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 Tim Hanna

Major U.S. stock market indexes were mixed last week. The S&P 500 increased by 0.71%, the Dow Jones Industrial Average was up 0.87%, the NASDAQ Composite declined by 0.09%, and the Russell 2000 small-capitalization index lost 1.10%. The 10-year Treasury bond yield fell 2 basis points to 1.28%, taking Treasury bonds higher for the week. Spot gold closed at $1,779.74, up 0.95%.

Stocks

The Dow and S&P 500 marched to new highs last week. Market reaction to the spread of the delta variant was fairly muted.

In political news, the Senate approved a $1.2 trillion infrastructure bill and authorized $3.5 trillion in additional spending. The bills are up for consideration by the House next.

Although last week was light for economic reports, investors were looking to inflation and sentiment data to guide market outlook. The U.S. Department of Labor’s core consumer prices increased by 0.3% in July, slightly below expectations of 0.4%. Core producer prices rose 1.0%, more than 0.5% expected. Initial weekly jobless claims met expectations of 375,000. The University of Michigan’s preliminary consumer sentiment surprised to the downside, coming in at 70.2 compared to expectations of 81.2.

To add context to the disappointing consumer sentiment reading, Bespoke Investment Group studied historical readings since the late 1990s. Attributed to concerns over the delta variant, the 11-point drop from 81.2 at the end of July to 70.2 on Friday (August 13) was the largest decline between two reports since April 2020 when COVID-19 shocked markets. The drop of 18.1 points back then was the largest drop on record. Before that, the largest drop was in October 2008 during the financial crisis.

The reading was a huge miss relative to expectations. Friday’s release came in 11 points below expectations. Going back to 1999, the largest miss was 9.9 points in February 2004.

In contrast, earnings news has been upbeat with many companies continuing to beat earnings per share (EPS) and revenue estimates. EPS beats are slightly below record levels from a few quarters ago, while revenue beat rates continue to rise and are at a record 80.1% of all reporting names.

Not only are earnings beating analyst expectations, but companies are also raising guidance. More than 20% of companies have raised guidance so far this quarter, a record for this cohort of names. Less than 4% of companies, approximately half the typical rate, cut guidance this quarter.

From a technician’s perspective, the stock market remains overbought. However, year to date, the 50-day moving average has provided support during price drops, pushing to new highs following pullbacks.

Bonds

Early in the week, yields moved higher as several Federal Reserve officials said they support a sooner-than-expected tapering of bonds purchases. Yields pulled back on Friday following the release of the disappointing University of Michigan consumer sentiment survey.

The 10-year Treasury is attempting to break out of its bear price channel that started forming in May. Following a breakout to the upside in early August, the upper limit of the channel is currently being tested for support. If support holds, trading action above 1.37% could signal a move higher.

T. Rowe Price traders reported, “Investment-grade corporate bonds weakened at the start of the week despite heightened overnight demand focused on longer maturities. Secondary trading volumes were relatively low but increased slightly as the week progressed. … The high yield bond primary calendar was very active, with issuers looking to bring new deals to the market before the pre-Labor Day slowdown.”

Gold

Gold continues to search for direction, currently trading below its 50-day and 200-day moving averages, considered an initial line of resistance at current levels. The yellow metal found it difficult to break above its 50-day moving average from July to early August. Following attempts to move higher, prices moved sharply lower but still off the lows set in March of this year. This move lower ended the short-lived golden cross that occurred in July and followed it with a death cross (50-day crossing below the 200-day), the second one this year.

A strong move up last week and failure to break lows from March could be a sign that investors are stepping in to aggressively buy the metal as it pulls back. Gold’s undervaluation compared to government bond yields, as well as uncertainty about future inflation, could prompt moves to higher trading ranges in the yellow metal.

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

The indicators

Our very short-term-oriented QFC S&P Pattern Recognition strategy’s equity exposure was 200% long throughout last week. Our QFC Political Seasonality Index continues to favor stocks with its buy signal on August 9. (Our QFC Political Seasonality Index is available post-login in our Weekly Performance Report section under the Quantified Fund Credit category.)

Our intermediate-term tactical strategies are positive, although to varying degrees. This makes sense considering the trend and volatility as markets are making new highs. The key advantage these strategies offer to investors is their ability to adapt to changing market environments, participate during uptrends (as they are currently), and adjust exposure to more defensive posturing during downtrends.

The Volatility Adjusted NASDAQ (VAN) strategy started last week 200% long to the NASDAQ and remained fully leverage to begin this week. The Systematic Advantage (SA) strategy is 90% exposed to the S&P 500, and our Classic model is in a fully invested position. Our QFC Self-adjusting Trend Following (QSTF) strategy was 200% long throughout 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 is one of our Market Regime Indicators. It 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, yet 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 Rising reading, which favors gold over stocks and then bonds from an annualized return standpoint. The combination has occurred 27% of the time since 2003.



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