Market insights and analysis

How dynamic, risk-managed investment solutions are performing in the current market environment

2nd Quarter | 2022

Market insights and analysis


Updates on how dynamic, risk-managed investment solutions are performing in the current market environment.


By Jerry Wagner

One of my favorite novels is Joseph Heller’s 1961 best seller, “Catch-22.” As a teenager, I found the novel hilarious and surprisingly relevant given my father’s experiences in the U.S. Army Air Corps. He, like the chief protagonist in the novel, flew bomber missions in World War II. He spent three years dealing with the Air Corps’ regulations and bureaucracy, and he loved, as Heller did in the novel, to recount their absurdity.

The phrase “catch-22” is a totally fictitious expression coined by Heller to deal with a very real phenomenon of life: the closed-circle problems that so often exist with no practical solution. In the book, the main character, Yossarian, can’t figure out why one of his fellow airmen continues to fly missions:

Yossarian looked at him soberly and tried another approach. “Is Orr crazy?”

“He sure is,” Doc Daneeka said.

“Can you ground him?”

“I sure can. But first he has to ask me to. That’s part of the rule.”

“Then why doesn’t he ask you to?”

“Because he’s crazy,” Doc Daneeka said. “He has to be crazy to keep flying combat missions after all the close calls he’s had. Sure, I can ground Orr. But first he has to ask me to.”

“That’s all he has to do to be grounded?”

“That’s all. Let him ask me.”

“And then you can ground him?” Yossarian asked.

“No. Then I can’t ground him.”

“You mean there’s a catch?”

“Sure there’s a catch,” Doc Daneeka replied. “Catch-22. Anyone who wants to get out of combat duty isn’t really crazy.”

There was only one catch and that was Catch-22, which specified that a concern for one’s safety in the face of dangers that were real and immediate was the process of a rational mind. Orr was crazy and could be grounded. All he had to do was ask; and as soon as he did, he would no longer be crazy and would have to fly more missions. Orr would be crazy to fly more missions and sane if he didn’t, but if he was sane he had to fly them. If he flew them he was crazy and didn’t have to; but if he didn’t want to he was sane and had to. Yossarian was moved very deeply by the absolute simplicity of this clause of Catch-22 and let out a respectful whistle.

“That’s some catch, that Catch-22,” he observed.

“It’s the best there is,” Doc Daneeka agreed.

Yossarian’s catch-22, while hilarious to read about, is a dilemma encountered throughout life: You can’t have the job without experience doing the job. You can’t have the loan unless you can prove you don’t need the loan.

Like a quantum particle that can’t be measured because it changes when it is observed, we all have times when it seems like we are damned if we do and damned if we don’t. You just can’t win.

While Yossarian’s rules were imposed by a higher authority, in today’s world, society seems to have squarely placed itself into its own catch-22. If we don’t close down the economy, the virus won’t go away and we lose many lives and millions of dollars; if we close down the economy, we lose fewer lives and trillions of dollars. While I would never equate human lives with mere dollars, no matter how many there are, the dilemma is clear. Either choice has grave consequences.

Stocks are between a rock and a hard place

As investors, we are in yet another catch-22 situation. The negative outcomes of either scenario mean losses in stocks and could bring great volatility to the usual flight to safety asset class—bonds.

The danger to stocks is pretty clear to anyone who has watched the precipitous drop in stock prices since their high-water mark on February 19. When President Trump suspended air travel to China on January 31, few grasped the true nature of the threat the virus posed.

The stock market continued to make new high after new high, peaking at the market close on February 19. At that point, the S&P 500 Index had gained 117% since the president’s Election Day victory and 1,026% since the last bear market ended on March 9, 2009.

But then, as the implications of the news that the virus could spread simply by community contact and that it had landed on our shores, the market began to fall. In just 22 trading days, the plunge exceeded 30%, making it the fastest 30%-plus crash in stock market history!

During this time, state after state told its citizens to stay at home ... and their nonessential businesses closed. With the shuttering of company after company, revenues dried up first for their businesses and then for the states that closed them down.

And then, the layoffs began. First-time unemployment claims jumped over 1,172% in a single week and then doubled the next week. Unemployment and claims records set in the Great Recession that had paralyzed the nation 12 years before were surpassed in a matter of days.

At first, the stay-at-home orders were for 15 days. Then they were increased to 30. Now the governor of my state, Michigan, is suggesting adding another 70 days to her stay-at-home order!

It feels like catch-22, like when Colonel Cathcart continually increased the number of required combat missions before a soldier could return home; every time Yossarian reached the magic number of missions, it was immediately retroactively raised.

In such an environment, how can businesses and, in turn, the stock market permanently recover? Yet, if we lift the orders, the virus may return even if it has appeared to pause. Catch-22.

A rough time for bonds

For bonds, it has been both the same and a different story, depending on the type of bond one is invested in. It certainly has been a case of the Federal Reserve trying to ride to the rescue. The Fed has reached deep into its treasure chest of methodologies to try to both support and stimulate the economy. But the harder it tries, the less ammunition is left for the next battle and the less the market seems to respond. Catch-22.

The first of the Fed assaults was to force interest rates into a downward path that was positive for bond prices and investors in those bonds. We even reached negative-interest-rate levels on some short-term-maturity Treasury issues.

But the disruptions at the Treasury auctions, the valuation centers for corporate bonds, and the municipal bond market (due to a fear for the degenerating levels of tax revenues) combined to increase volatility in both bond markets. The volatility undid much of the Fed’s efforts at reducing rates. Instead, rates spiked for a week or so, erasing most of the gains made by bond investors.

Furthermore, whenever the Fed does this kind of action (and nothing close to this has ever happened outside of the Great Recession response), there has been a fear of setting loose the inflation hounds. Rising inflation at this juncture of the pandemic would certainly dampen the economy’s ability to rebound.

The recent return of interest rates to their downside trajectory has also sent the dollar into a decline. This further reduces American purchasing power and also scares off foreign investors in the dollar.

Enter gold. Gold can be an effective hedge against bond volatility, inflation, and a weak dollar. For that reason, many of our strategies here at Flexible Plan have included the yellow metal.

So far, its inclusion has been a mixed bag. While it generated positive returns as equities were declining, its profits were the single-digit variety—compared to bonds, which had 10%-plus gains. This is similar to the behavior exhibited by both in the 2008 meltdown. Bonds did better than gold in the earlier days of the crisis, only to have gold rally more by the end of the downfall.

As with stocks, we appear to be at a crossroads for bonds. The Fed actions, as well as the unprecedented fiscal stimuli enacted by Congress and signed into law by the president in recent weeks, will likely stir inflation, weaken the dollar, scare off foreign investors, and place future generations under a heavy debt that we will only be able to work out of with difficulty.

But, on the other side of the ledger, all of these efforts appear necessary to protect our people and businesses. It is assumed that it will nourish both back to health. But there are no guarantees, and there is increasing risk the more they do and the longer they do it.

Heads I win, tails you lose. Catch-22.

How to deal with an investment catch-22

As Heller observed, “Everyone in my book accuses everyone else of being crazy. Frankly, I think the whole society is nuts—and the question is: What does a sane man do in an insane society?”

At Flexible Plan, we believe the best way to deal with these catch-22 dilemmas is to invest in a manner that is responsive to the message that the market prices are sending. We employ tools to initiate action or to be passive in a fashion that has historically tended to be profitable or to minimize loss.

There is no assurance that every indicator will be right all of the time. And often the indicators will be contradictory and our methodologies will have to sort out which have the highest priorities and whether to lean in or hedge. Some will be slow to get on board a new trend, but that happens out of caution, as capital preservation is our top priority. Even when such lag occurs, our use of leverage can help us catch up should a strong uptrend appear.

In addition, it cannot be stressed strongly enough that investors in dynamic, risk-managed strategies need to diversify, just as those that invest passively have to do. Diversify your core investments. Don’t rely on a single core strategy.

When I look at the core strategy returns for the one-year period through April 3, I see that 10 of 10 of our Growth strategies outperformed the S&P 500 Index (after 2.25% maximum advisory fees and applicable fund credits) and 7 of 10 of our Balanced strategies did the same versus the Vanguard balanced fund (after 2.25% maximum advisory fees and applicable fund credits).

More broadly, I find that the nearly 150 strategies we have at Strategic Solutions have outperformed the S&P 500 Index, the Dow Jones Industrial Average, and the Russell 2000 small-cap index in the period since the February 19 stock market top (after 2.25% maximum advisory fees and applicable fund credits). The same holds true year to date!

Best of all, our turnkey strategies—where we choose, monitor, and reallocate a portfolio of dynamic, risk-managed strategies for you, and offer low fees in the QFC versions—have achieved excellent relative returns. Fusion, QFC Fusion 2.0, their Prime versions, and QFC Multi-Strategy Core suitability profiles, together with all four QFC Multi-Strategy Explore versions, have all surpassed our own expectations during this downturn.

The actions of the economy, the markets, and the pandemic may all seem like they operate in a vicious circle. Like the ancient question of which came first, the chicken or the egg, there often is no satisfying answer—or, worse still, you are left with a seeming paradox.

Dynamic, risk-managed investing that monitors and opportunistically acts based on historic probabilities may be our best answer to these catch-22 moments.

All the best, stay safe and healthy, and share a moment of your prayers for the incredible efforts of our health-care workers, military, first responders supply chain and supermarket and pharmacy workers.


P.S. If you can find a copy of “Catch-22” (there were over 10 million published), it’s a great read and will likely cheer you up. Or, watch the 1970 movie version starring Alan Arkin or the 2019 Hulu version with George Clooney. All of the above are great “stay at home” activities.

According to Wikipedia, “Although he continued writing, including a sequel novel Closing Time, Heller's later works were inevitably overshadowed by the success of Catch-22. When asked by critics why he'd never managed to write another novel as good as his first, Heller would retort with a smile, ‘Who has?’”

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