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 significantly higher last week, with several indexes hitting all-time highs. The Russell 2000 turned in the best performance with a 5.05% gain, the NASDAQ Composite rose 2.82%, the S&P 500 was up 1.52%, and the Dow Jones Industrial Average gained 0.96%. The 10-year Treasury bond yield rose 5 basis points to 1.31%, taking bonds slightly down for the week. Spot gold closed the week at $1,817.57, up 2.05%.

Seven out of 11 sectors were up last week: Energy (+7.34%) was the best performer, followed by Financials (+3.47%). Consumer Staples (-1.36%) and Utility (-2.11%) stocks, typically risk-off sectors, were the worst performers of the week.

Stocks

Recent concerns about how new variants of COVID could negatively affect the economic recovery appear to be unfounded, at least for the moment.

Consumer spending rose 0.3% last month, which was within expectations. Spending is slowing compared to earlier in the year, primarily due to a decrease in government stimulus programs. However, current spending rates are expected to continue to increase through the end of the year at levels that can support a “rapid recovery” scenario.

Consumer income also rose in July, climbing 1.1%. Increases in consumer income have been healthy for much of 2020 and 2021. This, along with continued savings in the private sector, indicates a potential for significant economic growth going forward. Higher consumer savings rates typically lead to increased economic growth that is more sustainable than growth from debt-based spending. Higher consumer spending and income, along with a higher-than-average consumer savings rate, is giving investors plenty of reason for optimism.

However, not all measures of market performance and expectations are positive. Manufacturing reports have shown declines, with shipments declining the most. The overall composite is down 9.4.

Despite these declines, many manufacturing categories are in healthy territory (based on their percentiles), though inventories remain low. Overall, while declining numbers may call for some caution going forward, the market appears healthy on the whole.

Lastly, while things are looking up for the market going forward, September tends to be one of the most difficult months in terms of market performance. It is the only month in which the market historically has both a negative mean and median return.

However, stocks are poised to offer increasingly higher returns into the holiday spending season, which typically peaks in January.

Bonds

Treasury yields increased again as yields rose off recent lows. The 10-year Treasury climbed to 1.31%, up from a recent low of 1.17% earlier this month.

Yields are still historically low. Credit spreads fell for the week and term spreads increased, both indicating healthy economic expectations going forward. Overall, long-term Treasurys underperformed high-yield bonds, and longer-term bonds underperformed shorter-term bonds.

Expectations for the intermediate term have increased—but not as quickly as recently forecast. This may drive investors to seek yield and performance in other asset classes.

Gold

Spot gold rose last week, continuing its recovery from dips that have been occurring since May. The metal is still down year to date. Other safe-haven assets, such as long-term Treasurys also underperformed, primarily due to a slight increase in interest rates.

Recent releases from the Federal Reserve have indicated that it will keep interest rates low for the foreseeable future, which is a tailwind for gold and positive news for the economy as a whole. It also increases the potential for future inflation. Inflation itself has rebounded but its rise is slowing, and the nature of that rebound is likely to keep the Fed standing pat on interest rates for now.

Flexible Plan Investments is the subadvisor 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 Political Seasonality Index was fully invested last week but exited the markets 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 was 1.8X long for the week but fell to 0.1X on Monday.

Our intermediate-term tactical strategies are uniformly positive, although to varying degrees. The Volatility Adjusted NASDAQ (VAN) strategy started last week with 200% exposure to the NASDAQ. It decreased exposure to 160% on Tuesday’s close, to 180% on Wednesday’s close, and to 160% on Friday’s close to begin this week. The Systematic Advantage (SA) strategy was 90% exposed to the market last week, changing to 60% exposure 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 average returns for all three major asset classes.



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