Market insights and analysis

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

1st Quarter | 2023

Quarterly recap



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

By William Hubbard

The major U.S. stock market indexes finished up last week. The S&P 500 jumped 3.95%, the Dow Jones Industrial Average gained 5.72%, the NASDAQ Composite was up 2.24%, and the Russell 2000 small-capitalization index rose 6.01%. The 10-year Treasury bond yield fell 20 basis points to 4.01%, sending bond prices higher for the week. Spot gold closed the week at $1,644.86, down 0.77%.


Last week we saw light economic news in the U.S. The exception was the better-than-expected advance GDP figure, which lit a fire under markets, prompting a strong rally through Friday’s close. Unfortunately, the advance GDP estimate is subject (and likely) to change, and so we’ll focus the stock section of this week’s update on everyone’s favorite subject: politics.

We’re a quantitative, risk-managing investment manager, so we know past performance isn’t indicative of future results. But history sometimes rhymes, and our models are designed to learn from yesterday and adapt to today.

The economic backdrop going into this year’s midterms is pretty bleak. Research firm Bespoke Investment Group came in with a net number of accelerating economic indicators of -12. The current string of negative economic figures is tied for the longest streak since the global financial crisis.

According to Bespoke, manufacturing is soft to negative with four of seven indicators showing declines. Employment is still weak with the majority of indicators showing a decline. The housing market is also softening. The only likely “bright spot” is inflation. It shows negative momentum over the last three months; however, this could be the result of the base effect, which relates to inflation over the previous year.

Prices have remained elevated over the past year. Eventually, the year-over-year change starts to look OK, simply because we’re looking at higher levels relative to history. For example, if inflation spiked 10% one year ago and then remained at 0% for the next 12 months, on that 13th month, the 10% increase would “fall off” and we would have 0% year-over-year inflation. While this might be what the numbers say, the reality is still that prices are higher and stickier.

Finally, the consumer seems to be muddling through, which appears to be a best-case scenario. Bespoke looks at seven different consumer indicators: consumer confidence, the University of Michigan’s consumer confidence, personal income, personal spending, retail sales, retail sales ex-auto, and auto sales. Four of these are negative, and three are showing signs of positive momentum.

Despite the bleak backdrop, midterm elections tend to experience a lot of seasonality. Following the election, it’s historically very common to have a strong year-end.

According to Bespoke, the second year of the presidential cycle is the worst. Years three and four have been generally strong compared to years one and two. The third year of a presidential cycle has experienced a gain 82.6% of the time since 1928. Biden’s presidency has experienced magnified returns coming out of COVID, both positive and negative, but the general trends have been similar.

Keep in mind these returns are averages and represent a general experience. Some cycles experience better returns than others, so whether the market trends above or below average is yet to be seen. Regardless of the outcome, our recommendation this November is to check politics at the door, focus on the direction of economic data, and use historical context as a guide to make prudent rules-based investment decisions.


The 10-year Treasury bond yield dipped 20 basis points (0.20%) from 4.22 to 4.01% last week. The decrease in rates led to a price rally in long-term Treasurys, which jumped 3.9% in price terms last week, as represented by iShares 20+ year Treasury Bond ETF (ticker: TLT).

The relief in bond prices and the advance release of the Q3 real GDP numbers (mentioned previously) were both positives. According to the Bureau of Economic Analysis (BEA), GDP in the third quarter grew at an annualized rate of 2.6%, compared to a 2.3% estimate.

This better-than-expected GDP figure is good for the Federal Reserve as they tighten monetary policy through rate increases to battle the effects of inflation. The Fed has a dual mandate: stable prices (targeting 2% inflation) and full employment. Full employment is not zero unemployment but rather represents the economy operating at full capacity. In other words, cyclical unemployment is zero, GDP is at full potential, and the unemployment rate is equal to the nonaccelerating inflation rate of unemployment (NAIRU). NAIRU is the unemployment level that keeps inflation in balance, and this figure can change over time.

Because the Fed has very few ways to impact inflation (or employment), it has a limited capacity to change things directly, increasing or decreasing interest rates. Raising rates should slow the economy to reduce inflation—but what causes inflation to slow? We need to reduce demand for current goods or increase supply.

Recent reports show West Coast imports have fallen to the lowest share of U.S. imports since the early 1980s. Reports of tankers sitting out miles into the Pacific have largely gone by the wayside. So, supply seems to be evening out in our post-COVID world. If supply steadies but doesn’t meet demand, then the Fed will need to increase rates to stifle demand and help mitigate runaway prices.

Reducing demand will come in two forms. The first is that people will not want to take out a loan to pay for something because the interest rate is too high. The second is to force people to buy less by increasing unemployment, assuming the Fed can afford an increase in joblessness with the current economic situation.

The Fed can raise rates until unemployment increases quite a bit. Currently, we are at historically low unemployment. According to St. Louis Federal Reserve Economic Data (FRED), the current unemployment rate is 3.5%. A recent study from the Federal Reserve Bank of San Francisco suggests the natural rate of unemployment is near 6%.

The labor force is estimated to be about 165 million Americans. About 5.8 million Americans are currently unemployed. To get inflation under control, the Fed may need to see another 4.1 million or more temporarily displaced to reduce demand for goods and services.

The bottom line is the Fed can’t do a lot to reduce inflation without pulling the levers of monetary policy. Given the ongoing inflation issues, expect them to continue raising rates, putting downward pressure on bonds, until inflation subsides, people start losing their jobs, or both.


Last week, gold fell 0.77%, continuing its downward slide this year. As of Friday (October 28), gold was down 10.08% year to date. That is less than equities and fixed income, but gold isn’t providing the benefit we would expect.

The U.S. dollar and gold have been almost perfectly inversely correlated lately, explaining a lot of the yellow metal’s disappointing performance over the last few years. If we consider gold in U.S. terms, yes, it has been a disappointment. But if you look at it through a broader lens, a variety of interest rate and inflation effects show what might happen to the price of gold if the U.S. dollar starts to fall in line with other global currencies.

If we consider the performance of gold in yen, euro, or pound terms, the story looks much different. Over the last one-year period, gold in U.S. dollar terms is down 7.77%, according to Kitco, while it is up 19.3% in yen terms, 7.03% in euro terms, and 8.68% in pound terms. The reason for this is the varied inflation and interest-rate issues affecting each of these developed world currencies.

For U.S. investors with strategic, long-term allocations to gold, this year has been irritating; however, the global outlook for it seems to suggest that if the U.S. dollar begins to weaken relative to other global currencies, we could see a turnaround in gold spot priced in dollars.

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

The very short-term-oriented QFC S&P Pattern Recognition strategy started the week 60% long and flipped to 30% short on the close. It increased to 80% short on Tuesday’s close and then reversed to 70% long on Thursday’s close. On Friday’s close, it reduced exposure to 60% long.

Our QFC Political Seasonality Index was defensive all week. (Our QFC Political Seasonality Index is available—with all of the daily signals—post-login in our Weekly Performance Report section under the Quantified Fund Credit 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 was 40% short the NASDAQ all week. The Systematic Advantage (SA) strategy started this week 60% exposed to the S&P 500 before moving to 90% exposed at Tuesday’s close. By Friday afternoon, the Systematic Advantage strategy realized some of the gains it caught midweek and reduced exposure back to 60% on Friday. Our QFC Self-adjusting Trend Following (QSTF) strategy was short 100% the NASDAQ 100 Index 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 in defensive positioning over the last 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 continue to be in the Stagflation economic environment stage (meaning a positive monthly change in the inflation rate and negative quarterly GDP reading). This environment has occurred only 9% of the time since 2003 and favors gold and bonds, while equities tend to fall. Gold has significantly outpaced both stocks and bonds on an annualized return basis in this environment, with a lower risk of drawdown than equities. From a risk-adjusted perspective, Stagflation is also one of the best stages for gold.

The S&P volatility regime is registering a High and Rising reading. From an annualized return standpoint, high and rising volatility favors stocks over gold, and gold over bonds. The combination has occurred 23% of the time since 2003. Typically, this stage is associated with lower returns and higher fluctuations for the three major asset classes.

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