Market insights and analysis

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

4th Quarter | 2023

Quarterly recap

News

rss

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

By Jason Teed

Market snapshot 

•  The major U.S. stock market indexes were up last week, with technology, health care, and consumer discretionary stocks showing strong gains. 

•  The yield curve fell but became even more inverted, reflecting a nuanced economic shift and the anticipation of potentially lower future interest rates. 

•  Gold rose 2.09% last week, likely due to the decrease in interest rates. Falling interest rates make the metal more attractive than fixed-income securities. 

•  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 historically one of the best stages for stocks, with limited downside. The S&P volatility regime is registering a High and Rising reading, which favors equities over gold and then bonds.

***

The major U.S. stock market indexes were up last week due to a confluence of positive factors and investor confidence. The Russell 2000 small-capitalization index rose 5.42%, the NASDAQ Composite increased by 2.37%, the S&P 500 Index was up by 2.24%, and the Dow Jones Industrial Average gained 1.94%.

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 market experienced significant movements in key sectors last week. Technology stocks, often seen as barometers of growth, saw a strong rebound. Meanwhile, health-care stocks advanced due to positive earnings reports and favorable regulatory developments. Consumer discretionary stocks were buoyed by encouraging retail sales data, which suggests a resilient consumer spending environment.

Although consumer sales were expected to fall, the decrease was less than anticipated, hinting at better-than-expected consumer confidence in the U.S. Additionally, consumer sales data for September was adjusted upward. While these changes may seem minor, they have the potential to impact future economic expectations. Surprises suggest that aspects of the economy that could have future positive effects may have been overlooked.

Corporate earnings also played a pivotal role last week. Many earnings reports surpassed expectations, providing a window into the health of various industries and the broader economy. Of the S&P 1500 companies that reported last week, 77% had earnings surprises. These strong earnings reports not only reflect the robustness of individual companies, but they also have the potential to improve market sentiment, fueling stock market gains.

Interest rates, always an important factor for equities, remained a central theme last week. The month-over-month consumer price index (CPI) data for October was unchanged. Signs that the Federal Reserve might take a less aggressive stance on interest rates in light of easing inflation gave the stock market a more stable footing. Interest rates greatly affect borrowing costs and investment returns, making them a key determinant of stock market trajectories. This may have been a factor in the exceptional performance of the Real Estate sector, which was the top-performing equity industry last week, gaining 4.46%.

Global economic developments also played a significant role last week. U.S. stocks were influenced by both domestic economic factors and global events, including geopolitical tensions and international trade dynamics. Positive trends in global markets, including those in Europe and Asia, offered a supportive environment for U.S. equities. The EAFE Index, which represents developed international markets, rose 4.5% last week.

Despite mostly good news on the economic front, consumer sentiment hit a six-month low. This suggests that, despite encouraging data, a degree of caution may be prudent in the coming months.

Bonds

In the bond market, the narrative was more complex. While the yield curve fell, the inversion steepened, indicating a nuanced economic transition.

The bond market often reflects broader economic sentiments, particularly regarding inflation and interest-rate expectations. The mixed trends in bond yields last week could be attributed to the changing inflation landscape. As expectations of inflation moderate, there's a possibility of less aggressive rate hikes by the Federal Reserve, which generally benefits bond prices. While interest rates are expected to remain stable in the short term, the market seems to anticipate that future rates might not need to be as high as originally expected.

Gold

Gold rose 2.09% last week, likely due to the decrease in interest rates. Falling interest rates make the metal more attractive than fixed-income securities, which afford less income as rates fall.

Although gold has historically been linked to inflation over the long term, interest rates exert a more immediate influence on gold prices. This influence often supersedes gold's tendency to decrease (or at least not increase) in value in a low inflation environment.

Non-currency safe-haven assets, such as long-term Treasurys, were down for the week.

Flexible Plan Investments (FPI) is the subadvisor to the only U.S. gold mutual fund, The Gold Bullion Strategy Fund (QGLDX), designed at its introduction 10 years ago to track the daily price changes in the precious metal.

The indicators

Our QFC Political Seasonality Index was fully invested last week. (Our QFC Political Seasonality Index is available post-login in our Weekly Performance Report section under the Domestic Tactical Equity category.) The equity exposure of the very short-term-oriented QFC S&P Pattern Recognition strategy varied during the week. However, it maintained a completely inverse position throughout the week, aiming to capitalize on a potential mean-reversion trade that has not yet occurred.

Our intermediate-term tactical strategies are mixed in exposure. The Volatility Adjusted NASDAQ (VAN) strategy began last week 100% long, changing to 80% long on Wednesday’s close. The QFC Self-Adjusting Trend Following strategy was 2X long for the week. The Systematic Advantage (SA) strategy began last week out of the market. It changed to 60% long on Monday’s close, 30% on Tuesday’s close, and 60% on Wednesday’s close.

Our Classic strategy was fully invested for the week. The strategy can trade as frequently as weekly, but signals are generally longer term in nature.

Flexible Plan’s Growth and Inflation measure, one of our Market Regime Indicators, currently indicates a Normal economic environment stage (meaning an increasing inflation rate and positive quarterly GDP reading). Historically, a Normal environment has occurred 60% of the time since 2003 and has been a positive regime state for equities, gold, and bonds. Gold tends to outpace equities on an annualized return basis in a Normal environment, albeit with higher risk, while bond returns tend to be positive but fairly low.

Our S&P volatility regime is registering a High and Rising reading. This environment favors equity 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 relatively low returns for all three asset classes.



Comments are closed.