Market insights and analysis

By Tim Hanna

Market snapshot

•  Stocks: The S&P 500 reached a new high on Monday before consolidating the rest of the week and ending lower, mostly driven by expectations surrounding the policies of the incoming administration.

•  Bonds: The 10-year Treasury rose 13 basis points to 4.44%, and price action is now above the 50-day moving average. Federal Reserve Chair Jerome Powell remarked that “the economy is not sending any signals that we need to be in a hurry to lower rates.”

•  Gold: Gold fell 4.53%, continuing its pullback since the late-October peak and testing the upper end of its bullish price channel breakout.

•  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 equities over gold and then bonds from an annualized return standpoint.

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The major U.S. stock market indexes were down last week. The S&P 500 decreased by 2.05%, the NASDAQ Composite was down 3.13%, the Dow Jones Industrial Average lost 1.17%, and the Russell 2000 small-capitalization index fell 3.96%. The 10-year Treasury bond yield rose 13 basis points to 4.44%, taking Treasury bonds lower for the week. Spot gold closed the week at $2,563.25, down 4.53%.

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, the S&P 500 Index reached a new high on Monday before consolidating and ending the week lower. Despite the pullback, the Index remains 1.5% higher since the presidential election, well above its 200-day moving average, and around 2% above its 50-day moving average. Market dynamics were shaped by economic indicators, corporate earnings reports, and expectations surrounding the incoming administration’s policies.

The S&P 500’s retreat gave back some gains made from the post-election “Trump Trade.” The wide dispersion of sector returns shed some light on potential policy implications for corporate earnings. The Financials and Energy sectors benefited from hopes of deregulation and merger approvals, while the Health Care sector saw significant selling following news that Robert F. Kennedy Jr., a vaccine skeptic and critic of the pharmaceutical industry and existing public health programs, would be nominated to lead the Department of Health and Human Services (HHS).

The tech-heavy NASDAQ 100 fell each day last week, declining over 3% for the week. According to Bespoke Investment Group, such weeklong declines have occurred 25 times since 1985 (see the following chart), with the most recent before last week occurring during President Trump’s first term in early August 2019. Across all occurrences, the median decline has been 4.14%.

Forward performance of the Index during these scenarios has leaned positive with consistent gains. Forward one month through one year has seen the Index trade higher over 70% of the time. Average gains are not significantly different from normal when looking one, three, and six months forward. One year forward, the data suggests upward movement with a median gain slightly higher than the median during all periods.

In addition to taking control of the Senate and the presidency, it was confirmed on Thursday that Republicans would retain the House as well. Currently, the Democrats control the presidency and Senate, and the Republicans control the House. Historically, this combination has resulted in positive market performance all three times it has occurred (admittedly, a small sample size), with the Dow Jones Industrial Average having an annualized return of 12.47%. Since 1901, there have been 14 sessions of Congress under full Republican control, during which the Dow saw gains 79% of the time with an annualized return of 7.94%. As the following table shows, this combination had the third-best average performance of the possible combinations.

Although the longer-term studies above lean in favor of the bulls, market internals are flashing warning signs. While the S&P 500 hit a new high last week, its cumulative advance-decline line failed to do so and remains below its October high. More notably, there has been a reversal in the percentage of individual stocks hitting their own 52-week highs. On Friday, more stocks hit 52-week lows than 52-week highs. The following chart on the bottom right shows that the net new highs reading hit its lowest level in the last year, despite the broader S&P 500 Index remaining above its 50-day moving average.

While it’s impossible to predict which direction markets will trend over the coming months and next presidential term, real-time response to trend changes is critical to meeting one’s long-term investment goals. This uncertainty underscores the importance of incorporating dynamically risk-managed investment strategies that can adapt to changing market conditions.

When markets exhibit positive momentum, many of our momentum-based strategies adjust to a more risk-on positioning. If prices continue to rise, systematic trend-following algorithms are designed to identify and participate in the upward price momentum. Conversely, if volatility arises and prices decline, systematic momentum strategies are designed to identify the change and move to more defensive positioning. Mean-reversion strategies attempt to recognize and navigate sideways market conditions, offering an uncorrelated complement to momentum-based programs, which face challenges during trend-reversal inflection points.

An example of one of our systematic momentum methodologies is the Quantified STF Fund. The Fund dynamically trades the NASDAQ 100, identifying long-term trends within the market to determine its signal, ranging from 1X inverse to 2X long, with the flexibility to adjust its position daily. The Fund is used within some of our QFC strategies, including our QFC Self-adjusting Trend Following strategy, and can be used in our turnkey solutions. The following chart shows the one-year performance of the Quantified STF Fund (QSTFX, 36.44%) compared to the Invesco QQQ Trust (QQQ, 29.74%).

Bonds

Last week, the yield on the 10-year Treasury rose 13 basis points, ending at 4.44%. Following the initial post-election rally in stocks, investors shifted their focus back toward the Federal Reserve, interest rates, and inflation.

Federal Reserve Chair Jerome Powell remarked last week that “the economy is not sending any signals that we need to be in a hurry to lower rates.” The CME FedWatch Tool showed a decline in expectations for a quarter-point cut in December, dropping from 64.6% to 58.4%.

Against investor expectations, the 10-year Treasury rate has risen sharply since the September rate cut. The 10-year Treasury rate is now above its 50-day moving average and nearing the top of the sideways channel that began in the latter half of 2022, a shift from the late-April peak.

T. Rowe Price traders noted, “Issuance was heavy in the investment-grade corporate bond market, and spreads drifted wider as investors focused on the new supply. Likewise, the high yield market was marginally lower due to the move in rates and heavier issuance in the primary space. … The bank loan market was active with a high volume of new deals as issuers sought to take advantage of the market’s recent strength.”

Gold

Gold fell 4.53% last week, continuing its pullback since the late-October peak. The yellow metal is trading around the upper end of its bullish channel price structure (black lines on the following chart). The “golden cross” (when the 50-day moving average crosses above the 200-day moving average), seen by technicians as a longer-term trend signal to the upside, remains in play, but the 50-day moving average is showing signs of rolling over now that price is trading in between the two moving averages.

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 in a more tax-efficient manner than its ETF counterpart, GLD. The Fund is used within some of our QFC strategies (such as our QFC TVA Gold) and can be used within our more customizable turnkey solutions, such as our QFC Multi-Strategy Core and Explore offerings. In addition to alternative and bond strategies, our QFC Multi-Strategy Explore: Low Correlation strategy is currently allocated to QFC TVA Gold.

The indicators

The very short-term-oriented QFC S&P Pattern Recognition strategy started last week with 60% short exposure. Exposure changed to 20% long at Thursday’s close and to 120% long at Friday’s close. Our QFC Political Seasonality Index favored stocks throughout last 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 last week with 20% long exposure to the NASDAQ and increased exposure to 60% long at Friday’s close. The Systematic Advantage (SA) strategy is 120% exposed to the S&P 500. Our QFC Self-adjusting Trend Following (QSTF) strategy signal started last week with 0% exposure, changed to 200% long at Monday’s close, changed to 100% long at Tuesday’s close, and changed back to 0% exposure at Friday’s close. VAN, SA, and QSTF can all employ leverage—hence the investment positions may at times be more than 100%.

Our Classic model remained in stocks throughout 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 platforms that are more restrictive and can take up to one month to generate a new signal.

Flexible Plan’s Growth and Inflation measure is one of our Market Regime Indicators. It shows that we 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.

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 lower returns and higher volatility for all three major asset classes.