By Jason Teed Equity markets were up last week. The Russell 2000 Index posted the best performance with a 2.51% gain, followed by the NASDAQ composite (+1.73%), the S&P 500 Index (+1.23%), and the Dow Jones Industrial Average (+1.00%). The 10-year Treasury bond yield rose 4.5 basis points to 1.21%, as Treasury bonds fell slightly for the week. Last week, spot gold closed at $1,824.23, up 0.56%. The market’s upward movement seems to reflect a decrease in market uncertainty as pandemic stimulus moves closer to becoming a reality, vaccinations continue, and COVID-19 cases continue to fall around the U.S. Stocks The general stability and improvement of both economic and pandemic numbers supported equity prices last week. In fact, the riskier equity segments gained the most, with emerging markets and small-cap stocks beating large-cap domestic stocks, which had enjoyed outperformance for much of 2020. There is some concern that the market may be overbought, with equity prices far outpacing the earnings growth of companies. Another concern is the recent proliferation of SPACs (special purpose acquisition companies). SPACs are formed with the sole goal of acquiring a private firm and, through acquisition, taking the firm public. This method is cheaper than the IPO process, but for investors, it can be quite risky, as there is no guarantee that the SPAC will find a company to acquire, let alone a profitable one. Investors place their faith completely in the management of the SPAC. Even with that inherent risk, SPACs have boomed this last year. Many are being valued far above book value even before they find a company to acquire. Investors are betting on a future profitable acquisition. This seems to suggest that it is becoming difficult for investors to find return without significant levels of risk, likely because the economy is currently awash in cash, pushing down yields. With a lot of money sitting in unproductive investments, risk-taking may increase even more. This may lead to a bubble, which will burst at some point—which could bleed volatility into more traditional market segments. Bonds Treasury yields increased slightly, finishing the week up 4.5 points (ending at 1.21%) on the 10-year Treasury. Yields have been steadily increasing this year, though they are still low in historical terms. Term spreads increased further last week as interest rates rose and credit spreads fell for the week, both indicating a relatively healthy economic environment. Overall, high-yield bonds outperformed Treasurys, and shorter-term bonds outperformed longer-term bonds. Expectations for the intermediate term are for interest rates to remain at historically low levels, leading investors to continue to seek yield in other places. This will likely lead investors to bid up the price of high yields and compress the credit spread as the economy continues to recover. Gold Last week, spot gold closed at $1,824.23, up 0.56%. Other safe-haven assets did poorly last week, primarily due to decreasing investor uncertainty. Gold continues to enjoy positive fundamentals: Interest rates remain low, making the metal relativity more attractive when compared to interest-bearing assets, and the U.S. dollar has been weakening. These fundamentals are unlikely to change in the next few years. The metal started 2021 by falling 4.99%. Gold enjoyed strong performance in 2020 but has recently experienced selling pressure from investors taking profits. The indicators Our Political Seasonality Index began last week out of the market. It re-entered on Tuesday’s (2/9) close and remained there to begin this week. (Our Political Seasonality Index is available post-login in our Weekly Performance Report section under the Domestic Tactical Equity category.) The very short-term-oriented QFC S&P Pattern Recognition strategy’s equity exposure alternated between long and neutral exposure last week, but it ended the week 0.4X short. 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 (2/8) and increased exposure on Thursday, ending the week 120% exposed to the long side. The Systematic Advantage (SA) strategy is 131% exposed to the S&P 500, our Classic strategy is in a fully invested position, and our QFC Self-adjusting Trend Following (QSTF) strategy ended last week 200% invested. 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 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 21% of the time since 2000. It is a stage of lower returns for all asset classes with higher volatility overall.