to take the shopping experience under one roof. Today in-store shopping is being replaced with at-home shopping by online retailers such as Amazon. And the neighborhood stores are being rapidly eliminated.
Each step in this shopping evolution brings us closer to a time when we will think of something and it will be ours. Aladdin and his magic lamp is almost a reality.
Like most of you, I have not opposed these innovations. I’ve been in awe of the transformation and have been among the first in line to take advantage of the time-saving nature of each.
Nor do I consider myself a technological Luddite. I was there at the beginning of the computer revolution. I was one of the first to bring computing power to quantitative finance in the 1960s, to hedge fund creation in the 1970s, and to a hedge fund experience for small retail investors in the 1980s.
Since then, my firm, Flexible Plan Investments (FPI), has continued to be a fintech leader. (If you’re new to the terminology, “fintech” is just what it sounds like—bringing technological innovations into the financial-services industry.) Twice in the last couple of years, we’ve been nominated for multiple awards for our innovations by WealthManagement.com.
We’ve developed our own operating system that runs all of our turnkey asset management program processes. In fact, we are completing the fourth generation of this system this year. In addition, we created our OnTarget custom benchmarking system for clients, illustrations and proposals systems for financial advisers, and our My Business Analyzer account monitoring and oversight tool for advisers and their broker-dealer or RIA firms.
Bringing instant gratification culture to financial services
But if the culture of instant gratification is all about delivering goods and services more quickly, how have we done that in the financial-services industry? I think the industry has done a good job of bringing Wall Street out of the concrete caverns of NYC and into the homes of most Americans.
Data is now ubiquitous. When I started out, my wife and I would spend weekend after weekend hunting down pricing data in libraries to hand type into my computers to allow the analysis upon which FPI was founded. Each day new data was added to the archive by the same manual process.
Today, financial data is available instantaneously. It is there for everyone, just a keystroke away.
When we started, trading was laborious. It would start with a call to a broker, who would manually type up a trade ticket that would be wired to a brokerage firm, which in turn would send it to the trading floor, where an actual person would shout the order until a match was found. Then the resulting trade would have to follow the same tortuous path backward to the investor before a trade was truly completed. Now, instead of taking all day, the process is nearly immediate.
Wall Street has also done a good job of providing account transparency to investors. We used to see our account balances quarterly. Now we supply the account balance every day, and if you’re trading a brokerage account, you can see it every minute.
Hedge fund strategy results used to be available only quarterly. Now, in addition to having the daily account value access, FPI does a very complete summary report of every strategy weekly as part of our Weekly Update service that includes this article.
While the rest of the mutual fund industry reports on their holdings monthly or quarterly, here at FPI we publish ours every day on our website. We try to achieve full transparency with our investors.
Modern technology with a human touch
The financial-services industry itself has been transformed. When FPI began, most investors traded through a major wire house brokerage firm—EF Hutton and Merrill Lynch were the biggest. Then smaller independent brokerage firms began to appear in every town and city, bringing investors closer to their trusted financial advisers. Registered investment advisers soon began to spring up in every suburb. Investors had more immediate access to their advisers.
In recent years, technology has swept through the industry. Accounts are maintained online, and most of the communication is not via telephone or snail mail but via an internet account and email and texting.
I do wonder if something is being lost here. We in the industry have to be careful that we continue to be available in person rather than simply electronically. After all, our investors trust us with their life savings. Don’t they need to know us?
Perhaps not, if all they worry about is the transaction and best execution. But if they need a relationship with a financial planner, a true financial adviser, visits at the local office or the kitchen table still seem essential.
As an asset management firm, even though we do not do financial planning, we try to make our personnel available to investors and their advisers. We maintain a service support center for clients and a separate one for their advisers with real human beings to answer questions between account statements. We not only distribute our own financial content, but we also work with the financial magazine Proactive Advisor Magazine to deliver weekly third-party content to advisers.
We have both an internal and regional staff of business managers to work with financial advisers by phone or face to face. We encourage advisers to come to our offices here in Bloomfield Hills, Michigan, on due diligence visits to meet our staff and learn the latest about our investment strategies.
Can instant gratification come to Wall Street?
The major criticism of the culture of instant gratification is that it moves us ever farther from reality. The instant gratification of watching a movie at home with gorgeous HD scenes from around the world can make our real world seem drab in comparison. The ability to be a master of our own destiny in the latest video (maybe virtual reality?) game can make real life seem more difficult and not very exciting.
The ability to connect with everyone online via Facebook, Instagram, LinkedIn, and other platforms can make in-person social interaction seem superfluous. “Social” can mean internet networking rather than a gathering of people. Psychologists tell us this substitute is missing something and can eventually lead to depression.
I have come around to believing that the culture of instant gratification can never truly come to Wall Street. All of the innovations of the last several decades that have promoted it have led us closer to the final product. Television delivers the stories we once got only from books and the movies we used to have to go to the theater to see. The cellphone puts communication into our pockets when once we had to go home or to a pay phone to connect.
But can the goals of investing ever be instantly gratified? I think not. Investing is a process to reach goals: buy a new home, fund college, or provide support in retirement. Just as these goals are not instantly obtainable, the means to achieve them do not yield the returns necessary instantaneously.
As an asset manager, I do feel that many investors have a need for instant gratification in investing. We show them research reports and model portfolio results that look good, and it is natural for some investors to want to immediately see similar returns in their accounts.
Often overlooked is the fact that those returns are an average earned over, say, 20 years. During that time, the strategies illustrated had plenty of ups and downs. They were in favor and out of favor. Their values did increase, but they also went sideways and down for various periods of time.
The maximum loss that was shown was, in the end, less than the stock market indexes. It was better than a balanced fund or a passively allocated portfolio, but it was not zero.
The low maximum loss and impressive historical return that was important when they invested was only achieved over time. When all of the ups and downs, sideways markets, rallies, and downturns were completed, that’s what the strategy achieved.
Over time, through all of the market cycles, the ups, downs, and sideways, these results are what investors want and asset managers seek to deliver. But it is only achievable over time, and the gratification we all seek as investors is never instant.
The major market indexes finished mixed last week: The Dow Jones Industrial Average lost 0.92%, the S&P 500 Stock Index fell 0.33%, the NASDAQ Composite climbed 0.54%, and the Russell 2000 small-capitalization index gave up 1.30%. The 10-year Treasury bond yield fell 15 basis points to 1.52%, as bonds declined in value. Spot gold closed at $1,504.75, up $7.70 per ounce, or 0.51%.
As you can see from the previous chart, we continue in a sideways market approaching resistance at the 50-day moving average. The head-and-shoulders pattern, which can come before a correction, is still intact. It’s encouraging that the stock market decline that occurred last Monday through Wednesday did not breach the 200-day moving average.
The precipitous fall in stock prices early in the week (at one point, the Dow Jones Industrial Average was off over 1,000 points) could be attributed to the usual factors: no positive movement on trade, impeachment talk, and recession fears.
Recession fears were bolstered by disappointing numbers from the ISM Manufacturing and Non-Manufacturing reports. Manufacturing fell to the lowest level since 2009, while non-manufacturing hit 2016 levels. The release of each number re-activated fears of an impending recession, causing the stock market to recoil.
Yet fears abated on Thursday (October 3) when the Census Department released a revised durable goods report. Orders were up for the third straight month, and shipments gained ground for the third month out of the last four.
Friday’s employment report seemed to complete a repudiation of the ISM reports as it showed solid employment gains, the lowest unemployment rate in 50 years, and strong gains for non-managerial wages. Thursday’s and Friday’s reports are, so far, hardly what one would expect in a pre-recessionary period. (Although the economic reports improved as the week wore on, it has to be pointed out that the tally for the week remained negative with 14 reports coming in worse than economist estimates, 11 better, and five on target.)
Reinforcing the instant gratification discussion, retail employment continued to buck the trend of all of the other employment numbers. Its share of total employment continues to plummet in the face of the instant gratification promoted by online shopping (i.e., the “Amazon effect”).
Sentiment by small investors continued to be anything but bullish. Not only have they continued to buy puts (an option bet that stock prices will fall) at historically high rates, but the AAII investor sentiment measure says they are the least bullish since the bottom of the correction last December. Skipping that low, they are the lowest since the first-quarter bottom in 2016.
While bearish sentiment is not at its highest point, it is above average. As these indicators tend to be contrary to future stock market movements, this is regarded as bullish for stocks.
We reported last week that October has been both a good and bad month for stocks historically. It does contain many of the stock market’s steepest slides. Still, Octobers have more often seen rising prices, albeit mostly in the latter half of the month.
Putting aside whether October is a good or bad month for stocks, there is no doubt that it is the year’s most volatile month. As the following chart demonstrates, October bests all other months in the range of prices experienced by a wide margin.
One other interesting note about October seasonality is that it usually ends in the opposite direction it begins. In fact, when the month falls over 1% on the first day of the month (as it did this month), it has gone on to average a gain of 3.75% for the rest of the month and 7.22% for the rest of the year—gaining ground in 12 of 13 instances!
While our Political Seasonality Index maintains its bearish position in cash or bonds until October 9, most of our other strategies are fully invested. (Our Political Seasonality Index is available post-login in our Solution Selector under the Domestic Tactical Equity category.) Our Self-adjusting Trend Following strategy did reduce its exposure to match the market’s last week in the face of the early week downdraft.
Next week is the first week of earnings reporting season. Estimates are for a 4.1% decline in year-over-year earnings, marking the third quarter in a row for a decline in this measure. Such action has in the past led to a bear market each time it has occurred since 1990 (with one exception), although before that it appears to have no predictive information.
Once again coming into reporting season, analysts’ earnings revisions have mostly been reductions. In the past, this has led to most firms beating analyst estimates and has spurred stock indexes higher.
Our Market Regime indicators continue to show we are in a normal economic environment (rising inflation and positive GDP). Our gold, bond, and stock market volatility composite continues to be high and falling, which favors gold and then bonds over stocks—although all have positive returns in this regime stage. The short-term indicators I watch continue in a bearish mode for stocks.
In summary, the market volatility that we have experienced seems likely to continue. I believe that after the seasonal lows this week, the odds favor at least one more breakout to new highs by the indexes before a recession-induced correction is likely.
I guess this is like a forecast of more instant gratification, but, as in other fields, that good feeling is often not sustained in the long run. In reality, financial markets are not a one-way street. What goes up does tend to come back down over a complete market cycle. Hence, you need vigilance and discipline in monitoring and handling your investments to reap the benefits as long as the good times roll and to seek shelter when we hit a turning point.
All the best,
P.S. Our All-Terrain strategies have done a great job in this sideways market because they include stocks, bonds, and gold. They are a part of our QFC Multi-Strategy Core offering and are now available separately as Quantified Fee Credit (QFC) strategies.
This week, our third new Quantified Fund was launched. The Quantified Evolution Plus Fund (QEVOX) joins the new Quantified Pattern Recognition Fund (QSPMX) and Quantified Fixed Income Tactical Fund (QFITX), all of which have been launched since August. A fourth fund, the Quantified Common Ground Fund (QCGDX), should be introduced within the next month.
These new funds allow us to offer more low-fee QFC strategies to our clients, while also giving us the ability to trade daily within the funds (something most platforms aren’t equipped to do).
PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. Inherent in any investment is the potential for loss as well as profit. A list of all recommendations made within the immediately preceding twelve months is available upon written request. Please read Flexible Plan Investments’ Brochure Form ADV Part 2A carefully before investing. View full disclosures.