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 Jason Teed

The major stock market indexes were mostly up this week, responding to positive news about the development of a COVID-19 vaccine. The Russell 2000 led performance for the week with a 6.1% gain, the Dow Jones Industrial Average gained 4.1%, the S&P 500 Index rose 2.2%, and the NASDAQ Composite fell 0.6%. The 10-year Treasury bond yield rose about 8 basis points, as Treasury bonds fell slightly for the week. Last week, spot gold fell significantly, losing 3.3%. International developed rose by 4.8%, while emerging markets rose by 0.8%.

The main stories affecting the markets last week were both related to COVID. Pfizer released preliminary data on Monday (11/9) that showed its COVID-19 vaccine was over 90% effective in preventing disease. Unfortunately, the U.S. and the eurozone continue to post record-high COVID-19 cases, which has led some countries and states to reinstitute lockdown measures seen earlier this year.

Since each of these stories could potentially have a significant (and opposite) impact on the markets, let’s take them one at a time.

The good news: An effective vaccine

Pfizer’s good news last week bodes well for several vaccine candidates that are still in their final testing phases. Moderna, which is testing another mRNA vaccine like Pfizer, said this morning (11/16) that its vaccine is 94.5% effective based on preliminary data. AstraZeneca and Johnson and Johnson are both testing viral vector-based vaccines, which work differently from their mRNA counterparts.

Assuming that these vaccines are effective above the 50% threshold required by the FDA, manufacturing and distribution now become the main concern. Pfizer’s vaccine has the most difficult road to travel, as it requires storage temperatures of less than -90 degrees Fahrenheit. The Moderna vaccine requires slightly colder-than-normal storage, while Johnson and Johnson’s vaccine will require only standard vaccination storage techniques.

Where are we on manufacturing? Vaccine manufacturing has been ramping up, and it looks as though by the end of 2020, there will be 155 million people potentially vaccinated, assuming that all candidates are eventually approved.

This positive data, coupled with the manufacturing that has already been taking place, suggests that life may get back to “normal” a bit sooner than expected by medical professionals. This certainly contributed to the outperformance of the Russell and other equity indexes last week.

What can we expect when the new normal becomes a reality? We already saw quite a bit of market rotation on Monday and Tuesday of last week. The market tended to favor smaller value companies over larger growth companies, which had previously seen the lion’s share of gains this year. The largest companies were those most poised to take advantage of and survive the pandemic. Therefore, they were bid up in price. Smaller value companies, which were more likely to be susceptible to pandemic-related concerns, may be a bit undervalued for a world less concerned with COVID-19. This rotation out of the pandemic-related securities (such as Netflix, Zoom, and Amazon) and into companies that have suffered this year (such as Carnival, Delta, and American Airlines) is likely to continue.

The bad news: The continuing rise of COVID cases

As predicted earlier this year, the world is seeing a second (perhaps third) wave of COVID-19 cases as the Northern Hemisphere cools and people move indoors. Testing remains very robust, and the U.S. positivity rate (a metric of how well-controlled the pandemic is) remains well below levels seen in March through April. However, with those additional tests, confirmed cases are at an all-time high in both the U.S. and the eurozone. Additionally, hospitalizations (numbers that are far less subject to testing constraints) have exceeded the early-summer numbers and are quickly approaching numbers seen near the beginning of the year.

Pandemic fatigue and the weather seem to be playing a role in the recent surge. People are (understandably) tired of quarantine measures and eager to socialize again, while cold weather is moving much of the U.S. indoors. Should cases worsen and governments continue to institute a second round of lockdowns, another economic downturn could surface in the last portion of this year and the first quarter of next.

However, there is hope that the impact on the markets will be less than earlier this year. We now have a solid timeline for when the majority of U.S. citizens and those of other developed countries will likely be vaccinated, and we also know what lockdowns can look like. This second round of lockdowns could be less onerous than previous lockdowns, with perhaps more targeted fiscal support, depending on whether the political parties can work together on a second stimulus bill.

Where does this leave us?

Though this too shall pass, we don’t know what the overall impact on the markets and the economy (and indeed human lives) will be. Should cases moderate with more targeted lockdowns/policies, we could see continued rotation into small value and out of the previously popular pandemic stocks (to a degree, many changes to business and work culture will lead to permanent changes in areas such as work from home, with impacts on teleconferencing, travel, and commercial real estate businesses). Should cases continue their exponential march upward until we reach the time of broad vaccination, it’s likely that pandemic-related stocks will see continued popularity, as they did over the summer.

While it’s impossible to know exactly how the next few months will play out, we do know that dynamic risk management can make all the difference during those periods of uncertainty.

Flexible Plan update

As equities were the top performers last week, our best-performing strategies were a mix of momentum-based, mean-reverting, and pattern-based equity strategies. Our WP Aggressive strategy performed the best, up about 4.0%, while our Systematic Advantage strategy was up about 2.9%. Strategies that invest in other asset classes such as gold suffered for the week. Our QFC Evolution Plus Aggressive strategy, which is largely invested in gold, was down about 3.1% for the week.

Among the Flexible Plan Market Regime indicators, our Growth and Inflation measure continues to show that we are in a Normal economic environment stage (meaning a positive monthly change in the inflation rate and positive monthly GDP reading). In the current regime, gold tends to perform the best, followed by equities, and then bonds.

Our Volatility regime is showing a High and Rising reading, which favors equity over gold and then bonds, although all have positive returns in this regime stage.

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