By Jason Teed The major U.S. stock market indexes finished higher last week. The Russell 2000 small-capitalization index stormed ahead 4.32%, the Dow Jones Industrial Average rose 3.44%, the S&P 500 Index continued to hit new highs with a 2.74% gain, and the NASDAQ Composite advanced 2.35%. The 10-year Treasury bond yield increased 9 basis points to 1.52%, as bonds were mixed for the week. The 10-year yield has remained range-bound for weeks, trending slightly downward. Spot gold closed at $1,781.44, up 0.98%. All 11 sectors were up for the week. The best performers were Energy and Financials, up 6.66% and 5.25%, respectively. Real Estate and Utilities were the worst performers for the week. Stocks Cyclical stocks were the best performers last week. Defensive stocks trailed somewhat. On Friday (June 25), the Wilshire 5000 Total Market Index, a broad representation of the market, hit a 100% return over the pandemic low of 2020. That news appears to have been missed by most market participants since the index is not as widely followed. There are a lot of positives for the stock market at the moment, which we’ll get to shortly. There remains, however, the looming risk of the COVID-19 delta variant. While the U.S. is still in fairly good shape with regard to vaccinations, both in terms of the percentage of population vaccinated and efficacy, other countries continue to struggle, and the new variant has only increased the difficulty. The delta variant could pose a risk for pockets of the U.S. with lower-than-average vaccination rates and countries without the vaccination resources that the U.S. has. The market is taking these developments in stride, but unexpected volatility over the next few months is still possible. Those concerns aside, markets are doing extremely well in the U.S., and this growth appears to be organic rather than from increased valuations. Valuations have contracted over the past few months, while corporate earnings have driven the vast majority of stock price increases. While valuations are higher than they were before the pandemic, despite the upward trajectory of the markets, they have been edging downward, indicating healthy growth of the markets rather than bubble-like behavior. Likely, valuations are still somewhat elevated over historical levels due to the large amount of cash that has been injected into the markets by the Federal Reserve’s efforts to stave off a recession. Whether these elevated valuations continue to decrease as interest rates increase over time (typical behavior for the markets) or represent a new normal remains to be seen. As can be seen in the following chart, corporate earnings are far more correlated with stock price movements. While forward earnings were slowing significantly even before the pandemic, they have more than recovered from those previous highs and have shot far past them. These forward earnings don’t appear to be slowing, though the Fed’s consideration of an accelerated timeline of interest rate increases may put a foot on the brakes. Over the weekend, political drama ensued regarding the bipartisan infrastructure bill. However, those issues appear to be resolved, and the bill seems to be on track to passing. The final price tag is expected to be around $1.2 trillion with more than $500 billion in new spending. The bill will likely invest heavily in an expansion of the Affordable Care Act and a potential decrease in the required age for Medicare. This will likely benefit health-care providers. In addition, large subsidies are expected in the Renewables sector to reduce costs and increase efficiencies, allowing companies in that sector to benefit and potentially expand over the intermediate term. The most visible industries in the infrastructure bill—steel and concrete—are expected to benefit from investment in public works such as roads and bridges. While valuations remain historically high, even with the potential for a breather in the run-up the markets have seen recently, these sector plays may work to the advantage of an active manager. Bonds Treasury yields increased last week, potentially in anticipation of an accelerated rate hike timeline from the Fed. Yields continue to fall from their recent high in March, though at a relatively slow pace. The term yield fell over the week, while the credit spread increased for the week. Generally, it appears the bond markets are pricing in continued economic growth. Expectations for the intermediate term are for interest rates to remain relatively low, leading investors to seek yield in other places. However, the Fed has signaled an accelerated timeline for rate increases, and further acceleration is expected. Gold Spot gold gained last week. However, other safe-haven assets, such as long-term Treasurys, underperformed, primarily due to increasing interest rates. Gold tends to outperform when interest rates fall, though market behavior over the past week indicates some market anticipation of inflation. Gold’s increase in value, coupled with the drop in long-term Treasurys, indicates that, at least for the last week, the markets were concerned with an overly hot economy. 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 Our Political Seasonality Index started last week out of the market, entering back in on Friday’s close. (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 began the week 2X long, essentially exiting the market to just a 10% position on Friday’s close. Our intermediate-term tactical strategies are uniformly positive, although to varying degrees. The Volatility Adjusted NASDAQ (VAN) strategy started the week with 140% exposure to the NASDAQ. It increased exposure to 160% on Monday’s close and remained there for the rest of the week. The Systematic Advantage (SA) strategy began the week with a 90% exposure to the market, increasing to 120% on Tuesday’s close and to 150% on Friday’s close to begin this week. Our Classic strategy is in a fully invested position, and our QFC Self-adjusting Trend Following (QSTF) strategy was 200% long for the 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 and gold, but average returns for bonds.