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 1.20%, the Dow Jones Industrial Average lost 0.94%, the NASDAQ Composite was down 0.98%, and the Russell 2000 small-capitalization index gave back 0.26%. The 10-year Treasury bond yield rose 20 basis points to 2.93%, taking Treasury bonds lower for the week. Spot gold closed the week at $1,851.19, down 0.14%.


Equity markets finished the shortened week down on economic and earnings outlook concerns. Last week failed to follow through on the previous week’s upside momentum. The Federal Reserve is expected to continue its aggressive tightening plans in its efforts to fight rising inflation. Federal Reserve Vice Chair Lael Brainard stated that it is hard right now to see the Federal Reserve pausing its rate hikes in September. Federal Reserve Governor Christopher Waller acknowledged that he endorses a policy rate above the neutral rate by the end of the year.

On the economic data front, the ISM Manufacturing PMI came in at 56.1, above expectations of 54.4. The JOLTS report shows job openings were at 11.40 million, above the expected 11.29 million. Non-farm employment change came in at 390,000, higher than the 325,000 forecast. Unemployment claims reached 200,000, slightly better than the expected 210,000. The unemployment rate came in at 3.6%, higher than the 3.5% expected. ISM Services PMI was 55.9, lower than the 56.5 expected.

The S&P 500 paused its late-May push higher last week after posting yearly lows on May 20. Price remains in a bearish channel as the S&P 500 continues to trade below both its 50-day and 200-day moving averages, currently about halfway within the bearish channel.

While markets have dropped since the start of the year, with the S&P 500 falling just shy of 20%, forward earnings estimates have been positive. Bespoke Investment Group reported that aggregate forward earnings per share estimates have continued to rise and are up 7% on a year-to-date basis to record highs. Energy has seen the fastest rise in forward earnings estimates, followed by Materials. The greatest slowdown appears to be in the Communication Services and Health Care sectors.

Valuations on earnings have been declining since the first half of last year. Multiples of forward 12-month earnings estimates have fallen by over a quarter since their peak in 2020. Trailing earnings multiples have declined by over one-third since their peak in 2021. While earnings growth has continued, it hasn’t offset the collapse in valuation that has contributed to the decline in markets year to date.

Bespoke studied valuations on the Russell 3000 to provide the broadest possible look at the U.S. market. The median stock’s trailing price-earnings (P/E) multiple has fallen 15% since January. Results are similar for both forward multiples and price-to-sales multiples.

The top decile of stocks by P/E multiple had a 73X trailing P/E back in January. Last week, it fell to 56X for the top decile. Since the top, there has been a similar 24% decline for the top decile of stocks by forward P/E multiple. The most aggressively valued stocks based on a sales multiple have fallen from over 15X to around 10X, driven by renewed focus on profitability.

Last week, Microsoft lowered its fiscal fourth-quarter earnings per share (EPS) expectations due to unfavorable movement in the foreign exchange rate. Across 31 major global currencies, only four are down since the U.S. dollar peaked on May 13.

The U.S. dollar rally that started at the end of 2020 has paused over recent weeks. A higher dollar is a restraint on global liquidity and a headwind for inflation in the U.S. In general, a stronger dollar lowers the price of imports. The U.S. dollar and other non-equity or bond exposures are available asset classes for consideration within certain strategies at Flexible Plan Investments.

With so much uncertainty across markets and the globe, active, risk-managed strategies that are able to respond to changing market conditions are more important than ever. With the disconnect between fundamentals and technicals, it’s critical to respond to price movements as they come, rather than trying to predict them based on news and emotions. If prices go down and volatility elevates, systematic momentum strategies are programmed to look to move to defense or remain defensive. However, if a new uptrend emerges, systematic trend-following algorithms are designed to recognize the price momentum and reduced volatility, stepping back into the “risk-on” camp.


The yield on the 10-year Treasury rose 20 basis points, ending last week at 2.93% as the bond market continues to battle with rising interest rates. The two-, five-, and 10-year Treasurys found support at their 50-day moving averages as yields broke out of short-term “bull flags” (black lines on the chart below). Such price patterns are considered continuation patterns, with breakouts targeting new highs and a continuation of the longer-term trend.

T. Rowe Price traders reported, “Investment-grade corporate bonds traded lower as U.S. Treasury yields increased amid inflation and growth concerns. … Primary issuance exceeded expectations for the week. Meanwhile, the high yield bond market saw slightly higher-than-usual trade volumes as the new month began with strong positive flows and the pricing of several new deals. The new issues were met with solid demand, especially for higher-quality bonds. … Banks and exchange-traded funds continued to drive demand in the bank loan market.”


Last week, gold fell 0.14%, ending the week trading right above its 200-day moving average. Price movement has slowed in recent weeks relative to the large swings experienced this year. After its year-to-date performance dropped briefly into negative territory in mid-May, gold rebounded and is up slightly for the year.

Although gold has struggled since late April, geopolitical tensions, inflation fears, recession fears, and Fed rate hikes continue to make a fundamental case for gold into 2022. Just as the historical stock and bond relationship hadn’t been there for investors this year until a few weeks ago, gold’s run may regain steam, especially if we see continued weakening in the U.S. dollar over the coming months. The purple line in the following chart shows how strong the move down in the U.S. dollar has been since mid-May.

The indicators

The very short-term-oriented QFC S&P Pattern Recognition strategy’s equity exposure started last week with 0% exposure and changed to 80% long at Wednesday’s close. Our QFC Political Seasonality Index favored stocks throughout last week. (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 60% short (negative) the NASDAQ throughout last week, changing to 40% short at Friday’s close. The Systematic Advantage (SA) strategy is 30% exposed to the S&P 500. Our QFC Self-adjusting Trend Following (QSTF) strategy was 0% exposed throughout last week, changing to 100% short at Friday’s close. VAN, SA, and QSTF can all employ leverage—hence the investment positions may at times be more than 100%.

Our Classic model remained out of 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. Classic bought back into the stock market at the close on Tuesday, June 7.

Flexible Plan’s Growth and Inflation measure, one of our Market Regime Indicators, shows that we continue to be in the Stagflation economic environment stage (meaning a positive monthly change in the inflation rate and negative quarterly GDP reading). This environment has occurred only 9% of the time since 2003 and favors gold and bonds, while equities tend to fall. Gold tends to significantly outpace both stocks and bonds on an annualized return basis in this environment, with a lower risk of drawdown than equities. From a risk-adjusted perspective, Stagflation is one of the best stages for gold.

Our S&P volatility regime is registering a High and Rising reading, which favors equity over gold and then bonds from an annualized return standpoint. The combination has occurred 23% of the time since 2000. It is a stage of lower returns and higher volatility for all three major asset classes.

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