By Jason Teed The major U.S. stock market indexes were mixed last week. The Russell 2000 gained 0.42%, the NASDAQ Composite fell 0.47%, the S&P 500 was down 0.57%, and the Dow Jones Industrial Average lost 0.07%. The 10-year Treasury bond yield rose 2 basis points to 1.36%, though bonds were mixed for the week. Spot gold closed the week at $1,754.34, down 1.86%. Nine out of 11 sectors were down last week. Energy (+3.31%) was the best performer, followed by Consumer Discretionary (+0.35%). Materials (-3.22%) and Utility (-3.11%) stocks were the worst performers of the week. Late Monday (September 20), the equity markets were down significantly, spooked by the news of a potential debt crisis in China. The S&P was down over 2.5% by mid-afternoon. Whether these concerns are temporary remains to be seen. Stocks The stock market, while down last week and at the start of this week, remains at historically high levels. However, a few issues continue to affect the market as a whole: inflation, consumer spending, labor supply, and valuation. Inflation for August was lower than expected, although the overall level was elevated. The inflation increases are related, in part, to either real estate (such as rental costs) or COVID-affected sectors (such as new and used cars). The latter group remains volatile, and supply-chain disruptions are not expected to lessen for the next year or two. This is in line with the Federal Reserve’s view that elevated inflation readings are at least partially transitory and that their supportive role in the markets is not leading to runaway inflation. Nonetheless, an element of nontransitory inflation does seem to be occurring, partially due to the increases seen in consumer spending. Consumer spending is down in several industries—for example, the automotive industry, which is mired in supply-chain issues, and home sales, as buyers deal with elevated housing prices. However, spending on consumer goods has risen. In August, sales of consumer goods grew more than the sales of services. The highest growth was in groceries, electronics, and other goods. Online sales alone grew 5% in August. Some economists and investors are concerned that the delta variant could have a major impact on economic growth. These reports, however, seem to show that the American consumer is ready to continue spending and that growth is likely to continue. However, not all industries saw growth in consumer spending. Some struggled with production issues, many of which can be traced back to a shortage within the labor markets. Some industries are struggling to fill positions, leading to a shortage in production and supply, as well as contributing to the “transitory” inflation discussed by the Federal Reserve. Labor shortages aren’t expected to decrease until well into 2022. Some hoped that an end to federal programs that supported the unemployed during the pandemic would lead to an increase in labor supply. That does not appear to have happened, however—at least not yet. Yet some firms, such as Goldman Sachs, are expecting to add 1.3 million people to payrolls by the end of this year—though the full impact of this may take a few months to be felt. With a mix of strong consumer spending and transitory inflation caused by supply-chain and labor issues, the Fed may have a difficult time navigating policy to support the markets. The COVID pandemic is not over, and a significant amount of uncertainty remains. The Fed will need to signal market support when necessary while preventing the economy from overheating. The Fed is expected to accelerate its timeline for interest rate increases, though by how much remains unknown. Bonds Treasury yields continued their slow rise. The 10-year Treasury climbed to 1.36%, up from a recent low of 1.17% in August. 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 fell last week, continuing its longer-term decline from the 2020 peak. The metal is still down year to date. Other safe-haven assets, such as long-term Treasurys were up for the week, suggesting that the market is still digesting economic concerns. The Federal Reserve will be meeting this week. The expectation is that it will decrease current levels of market support. This may create a further headwind for the metal, as higher interest rates make bonds relatively preferable to gold. Inflation has rebounded, but its rise continues to slow, further increasing the likelihood that interest rates may begin rising. Flexible Plan Investments (FPI) 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 began last week out of the market, entered on Wednesday’s close, and 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 2.0X long for the week. Our intermediate-term tactical strategies are uniformly positive, although to varying degrees. The Volatility Adjusted NASDAQ (VAN) strategy was 200% exposed for the week. The Systematic Advantage (SA) strategy began last week 120% exposed to the market, changed to 90% exposure on Monday’s close, and remained there for the rest of the 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 Rising reading, which favors gold over equities and then bonds from an annualized return standpoint. The combination has occurred 37% of the time since 2000. It is a stage of low returns for equities and bonds, but average returns for gold.