Market insights and analysis

By Will Hubbard

Market snapshot

•  Stocks: After a slow start, stocks ended the week with a strong post-election rally.

•  Bonds: Fixed income struggled with rates dipping after the Fed’s announcement on Thursday.

•  Gold: Gold paused its year-to-date advance with a stronger U.S. dollar in focus.

•  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 High and Rising, which favors stocks over gold and then bonds.

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Last week, markets performed very well following the presidential election. After declines in October, the S&P 500 rose 4.69% during the first full week of November, the NASDAQ gained 5.76%, the Dow Jones Industrial Average increased by 4.61%, and the Russell 2000 jumped 8.61%. The 10-year Treasury rallied and rates fell from 4.39% to 4.31%. Gold fell 1.89%.

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 presidential election last week set the tone for a markedly different start to November in the markets. Before Tuesday, uncertainty about the election’s outcome and its potential impact on the markets loomed. Trump’s victory, however, buoyed risk-on assets, like small-cap stocks, while his statements about bitcoin caused cryptocurrencies to soar. According to a CNBC article, Trump positioned himself as a pro-crypto candidate, saying before his win on Tuesday, “If I am elected, it will be the policy of my administration, United States of America, to keep 100% of all bitcoin the U.S. government currently holds or acquires in the future.”

On Wednesday morning, unemployment claims came in as expected, and on Thursday afternoon, the Federal Reserve announced a quarter-point reduction in the overnight rate, bringing it to the 4.50%–4.75% range. The Fed’s press release said that “recent indicators suggest that economic activity has continued to expand at a solid pace” and pointed out that, despite a slight rise, employment remains low. It also mentioned that “inflation has made progress toward the Committee’s 2 percent objective,” sending a generally upbeat message to an already energized market.

Two noteworthy developments took place last week. First, bitcoin formed a technical “cup and handle” pattern and appears to be breaking out (see the following chart), according to Bespoke Investment Group. This breakout coincides with Trump’s recent statements about cryptocurrencies.

Second, following a sharp rise in the volatility index (VIX) in early August, volatility had been increasing leading up to the election. But after the election, the VIX dropped 40% from its peak just before the election.

The drop in volatility shows that there was a lot of hedging leading up to the election that was driven by the U.S. political cycle. Until last Tuesday, heightened volatility could have been attributed to geopolitical events like the wars in Ukraine or Israel, or Chinese tensions with Taiwan, but it now appears that domestic uncertainty was the primary driver.

However, now that the election is over, will we stay at these levels? It appears the expectation is that volatility will remain at current levels possibly through year-end or until something unexpected happens.

Ultimately, with the election over and volatility at relatively low levels, our expectation, along with that of our Political Seasonality Index, is for a higher market from now until year-end.

Bonds

The 10-year Treasury dropped 8 basis points last week, from 4.39 to 4.31%, following the Federal Reserve’s anticipated cut in the federal funds rate. On Thursday, the Fed announced rates would decrease to the 4.50%–4.75% range. Despite recent economic improvements noted in the Fed’s press release, the CME FedWatch still projects a 66.8% likelihood of another 0.25% rate cut in December, which would bring the range down to 4.25%–4.50% by year-end.

While the economy appears to be moving in the Fed’s desired direction, there is no guarantee that this trend will continue or that inflation won’t pick up again. In the short term, the interest-bearing deposits and securities investors have flocked to, like money market mutual funds and CDs, will begin paying less. Investors may want to consider alternative sources of portfolio income.

Gold

Gold’s recent rally came to an end last week, following the Federal Reserve’s rate cut and President-elect Trump’s comments on bitcoin. By lending legitimacy to the cryptocurrency space, Trump took some of the wind out of gold’s sails and buoyed the digital asset space. Gold dipped 1.89% last week, closing at $2,684.77 per ounce. Despite this dip, the yellow metal remains up over 30% year to date.

Flexible Plan Investments (FPI) 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 80% long on Monday, dropped to 10% long on Wednesday, moved to 40% short on Thursday, and moved to 60% short on Friday. Our Political Seasonality Index started the week in its risk-on posture where it remained 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 60% long, reduced exposure to 40% on Wednesday’s close, and further reduced it to 20% long on Thursday where it ended the week. The Systematic Advantage (SA) strategy was 120% long all week. Our QFC Self-adjusting Trend Following (QSTF) strategy started the week in cash, moved to 100% long on Tuesday, went to cash on Wednesday, jumped to 200% long on Thursday, and went to cash on Friday where it ended the 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.

FPI’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 prices and a positive monthly change in GDP). 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.

Our S&P volatility regime is registering a High and Rising reading, which favors equities over gold and then bonds from an annualized return standpoint. The combination has occurred 23% of the time since 2003. It is a stage of high risk for both equities and gold.

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