Market insights and analysis

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

2nd Quarter | 2021

Market insights and analysis

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

By Tim Hanna

Stocks traveled north last week, with all major U.S. indexes trading at all-time highs. The NASDAQ Composite was up 3.05%, the Russell 2000 small-capitalization index also rose 3.05%, the S&P 500 increased by 1.25%, and the Dow Jones Industrial Average gained 0.44%. The 10-year Treasury bond yield rose 5 basis points to 0.95%, as Treasury bonds fell for the week. Last week, spot gold closed at $1,881.31, up 2.26%.

Stocks

Stocks reached record highs last week on news that another coronavirus relief package is close to being reached. Another major contributor to the move upward was the rollout of the vaccine, which helped provide a more positive long-term outlook for the COVID-19 pandemic. In addition, the Federal Reserve affirmed its “extraordinarily accommodative” policy stance, another encouraging signal for the markets.

The news wasn’t all good, however. Unemployment claims rose to 885,000 (817,000 were forecast), their highest level since September. The Commerce Department reported a contraction of 1.1% in retail sales for November, the worst since April and almost triple the expected decline. Also, the Fed kept the federal funds target rate in a range of 0% to 0.25%, forecasting that they will hold rates near zero at least through 2023.

With markets at new highs, Bespoke Investment Group looked at the number of new closing highs by year for the S&P 500 from 1950. Reflecting back to March of this year, markets breaking all-time highs before the end of the year would have seemed unlikely. However, through December 17, the S&P 500 had 31 record-high closes during 2020, and it has a few more trading days left to add to that record.

The Bespoke team also noted how significant the move has been: “At the surface, 31 record highs doesn’t look all that impressive compared to 2019 when there were 36 and 2017’s total of 62. However, when you consider the fact that the S&P 500 experienced a drawdown of more than 30% that began less than two months into the year, it’s actually an amazing accomplishment.”

Bonds

Treasury yields increased last week, finishing the week up 5 basis points (ending at 0.95%) on the 10-year Treasury. On the investment-grade corporate-bond front, T. Rowe Price traders noted, “Low levels of primary issuance, along with a year-end buying trend, drove investment-grade corporate bond credit spreads tighter throughout the week.” The equity market’s move higher helped the performance of high-yield bonds. Trading volumes were lower than average in the fixed-income markets overall last week.

Gold

Last week, spot gold closed at $1,881.31, up 2.26%. The metal experienced a steady climb last week while the U.S. dollar continued to weaken. The following chart highlights the daily jumps in gold and shows the relationship last week between gold (blue) and the U.S. dollar (orange).

Equity markets may have broken new highs on hopes of a stimulus package, vaccine rollout, and the Fed’s accommodative stance. However, along with those factors comes some uncertainty. If markets were comfortably breaking highs with little risk on the horizon, one would expect gold to have a difficult week. Longer term, gold is trading toward the top of a bearish price channel, indicated by the negative-sloping red trend lines in the following chart.

The indicators

Our very short-term-oriented QFC S&P Pattern Recognition strategy’s equity exposure increased from 160% long to 200% long on Monday’s (12/14) close. Maximum leverage was maintained the rest of the week.

Our intermediate-term tactical strategies are uniformly positive, although to various degrees. The Volatility Adjusted NASDAQ (VAN) strategy had a 160% exposure to the NASDAQ on Monday, increased exposure to 180% at Tuesday’s close, and remained there to close out the week. 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 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.



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