Current market environment performance of dynamic, risk-managed investment solutions.
By Will Hubbard
Market snapshot
• Stocks slumped, pushing year-to-date equity returns into the red.
• Bond yields rose, and prices fell to levels not seen since September.
• Gold’s consolidation phase continued, ending the week on a high note.
• Market indicators and outlook: Market regime indicators place the market in a Normal economic stage, historically positive for stocks, bonds, and gold, though gold faces higher downturn risks. Normal stages are especially favorable for stocks, with limited downside. Volatility is High and Rising, which favors stocks over gold, then bonds.
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Stocks struggled last week and are down for the year. The S&P 500 lost 1.92%, the NASDAQ dropped 2.34%, the Dow Jones Industrial Average fell 1.83%, and the Russell 2000 declined by 3.49%. Bond prices struggled as the 10-year Treasury yield rose from 4.60% to 4.76%. Gold was a shining spot for the week, adding 1.88%.
For the latest information on our Quantified Funds, check out our weekly fund updates. You can also see the daily holdings of the funds here.
Stocks
Last week’s downturn was driven by a stronger-than-expected December jobs report, which spooked investors already concerned about the Federal Reserve’s current monetary policy. The Fed has signaled plans to lower rates aggressively, prompting investors to buy equities under the mantra “Don’t fight the Fed.”
However, stronger labor data, with 256,000 jobs added in December (far exceeding the 155,000 expected), indicates an economy resilient enough to sustain higher rates. With inflation running just below 3% on an annualized basis, the Fed may consider keeping rates elevated longer than originally expected.
The jobs report also shifted expectations for rate cuts. The CME FedWatch shows that 42.8% of traders expect rates will stay in the current range through July, while 41.7% anticipate a 0.25% cut by then.
The NASDAQ 100 weakened further heading into the weekend. According to Bespoke Investment Group, Friday was the first day since September 11 that the Index opened, traded, and closed entirely below its 50-day moving average. Additionally, since September, each high has been lower than the all-time high, and each successive low is lower than the previous.
Last week’s data represented ongoing economic resilience, increasing monetary policy uncertainty. Following two strong years of data, investors may want to consider bracing for market volatility.
Bonds
The 10-year U.S. Treasury yield has risen from 3.6% in mid-September to near recent highs at 4.76%, causing bond prices to drop nearly 10% since September 16.
Investors and traders are closely watching the December consumer price index (CPI) to see whether inflation will be stickier than expected. Persistent inflation could delay Federal Reserve rate cuts, further pressuring loan-driven purchases like homes and cars.
Bonds remain out of favor as rising interest rates weigh on prices. For bonds to find some grounding, economic conditions would need to support a dovish Fed.
Gold
Gold rose 1.88% last week to close at $2,689.76 per ounce. After gaining 25.5% last year—its best performance in 14 years—gold has moved in a mainly horizontal channel since the U.S. election in early November.
Typically, consolidation helps to create and form new bases, which can support future momentum-driven price increases. Our models continue to assess the probability of gold moving higher or lower and adjust trades accordingly.
Gold and other nontraditional investments, such as managed futures, may present opportunities should we head into a more volatile market environment.
Flexible Plan Investments is the subadviser to the only U.S. gold mutual fund, The Gold Bullion Strategy Fund (QGLDX), designed at its introduction 11 years ago to track the daily price changes in the precious metal.
The indicators
The QFC S&P Pattern Recognition strategy started last week 130% long. On Monday, it reduced exposure to 110% long and further reduced to 90% on Tuesday. On Wednesday, it increased exposure back to 130% amid market weakness and then reduced it to 120% on Friday. Our QFC Political Seasonality Index started the week in its risk-on posture and moved to its defensive mode on Tuesday’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 Domestic Tactical Equity 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 last week 60% long, moved to 100% long on Monday’s close, and scaled back to 80% on Wednesday as market volatility increased. The Systematic Advantage (SA) strategy started last week 60% long, increased to 120% long on Monday, and reduced to 90% long on Wednesday’s close, where it stayed for the remainder of the week. The QFC Self-adjusting Trend Following (QSTF) strategy started the week in cash, took a fully leveraged position (200% long) on Monday, and reduced exposure to 100% on Wednesday, where it remained for the rest of the week. VAN, SA, and QSTF can employ leverage, so the investment positions may exceed 100%.
Our Classic model was long risk-on positioning all 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.
FPI’s Growth and Inflation measure, one of our Market Regime Indicators, shows markets are in a Normal economic environment stage (meaning inflation is falling and GDP is growing). 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 carries a substantial risk of a downturn in this stage.
Our S&P volatility regime is registering a High and Rising reading, which favors stocks over gold and then bonds from an annualized return standpoint. The combination has occurred 23% of the time since 2003. It is a stage of high risk for both equities and gold.