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.

Market Update 9/12/22

By William Hubbard

The major U.S. stock market indexes were up last week. The S&P 500 jumped 3.65%, the Dow Jones Industrial Average gained 2.66%, the NASDAQ Composite was up 4.14%, and the Russell 2000 small-capitalization index rose 4.04%. The 10-year Treasury bond yield rose 12 basis points to 3.31%, taking Treasury bonds lower for the week. Spot gold closed the week at $1,716.83, up 0.27%.


In every industry, people are often labeled or categorized based on their beliefs about certain industry topics. In the asset management industry, those labels include the “perma-bulls” (those who believe that stocks always go up) and the “passive or bust” crew (those who can’t imagine investing any way other than passive because it’s worked for the last decade—a form of recency bias). The latter bunch is also known as the “Hold on for Dear Life” or “HODL” group, as the “Wall Street Bets” circle likes to say.

I am usually characterized as a “perma-bear.” Perma-bears are those who think the sky is always falling and that the next Great Depression is right around the corner. Some people believe that, but many people who are lumped in with this group are misclassified.

Some, like myself, believe in investing but do not throw caution to the wind. We believe in planning for future uncertainty. We believe that all investment theories and ideologies have a place, so long as they provide a specific benefit to an investor’s portfolio. We invest and own stocks, bonds, gold, and alternatives for a reason. Instead of being thought of as “perpetually pessimistic,” I’d rather think of this group as trying to be “permanently prepared.”

The last 12 months have been challenging for investors of all stripes: equity, bonds, gold, and even traditional equity hedge funds (for example, see the recent Tiger Cub Blowups).

In stocks, the trend has been down since the December 2021 peak, but this isn’t news to anyone. The drawdown has been slow, lasting almost all of 2022 with little bouts of relief along the way. Over the last five years, any drawdowns have been met with swift buying from traders and institutions, making the phrase “buy the dip” part of our daily lexicon.

Unfortunately, that hasn’t worked in 2022. Each dip that was bought was met with more punishing selling. “Dip buyers” are sitting underwater, and 401(k)s are feeling the pain as investors face consecutive down quarters. It feels like no end is in sight because “the bears are winning.”

Since June’s bottom, stocks have consolidated and put in higher lows. Throughout the year, the broad trend is down, but we’re seeing some bright spots of support, and buying the pullbacks is starting to pay off again.

According to Bespoke Investment Group, “We don’t think bears can really press their bets until the June lows are taken out, while bulls can’t press their bets until the mid-August highs are taken out. Each of those levels represents pretty big moves from where the index is currently trading.” Bears might have 2022 pegged so far, but it’s not a foregone conclusion that more losses are imminent. For equity investors, it could mean waiting until we can break out above the mid-August highs, especially considering it’s a midterm election year.

Midterm years are historically not very strong for equities, but this year might be different. Bespoke Investment Group reviewed every eight-year period with two consecutive quarters of 20%-plus declines in the S&P since World War II. In only one instance (2008) was the next quarter negative, and the average return of the next quarter was 8.5%.

If we couple that with Bespoke’s research on midterm elections, it looks like history is giving us a tailwind for equities going into the end of the year. During midterm years, equities are relatively unchanged through September on average. By October 1, equities begin a rally that persists through the end of the year, up 4% on average.

While industry colleagues who know me might call me a “perma-bear,” I think of myself as standing on the middle of a seesaw, balancing between bullish and bearish, thinking about what can go right and wrong, and using data to make informed allocation decisions. There is a lot of uncertainty in the world and global economics—the war in Ukraine, the energy crisis, and so on—but the data presents a more optimistic perspective today than anecdotes have us believe.


The yield on the 10-year Treasury rose 12 basis points, ending the week at 3.31%. The 10-year Treasury has been in a state of decline in 2022 and is currently in the process of testing the lows set mid-June.

Year-over-year inflation remains elevated, and yields have ascended throughout 2022 to accommodate. The St. Louis Federal Reserve reports that, since May, real yields have been positive and trending higher, currently at levels not seen since 2019.

The increase in rates comes at a time when the U.S. economy slowed in the most recent quarter and continues to slow, suggesting a recession is possible. When the economic outlook is gloomy, investors typically seek refuge in bonds, but that is not what we’re seeing right now. We’re seeing a flight from fixed income and a move toward risk-on assets. Last week, long-term Treasurys were down 1.73% and high yield was up 2.02%, showing that investors are moving away from safety and into more speculative investments.

The consumer price index is a measure of how much prices have changed due to inflation, and the Fed is watching this closely. Their dual mandate demands full employment and price stability. Right now, the U.S. is fully employed, but inflation is out of control. The Fed is likely to focus more on inflation and less on jobs. If interest rates continue to rise too quickly, it will force borrowing costs to go up too fast, which could put pressure on the jobs market and consumer spending.

The consumer is where investors should focus their attention. Is the consumer spending money? Keep an eye on personal consumption and retail sales, both of which are currently slowing to a near-flat line.

Why is the consumer so important? Because inflation is high, employment is full, and consumer spending has plateaued. The consumer makes up almost 70% of U.S. GDP, according to the Federal Reserve Bank of St. Louis. Basic economics reminds us that GDP using the expenditure approach is consumption (C) plus government spending (G) plus domestic capital expenditures, or investment (I), plus net exports.

GDP + (export imports)

If the consumer falters, it could cause the U.S. to stumble into a recession, causing additional difficulties for citizens. Assuming inflation stays reasonable, if the U.S. enters into a recession, bonds will likely be a go-to safe haven. Investors should have a process laid out in advance to either buy bonds today or allocate to them when the tides turn.


Last week, gold gained 0.27% and still trends below its 50-day moving average. Since early May, gold has been in a steady trend lower thanks to a strong and strengthening U.S. dollar. The dollar’s strong advance relative to global currencies combined with gold’s decline makes the risk/reward trade-off for gold increasingly more appealing.

Gold and the dollar are related and linked as a store of value, but what drives their movements varies. The dollar is driven by relative interest rate and inflation expectations across global currencies. Gold is driven, in part, by supply and demand, fear, and its desirability as a portfolio diversifier. Contrary to popular belief, it’s not a great hedge against inflation according to a study completed by Claude Erb and Campbell Harvey from the National Bureau of Economic Research and Duke University, respectively.

Now we see gold consolidating after its rapid ascent during the COVID outbreak and the dollar playing catch up as the global economic situation worsens and worldwide inflation remains a driving concern around future growth expectations. Inflation across the world remains heightened, with only Saudi Arabia, Japan, and China coming in at sub-3% rates. Switzerland maintained relatively low inflation levels most of the year, but the natural gas games being played by Russia finally caught up, and it now has a rate of nearly 3.5%.

Gold’s current position and the dollar’s strong momentum are providing an interesting setup for the yellow metal. If a potential breakout to the upside occurs, it will be off a strong two-year consolidation.

Many investors use commodities, especially gold, as a portfolio diversifier due to their general lack of correlation with other traditional asset classes. Decades of historical context set a strong precedent for why investors should consider an allocation to gold, and a larger percentage than most investors and professionals think is appropriate. Flexible Plan Investments’ white paper “The role of gold in investment portfolios” (for financial professionals only) highlights some of the key benefits of investing in gold.

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

The short-term-oriented QFC S&P Pattern Recognition strategy started last week 30% long, increasing to 70% long on Tuesday’s close before shorting 20% on Thursday. On Friday, the short position increased to 60% and then again to 100% on Monday’s (September 12) close. Our QFC Political Seasonality Index started last week favoring equities and moved into defensive mode on Wednesday’s close. (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 are 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 started the week 20% short the NASDAQ. It increased short exposure to the NASDAQ 100 to 40% on Wednesday’s close and went to cash on Monday’s (September 12) close. The Systematic Advantage (SA) strategy started this week 90% exposed to the S&P 500. Our QFC Self-adjusting Trend Following (QSTF) strategy started last week in cash and went short 100% on Tuesday’s close. On Friday, QSTF moved back to a cash (0%) position and starts this week off at 100% long. VAN, SA, and QSTF can all employ leverage—hence the investment positions may at times be more than 100%.

Our Classic model was in cash 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 more restrictive platforms and can take up to one month to generate a new signal.

Flexible Plan’s Growth and Inflation measure, one of our Market Regime Indicators, shows markets 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 has significantly outpaced 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 also one of the best stages for gold.

The S&P volatility regime is registering a High and Rising reading. From an annualized return standpoint, high and rising volatility favors stocks over gold, and gold over bonds. The combination has occurred 23% of the time since 2003. Typically, this stage is associated with lower returns and higher fluctuations for the three major asset classes.

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