Market insights and analysis

By Will Hubbard

Market snapshot
•    Stocks: Stock returns were muted amid escalating Middle East tensions and increasing volatility as the U.S. presidential election approaches.
•    Bonds: Fixed-income yields rose markedly as demand for safe havens rose against a backdrop of geopolitical uncertainty.
•    Gold: The yellow metal continued to cool as it searched for support in its current uptrend.
•    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 mostly up last week. The S&P 500 increased by 0.26%, the NASDAQ Composite was up 0.12%, the Dow Jones Industrial Average gained 0.13%, and the Russell 2000 small-capitalization index fell 0.48%. The 10-year Treasury bond yield rose 22 basis points to close at 3.97%. Gold slumped 0.17% to close at $2,653.60 per ounce.

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 economic data indicated that the U.S. economy remains relatively healthy. While manufacturing continues to decline, the services sector is expanding strongly. New unemployment claims fell from 4.2% to 4.1%, a historically low figure. 

Geopolitical tensions in the Middle East escalated amid missile strikes leading up to the anniversary of the October 7 attacks on Israel. Stocks responded with muted performance. 

With one month until the U.S. presidential election, it’s a good time to examine market behavior leading up to the face-off between former President Trump and Vice President Harris. Currently, polls show Harris with a slight lead at the national level, with FiveThirtyEight reporting a 2.6% advantage.
 

However, the electoral map presents a closer race, with 270towin.com projecting 226 likely electoral votes for the Democrats and 219 for the Republicans, leaving 93 votes in play that could swing the election in either party’s direction.

 
Historically, election years see increased volatility between August and November, with October showing about 35% more volatility than the other months, according to Sam Stovall of CFRA research. While day-to-day volatility may be higher than usual, average returns tend to remain stable as investors struggle to find a clear direction before Election Day. Research from Bespoke Investment Group shows that in presidential election years, the S&P 500 averages a 0.82% gain, compared to 1.89% in non-election years.

As quantitative investors, we analyze a wide range of data to make internal market assessments. Currently, our Political Seasonality Index (available post-login in our Weekly Performance Report section under the Domestic Tactical Equity category) is in a risk-off posture, but historical data suggests that, while the average return might be smaller than normal, the volatility leading up to the election offers potential for profit. We expect the Index to shift between risk-off and risk-on postures between now and the election. Stay tuned for insights on managing equity volatility during this election cycle.

Uncertainty surrounding elections typically drives market volatility. Given the polarized nature of the upcoming election, we see short-term opportunities to capitalize on this volatility leading up to the election and through the end of the year.

Bonds

The 10-year Treasury bond yield rose 22 basis points, closing at 3.97%, as investors sought safer assets amid ongoing geopolitical tensions in the Middle East. Investors also looked to capitalize on the Federal Reserve’s dovish stance, with expectations of future rate cuts.

After the most recent rate cut, the Fed’s dot plot now suggests an additional cut of 50 basis points this year, 100 basis points in 2025, and another 50 in 2026. If this forecast holds, the yield curve may remain normal, with short-term rates falling further and faster than long-term rates. 
 

Investors chasing the highest-yielding bonds or certificates of deposit (CDs) may want to switch their strategy to distributing assets from their entire portfolio instead of just one small sleeve. Many banks are offering appealing rates on callable CDs, but with anticipated steep rate cuts, these CDs are likely to be called, leaving investors with a tough choice: accept a lower yield or take on more risk. 

After a few years of real positive yields on fixed income, investors may face greater challenges in finding yield. Exploring alternative strategies to meet distribution needs can help balance the demand for stability and income. 

Gold

Gold lost 0.17%, retreating slightly from its all-time high to close at $2,653.60 per ounce. While the yellow metal is cooling off, it remains near all-time highs. Bears expect further declines, with support for the uptrend sitting about 3% below the current price level. 
 
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 30% short, moved to cash on Monday, reentered the market at 40% long on Thursday, and closed the week 110% long. Our QFC Political Seasonality Index remained in its risk-off posture throughout 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 80% long, reduced exposure to 60% on Wednesday’s close, and increased to 100% long on Friday. 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.