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

Special Recession Report

Is there a recession?

With the Federal Reserve on Wednesday (7/27) continuing its fight against inflation by making another 75-basis-point increase in interest rates, investors were watching with apprehension the government’s report on second quarter GDP. While many economists were saying that the chance of a recession was still low, the Thursday (7/28) report registered a 0.4% decline. While that was less than the first quarter, which fell 1.6%, it still met the “technical” requirements of a recession—two negative quarters of GDP growth. 

The reason cited for calling it “technically” a recession is that the Business Cycle Dating Committee, part of the U.S. National Bureau of Economic Research (NBER), is the official arbiter of whether or not a recession has occurred, and they have not made that call as yet. The trouble is that NBER only pronounces a recession on average seven months after the occurrence of a recession; investors and economists must operate in the real world and can’t wait that long.

As a result, students of the economy long ago developed a shorthand way of determining on a more real-time basis whether or not the country was in a recession: the two down quarters of GDP approach. 

How has that shorthand recession indicator done?

Since World War II, the indicator has been triggered 11 times. A recession followed in ten of those occurrences. You have to go back 75 years to 1947 to find the last time that the indicator was wrong and a recession did not occur in the eyes of the NBER. The indicator was correct the last ten times that it signaled a recession. Twice in that time, the indicator failed to announce a recession—the 1960-61 and 2000-01 recessions, which occurred without the two down quarters signal—but that is not the situation today.

Where do we stand on the likelihood of a NBER call of a recession?

The NBER looks at four types of data in making its determination: industrial production, employment, real income, and wholesale-retail trade.

I constructed a chart of where we stand on those indicators from the graphs supplied in this helpful slideshow:

As is demonstrated by the table, most of the NBER data used to call a recession are struggling. The current administration continually cites the growth in nonfarm payroll for its belief that there is no recession. While the payroll numbers have been positive, the monthly number has declined from an average of 450,000 new jobs to an estimated 250,000 jobs expected in the next report. At the same time, a second measure of jobs growth, the household employment report, found a decline in two of its last three monthly surveys.

While personal consumption is reported to be strong, rising five out of the last six reports, the rest of the NBER numbers were down in their last report and all are struggling. With four out six of its indicators clearly in a downturn, and a fifth in a mixed mode, it seems likely that when the NBER gets around to ruling—again, on average, seven months from now—it will say we are in a recession.

What does a recession mean for the stock market?

A recession can have serious negative effects on the economy and personal finances in general. However, the very inflation that is an insidious cancer in terms of purchasing power, does inflate wage growth and helps many employees and businesses weather this type of Federal Reserve-induced recession. 

At the same time, however, history tells us that bear markets in a recession are longer and deeper on average. Bear market rallies are frequent and can disappoint investors trying to get on board. 

If the market bottomed with the low on June 16, it would have been a very short downturn, like the one in 2020. The average downturn has included a loss in the S&P 500 of over 30% and a duration, on average, of 339 days. This bear market has seen the index fall a maximum of 23.55% over just 164 days. So, on this basis, we would usually expect more downside to this bear market. As the chart of the index in the stocks section below shows, it is still in an intermediate-term bear channel despite the recent rally.

However, we are taught that the stock market is forever anticipating. It often factors in expectations long before the actual occurrence of events (by three to six months on average). It could be that the conventional recession indicator (two down quarters in GDP) has been anticipated by the market and that stocks are now in the phase of looking ahead at a return to growth in the third quarter and beyond.

And there is substantial support for this belief as demonstrated in the next chart:

Back-to-back downturns of GDP have often marked the bottom of the bear market. While there have been major exceptions, with declines over the next three months (in 1970, 1982, 1991, and 2008), the longer-term, 6- to 12-month, picture has been mostly unblemished.

Generally, returning to the market after such an event has paid off most of the time when this indicator has signaled a recession. This can be especially the case where the investment is with an adviser employing dynamic risk management. If there is more downside to come, we can adjust to that. If the market has bottomed and is turning higher, an actively managing adviser, like Flexible Plan Investments (FPI), can quickly reposition the portfolio to focus on equities to take advantage of it. The Dalbar studies have repeatedly demonstrated that individual investors are not particularly good at market timing or timely reallocations.

Weekly Market Update

The major U.S. stock market indexes finished the week up last week. The Dow Jones Industrial Average gained 2.97%, the S&P 500 rose 4.3%, the NASDAQ Composite advanced 4.7%, and the Russell 2000 small-capitalization index grabbed back 4.3%. The 10-year Treasury bond yield fell 9 basis points to 2.65%, sending bond prices higher for the week. This week gold futures closed at $1,779.80, up $34.50 per ounce, or 1.98%.


Despite a falling GDP, a recession call, and the Federal Reserve’s 0.75% increase in interest rates, the market managed to register its best month since 2020. The S&P 500 gained 9% for the month.

The shorter-term price channel of the S&P 500 is up and stocks have broken back above their 50-day moving average. Yet, the price index still remains below the longer-term downward channel marking the recent bear market, as well as its 200-day moving average. The gains have pushed stocks into an overbought condition where a pause or retracement is certainly possible. 

Still, the upward thrust has been impressive. One measure that is 80% effective in calling sustainable rallies over the next six months is signaling “buy”. Even in bear markets this indicator of market strength is 75% effective over the short term and has been right 100% of the time over the 6- to 12-month period.

Earnings reports, as I suggested would be the case before the start of the earnings reporting season, have pushed stocks higher. More than 70% of reported earnings and sales have exceeded analyst expectations, compared to average outperformance in the high 50% range. All four companies in the trillion-dollar market-cap club (Microsoft, Google-Alphabet, Amazon, and Apple) made strong gains after their earnings reports of better-than-expected second-quarter results. 

Investor sentiment continues in a very pessimistic mode. As a contrarian measure, this is usually bullish. 

With all of the talk of a recession, it’s worth noting that only 21.4% of the possible yield curve inversions are currently signaling a coming recession. Normally it takes over 50% to make a recession call. The six inverted curves have an average accuracy of 87.9%.

Bottom line: The market looks overbought but could still challenge the longer-term downtrend and 200-day moving average because of the strength of the recent market move. After that, it still looks likely to test the bottom registered on June 16.


The above chart of the 10-year Treasury bond yield demonstrates just how dramatic the decline in interest rates has been in the last two weeks. Prior to that, yields had received repeated support at the 50-day moving average. Each time it would approach that level, interest rates would bounce higher. Suddenly, two weeks ago, rates plunged through that level and have steadily been declining ever since. 

While part of this decline is seasonal, most can probably be attributed to the growing realization that a recession has already appeared on the economic scene. That realization has caused the investment community to start to believe that the quick decline into recession may influence the Federal Reserve to moderate its rate expansion (which has been at the fastest rate since 1981) or bring it to an early ending. While so far a change in policy has not occurred, rates have continued to decline. Now that the 50-day moving average level is likely to act as resistance instead of support, we will be looking to the 200-day moving average level (38 bps below the current rate) for that support instead. 

Bond prices have, of course, risen as they reflect the inverse of the yield movement and direction. The long bond (with a 20-year+ maturity) has regained about 1/7th of the value lost in its recent 20%+ decline. It, too, is nearing resistance from its 40-day moving average and, perhaps at an even lower level, from the gap just south of the $125 price level.

The high yield, or junk bond, sector of the bond market has held up better than both stocks and longer-term Treasury bonds. The high-yield bond ETF (HYG) at its maximum drawdown declined just 15%. Now, like the stock market and the bond market generally, it has been rallying. While, as with their government bond brethren, high-yield bonds may continue to move higher, they, too, are overbought, like their stock market cousins as well.


Gold has been a bit of an enigma since near the end of the first quarter. Report after report of higher inflation kept being published throughout the second quarter. Yet gold, the so-called inflation fighter, just kept declining in value. Like bonds, it provided little defense during that period against the ravages of the stock market declines on investment portfolios. 

Then, as headline inflation numbers began to decline for other commodities (see chart below), gold picked up and began to deliver healthy gains to the portfolios that still contained it. As the chart above demonstrates, gold is still within an intermediate-term downtrend. And it has been approaching its 50-day moving average, which may bring an end to its advance.

Just as stocks and interest rates have fallen—perhaps in response to the belief that the decline in other commodities plus the fears of a recession will cause the Fed to reverse policy—the dollar has fallen with interest rates. As we have repeatedly reported, the price of gold has been tightly tied to the movements of the value of the dollar this year. 

As the dollar had its almost historic rally earlier this year, gold marched in lockstep lower. Now the reverse is occurring, and like gold meeting its resistance at its 50-day moving average, the dollar is likely going to find support at its own 50-day moving average.

FPI is the subadvisor to the only U.S. gold mutual fund, The Gold Bullion Strategy Fund (QGLDX), designed at its introduction more than nine years ago to track the daily price changes in the precious metal.

The indicators

The short-term-trend indicators for stocks that I watch remain positive. Our very short-term-oriented QFC S&P Pattern Recognition strategy is 60% invested in the S&P 500.

Going into the month of July we reported that the month was a top performer when it came to stock market seasonality. Over the last 100 years, stocks grew at their fastest rate during that month. 

Once again in 2022, July lived up to its reputation, producing the best month for stock market gains this year and the best since 2020. Our QFC Political Seasonality Index (PSI) strategy took advantage of that favorable seasonality. It was fully invested for all but four trading days during the month and continues to rank number one among our QFC equity strategies year to date.

August has not done nearly as well as July when it comes to stock market returns. Over the last 20 years, it has ranked 4th from the bottom in returns and in the percentage of times August returns were profitable. 

The QFC PSI strategy is currently fully invested and will stay in that allocation until the close on August 17. The strategy is included in our QFC Multi-Strategy Explore  - Special Equities portfolio. (Our QFC Political Seasonality Index—with all of the 2022 daily signals—is available post-login in our Weekly Performance Report section under the Quantified Fund Credit category.)

FPI’s intermediate-term tactical strategies are mixed. The Volatility Adjusted NASDAQ (VAN) strategy is 40% inverse to the NASDAQ, the Systematic Advantage (SA) strategy is 60% in equities, the Classic strategy is fully invested in equities, and our QFC Self-adjusting Trend Following (QSTF) strategy is 100% invested in the NASDAQ. VAN, SA, and QSTF can all employ leverage—hence the investment positions may at times be more than 100%. 

At the beginning of May, our All-Terrain indicator, one of Flexible Plan’s Market Regime Indicators, registered a major change. Our Growth and Inflation measure began signaling that we were in a Stagflation economic environment stage (meaning a positive monthly change in the inflation rate and negative monthly GDP reading). 

This occurs only about 9% of the time and favors gold and then bonds over stocks. It is a time of moderate risk for gold, but stocks have their second-worst drawdown of all the regimes. Only the Deflation economic environment has seen larger drawdowns for stocks. 

Our S&P 500 volatility regime is registering a High and Falling reading, which favors gold over bonds and then stocks from an annualized return standpoint. The combination has occurred 13% of the time since 2003. It is a stage of lower returns for equities and higher volatility for both gold and equities. The S&P 500 registered a maximum drawdown of over 29% during one of these regimes, while gold’s maximum price loss was over 21%.

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