Current market environment performance of dynamic, risk-managed investment solutions.
By Will Hubbard
Market snapshot
• Equities: Stocks were mixed last week. The Dow Jones Industrial Average gained 0.67%, the S&P 500 fell 1.94%, the small-cap Russell 2000 declined 3.04%, and the NASDAQ Composite lost 4.48%.
• Fixed income: The 10-year Treasury yield fell from 5.24% to 5.08% last week.
• Gold and commodities: Gold fell 0.68% for the week.
• Market indicators and outlook: The economic environment is classified as Normal, favoring stocks and gold for returns. Volatility is Low and Rising, a regime historically favorable for stocks over other asset classes on a return basis.
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Equities
Last week’s losses came from technology and AI-linked stocks, not from the broad market. The tech-heavy NASDAQ 100 fell 5.49%, while the price-weighted Dow rose 0.67%, a gap of more than six percentage points. CNBC tied the NASDAQ’s worst week since June to the AI sell-off and higher oil prices, with the Dow the one major index to post a weekly gain.
Semiconductors were at the center of the selling. On Tuesday, Oct. 13, chip stocks were the weakest performers, with Applied Materials falling 7.2%, Micron declining 4.6%, and Lam Research losing 3.2%. Trading Economics attributed the slide to two worries: China’s CXMT unveiled a new memory design, and Broadcom CEO Hock Tan warned that excessive spending by AI labs could deliver poor returns. Equipment and memory makers depend on that spending continuing, so doubts about its payoff hit them first.
Concerns about how the AI build-out is financed widened the doubt from earnings to credit. CNBC reported that CoreWeave’s credit default swaps, contracts that work like insurance against a borrower’s default, climbed to levels generally read as credit distress. The stock ended the week 25.21% lower on concerns that the company is borrowing too much for its AI build-out. Deutsche Bank offered the bull case: a backlog above $100 billion, about two-thirds of it with investment-grade counterparties.
The week’s inflation data added a rate-policy problem. CNBC reported that September’s consumer price index (CPI) rose 3.7% from a year earlier, against a 3.6% forecast. Core inflation, which excludes food and energy, ran 2.6%, against a 2.5% forecast. CNBC also noted that odds of a quarter-point Fed rate hike at the late-October meeting jumped after the report. Higher rates weigh hardest on growth stocks, whose value rests on profits expected years from now. A higher discount rate shrinks what those future earnings are worth today, which is why tech was the most exposed group.
Investors moved to a more defensive posture rather than abandoning stocks. Consumer Staples led all sectors with a 5.05% gain, and seven of 11 sectors finished higher even as the S&P 500 fell. Bespoke Investment Group’s Oct. 16 report, “The Return of Risk Off,” framed the week as a shift toward defensive areas such as Staples and Health Care, with Technology the main drag. Its sector table shows Technology as the weakest large sector. The Staples, Energy, Utilities, and Health Care sector funds all finished positive.
Against its longer-term trend, the market shows a break, not yet a breakdown. SPY, an ETF that tracks the S&P 500 Index, closed at 763.25 on Oct. 16, below its 50-day moving average of 768.50 but still well above its 200-day average of 725.01. The move signals weakening short-term momentum, but the longer-term uptrend remains intact for now.
Source: Flexible Plan Investments
Fixed income
Treasurys did what a bond allocation is supposed to do in a risk-off week. They rallied as AI-linked stocks sold off, even though the week’s inflation data ran hot. Yields initially jumped on Wednesday’s hotter-than-expected September CPI report, then reversed. Bespoke Investment Group noted in its Oct. 15 Closer that Treasury yields reached their lows alongside weakness in the riskiest parts of the AI trade and the major indexes. The firm characterized the move as a shift driven more by risk aversion than economic data, despite Thursday’s hot producer price index (PPI) report.
That rotation was clearest on Thursday. As the tech and AI sell-off deepened, investors moved into Treasurys across the yield curve, and the long end rallied most: The 30-year yield fell roughly 10 basis points, compared with about 5 basis points for the two-year, according to CNBC. The hot PPI did little to change expectations that the Fed will hold rates high for longer. That made the rally a safe-haven bid, not a repricing of Fed policy.
Gold and commodities
Gold lost ground this week even as the dollar weakened, suggesting interest-rate expectations set the tone more than the currency did. Gold futures fell 0.83%, while the U.S. dollar Index slipped 0.37%. A softer dollar usually supports gold because it makes the metal cheaper for buyers holding other currencies. This week, that support wasn’t enough to offset pressure from the inflation data.
The turning point came on Wednesday, Oct. 14. A hotter-than-expected September consumer price index report lifted the dollar and the 10-year Treasury yield and pushed up the odds of a Fed rate hike. According to Kitco, spot gold fell about 1.5% that day, dropping below $4,100 an ounce. Gold pays no interest, so higher yields and rate-hike expectations raise the cost of holding it relative to income-producing assets. The dollar gave back its midweek gains and finished the week lower. Gold also finished the week with a loss.
Energy was the week’s bigger commodity story, with rising oil prices adding to concerns about inflation and interest rates. West Texas Intermediate (WTI) crude rose roughly 10% over the week, while Brent gained about 5%, reaching a five-month high. Most of the rally came late in the week. WTI was near $91.85 on Tuesday, but by Friday, front-month WTI traded near $101.41, its first close above $100 since September. Brent settled at $109.86.
Flexible Plan Investments (FPI) is the subadviser to the only U.S. gold mutual fund, The Quantified Gold Futures Tracking Fund. Launched in 2013, the fund is designed to track the daily price changes in the precious metal in a more tax-efficient manner than its ETF counterpart, GLD.
The indicators
The QFC S&P Pattern Recognition strategy started the week 100% net long to the S&P 500, cut exposure to 70% net long on Monday, and trimmed it to 60% net long on Friday. The QFC Political Seasonality Index strategy started the week in a risk-on posture and moved to risk-off on Tuesday’s close, where it remained through Friday. Our QFC Political Seasonality Index—with all of the daily signals—is available after 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. These strategies’ key advantage is their ability to adapt to changing market environments by participating in uptrends and moving to a defensive posture in downtrends.
The Volatility Adjusted NASDAQ strategy started the week 140% net long to the NASDAQ 100, increased exposure to 160% net long on Tuesday, and scaled back to 120% net long on Thursday. The Systematic Advantage strategy started the week 90% net long to the S&P 500, increased exposure to 120% net long on Monday, then trimmed exposure to 90% net long on Friday. The QFC Self-adjusting Trend Following strategy remained in cash throughout the week. These strategies can employ leverage, so their exposure may exceed 100% at times.
The Classic strategy remained in a risk-on posture throughout the week. Most Classic accounts follow a signal that can change exposure within a week, though a few remain on platforms requiring up to a month to adjust to new signals.
FPI’s Growth and Inflation measure, one of our Market Regime Indicators, shows that markets are in a Normal economic environment (inflation and GDP are growing). Historically, a Normal environment has occurred 75% of the time since 2003 and has been a positive regime for stocks, bonds, and gold. Stocks have the highest returns in Normal periods. Gold has the second-highest return but has also experienced high drawdowns in these environments.
Our S&P volatility regime is registering a Low and Rising reading. Since 2003, this environment has favored stocks over gold, and then bonds, in both annualized return and risk-adjusted return terms. Gold has the highest drawdown risk among the three asset classes. Bonds have the lowest return, risk, and drawdown. The Low and Rising combination has occurred 22% of the time since 2003.
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