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 Jerry Wagner

The major stock market indexes finished lower last week. The Dow Jones Industrial Average lost 0.5%, the S&P 500 Index slipped 0.7%, the NASDAQ Composite fell 0.8%, and the Russell 2000 small-capitalization index tumbled 2.8%. The 10-year Treasury bond yield rose 10 basis points to 1.727%, sending bonds lower for the week despite a late-week rally. Last week, spot gold closed at $1,745.23, up $18.12 per ounce, or 1.1%.

Stocks

The greater weakness in the NASDAQ 100 versus the S&P 500 that I suggested in my last Market Update continued last week. The NASDAQ tumbled over 10% before rallying but failing to make a new high, while the S&P 500 slipped only a bit over 4% and then rallied to a new high on March 17. Since then it has been back to lower prices again, although so far both indexes have remained above the lows booked in the first week of March.

Despite the recent decline, the indexes mark an anniversary on Wednesday this week. On March 24 it will be one year after the market hit its post-correction low. Since then all of the major indexes have posted impressive, near historic, one-year returns. The S&P 500, for example, is up over 75%, the best one-year period since 1936. The NASDAQ 100 has soared over 86% so far, and the Russell 2000 small-cap index has topped them all with a better-than 125% rally.

As reported by Bespoke Investment Group, the number of such rallies is few in market history. Still, the limited history supports generally higher prices over the next three months. Six months later is a bit dicier, as the S&P 500 actually lost money over that span. Still, returns one year later were generally positive.

Economic reports mostly disappointed, as 15 of the 24 published reports last week underperformed economist expectations. Only five reports delivered outperformance.

Project Warpspeed continued to deliver for the American people. After some delays in February, vaccine deliveries resumed their rapid ascent, driving us toward a much sought after goal of herd immunity. With that goal in sight, and deaths from the virus plummeting, most market watchers are expecting further market gains as the promised return to normalcy is realized.

Despite last week’s decline, most intermediate-term trend indicators remain positive.

Bonds

The long-term bond ETF (TLT) has fallen almost 20% since interest rates began rising last August. Still, while long-term bonds have plunged and rates have soared, shorter-term rates have remained low. The very short-term duration rates have actually dipped into negative territory as those markets are awash in liquidity.

This phenomenon of flat-to-down short-term rates and soaring long-term rates has resulted in an ever-steepening yield curve. While this can be a negative for stocks and costly for long-term bondholders, it needn’t be, especially when accompanied with substantial liquidity, and that is certainly what we see occurring today. Last week the Federal Reserve made more than $110 billion in asset purchases!

On Wednesday, the Federal Reserve Governors once again insisted that they are maintaining a dovish posture on interest rates and will give leeway to some inflationary gains to provide support for a still weak labor market. This seemed to calm the markets and longer-term bonds rallied. However, one glance at the chart of the TLT long-term government bond ETF above shows that the rally is already nearing the top of the longer-term price trend. Unless there is a clear break out, the current rally may fizzle out by week’s end.

Gold

The battle for the future price direction of gold continued. This week the bulls won out, as the very same Federal Reserve talking points that calmed the bond market also rallied gold investors with the fear that the Fed may err and runaway inflation will be the result.

Last week’s Philly Fed report certainly gave support to the re-inflation scenario. The average of the prices paid and received in the Manufacturing sector grew at one of the fastest rates in the history of the data.

Still, a counteracting force in the marketplace continues to be the resurgence of the U.S. dollar. After a protracted decline that commenced with the pandemic, the dollar appears to have turned the corner and begun to rally. Should this continue to be the case it will provide a head wind to any inflation inspired rally in gold.

Flexible Plan is the subadvisor to the only U.S. gold mutual fund, The Gold Bullion Strategy Fund (QGLDX), designed at its introduction over eight years ago to track the daily price changes in the precious metal.

The indicators

The short-term trend indicators for stocks that we watch remain bearish but seem poised for a breakout this week. In addition, numerous price patterns of late can only be classified as bullish, leading our very short-term-oriented QFC S&P Pattern Recognition strategy’s equity exposure to the S&P 500 Index to 190%.

Our Political Seasonality Index (PSI) turned positive Monday (3/22). It shifts back to a bearish mode at the close on the 25th before returning to the positive column at the close of the 31st. (The 2021 PSI chart is available post-login through our Weekly Performance Report section under the Domestic Tactical Equity category.)

Our intermediate-term tactical strategies are uniformly positive, although to varying degrees. The Volatility Adjusted NASDAQ (VAN) strategy has a 40% exposure to the NASDAQ, the Systematic Advantage (SA) strategy continues at 137.5% exposed to the S&P 500, our Classic strategy is in a fully invested position, and our QFC Self-adjusting Trend Following (QSTF) strategy remains 100% invested. VAN, SA, and QSTF can all employ leverage—hence the investment positions may at times be more than 100%.

Among the Flexible Plan Market Regime indicators, our Growth and Inflation measure shows that we are in a Normal economic environment stage (meaning a positive monthly change in the inflation rate and positive monthly GDP reading). This occurs about 60% of the time and favors gold and then stocks over bonds, although gold carries a substantial risk of a downturn in this stage.

Our Volatility composite (gold, bond, and stock market) is now showing a High and Rising reading, which favors stocks returns over gold and then bonds. This stage occurs about 23% of the time and is represented by decent returns for all asset classes, though with higher-than-average risk for gold and stocks.



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