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.

Market Update 9/7/21

By Tim Hanna

Major U.S. stock market indexes were mixed last week. The S&P 500 increased by 0.58%, the Dow Jones Industrial Average was down 0.24%, the NASDAQ Composite gained 1.55%, and the Russell 2000 small-capitalization index was up 0.65%. The 10-year Treasury bond yield rose 1 basis point to 1.32%, taking Treasury bonds lower for the week. Spot gold closed at $1,827.73, up 0.56%.

Stocks

Investors processed economic data and continued to have concerns around the delta variant in what was a light trading-volume week before the Labor Day weekend.

The S&P MidCap 400 Index traded at a record, joining the NASDAQ and S&P 500 in reaching new intraday highs on Thursday (September 2).

ISM Manufacturing PMI came in at 59.9, above expectations of 58.5. Housing market numbers were below expectations, with pending home sales falling for the second consecutive month. ISM Services PMI came in at 61.7, compared to expectations of 61.9.

The big shock of the week was the massive miss in nonfarm payrolls. With expectations set around 750,000, the reading of 235,000 made investors reevaluate prospects regarding the Federal Open Market Committee’s timeline to reduce, or taper, assets. The unemployment rate met expectations of 5.2%; however, fears of inflation were reignited following a sharp rise in hourly earnings.

The Federal Reserve has repeatedly stated that its decisions will be based on data. Asset purchase tapering and future rate hikes should be viewed as separate decisions, both requiring data to guide any move by the Fed.

Specifically, Chairman Powell suggested that tapering may start at the end of this year if “substantial further progress,” relating to inflation, economic momentum, and employment numbers is made.

With such a big disconnect between consensus expectations and actual figures, Bespoke Investment Group provided context around the labor market, which contributes to future inflation and economic momentum. According to Bespoke, business-reported payrolls rose 235,000 (the expectation was for 750,000), which was below the lowest economist estimate. Household numbers came in at 509,000, but August jobs showed “a significant deceleration in the recent trend of accelerating job creation,” says Bespoke.

Bespoke adds, “That’s not to say the economy suddenly lurched to a halt in August; rather, this looks very specifically like a consequence of ramped up COVID cases courtesy of the Delta variant.”

Coming into the fall/winter season, with new variants such as mu emerging in many states, only time will tell whether COVID can throw another wrench into the almost two-year-long recovery.

Leisure and hospitality employment did not change at all in August. The net-zero job additions were the result of lower restaurant/hotel traffic and difficulty finding enough workers.

Despite the slowdown in job creations, household incomes look good. Total payroll disbursals rose at an 8% annualized rate. Wages are a big reason why, with the average nonmanagerial wage over the last three months up over 6% at annual rates versus the prior three months. Somewhat worrisome is the fact that this is the fastest pace since the late 1970s.

Prior to the data last week, the expectations were for the Fed to discuss tapering at the September Fed meeting, announce a taper in November, and begin tapering in December. In the coming months, we will see whether the economic backdrop, especially from the inflation and employment perspective, delays the Federal Reserve’s expected timeline.

Bonds

Yields generally moved higher last week as the sharp rise in hourly earnings reignited inflation fears. The 10-year Treasury continued its breakout from the bear price channel that started forming in May 2021. The upper limit of the channel was successfully tested for support, and trading action above 1.37% could signal a move higher from a technician’s perspective. If the move has legs, 1.55% is the next line of resistance to watch. This was the origination of the down move in rates that started in May.

T. Rowe Price traders reported, “The broad municipal bond market was little changed through most of the week and underperformed Treasuries. Light levels of primary market issuance and continued cash flows into municipal bond portfolios industrywide helped to preserve a favorable technical backdrop. … Steady demand and a lack of new issuance ahead of the holiday weekend created favorable technical conditions in the high yield bond market.”

Gold

Last week, gold continued its move higher, trading through and within multiple levels of resistance. The yellow metal saw days of hesitation at the 200-day moving average until finally making a breakout attempt to the upside on Friday, which appeared to fail following Tuesday’s (September 7) price action. With gold still in the middle of its 2021 price range, consistent trading action north of near-term resistance levels could help upward trend formation. Renewed inflation fears and uncertainty following last week’s economic data could strengthen the fundamental case for gold in the near term as well.

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 180% long to start last week. It changed to 10% long on Monday’s close and changed to 20% long on Wednesday’s close to begin this week. Our QFC Political Seasonality Index moved to a more defensive position 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.)

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 160% long to the NASDAQ, changed to 180% on Tuesday’s close, and changed to 200% long on Wednesday’s close to begin this week. The Systematic Advantage (SA) strategy is 120% 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 and 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 stocks over gold and then bonds from an annualized return standpoint. The combination has occurred 37% of the time since 2003.



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