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 Tim Hanna

The major U.S. stock market indexes were down last week. The S&P 500 decreased by 2.75%, the Dow Jones Industrial Average lost 1.86%, the NASDAQ Composite was down 3.83%, and the Russell 2000 small-capitalization index gave back 3.21%. The 10-year Treasury bond yield rose 7 basis points to 2.90%, taking Treasury bonds lower for the week. Spot gold closed the week at $1,931.60, down 2.13%.


Equity markets finished the week down as investors digested earnings and economic reports. Weakening technical factors also contributed to the poor performance. Markets continue to speculate on future policy moves by the Federal Reserve while the 10-year Treasury approached 3.00% last week.

On the economic data front, building permits reached 1.87M, better than the 1.83M expected. Housing starts came in at 1.79M, above expectations of 1.74M. At 5.77M, existing home sales were in line with the expected 5.78M. The Philly Fed Manufacturing Index came in at 17.6, below the 21.5 that was forecast. Unemployment claims reached 184,000, slightly worse than the expected 177,000. The Flash Manufacturing PMI increased to 59.7, above expectations of 58.1. The Flash Services PMI came in at 54.7, lower than the 58.0 forecast.

The S&P 500 made a failed attempt at trading above its 200-day moving average and continued the leg down that it started at the end of March. The “death cross” (when the 50-day moving average crosses below the 200-day moving average) remains in play as price looks to be on its way to testing the lows set in February, unless a higher low appears in the near term. The NASDAQ Composite is currently trading below its 50-day and 200-day moving averages as well.

Markets were off to a good start last week before falling more than 5% from the peak on Thursday to Friday’s close. Bespoke Investment Group wasn’t able to link the start of the selling to any particular news item, but Federal Reserve Chair Jerome Powell did introduce the possibility of a 50-basis-point interest rate hike for the May meeting in a speech at the IMF on Thursday.

Bespoke noted that the Federal Reserve is doing a good job of taming inflation when it comes to equity and fixed-income markets. IPO and deal activity have essentially dried up, and both stocks and bonds are down double-digit percentage points year to date. All major global asset classes have struggled this year, with commodities being the one area showing strength, up around 30% year to date.

Midterm elections are quickly approaching. The Republicans look to have a good chance of winning back control of the House and Senate, according to data from

Market performance during midterms tends to be rocky for equity markets. Since the end of WWII, midterm years have seen the S&P 500 average only a 5.03% gain by year-end. For much of the first and third quarters, the Index has traded in the red on average. Outside of midterm years, the S&P 500 averages stronger performance. The same is true for the average for all years.

The Bespoke team discovered that weakness during an election year is not unusual. However, the current 10.4% year-to-date decline is the worst performance through April 22 of any midterm election year since 1946. This surpasses the previous record from 1970 when the Index was down 8.5% through the same point of the year.

With midterms just around the corner, it’s worth highlighting our QFC Political Seasonality Index strategy (QPSI in the chart below). This strategy is available within two different turnkey solutions and as an individual investment within a diversified portfolio of strategies. After max fees, the strategy was up 6.21% for the year to date through April 18, while the S&P 500 (SPX in the chart below) was down 7.53% for the same period. During that period, the strategy experienced a risk of 11.80%. The S&P 500 had a risk of 20.54%. The drawdown for the strategy was 3.57%, while the S&P 500 experienced a drawdown of 12.84% over the same period.

As is evident industrywide at this point, traditional asset-class diversification has failed investors during the down move from the start of this year. As the stock market retraced, losses in traditional bond exposures were further magnified. In the current interest rate environment, active, risk-managed strategies in the fixed-income space continue to be more important than ever.

The following chart shows the year-to-date performance of the Quantified Managed Income Fund (QBDSX, +0.3%) compared to the iShares Core US Aggregate Bond ETF (AGG, -8.6%). The Quantified Managed Income Fund is an actively managed income fund that can seek various income classes as well as the safety of cash when market exposure is undesirable. The Fund is a key defensive component in several actively managed strategies at Flexible Plan Investments.


The yield on the 10-year Treasury rose 7 basis points, ending last week at 2.90% as the bond market continued its move down. T. Rowe Price traders reported, “Investment-grade corporate bonds weakened against a less supportive technical backdrop. New issuance exceeded weekly expectations, and this uptick in new deals, which generally offered attractive concessions, appeared to weigh on demand for bonds in the secondary market. … In the high yield bond market, traders noted a bias toward quality, with BB rated bonds outperforming the CCC tier.”

Markets continue to take cues from fixed-income and fed funds futures pricing. Hints of a less hawkish Federal Reserve have led to short-term rallies in equities, while more hawkish news has sent stocks lower.

Earlier in the year, markets priced a steady tightening cycle with a neutral long-term rate of around 2%. Over recent months, this has shifted dramatically, with the policy rate now priced to exceed 3% next year before the Fed ramps back to a neutral rate of around 3%. Said differently, more than 200 basis points of Fed tightening has been added to this cycle in less than three months. About one-quarter of that has come over the last month. Fed funds futures now price 175 basis points of tightening over the next three meetings. Bespoke believes the economy can handle a 2% fed funds rate, but whether the speed of the move to that rate will have unexpected side effects remains to be seen.


Last week, gold fell 2.13%, ending the week near its 50-day moving average. Last week’s pullback comes off the upward momentum exhibited following the February breakout (see the black line in the following chart). However, price action appears to show that gold is finding support at levels above the 2021 price range as geopolitical tensions, inflation fears, yield-curve inversion (recession fears), and Fed rate hikes continue to make a case for gold into 2022.

Flexible Plan Investments is the subadviser 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 very short-term-oriented QFC S&P Pattern Recognition strategy’s equity exposure started the week with 160% long exposure, changed to 130% long at Monday’s close, and changed to 140% long at Friday’s close. Our QFC Political Seasonality Index favored defensive positioning at the beginning of last week, trading back into stocks at Wednesday’s close, and moving back to defensive positioning at Friday’s close. (Our QFC Political Seasonality Index is available—with all of the daily signals—post-login in our Weekly Performance Report section under the Quantified Fund Credit category.)

Our intermediate-term tactical strategies have been varied in their degree of defensive positioning. The key advantages these strategies offer to investors is their ability to adapt to changing market environments, participate during uptrends, and adjust exposure to more defensive posturing during downtrends.

The Volatility Adjusted NASDAQ (VAN) strategy was 40% short (negative) the NASDAQ throughout last week. The Systematic Advantage (SA) strategy is 30% exposed to the S&P 500. Our QFC Self-adjusting Trend Following (QSTF) strategy was 100% exposed throughout last week. VAN, SA, and QSTF can all employ leverage—hence the investment positions may at times be more than 100%.

Our Classic model remained long stocks last week. Most of our Classic accounts follow a signal that will allow the strategy to change exposure in as little as a week. A few accounts are on platforms that are more restrictive and can take up to one month to generate a new signal.

Among the Flexible Plan Market Regime Indicators, our Growth and Inflation measure shows that we remain 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. From a risk-adjusted perspective, Normal is one of the best stages for stocks, with limited downside. However, many market gurus are now suggesting that the U.S. could soon be moving into a stagflation phase (rising inflation and declining GDP). This would materially change the expected performance of all of the asset classes.

Our S&P volatility regime is registering a High and Falling reading, which favors gold over bonds and then stocks from an annualized return standpoint. The combination has occurred 13% of the time since 2003. It is a stage of higher returns and lower volatility for bonds relative to the other volatility regimes.

Comments are closed.