Why We’re Willing — And Wanting — To Look Different From the Norm

Since the Federal Reserve began raising rates in 2022, the term “soft landing” has been used to describe the goal of reducing inflation without tipping the economy into recession. Now, as the third quarter draws to a close, it seems not only possible but increasingly likely that this outcome is on track. Gross domestic product remains above long-term growth estimates, supported by strong consumer, capital expenditure, and government spending. Meanwhile, unemployment remains historically low. Recent Fed cuts are also expected to boost the economy by putting downward pressure on mortgage rates. In short, the data offers little support for a recession forecast.

As one might imagine, the stock market has responded positively to these developments by once again making new highs. Perhaps just as important, bond markets have also reacted favorably by making multi-year highs as they seek to recover from their great bear market of 2022. The combination of these two can create a powerful wealth effect that could further fuel growth in the economy.

Now, to someone who doesn’t closely follow the economy or financial news, this might not appear to be a big deal. However, to us — and we would assume most of our readers — this is enormous news. It is also a reminder of just how difficult it is to predict markets given how much sentiment has vacillated between optimism and pessimism during the last few years.

One of the key attributes of trend following, which we emphasize at every opportunity, is its ability to position without relying on the risky biases that come with making predictions. In our view, prediction is a high-risk, high-reward game — get it right, and the returns can be significant; get it wrong, and the consequences can be disastrous.

Besides the RISK of prediction is the COST of prediction. Making educated guesses requires significant cost in terms of the time and energy needed to develop an edge on the competition. This raises questions:

• Is it better to pursue high-risk/ high-reward, high-cost predictions?
• Or is it better to follow a system that offers more consistent, lower-risk outcomes with less cost?

To be clear, we believe the payoff of trend following will match or exceed that of a predictive approach over the long term, but even if you handicap the outcomes a bit lower, the reduction of risk and the savings of time and energy more than compensate, in our view.

While a soft landing seems to have been achieved or is imminent, it’s crucial to remember that this outcome was far from certain — and still may not be a few months from now. It’s also worth noting that the debate is far from over. Opinions have shifted frequently and likely will continue to do so for the foreseeable future.

Attempting to navigate the uncertainty thus far without a fully defined system was a gamble at best, in our view. Perhaps most importantly, even if we were able to nail it this time by using a predictive approach, that does nothing to improve the odds we will be able to do so again next time. On the other hand, if we adopt a more passive approach, then it begs the question of why our clients cannot do the same on their own.

We view a trend-following approach as the “happy medium” between the two: rooted in data, based on a repeatable system, and designed to react to actual market behavior rather than relying on prediction or passivity. While our clients could theoretically implement such a system themselves, we think we can bring immense value by helping our clients stay focused on their long-term goals, adjusting the plan as life circumstances change, and providing guidance during both positive and negative market environments.

Partnering with a firm like Blueprint Financial Advisors can represent a big paradigm shift for an investor, which can be scary. We appreciate the guts it takes to embrace a new approach. However, we will attest from our own experience that incorporating systematic trend following can be a breath of fresh air. We believe the clients that have partnered with us for years would attest to the same.