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 U.S. stock market indexes finished lower last week. The Dow Jones Industrial Average lost 3.4%, the S&P 500 Index gave back 1.9%, the NASDAQ Composite tumbled 0.3%, and the Russell 2000 small-capitalization index dropped 4.2%. The 10-year Treasury bond yield fell 1 basis point to 1.44%. Spot gold closed at $1,764.16, down $113.37 per ounce, or 6.04%. 

Stocks

What a difference a day makes. The S&P 500 hit a new all-time high earlier last week only to end the week seeking the support of its 50-day moving average. Other indexes did even worse, failing to achieve new highs and lagging the early May highs made by most indexes.

Over 30% (149) of the S&P 500 stocks fell more than 5% for the week, and 15 of the 500 fell more than 10%. Only eight were up more than 5%, and two were up more than 10%. Among this group of winners was graphics-chip maker Nvidia, one of the largest holdings in our subadvised Quantified Common Ground Fund (QCGDX). (Holdings for the Quantified Funds can be found daily on our website.)

Stock markets tumbled following the Federal Reserve’s announcement Wednesday (June 16) that it would likely raise rates a year earlier (2022) than previously suggested. Yet there were some rays of sunlight in the ensuing market gloom. The NASDAQ 100 Index managed a gain for the week, as growth stocks surged ahead of value stocks once again.

Unlike most of the market indexes that did not exceed their May highs, almost all of the measures of market breadth (cumulative advance-decline indexes) topped those highs. This suggests that the indexes will resume their move higher and, since breath tends to lead price, attain their own new highs in short order.

Economic indicators continue to retreat. Housing, which has been leading the economy out of the pandemic recession (as it does from most recessions), has slowed. Both homebuilder sentiment and homebuyer sentiment were lower. In fact, the Buyer Conditions for Homes Consumer Sentiment survey reported its largest drop since 1981!

May retail sales fell short of economist expectations, growing 0.8% versus estimates of 1.3%. Fortunately, April sales numbers were revised upward significantly as the economic recovery continues.

Economic estimates fell by the wayside in one area after another last week. Inflation was worse than expected (see below), and jobless claims rose for the first time after falling during each of the last six weeks.

Finally, the New York Federal Reserve’s consumer survey showed that expectations of higher taxes soared. This was before the nonpartisan Tax Foundation released its findings that the Biden administration’s tax plans would increase taxes on 60% of Americans, with increases hitting almost three-quarters of middle-income households. Most of these increases would come from the pass-through of the higher corporate taxes proposed.

Good news! Europe is open again to U.S. tourists. The EU did implement a vaccine passport requirement, and, significantly, it includes those who have recovered from COVID in its list of qualifiers. (See my article “It can be good to be a part of the herd.”) This is important as more and more countries and states achieve herd immunity, which requires either vaccination or recovery from COVID.

Surprisingly, Canada, which leads the world in COVID vaccinations, continues to ignore the science and has decided to keep the world’s longest border (the U.S.–Canadian border) closed to nonessential travel. Hard to understand.

Bonds

Last week, the headlines spoke of the increase in inflation and the Federal Reserve’s suggestion that it might be accelerating its plan to increase rates and stop injecting money into the economy (it also raised two minor rates at its Wednesday Open Market meeting). Yet, by week’s end, interest rates had spiked to another lower high and then closed lower. Longer maturities gained the most in value, while shorter-term maturities saw rates rise and values fall.

It seems to have gone unnoticed, but interest rates on the 10-year Treasury bond have fallen from 1.75% to 1.51% during the quarter—even though inflation measures such as the consumer price index (CPI) and producer price index (PPI) continue to increase at rates far over economist expectations. Last week, the PPI for May was reported to have increased 0.8% versus economist predictions of 0.5%. The year-over-year increase was 6.6%!

The Federal Reserve continues to insist that these increases are “transitory.” In other words, they are temporary, being the result of the surge in demand from the reopening of the economy and the resulting short-term supply-line disruptions. So far, the bond market seems to be agreeing and discounting the inflation news.

Gold

Gold prices moved from overbought (relative to their 50-day moving average) to oversold, all in a single week. This was primarily the result of the Federal Reserve Board’s announcement of the intent to end its accommodative monetary stance a year early (but still not until 2022).

The news sent the U.S. dollar back into rally mode. That plus the prospects of a higher real yield coming in the future decimated most commodities. Although gold fell less than most precious metals, it still experienced the worst losses since last October, with three hard down days in a row.

Still, gold seems likely to recover. Real yields are negative currently, which is historically good for gold. Monetary expansion, which also has been a precursor of gold price increases, seems likely to continue for at least the rest of this year. And seasonality strongly favors rising gold prices until the fall.

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

The indicators

The venerable Dow Theory indicator issued a sell signal on stocks last week as the Dow Jones Industrial and Transportation Averages have gone from “a period of successively higher highs and lows to successively lower highs and lows.” Investopedia defines these conditions as the components of a downward primary trend and a Dow Theory sell signal.

The short-term-trend indicators for stocks that we watch are mixed but weaker overall. Our Political Seasonality Index remains on a sell signal until the close of the market on June 25. (Our QFC Political Seasonality Index is available post-login in our Weekly Performance Report section under the Quantified Fund Credit category.)

Our very short-term-oriented QFC S&P Pattern Recognition strategy remains at a 2X reading, meaning it is utilizing a leverage target of 200% of the price movements of the S&P 500 Index.

FPI’s intermediate-term tactical strategies are also uniformly positive, although to varying degrees. The Volatility Adjusted NASDAQ (VAN) strategy has a 160% exposure to the NASDAQ, the Systematic Advantage (SA) strategy continues to be 90% exposed to the S&P 500, our Classic strategy is in a fully invested position, and our QFC Self-adjusting Trend Following (QSTF) strategy has reduced its exposure to 200% 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) has a Low and Falling reading, which is the most favorable regime stage for stock returns historically, followed by gold and then bonds. This stage occurs about 37% of the time.



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