Market insights and analysis

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

2nd Quarter | 2022

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 2/8/22

By Jason Teed

The major U.S. stock market rebounded last week after recent, significant sell-offs. The S&P 500 rose 1.55%, the Dow Jones Industrial Average gained 1.05%, the NASDAQ Composite rose 2.38%, and the Russell 2000 gained 1.72%. The 10-year Treasury bond yield rose 14 basis points to 1.91%, continuing a strong upward trend that began in mid-December 2021. Spot gold closed the week at $1,808.28, up 0.93% for the week.

Eight out of 11 sectors were up last week. The Energy and Consumer Discretionary sectors were the best performers for the week, rising 4.94% and 3.94%, respectively. Communications was the worst-performing sector for the week, down 0.25%.

Stocks

Despite concern over rising interest rates and inflation, the U.S. economy and stock market appear to be on solid footing. Signs of a strong economy leading to rising corporate earnings have helped stave off losses like those we saw in 2020. Even though the market seems to be punishing earnings misses severely, investors appear to have an appetite for risk-on assets.

Thirty significant economic reports were released last week. Of those 30, two-thirds came back as expected or better. Manufacturing exceeded expectations overall, while employment readings were mixed.

Strong economic growth continues to boost company earnings. Growth rates are lower than what we saw in 2021, which looked particularly strong compared to the significant earnings declines in 2020. The number of companies that are beating or meeting expectations is lower than it has been recently but still higher than historical levels. Additionally, companies continue to increase guidance at a rate higher than historical levels, though not as high as what we saw in 2021.

One behavior that suggests that all may not be well is how significantly the markets have been punishing firms that miss guidance on earnings per share. One spectacular example we saw last week was the drop in the value of Facebook after an earnings miss and worse-than-expected forecast. To date, it is the largest single-day drop in a company’s market cap ever.

While the market did not react as dramatically in every case, such behavior can indicate that investors are becoming more discriminating about the securities that they select. During periods of easy money, investors tend to be more optimistic and forgiving of companies with earnings misses, while more cautious investors can more quickly move away from a stock with concerning fundamentals.

But not all segments of the market are showing signs of trepidation. Bitcoin has had an interesting journey over the past few months. From its peak in November, it sold off as investors anticipated Federal Reserve tightening and the end of easy money. The cryptocurrency fell through mid-January, losing over 45% of its value. Despite the backdrop of rising rates and harder money, bitcoin has risen about 25% from its January lows. Though it has much further to go to reach previous highs, it is a sign that the asset may be rebounding, having found a bottom just shy of a 50% loss, which has been typical for bull-bear cycles for this asset.

The market appears to be close to transitioning from continued gains (albeit, at a lower level than we’ve seen previously) to further deflation of equities overall. For example, our Classic strategy, which tends to trade on a longer-term basis than some of our other strategies, has been trading more frequently. It exited the markets last Tuesday (February 1) and reentered this Tuesday (February 8). This indicates that the strategy, an econometrically modeled composite strategy, is near such a transition point. In these types of investment environments, it's beneficial to include actively managed strategies in your portfolio that can take advantage once the market begins to move in a sustained direction.

Overall, however, market behavior looks healthier than it was, with investors becoming more discriminating. While we may see further declines as assets deflate from widely speculated bubbles, the overall fundamental picture of the economy appears good.

Bonds

Treasury yields increased, continuing a strong trend from mid-December. The 10-year Treasury rose to 1.91%, hitting levels not seen since before the pandemic.

Yields throughout the curve are rising overall, though the term yield did shrink by 1 basis point last week. Credit spreads also shrank, by nearly 9 basis points. The credit spread shrinking more than the term spread indicates risk-on behavior from the market. Overall, long-term Treasurys underperformed high-yield bonds, and longer-term bonds underperformed shorter-term bonds.

The yield curve seems healthy, with rates increasing from short to long maturities. The market expects that rates will continue to rise as the Federal Reserve begins to combat recent inflation. Overall, the yield curve continues to suggest a healthy economy going forward.

Gold

Spot gold was up last week, though it has been trading within a range for the past six months. Other safe-haven assets, such as long-term Treasurys, were down for the week as rates increased. Increasing rates are often a headwind for gold, but not last week.

Flexible Plan Investments (FPI) is the subadvisor 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 Political Seasonality Index began last week fully invested but exited on Wednesday’s close, remaining there to begin this week. (Our QFC Political Seasonality Index is available post-login in our Weekly Performance Report section under the Quantified Fund Credit category.) The very short-term-oriented QFC S&P Pattern Recognition strategy’s equity exposure began last week 1.6X long, changed to 1.4X long on Tuesday, sold off on Wednesday, and remained there for the rest of the week.

Our intermediate-term tactical strategies are uniformly positive, although to varying degrees. The Volatility Adjusted NASDAQ (VAN) strategy began last week 20% exposed, changed to 20% inversely exposed on Monday’s close, changed to 40% inversely exposed on Tuesday’s close, and remained there to begin this week. The Systematic Advantage (SA) strategy began last week 120% exposed to the market, changed to 60% exposed on Monday’s close, and changed to 30% on Thursday’s close. Our QFC Self-adjusting Trend Following (QSTF) strategy was 1X exposed last week. Its maximum position is 2X leveraged. VAN, SA, and QSTF can all employ leverage—hence the investment positions may at times be more than 100%.

Our Classic strategy exited the markets on last Tuesday’s (February 1) close but bought back in on this Tuesday’s (February 8) close. The strategy can trade as frequently as weekly.

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 equity over gold and then bonds from an annualized return standpoint. The combination has occurred 23% of the time since 2000. It is a stage of lower returns and higher volatility for all three major asset classes.



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