By Tim Hanna The new year brought new highs, with all major U.S. indexes trading at record levels last week. The Russell 2000 small-capitalization index rose 5.92%, the NASDAQ Composite was up 2.43%, the S&P 500 increased by 1.83%, and the Dow Jones Industrial Average gained 1.61%. The 10-year Treasury bond yield rose 20 basis points to 1.12%, as Treasury bonds fell for the week. Last week, spot gold closed at $1,849.01, down 2.60%. Stocks Markets rallied following confirmation that Democrats had won the two runoff elections in Georgia, gaining control of the Senate. Despite civil unrest that led to an assault on the U.S. Capitol, markets marched higher on prospects for significant fiscal stimulus under the Biden administration, with Democrats securing the Senate majority. ISM Manufacturing PMI rose to 60.7 in December (56.6 forecast), its highest level since August 2018. Non-farm payrolls fell by 140,000 in December (+60,000 forecast), the first monthly decline since April of last year. The unemployment rate came in at 6.7%, almost identical to the 6.8% forecast. With 2020 behind us and 2021 being a “fresh start” for markets, Bespoke Investment Group looked at the historical yearly starts for the S&P 500 since 1983. They discovered that only two years, 2000 and 2008, started out positive at the opening bell and then finished the day down more than 1%, as happened this year. But this year did not follow suit. Bespoke noted, “Thankfully, the rest of the week looked nothing like what transpired in 2000 and 2008. In both of those years, the S&P 500 continued declining throughout the week, but this year the market came back strong. Even in the midst of Tuesday’s Georgia Senate run-off, Wednesday’s riots at the Capitol, and Friday’s much weaker than expected non-farm payrolls report, equities glided higher.” Bonds Treasury yields increased last week, finishing the week up 20 basis points (ending at 1.12%) on the 10-year Treasury, its highest level since March of last year. As a result, these bond prices fell hard this week. On the municipal-bond front, T. Rowe Price traders noted , “Reinvestments of January coupon payments supported the tax-exempt market, as did strong risk appetite for higher-yielding munis. Many observers believe that Democratic control of both houses of Congress is likely to lead to greater federal support for financially stressed states and municipalities.” Primary issuance in the investment-grade corporate-bond market exceeded expectations, and the high-yield market followed the gains experienced in equities last week. Gold Last week, spot gold closed at $1,849.01, down 2.60%. The outcome of the U.S. Senate runoff elections has increased investors’ risk appetite, specifically with expectations of more fiscal stimulus. The Democratic majority and a short-lived decrease in political uncertainty translated to widespread selling of traditional “safety” assets such as gold and U.S. Treasurys. The yellow metal experienced a fairly sharp move down last week, while the U.S. dollar moved slightly higher. The following chart highlights the daily drops in gold and shows the relationship last week between gold (blue) and the U.S. dollar (orange). The indicators Our very short-term-oriented QFC S&P Pattern Recognition strategy’s equity exposure started the new year 200% long, changing to 0% at Thursday’s close, and initiating a 2% short exposure at the close on Friday. Our intermediate-term tactical strategies are uniformly positive, although to various degrees. The Volatility Adjusted NASDAQ (VAN) strategy had a 200% long exposure to the NASDAQ on Monday, reduced exposure to 180% long at Thursday’s close, and reduced it to 140% long at Friday’s close. The Systematic Advantage (SA) strategy is 137% exposed to the S&P 500, our Classic strategy is in a fully invested position, and our QFC Self-adjusting Trend Following (QSTF) strategy was 200% exposed all of last week. VAN, SA, and QSTF can all employ leverage—hence the investment positions may at times be more than 100%. Flexible Plan’s Growth and Inflation measure, one of our Market Regime Indicators , shows that we remain in a Normal economic environment stage (meaning a positive monthly change in the inflation rate and positive monthly GDP reading). Historically, a Normal environment has occurred 60% of the time since 2003 and has been a positive regime state for stocks, bonds, and gold. Gold tends to outpace both stocks and bonds on an annualized return basis in a Normal environment but also carries a substantial risk of a downturn in this stage. From a risk-adjusted perspective, Normal is one of the best stages for stocks, with limited downside. Our Volatility composite (gold, bond, and stock market) is registering a Low and Falling reading, which favors stocks over gold and then bonds from an annualized return standpoint. The combination has occurred 37% of the time since 2003. Gold is likely to be the most volatile asset class during this regime stage.