Market insights and analysis

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

2nd Quarter | 2022

Market insights and analysis


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

By Jerry Wagner

The major U.S. stock market indexes finished down last week. The Dow Jones Industrial Average lost 0.3%, the S&P 500 Index fell 1.3%, the NASDAQ Composite dropped 3.9%, and the Russell 2000 small-capitalization index gave back 4.6%. The 10-year Treasury bond yield rose 3 basis points to 2.704%, sending bond prices lower for the week. In fact, the long-term Treasury bond ETF (TLT) fell 5.5% last week. In contrast, gold futures closed at $1,948.50, up $24.80 per ounce, or 1.29%.


The stock market had rallied from its March 8–14 lows, despite raging inflation, an interest-rate-tightening Federal Reserve, and the Ukraine invasion. However, as I reported in late March, it seemed likely to run into a double-top resistance area (see the horizontal red line in the chart above). At first, it looked like this obstacle was going to be overrun, but the bears won the day and stocks have been largely retreating since making a high on March 29 in the S&P 500 Index.

The Index will likely face another test: The minor top from February 25 to March 2 is within 30 points (see the green line in the chart above). As resistance levels on the way up can often turn into support, the current decline may stall here—at least for a while.

This view is supported by Easter week seasonality. It is generally positive from here until the end of the week. Although the day after Easter is often negative, the period between now and the first week in May tends to, for the most part, trend up.

In addition, economic reports were mostly positive last week. Nine of 15 beat economists’ expectations. Still, there was concern that the reports were generally worse than the previous month’s despite being above expectations.

This week markets will contend with a triple play of financial reports: the consumer price index on Tuesday, then the producer price index on Wednesday, followed by the retail sales report on Friday.

Hopefully, the first-quarter earnings reporting that begins this week will overcome any price volatility engendered by the economic reports. Strong earnings growth has provided a solid foundation for most of the multi-year run-up in stock prices. Such growth is expected to continue with the new season, which kicks off with banking giant JPMorgan’s reports Wednesday morning.

Most of the financial press in the last month has focused on the “R” word: recession.

A primary reason for the concern is the impending inversion of the yield curve. When short-term maturities in the Treasury bond market start to yield more than longer-term maturities, investors have learned that a recession often comes a year or two later. When the two-year rate exceeded the 10-year rate last week, many commentators pointed fingers and predicted impending doom.

The inversion disappeared the next day, but at least three other combinations of bond maturities exhibited the reversal and remain a concern. As I said, though, while this is an extremely accurate predictor, it is also typically a very early warning signal of the one-year to two-year variety.

Furthermore, inversions of many of the bond-maturity combinations are very accurate indicators, but some are not accurate at all. For example, the one-month versus three-month combination and the 20-year versus 30-year combination (the latter of which is presently inverted) are only accurate in predicting a recession about 50% of the time. The six listed below, however, have a 100% accuracy in forecasting an economic downturn.

None of these have inverted … yet.

Rather than focus on any particular combination, at least two research firms (SentimenTrader and Bespoke Investment Group) have pointed out lately that it is more productive to watch for a majority of the combinations to invert before making a prediction. Not only has this worked well in predicting recessions but also bear markets linked to recessions. Presently, only 10.7% of the possible maturity combinations have inverted.

Furthermore, as I have often remarked, waiting for the reversal of the inversion, at least in the case of the three-month versus 10-year combination, has been a better predictor of a more immediate economic downturn.

While the market has been focused on the yield curve, Bespoke reminds us that the job market is also an excellent bellwether of the economy. Jobless claims, which hit a record low last week, and unemployment rates, also at a recent low, generally bottom with a lead time that tends to be less than half that afforded by yield-curve inversions. With the recent lows in these measures, any recession is likely to be months away at the very least.

Finally, the NASDAQ bottom-finder indicator, based on the percentage of stocks making new highs, has yet to move much above the 20% level. It is still a considerable distance from the 35% level that would signal that the worst is over.

Bottom line: A recession would be a very early call here, but we still believe stocks have a few more hurdles to overcome before the all-clear can be signaled.


In the face of rampant inflation and a more hawkish Federal Reserve, interest rates have been soaring. In the last month, the 10-year bond has seen its yield increase over 100 basis points. Back in August, the yield was 0.5%, or 50 basis points. Last week, the yield closed at 2.7%,

Of course, bondholders have suffered mightily. Whether invested in the security of Treasury bonds or those high-flying, high-yielding junk bonds, investors have seen nothing but losses since the end of last summer.


Gold has been one of the bright spots in the financial markets this year. Its ability to diversify investor portfolios is the big reason we make it available for use in so many of our portfolios. It tends to move in the opposite direction of the stock market at key crisis points.

Although the yellow metal remains solidly above its 50-day moving average, its advance has stalled a bit. While it gained ground last week, it was slowed by a rising dollar.

The dollar has been able to hold on to its gains since its early-March breakout. It is now powering into new high ground.

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

The short-term-trend indicators for stocks that we watch are now mixed. Most have turned negative, while our very short-term-oriented QFC S&P Pattern Recognition strategy remains invested in stocks.

Our Political Seasonality Index has been in the market since the close on March 31 and will stay there until April 18. Through Friday, it has gained over 6.2% this year. The strategy is included in our QFC Multi-Strategy Explore portfolio within Special Equities and mostly uses our subadvised Quantified Common Ground Fund (QCGDX) for equity market exposure. (Our QFC Political Seasonality Index—with all of the daily signals—is available post-login in our Weekly Performance Report section under the Quantified Fund Credit category.)

FPI’s intermediate-term tactical strategies are very mixed. The Volatility Adjusted NASDAQ (VAN) strategy has a -20% exposure to the NASDAQ, the Systematic Advantage (SA) strategy is 60% exposed to the S&P 500, and our QFC Self-Adjusting Trend Following (QSTF) strategy has an exposure of 100%. VAN, SA, and QSTF can all employ leverage—hence the investment positions may at times be more than 100%.

Our Classic strategy has been invested in stocks since the close on April 5. QFC Classic has been principally invested in our popular Quantified Common Ground Fund (QCGDX), allowing the strategy to outperform the S&P since purchase.

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 S&P volatility regime is registering a High and Falling reading, which favors gold over bonds and then equity from an annualized return standpoint. The combination has occurred 13% of the time since 2003. It is a stage of lower returns for equities and higher volatility for both gold and stocks. The S&P 500 registered a maximum drawdown of over 29% during one of these regimes, while gold was over 21% to the downside.

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