Market insights and analysis

How dynamic, risk-managed investment solutions are performing in the current market environment

4th Quarter | 2023

Quarterly recap

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Current market environment performance of dynamic, risk-managed investment solutions.

By Jason Teed

Market Snapshot 

•  Stocks: The stock market continued its upward trend last week, buoyed by positive economic and inflation news.

•  Bonds: Bond yields were mostly stable, with yields on the 1-3 year maturities falling slightly. Despite the deeply inverted yield curve, which typically signals market weakness, investors appear to anticipate a “soft landing.” 

•  Gold: Gold fell 0.54% last week, driven by low volatility and a lack of major market or inflation news. Falling interest rates make the metal more attractive than fixed-income securities, which afford less income as rates fall.

•  Market indicators and outlook: Market regime indicators show the market is in a Normal economic environment stage, which is historically positive for stocks, bonds, and gold but with a substantial risk of a downturn for gold. Normal is one of the best stages for stocks, with limited downside. Volatility is Low and Falling, which favors stocks over gold and then bonds.

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Last week, the stock market continued its upward trend, buoyed by positive economic and inflation news. The Russell 2000 small-capitalization index rose 1.75%, the S&P 500 Index gained 1.06%, the NASDAQ Composite increased by 0.94%, and the Dow Jones Industrial Average was up by 0.65%.

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

The S&P 500 Index’s gain last week reflected upbeat investor sentiment. This optimism is largely driven by recent economic data indicating that the U.S. economy entered 2024 in a good position.

For example, the S&P Purchasing Managers Index (PMI) for manufacturing came in higher than anticipated, suggesting that the manufacturing sector may be stabilizing. Services PMI also continued to show strength, further bolstering confidence in the U.S. services economy. Moreover, U.S. economic growth for the fourth quarter, as measured by GDP, surpassed expectations. This indicates strong consumption despite the challenges of higher interest rates.

Inflation data also shaped market performance. The recent slowdown in inflation, as illustrated by core personal consumption expenditures (PCE) inflation data, combined with strong economic growth, has led to a “Goldilocks” scenario—where the economy is neither too hot nor too cold, but just right. Such a balance is usually good for the market and could put downward pressure on interest rates.

Last week, eight out of the 11 sectors in the S&P 500 gained ground. Energy, Financials, and Communication Services saw significant advances, while the Consumer Discretionary and Real Estate sectors experienced some weakness. Some sectors continue to struggle in the current economic environment. Interest rates might have peaked, but the possibility of maintaining higher rates for a longer period could be necessary to balance a historically strong economy.

Looking ahead, investors are now focusing on the upcoming Federal Reserve meeting and the Fed’s response to the recent economic data. The market is also factoring in the possibility of potential rate cuts later in the year. Analysts expect that GDP, while historically strong, will slow in the first quarters of 2024 before picking up again. Both the Fed and the market are closely monitoring the timing and scale of these changes. The consensus among experts is that GDP will remain low but continue to grow, and that further interest rate increases will not be necessary. However, if events turn out differently, we may see an increase in market volatility.

Bonds

Bond yields remained mostly stable last week, with yields on the 1-year to 3-year maturities falling a few basis points. The yield curve is still deeply inverted, which usually signals upcoming market weakness, typically a recession. Despite this, market participants appear to be expecting a “soft landing” (i.e., taming inflation without triggering a recession).

Gold

Gold fell 0.54% last week, driven by low volatility and a lack of major market or inflation news. Falling interest rates make the metal more attractive than fixed-income securities, which afford less income as rates fall. However, last week’s changes were mild.

Although gold has historically been linked to inflation over the long term, interest rates exert a more immediate influence on gold prices. This influence often supersedes gold's tendency to decrease (or at least not increase) in value in a low inflation environment.

Non-currency safe-haven assets, such as long-term Treasurys, were down for the week.

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 10 years ago to track the daily price changes in the precious metal.

The indicators

Our Political Seasonality Index was in the market for the entire week. (Our QFC Political Seasonality Index is available post-login in our Weekly Performance Report section under the Domestic Tactical Equity category.) The equity exposure of the very short-term-oriented QFC S&P Pattern Recognition strategy began the week with heavy market exposure. As the week progressed, the strategy gradually reduced its market exposure but maintained a long position throughout the week.

Our intermediate-term tactical strategies are mixed in exposure. The Volatility Adjusted NASDAQ (VAN) strategy began the week 160% long, changing to 140% long on Monday’s close and 180% long on Wednesday’s close. The QFC Self-Adjusting Trend Following strategy was 2X long for the week. The Systematic Advantage (SA) strategy began the week 120% long. It changed to 90% long on Wednesday’s close, 60% long on Thursday’s close, and 120% long on Friday’s close.

Our Classic strategy was fully invested for the week. The strategy can trade as frequently as weekly, but signals are generally longer term in nature.

FPI’s Growth and Inflation measure, one of our Market Regime Indicators, currently indicates a Normal economic environment stage (meaning an increasing inflation rate and positive quarterly GDP reading). Historically, a Normal environment has occurred 60% of the time since 2003 and has been a positive regime state for equities, gold, and bonds. Gold tends to outpace equities on an annualized return basis in a Normal environment, albeit with higher risk, while bond returns tend to be positive but fairly low.

Our S&P volatility regime is registering a Low and Falling reading. This environment favors equity over gold and then bonds from an annualized return standpoint. The combination has occurred 37% of the time since 2003. It is a stage of moderate returns and low volatility for all three asset classes.



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