Immediacy

[View this email in your browser]( I spoke about immediacy yesterday evening in our daily Market Scout video, however, I think today it makes some sense for me to send an explanation of that topic in writing. Think Uber. You click a button. The car shows up in 5 minutes. Think Seamless. You click a button. The food shows up in 20 minutes. Think Amazon. You click a button. The products show up in some cases within 4 hours. Technology has and continues to move mountains to fulfill customer needs, and specifically, the need to give the customer what they want almost immediately and have the customer put forth very little effort in doing so. Don't get me wrong. Clicking a button and having magic happen is awesome. Uber is awesome. Seamless is awesome. Amazon is awesome. What is starting to concern me is that the expectations that many have regarding the immediacy we receive in other parts of our lives is starting to demand to be translated to financial markets. Let me explain. From March of 2009 until November of 2021, outside of a Fed pivot, the biggest drawdown the market saw was 5-10%. Yes sometimes the Fed thought they could get away with removing the punch bowl, but as we saw in 2018, they capitulated after a 20% drawdown. In short, for basically 12 years straight, the market went straight up and in fact, during that 12-year period, returned 3 times more returns than the average year going back to 1900. During that period, returns were immediate. Drawdowns became less frequent and were negated in shorter times than ever. Profits were much more immediate than ever. As it turns out, when the money supply is being increased by over $100,000,000,000 (with a B) a month, it's not overly complex to generate some nice profits. You type in basically any symbol, you buy it, and poof, profits start happening right away. Uber...immediate. Amazon...immediate. Seamless...immediate. 2009 - 2021 stock market...immediate. While this worked for many, I believe it has created unrealistic expectations and habits for traders and investors when the Fed is tightening financial conditions. And I'm not even talking about retail traders. I have been pretty sick this week and while trying to rest up, I decided to watch the Halftime Show on CNBC the past two days. I am almost shocked by what I saw. Every analyst, I mean every analyst, every analyst I just could not believe what they were saying. If I didn't know better, I would walk away thinking that we will CERTAINLY be back at all time highs by the end of the year. Jim Cramer said the market bottomed back in March. We are lower now. Jim Labenthal (I think that's his name, but he's a CNBC guy) said the market bottomed at $4,000. We are lower now. JP Morgan has told its clients to buy every dip and every rip this year...and we are lower. It's retail and professionals. Yes, it made oodles of money on the way up, but few stop to think through why it made oodles of money on the way up. And what's more is, because they are professionals and because they are on TV, those bad habits get communicated to retail, who are working their asses off to survive this year. It's shocking. If the historic increase of the money supply and the historic reduction in interest rates helped on the way up, at least in my opinion, it hurts on the way down. To me, coming up with that is as basic as tying my own shoes or walking forward two steps. I believe that these "analysts" have also gotten trapped by the immediacy bad habits that more or less surround us on a given day. Just this morning, Kathy Wood (I like her, but man is she stubborn) was interviewed by Bloomberg. This is a money manager who not too long ago was seen as a very rare investor based on her calls, her intellect, and her returns. I mean, her returns were significantly market outperforming. Unfortunately, I believe she is a wonderful example (again, I like her a lot) of what I am talking about. In her [interview]( she said "When people invest in Ark, they know they're getting truly disruptive transformative innovation. That's what we offer, and we don't pretend to offer anything else". To me, that translates to "we straight up just buy unprofitable tech companies no matter what, and Teledoc is our number one holding in our Genomics ETF..." That worked from March 2009 until November 2021. Since November 2021, ARKK is down 66% and has now lost all of its gains since January 2018 (since January 2018, the S&P is up 42%, the Dow is up 26%, and the Nasdaq is up 77%). If I can turn this into something a little less of a ramble. The immediacy of returns is unrealistic when the Fed is tightening financial conditions. The size of expected returns is unrealistic when the Fed is tightening financial conditions. Sticking with one strategy that has bombed is unrealistic when the Fed is tightening financial conditions. Expecting immediate profits and positive returns is unrealistic when the Fed is tightening financial conditions. In the past, when the Fed was increasing the money supply by 7% a year, and consequently, the S&P 500 was rising 7% a year (cough cough, no surprise there), profits were made, but bad habits were created. Many are feeling the pain of those bad habits showing their ugly side this year. So, how do we fix this? Well, it's actually pretty simple. I cannot tell you what to do, but here is what I have done. When the Fed is easing financial conditions, volatility gets compressed. When volatility gets compressed, dips are very shallow and stocks rise. When the Fed is tightening financial conditions, volatility expands and the stuff that worked before no longer will work. While many require immediate results, similar to what is experienced interacting with Uber or Seamless or Amazon, having those same beliefs during a tightening cycle is likely going to continue to be an uphill battle. As of the close yesterday, the S&P 500 entered back into a bear market down 20%. However, according to Fidelity, the average customer account is now down almost double that or 39%. I feel very strongly that the average retail account being down double what the index is is exactly for the reasons I have stated in this email. Bad habits. Unrealistic expectations. I do not act like I know when this type of market will end. My best guess is that the market will go back to the way it was last year only when the Fed capitulates, cuts rates to 0% (not just cuts rates, but cuts them to 0%), and restarts QE. When that happens I have not the faintest clue and don't want to act as I do. But until that happens, expectations have to be realistic in terms of the size of potential returns and certainly the immediacy of potential returns. I don't know how low we will go. I don't know if a low or the low is in. I have no idea. What I do know is that it took 16 years for the Nasdaq to get back the gains it lost from the height of the dot com bubble. I do know that the S&P 500 is trading at 16 times multiple on 2023 expected earnings. I do know that not only have those 2023 earnings expectations not come down yet but that historically during a recession, the multiple on the S&P bottoms somewhere around 10. I do know it costs me double at the pump compared to last year. I do know my groceries cost 30% more than they did in January. I do know my cost of living is up well over 25% year over year. I do know that. And as long as those things are happening, it is critical for me to have realistic expectations about returns and how fast and immediate those returns may be. Stay small and win more trades, Steven STONY BROOK SECURITIES LLC IS A PUBLISHER AND DOES NOT OFFER TRADING ADVICE OR RECOMMENDATIONS. ALL INFORMATION IS PROVIDED FOR EDUCATIONAL PURPOSES ONLY AND NOT AN OFFER OR A RECOMMENDATION TO TRADE FUTURES CONTRACTS, STOCKS, OPTIONS OR FOREX. GOVERNMENT REGULATIONS REQUIRE DISCLOSURE OF THE FACT THAT WHILE THE TRADING IDEAS AND TRADING METHODS SHOWN ON THIS WEBSITE MAY HAVE WORKED IN THE PAST; BUT PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. WHILE THERE IS A POTENTIAL FOR PROFITS THERE IS ALSO A HUGE RISK OF LOSS. A LOSS INCURRED IN CONNECTION WITH TRADING FUTURES CONTRACTS, STOCKS, OPTIONS OR FOREX CAN BE SIGNIFICANT. YOU SHOULD THEREFORE CAREFULLY CONSIDER WHETHER SUCH TRADING IS SUITABLE FOR YOU IN LIGHT OF YOUR FINANCIAL CONDITION SINCE ALL SPECULATIVE TRADING IS INHERENTLY RISKY AND SHOULD ONLY BE UNDERTAKEN BY INDIVIDUALS WITH ADEQUATE RISK CAPITAL. 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