By Tim Hanna Major U.S. stock market indexes were down last week. The S&P 500 decreased by 1.94%, the Dow Jones Industrial Average was down 1.68%, the NASDAQ Composite fell 2.95%, and the Russell 2000 small-capitalization index lost 1.71%. The 10-year Treasury bond yield fell 8 basis points to 1.40%, taking Treasury bonds higher for the week. Spot gold closed at $1,798.11, up 0.86%. Stocks Last week’s sentiment was mostly driven by the Federal Reserve’s monetary policy meeting on Tuesday and Wednesday. As expected, the target range for the fed funds rate was unchanged. The Fed announced that it will double the reduction of asset purchases to $30 billion per month—$20 billion for Treasurys and $10 billion for agency mortgage-backed securities. Also, amid expectations of continued inflation pressures, the Federal Reserve signaled three rate hikes in 2022, an increase from prior announcements but in line with investor expectations. Adding to volatility last week were investor fears over the impact of the omicron variant of the coronavirus and “triple witching” (expiration of three types of options and futures contracts on Friday). On the economic data front, the producer price index for November came in hotter than expected, up 0.8% month over month compared to expectations of 0.5%. The Index was up 9.6% year over year. Retail sales were up 0.3% month over month, below expectations of 0.8%. Unemployment claims came in a 206,000, slightly above estimates of 196,000. Housing starts were at 1.68M, above expectations of 1.57M. Markets have been mostly treading water for the last month, but major weakness has been exhibited by companies trading at the highest price-to-sales ratios. Bespoke Investment Group studied S&P 500 performance by decile (P/S) and noted that stocks in the S&P 500 are up an average of 3.3% month to date (MTD) through December 17. The 50 stocks in the S&P 500 with the highest P/S ratios are up an average of 0.35%, while the average return of the 250 stocks with the lowest price-to-sales ratios (deciles 6 through 10) is a gain of 4.0%. This behavior over the last few weeks is very similar to what was experienced at the end of January this year. The S&P 500 experienced a modest sell-off from the end of January through early March. During that period, the “average” stock was up an average of 5.7%, but the 50 highest P/S ratio stocks were down an average of 2.5%. The 250 stocks with the lowest P/S ratios were up an average of 10.3%. At that time, the divergence between stocks with high price-to-sales ratios and those with low price-to-sales ratios was wider than it is now. With 2021 coming to a close soon, we are now in what historically is the strongest part of December, the last two weeks. Going back to 1983, the following chart shows the composite average performance of the S&P 500 during December. Through the close on December 17, the average performance has been a gain of 0.45%. By the end of the month, the average performance for December is more than 1% higher, averaging 1.53%. Through Thursday’s close (December 16), the S&P 500 was up over 2% for the month. Bespoke looked at past years when December had a strong start to see if the second half of the month struggled. The findings show that following a month-to-date (MTD) gain of more than 2% through December 16, returns were right in line with the historical averages of all Decembers after WWII. Also, there wasn’t a single year when the S&P 500 lost more than 1% from the close on December 16 through the end of the month in Decembers with a month-to-date gain of more than 2% through December 16. While the S&P 500 posted solid gains in the first half of the month, the NASDAQ has been marching to its own drum, down over 2% MTD as of Thursday. Such divergence between the S&P 500 and the NASDAQ has been rare. In the NASDAQ’s history, there have been only seven other months when the Index was down 2% MTD at some point in the month while the S&P 500 was simultaneously up over 2%. The most recent occurrence was in March 2000. According to the study, the NASDAQ tended to outperform the S&P 500 with positive returns just over half of the time. With March 2000 being the one exception, these divergences were generally not an ominous signal for future NASDAQ returns. Time will tell whether this rare divergence increases the number of “exceptions” to two. Markets continue to see risks and uncertainty this week, with major indexes down over 1.5% Monday morning (December 20). Incorporating active, risk-managed strategies can help manage downside risk in periods when market volatility is prolonged, with certain strategies being able to profit in markets that are in an established downtrend. Bonds The yield on the 10-year Treasury fell 8 basis points to 1.40%. It ended the week around three-month lows following a test of support turned resistance in early December (black arrow in the following chart). Uncertainty surrounding omicron and investors trying to assess Federal Reserve’s policy effects in 2022 contributed to downward movement in yields last week. The Federal Reserve announcement last week was as expected, signaling three rate hikes next year. Internationally, the Bank of England surprised markets when it increased its bank rate 15 basis points to 0.25%. The European Central Bank and Bank of Japan both left rates unchanged and announced further tapering of asset purchases. T. Rowe Price traders reported, “High yield bonds experienced some weakness ahead of the Fed meeting, but the few deals launched in the high yield market during the early part of the week were met with strong demand. … Municipal traders noted that new issuance volume waned as the week progressed—preserving a positive technical environment for the market—and is expected to remain muted through the end of the year.” Gold Last week, gold rose 0.86%, continuing to trade near its 50-day and 200-day moving averages. Price action remains at early November breakout levels. The yellow metal’s story hasn’t changed. It is still trading in the middle of its yearly high and low that were both set in the first quarter. Technically, a golden cross (when the 50-day average crosses above the 200-day average) occurred earlier this month. A signal that is extensively followed by market technicians, gold could be lining up for a second failed golden cross of the year (the first occurring in July). If trading action can be sustained above moving averages, the yellow metal could gain some momentum and begin trading at higher value zones. Flexible Plan Investments is the subadviser 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 Our very short-term-oriented QFC S&P Pattern Recognition strategy’s equity exposure was 160% long throughout last week. Our QFC Political Seasonality Index favored stocks last week. (Our QFC Political Seasonality Index is available post-login in our Weekly Performance Report section under the Quantified Fund Credit category.) Our intermediate-term tactical strategies are positive, although to varying degrees. The key advantages these strategies offer to investors is their ability to adapt to changing market environments, participate during uptrends, and adjust exposure to more defensive posturing during downtrends. The Volatility Adjusted NASDAQ (VAN) strategy started last week 20% long to the NASDAQ. It changed to 40% long on Monday’s close and to 20% long on Thursday’s close. The Systematic Advantage (SA) strategy is 60% exposed to the S&P 500, and our Classic model is in a fully invested position. Our systems generated a new buy signal for most of our Classic accounts to buy on Tuesday’s (December 14) close. As was pointed out last week, while it rarely does so, the strategy can trade as frequently as weekly. Some accounts are customized to deal with more restrictive trading rules and thus will buy back later pending any additional Classic signals to the contrary. Our QFC Self-adjusting Trend Following (QSTF) strategy started last week 160% long, changed to 200% long on Tuesday’s close, and changed to 160% long on Wednesday’s close. 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 is one of our Market Regime Indicators . It 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 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 S&P volatility regime 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. It is a stage of lower returns and higher volatility for all three major asset classes.