Market insights and analysis

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

1st Quarter | 2024

Quarterly recap



Current market environment performance of dynamic, risk-managed investment solutions.

By Jerry Wagner

It’s that time of year. If you live in the Northeast or Midwest, you probably know what I mean. As winter begins to draw to a close and the first signs of spring surface, we enter the twilight zone where ice storms appear.

On a weather map, ice storms are usually the fuzzy area clinging to the southern edges of snowstorms as they sweep across the country. They begin with rain that often switches to slush but rarely transforms into snow.

The torrents of rain coat the trees and the power lines. The temperature plummets as night descends. And we awake to a fairy-tale land, a glittering treescape, as a half an inch to an inch of ice covers every branch and twig.

But in that beauty, like that of a rallying stock market, lies the danger. Roads that were once well traveled are now deserted. The isolated car or truck that ventures out is often seen slipping out of control at an intersection, as there is no traction to be found. The number of accidents soars.

The silent beauty of the landscape is soon pierced with a cacophony of sounds. Trees fracture, split, and shatter under the weight of the ice. Branches crack off and plunge to earth. And power lines snap and crackle, rendered useless for their purpose.

Facing unexpected risk with flexibility and resilience

Ice storms are just another example of unexpected risk that cycles through the calendar year. This follows the same pattern as what we see in the stock market. No one knows for certain when a market correction will occur, but we know that these market declines occur with regularity—and when they do strike, they are fraught with danger.

The latest round of ice storms has just passed through Michigan. It left close to 700,000 homes without power. Most will have no electricity for at least five days.

As widespread as this damage has been, it does not hold a candle to the extensive damage inflicted by the latest bear market. According to the Financial Times, global wealth loss in 2022 in stocks and bonds totaled over $30 trillion! “The market value of companies traded across all global stock exchanges tumbled by $25tn, according to Bloomberg, while the data provider’s Multiverse index, which tracks global government and corporate debt, is down almost 16 per cent or $9.6tn in market value terms, …” adds the Financial Times.

Like the weight of ice on trees after an ice storm, the weight of the losses in the financial markets brought down investor portfolios. In a report from Fidelity last week, it was estimated that retirement accounts of Americans sank in 2022. The average 401(k) account lost 23% of its value, IRAs 20%, and 403(b)s 19%. Vanguard released similar numbers.

In observing the effects of an ice storm on the trees, it’s apparent that there are contrasting experiences. Ancient oaks known for their hard wood and tall, majestic stature seem to experience the most losses. Their long branches and many jointed limbs are extensive, and when they become ice-laden, they accumulate more weight that can cause them to fracture and crash to earth.

Suppler trees, like willows, must also bear the weight of the accumulating ice. Yet they seem to react differently. They begin to stoop under the load. They often bend all the way to the earth. They appear to be dying. Yet when the temperature rises, they bounce back. Unlike the oaks with their resultant open wounds and gaps in their foliage, willows often survive the storm none the worse for the experience.

Like trees responding to an ice storm, different investor portfolios have different responses to bear markets. Like the oak with its massive network of interlocking branches, investor portfolios can be well diversified. But if they are not also resilient, they will suffer more than their suppler counterparts. Like the oak, their damages will be more lasting.

Resilience requires more than diversification. It needs to be able to be flexible when the weight of the bear market descends upon it. Being flexible entails taking action. It requires the ability to shift allocations in response to the environment.

A bending tree finds some relief when its sagging branches rest upon the ground below. Similarly, investor portfolios need to be able to find support from cash and other alternative and defensive asset classes when the financial markets get stormy. They can only do this—and bounce back when skies clear—if they employ dynamic risk management.

Even AI knows the best way to survive risk is to prepare

A few weeks ago, we published an article by one of our researchers, Will Hubbard, called “ChatGPT: The future of finance?” It received a lot of interest, and it got me thinking about my own role as a financial writer.

To test out the new tool, I asked the OpenAI creation to take a shot at today’s topic and write a story about the similarities between ice storms and bear markets. Here’s the result:

Once upon a time, in a small town nestled in the mountains, the residents were preparing for winter. They knew that they would face two major risks: the risk of a bear market in the economy and the risk of an ice storm in the weather.

The town had experienced both events in the past, and they knew that each could cause significant disruption to their lives. They also knew that both events required preparation and mitigation to minimize the negative impacts.

As winter approached, the townspeople prepared for the worst. They stocked up on emergency supplies like canned food, water, and blankets, in case they were hit by an ice storm that knocked out power and left them stranded. They also diversified their investments and saved up emergency funds, in case they were hit by a bear market that caused job losses and reduced returns on their investments.

Despite their preparation, both events eventually hit the town. First, an ice storm swept through the mountains, coating everything in a thick layer of ice. Trees and power lines sagged under the weight, and many homes lost power. The townspeople hunkered down with their emergency supplies, trying to stay warm and safe until the storm passed.

As they recovered from the ice storm, they were hit by another blow: the economy took a turn for the worse. Stock prices plummeted, and many businesses were forced to lay off workers. The townspeople felt the impact of the bear market in their own lives, as friends and neighbors lost their jobs and struggled to make ends meet.

But despite the challenges they faced, the townspeople rallied together. They helped each other clear fallen trees and repair damaged homes after the ice storm. They shared their emergency supplies and offered support to those who were struggling with the impact of the bear market. They knew that the only way to weather these storms was to work together and support each other through the difficult times.

In the end, the town emerged stronger and more resilient than ever before. They knew that they couldn’t predict when the next ice storm or bear market would hit, but they were prepared to face whatever challenges came their way. And they knew that, as long as they worked together, they could overcome anything.

As the townspeople were basking in the satisfaction of their successful preparation and mitigation of both the bear market and the ice storm, one of the town’s most vocal skeptics, an old man named Bob, chimed in with a joke.

“You know what’s worse than a bear market and an ice storm combined?” he said with a sly grin. “A bear market during an ice storm! That would really put a damper on things!”

The townspeople chuckled, knowing that Bob had a penchant for humor and a unique perspective on life. They all agreed that, while the combination of a bear market and an ice storm would certainly be challenging, they were confident that they could handle whatever challenges came their way.

And with that, they all decided to throw a community party to celebrate their resilience and teamwork, with hot cocoa, marshmallows, and a roaring fire to warm their hearts and lift their spirits.

While I don’t feel too threatened (I could have especially done without the weak attempt at humor and its Hollywood ending), I think ChatGPT did an adequate job. I especially liked how it emphasized that surviving, whether it be ice storms or bear markets, requires preparations to mitigate the damage that either can impose.

With investor portfolios, such preparation necessarily involves relying on financial professionals to create resilient portfolios and then help guide investors through blustery markets. That’s where Flexible Plan Investments (FPI) enters the story. We bolster the efforts of our clients and their financial advisers with portfolio construction tools, crash testing, dynamically risk-managed investment strategies, and support measures such as our OnTarget Investing process, to help investors weather the storm.

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