Market insights and analysis

By Will Hubbard

Market snapshot

•  Stocks: The market remained positive as the Fed signaled a more dovish stance and inflation data softened. The S&P 500 neared all-time highs amid cautious trading ahead of the U.S. presidential election.

•  Bonds: Despite the Fed’s accommodative tone, the 10-year Treasury yield rose to 4.10%, reflecting uncertainty about the future path of rate cuts.

•  Gold: The yellow metal maintained strength amid a strong U.S. dollar and geopolitical uncertainty.

•  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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The major U.S. stock market indexes were up last week. The Dow Jones Industrial Average increased by 1.22%, the S&P 500 and NASDAQ Composite both gained 1.13%, and the Russell 2000 small-capitalization index rose 0.99%. The 10-year Treasury yield rose 13 basis points to close at 4.10%. Gold held strong, gaining 0.11% to close at $2,656.59 per ounce.

Stocks

Market trends last week were generally positive. Economic news was light, with the main drivers for price action being the Federal Open Market Committee (FOMC) meeting minutes and the latest consumer price index (CPI) and producer price index (PPI) data.

The FOMC minutes, released last Wednesday, provided context for the committee’s decision to lower the federal funds rate in September. Members were generally unanimous in their expectation that year-over-year inflation is returning to a sustainable 2%. The committee also appeared more dovish, suggesting that if future data aligns with their expectations, they may continue to “move toward a more neutral stance of policy over time.” This implies that the Federal Reserve is inclined to adopt a more accommodative approach, possibly signaling further rate cuts if conditions remain stable.

The CPI declined by 0.1%, dropping from 2.5% to 2.4% year over year. Economists were expecting a 0.2% decline to 2.3%. Core CPI, which excludes food and energy prices, remained unchanged at +0.3% month over month. The PPI stayed flat at 0% month over month, despite expectations of a 0.1% rise. Slower increases in producer costs generally benefit consumer prices down the road.

The S&P 500 also neared all-time highs last week. Barron’s reported that the value of the Index is now $50 trillion—50 times more than when the long-term bull market started in 1982. For perspective, at the end of 1974, the U.S. equity market was valued at $500 billion, about one-seventh of Apple’s current market cap.

Last week, we discussed how markets tend to behave leading up to elections, typically with little movement but a positive bias heading into a U.S. presidential election. This trend continues to hold in recent data. Bespoke Investment Group reported that 49% of its weekly sentiment indicators were bullish, while 21% were bearish—the lowest reading since December.

Bespoke also reviewed Schwab’s Trading Activity Index and TD Ameritrade’s former Investor Momentum Index to gauge investor positioning as the S&P 500 approached all-time highs. Bespoke found less trading activity at current highs compared to previous ones, likely due to caution around the upcoming presidential election. This hesitation could result in some pent-up demand after the election.

In the following chart, the red line represents the S&P 500, and the blue lines reflect investor activity. Typically, as the S&P hits new highs, trading increases, but that hasn’t been the case this time.

Every election cycle is labeled as “unprecedented,” and every presidential race is contentious. However, investors shouldn’t let concerns about a less-preferred party’s victory stop them from investing proactively. Risk-management techniques such as active management can help mitigate these fears.

Bonds

Despite the Federal Reserve’s accommodative tone, the 10-year Treasury yield rose to 4.10%, reflecting uncertainty about the future path of rate cuts.

Rising Treasury yields came without a subsequent rise in high-yield bonds, indicating a healthier economic outlook. According to Clearnomics, the average high-yield bond spread over the last 10 years is 4.2%, but it currently sits at 2.9%—a low for that period.

In summary, bond markets are signaling optimism, with high-yield spreads narrowing and yields declining relative to safe-haven Treasurys. This suggests that investors waiting on the sidelines may be missing the start of another favorable period for stocks.

Gold

Gold regained 11 basis points after losing 17 the previous week, ending at $2,656.59 per ounce.

Movements of most precious metals, including gold, were generally muted last week. However, the notable shift was that both the U.S. dollar and gold rose simultaneously—a rare occurrence given their historically inverse correlation. This could signal growing investor concern about ongoing conflicts in the Middle East, China, and inflationary pressures abroad. As a result, both assets may be seen as safe havens in the face of potential geopolitical instability. In the following chart, the blue line represents gold, and the red line reflects the U.S. dollar.

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 110% long, cut exposure to 10% long on Monday, moved to 70% on Tuesday, dropped back to 10% long again on Wednesday, moved to 70% short on Thursday, and reverted to 10% long on Friday to end the week. Our QFC Political Seasonality Index started the week in its risk-off posture, switched to risk-on at Wednesday’s close, and remained there for the rest of the week. (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 the week 140% long, reduced exposure to 120% on Monday’s close, reduced it to 100% long on Tuesday and 80% long on Wednesday, dropped back to 60% long on Thursday, and then tilted slightly more aggressive to end the week 80% long. The Systematic Advantage (SA) strategy was 120% long all week. Our QFC Self-adjusting Trend Following (QSTF) strategy was 200% long all week. VAN, SA, and QSTF can all employ leverage—hence the investment positions may at times be more than 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.

Flexible Plan’s Growth and Inflation measure, one of our Market Regime Indicators, shows markets are in a Normal economic environment stage (meaning a positive monthly change in the inflation rate and a 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 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.

The 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. It is a stage of higher returns and lower volatility for stocks relative to the other volatility regimes.