Market insights and analysis

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

1st Quarter | 2022

Market insights and analysis

rss

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

By Jason Teed

The major U.S. stock market indexes were up last week, rebounding from downward movements that pulled the NASDAQ into bear market territory. The NASDAQ posted the strongest performance with an 8.18% gain, the S&P 500 rose 6.16%, the Dow climbed 5.50%, and the Russell 2000 jumped 5.38%. The 10-year Treasury bond yield rose 16 basis points to 2.15%, continuing a strong upward trend for the year. Spot gold closed the week at $1,921.62, down 3.36%.

Ten out of 11 sectors were up last week. The Consumer Discretionary and Technology sectors were the best performers, up 9.27% and 7.87%, respectively. Energy, in a reversal of its recent upward trend, fell 3.58%.

Stocks

Last week’s major rebound arose out of a lot of conflicting data and circumstances.

On Wednesday, the Federal Reserve increased its short-term benchmark rate by 0.25%, kicking off what is expected to be a series of increases. The market responded positively. With inflation running in the high single digits for the past few months, the Fed was expected to aggressively increase rates.

And this appears to be the case. The Fed is expected to raise interest rates at each one of its remaining six meetings this year, and Chairman Powell said during a National Association for Business Economics conference, “If we conclude that it is appropriate to move more aggressively by raising the federal funds rate by more than 25 basis points at a meeting or meetings, we will do so.”

Investors likely see the rate hikes as necessary, but the flattening of the yield curve has accelerated in response. Currently, three-year rates are nearly equal to 10-year rates, and the difference between two-year and 10-year rates (a key metric) is shrinking rapidly. An inverted yield curve (when the two-year yield rises above the 10-year yield) has preceded every recession and has offered only one false signal for recession since 1955. The spread is currently about 21 basis points, the lowest it has been since 2020.

However, the situation is not as dire for the Fed as it might seem. The spread between the three-month and 10-year maturities remains wide, giving the Fed some wiggle room to implement rate changes without pushing the yield curve over the edge. Despite the Fed’s apparent latitude, rising rates will remain a headwind for the near future.

Commodities are also a headwind and source of volatility for the global economy. The recent short squeeze in nickel appears to be ending, but not before spiking volatility and uncertainty in the metal markets. Additionally, oil responded to the Russia-Ukraine crisis with significant increases, though the markets are off those highs.

Overall, broad commodity indexes are rising along the same line that they were before the geopolitical crisis began in February, a trend that is unlikely to abate soon given the continued uncertainty.

Despite these concerns, the U.S. economy remains on strong footing. Last week, jobless claims fell to 214,000, with unemployment benefits in the U.S. the lowest they’ve been in over 50 years. Housing starts also increased over 6% for February after a modest drop in January. On top of this, the construction of a record number of homes has been authorized but not yet started, suggesting that this strength will continue for months to come.

Lastly, manufacturing also showed strong improvement, with a 1.2% increase in February despite automobile manufacturing remaining a drag on the total. Overall, manufacturing experienced an increase of over 7% when compared to February 2021.

Whether the U.S. economy will be able to weather the current headwinds remains to be seen, but it appears to be prepared for current global economic trends. What is easier to predict is that volatility and volatility control will be integral to investing for the coming months.

Bonds

Treasury yields rose significantly last week along the shorter end of the curve as the Fed increased its benchmark rate.

Yields rose the most in two-year and three-year maturities, causing a flattening of the curve overall. The term yield shrank by 3.7 basis points, and credit spreads fell by over 14 basis points.

These are conflicting signals with regard to expected economic growth. The term yield suggests stalling growth, and the credit yield suggests a risk-on environment. Overall, long-term Treasurys underperformed high-yield bonds, and longer-term bonds underperformed shorter-term bonds.

The yield curve is less healthy than we’ve seen in recent months. The market expects that rates will continue to rise as the Federal Reserve begins to combat inflation. Overall, economic messaging from the bond market appears to be mixed.

Gold

Spot gold was down last week, though it is still up year to date after coming off highs from the beginning of the Russia-Ukraine conflict. Other safe-haven assets, such as long-term Treasurys, were also down for the week as rates increased. Increasing rates are often a headwind for gold.

Last week, the market appeared to be in a risk-on mode, which is not an ideal environment for gold. However, in the longer term, gold is likely to continue an upward trajectory as inflation continues.

Flexible Plan Investments 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 spent the week fully invested in the market before exiting on Friday 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 the week 0.8X long, changed to 1.6X long on Monday, sold off on Thursday, and remained there for the rest of the week.

Our intermediate-term tactical strategies have mixed exposure. The Volatility Adjusted NASDAQ (VAN) began the week 40% inverse the NASDAQ 100, changed to 60% inverse on Wednesday’s close, and remained there until the end of the week. The Systematic Advantage (SA) strategy began the week 30% exposed to the market, changed to 60% exposed on Wednesday’s close, and remained there to begin this week. Our QFC Self-adjusting Trend Following (QSTF) strategy was 1X inverse for the week. VAN, SA, and QSTF can all employ leverage—hence the investment positions may at times be more than 100%.

Our Classic strategy remained out of the markets for the week. The strategy can trade as frequently as weekly.

Our strategies are relatively underexposed to the market, having exited several weeks ago. Volatility is high, and the overall market direction remains uncertain.

Our individual strategies have responded to market movements in different ways, depending on their rule sets and goals. Both QFC Market Leaders and QFC Evolution Plus had very little exposure to equities, though QFC Market Leaders largely reentered the markets on the close of March 21.

Exposure varied among our QFC All-Terrain strategies, each of which is powered by different mechanisms. The more conservative strategies, which don’t employ leverage, remained in the markets longer than the aggressive strategies, which do employ leverage.

This highlights the ability of our turnkey strategies to navigate the different strategies we offer to create a composite strategy that can take advantage of a plethora of trading methodologies.

The response of our subadvised family of Quantified Funds also differed. Our most aggressive funds, which can invest in equity, reduced exposure the most. Our Quantified STF Fund (QSTFX) went inverse for the first time in several years. Our two unleveraged offerings, the Quantified Common Ground Fund and the Quantified Rising Dividends Tactical Fund, remained mostly invested in the markets. Both are outperforming the S&P year to date, with the Quantified Common Ground Fund outperforming by over 4% for the year through March 18.

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.



Comments are closed.