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 Jason Teed

The major U.S. stock market indexes ended mostly higher last week. The Dow Jones Industrial Average rose 2.67%, the S&P 500 gained 1.23%, the Russell 2000 was up 0.23%, and the tech-dominated NASDAQ Composite fell 1.51%. The 10-year Treasury bond yield fell 5 basis points to 1.58%, as bonds were largely up for the week. Spot gold closed at $1,831.24, up 3.51%.

Four sectors were down last week, though not significantly. As the economy continues to reopen, demand for energy continues to increase, which resulted in a big move up for that sector.

Stocks

The equity markets were mostly up last week. The NASDAQ Composite, which took a breather last week after its recent tremendous run-up, was the only loser for the week.

There was a lot of earnings news last week. Companies continued to report significant outperformance. Earnings beat rates remain above the 75% level, which is historically very high.

The continued rollout of the COVID-19 vaccine is also providing some positive news. As more people receive vaccinations, those who have been hesitant to reenter society are beginning to do so, releasing pent-up demand for products and services.

While the rate of vaccinations is slowing, the effects can be seen in declining cases and a dramatic drop in the death rates of the elderly.

Additionally, the number of unemployed continues to shrink. Some industries are finding it difficult to find workers, resulting in increased wages, particularly for low-paying industries. This situation will likely fade as the economy continues to pick up and unemployment benefits expire. Many goods and services are currently priced at a premium due to lack of supply, which is likely temporary as the economy adapts to new demands.

Bonds

Treasury yields decreased once again, as yields continue to ease. The 10-year Treasury fell 5 basis points last week to 1.58%.

Yields are still historically low. They had been rapidly increasing this year, but have taken a breather, coming off recent highs. Credit spreads fell for the week and term spreads decreased, both indicating an increased demand for bonds overall. Long-term Treasurys outperformed high-yield bonds, and longer-term bonds outperformed shorter-term bonds.

Expectations for the intermediate term are for interest rates to remain relatively low, perhaps decreasing further, leading investors to seek yield in other places. This will likely cause investors to bid up the price of high yields and compress the credit spread as the economy continues to recover.

Gold

Last week, spot gold closed at $1,831.24, up 3.51%. As interest rates decrease, gold becomes more attractive when compared to bonds, which creates buying pressure on the metal. Though the Federal Reserve is expected to keep interest rates low in the short term, if inflation begins to rise beyond what is expected, many anticipate that the Fed will become more hawkish.

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

Our Political Seasonality Index started last week fully invested but exited on Thursday’s (May 6) 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 was 0.8X long for the week.

Our intermediate-term tactical strategies are uniformly positive, although to various degrees. The Volatility Adjusted NASDAQ (VAN) strategy started the week with 140% exposure to the NASDAQ. It decreased exposure to 120% on May 5, remaining there to begin this week. The Systematic Advantage (SA) strategy is 120% exposed to the S&P 500, our Classic strategy is in a fully invested position, and our QFC Self-adjusting Trend Following (QSTF) strategy was 100% exposed ending last week. VAN, SA, and QSTF can all employ leverage—hence the investment positions may at times be more than 100%.

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 Low and Falling reading, which favors equities over gold and then bonds from an annualized return standpoint. The combination has occurred 37% of the time since 2000. It is a stage of above-average returns for equities, normal returns for the other two asset classes, and lower volatility overall.



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