Market insights and analysis

How dynamic, risk-managed investment solutions are performing in the current market environment

3rd Quarter | 2020

Market insights and analysis

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Updates on how dynamic, risk-managed investment solutions are performing in the current market environment.

Market Update 11/9/20

By Tim Hanna

As Election Day turned into election week, the major indexes rallied, experiencing weekly gains not seen since April. The NASDAQ Composite surged 9.0%, the S&P 500 gained 7.3%, the Dow Jones Industrial Average was up 6.9%, and the Russell 2000 small-capitalization index increased 6.9%. The 10-year Treasury bond yield fell 5 basis points to 0.82%, as Treasury bonds rose for the week. Last week, spot gold closed at $1,951.35, up 3.86%.

Stocks

Stocks surged on the increased possibility of a divided government, with Biden winning the presidential election and Republican control maintained in the Senate. The markets priced in the scenario of a reduced chance of immediate tax hikes and increased regulation, including the potential for a fiscal-aid package in some form.

The economic recovery was seen to be going in the right direction despite election uncertainty, rising COVID-19 cases, and no agreement on additional stimulus yet. Nonfarm payrolls increased by 638,000 in October (forecast 595,000), the unemployment rate declined to 6.9% from 7.9% in September (forecast 7.7%), and the ISM Manufacturing Index increased to 59.3% in October from 55.4% in September (forecast 55.7%).

In addition, last week the Federal Reserve left its policy rate unchanged. The central bank committed once again to support the economy by keeping rates lower for an extended period. Worth noting is that the markets continued their rally Monday of this week (DJIA, +1,200 pts, +4%) on the news that Pfizer’s COVID-19 vaccine showed an efficacy rate of above 90% at seven days after the second dose (two-dose schedule), meaning that protection from COVID-19 is achieved 28 days after the initial vaccination.

During the first four days of last week, the S&P 500 gained more than 1% each day. Four straight days of 1%-plus gains are very rare, with the last occurrence in October 1982. According to Bespoke Investment Group, “Back-to-back-to-back-to-back huge gains suggest to us that there is massive buying and enthusiasm for the equity market, so we wanted to see if these streaks have in the past been the spark for a longer-term rally. As shown below …, they have indeed typically been followed by strong gains going out 3-12 months, especially in the post-WW2 era.”

Bonds

Treasury yields decreased last week, finishing the week down 5 basis points (ending at 0.82%) on the 10-year Treasury. T. Rowe Price traders noted, “The investment-grade corporate bonds market received technical support as issuance virtually came to a halt around Election Day. High yield corporates, meanwhile, benefited from the strong equity rally and from generally solid corporate earnings reports.”

On the municipal bond front, a divided government could result in less fiscal support for state and local governments. Last week, however, municipal bonds fared well following the election, benefiting from declining Treasury yields and limited new issuance.

Gold

Last week, spot gold closed at $1,951.35, up 3.86%. At the start of the week, some volume of gold buying likely came from market and election uncertainty in the form of safety hedging. Due to the continued tight relationship between gold and the U.S. dollar, the metal’s surge last week could be in response to the U.S. dollar falling. John Moncrief, active commodities trader at GoldPrice.Org states, “Investors have been heartened and encouraged to exchange Dollar-denominated cash for assets; To a large degree it’s been a move to risk assets like equities, yes, but money is also moving into commodities as a speculative investment position, as well as reliable inflation protection. Gold, of course, fits both descriptions.” The following chart highlights the intraday relationship last week between gold (blue) and the U.S. dollar (orange).

The indicators

Our Political Seasonality Index was long to start last week, exiting at the close on Thursday, November 5. The strategy captured the four-day streak of 1%-plus returns but did not participate on Friday when the Dow Jones Industrial Average was down around 0.25%.

The very short-term-oriented QFC S&P Pattern Recognition strategy’s equity exposure had a long bias, starting last week at 40% long, peaking at 116% long on Tuesday, and ending the week with 0% exposure.

Our intermediate-term tactical strategies are uniformly positive, although to various degrees. The Volatility Adjusted NASDAQ (VAN) strategy had a 100% exposure to the NASDAQ on Monday and reduced exposure throughout the week, ending the week 20% exposed to the long side. The Systematic Advantage (SA) strategy is 125% 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 80% exposed until Thursday when the strategy reduced exposure to 60%. 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 from an annualized return basis in Normal environments. As a reminder, 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 High and Rising reading, which favors stocks over gold and then bonds from an annualized return standpoint. The combination has occurred 23% of the time since 2003.



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