Market insights and analysis

By Jerry Wagner

Market snapshot 

•  Stocks: The major indexes finished down last week, with the S&P 500 falling 1.33% ahead of election week. October broke a six-month positive streak, but historical data suggests this pattern often leads to market rallies. Earnings reports have been mixed, with 68% of companies beating EPS forecasts. Economic indicators revealed disappointing jobs data but positive GDP numbers, suggesting no immediate recession threat.

•  Bonds: Bond markets continue to struggle, with yields rising consistently since the Federal Reserve’s September rate decision. The longer-term bond ETF (TLT) has broken through its intermediate-term moving average support. High-yield bonds remain resilient, staying near cycle highs due to their correlation with still-strong stock market performance.

•  Gold: Gold experienced a slight pause last week, declining 0.38% to $2,754.60 amid election uncertainty. However, it remains a leading performer in 2024, with global demand increasing 5% in Q3 and exceeding $100 billion for the first time. Notably, gold has shown strength despite an appreciating dollar, which typically has an inverse relationship with gold.

•  Indicators: The technical indicators are mixed. Short-term indicators show bearish signals, while some price patterns suggest potential positive movement. The Market Regime Indicators suggest a Normal economic environment and a Low and Falling volatility regime, historically favorable conditions for various asset classes but particularly equities.

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The major stock market indexes finished down last week. The Dow Jones Industrial Average lost 0.15%, the S&P 500 Index also tumbled 1.33%, and the NASDAQ Composite shaved 1.5% off its value. The Russell 2000 small-capitalization index slipped 0.1%. The U.S. Aggregate Bond ETF (AGG) declined 0.6%, and the 20-year Treasury Bond ETF (TLT) fell 1.1%. The 10-year Treasury bond yield rose 13 basis points to 4.379%. Gold futures closed at $2,754.60, down $10.50 per ounce, or 0.38%. The U.S. trade-weighted dollar slipped 0.02%.

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 S&P 500, the world’s most benchmarked index, is at a critical short-term inflection point, entering election week just above its 50-day moving average. October marked the Index’s first negative month in the last six.

While that may sound negative, our friends at Sentimentrader.com report that October’s losses are a positive sign from a historical perspective. Since 1950, in 90% of the 31 times the market gained for five months and then dipped for one, stocks have posted positive returns three to six months later. Across all measured periods, from one week to 12 months following such occurrences, the Index has risen 70% to over 80% of the time.

Third-quarter earnings season is well underway. As The Bespoke Report recently related, “We’re now past the peak of another earnings season. … Of the 950 companies that have reported since the start of October, 68% have exceeded EPS [earnings-per-share] forecasts, while just 58% have topped sales forecasts. While the EPS beat rate has been five percentage points higher than the long-term average, the revenue beat rate has been slightly weaker than the long-term average (58% vs 59%).”

It was a heavy week for economic indicators. GDP (more on this later) and the Federal Reserve’s preferred inflation measure reported the most positive results, both mostly in line with expectations. However, employment data disappointed, with just 12,000 new jobs created versus the 100,000 expected. The ISM Manufacturing Survey was also weaker than expected and showed a surprising surge in the Prices Paid component. Although some of the business press blamed the poor jobs showing on the Boeing Strike and hurricane shutdowns, the report did not support those interpretations. Other employment indicators, including the Job Openings and Labor Turnover Survey (JOLTS), the ADP National Employment Report, jobless claims, and the Indeed Job Posting Index, have been slowing for months.

Despite last week’s disappointments, recent months have seen more economic surprises to the upside than the downside. A recession is not on the horizon yet.

Finally, the election will be over by the time you read this. The yard signs will be gone, fundraising texts and emails will have stopped, and campaign ads will no longer be running nonstop. And, maybe, just maybe, you may even know who the victor is and who will be taking on the enormous task of running this country and being the leader of the free world for the next four years.

Based on the polling, it seems inevitable that half of you will be disappointed with the results. While there may be some volatility in the market in the days ahead, experience suggests that it is just as likely to be upside as downside volatility. Remember 2016, when overnight stock prices plunged only to see a rally begin the next day? Mixing one’s election opinions with investment strategy has not proven wise in the past. Donald Trump was president for four years, and investors fared very well, just as they did during the four years Vice President Harris served with Joe Biden.

The bottom line is that the market looks solid in the intermediate term. Yet, volatility will likely stay high in the short term.

Bonds

Bonds continue to struggle, as yields have risen consistently since the Federal Reserve decided to lower rates in September. Once again, we learn that while the Federal Reserve can influence short-term rates, bond traders and economic reports can and do significantly impact the rates of longer-term fixed-income instruments.

The longer-term bond ETF (TLT) has broken through its intermediate-term moving average support. The Treasury bond yield has continued to soar since the Fed’s decision in September, breaking out above its short- and intermediate-term moving averages.

At the same time, the high-yield bond market has again demonstrated that it can be influenced by both stock and bond trends. With stocks still near their all-time highs (the NASDAQ reached a new peak last Monday), the high-yield corporate bond market has also remained near its cycle highs.

Gold

Gold’s headlong race higher paused last week as election uncertainty and the Fed’s likely decision to lower rates further this Wednesday drew nearer. Still, the yellow metal has shone throughout 2024 and led the pack of traditional portfolio asset classes.

As U.S. Global Investors reported, “Global gold demand swelled about 5% in the third quarter, setting a record for the period and lifting consumption above $100 billion for the first time, according to the World Gold Council. The increase—which saw volumes climb to 1,313 tons—was underpinned by more robust investment flows from the West, including more high-net-worth individuals, that helped offset waning appetite from Asia.”

As I previously mentioned, the preliminary Q3 GDP report, released Thursday, showed annualized growth of 2.8%, which was 0.1% below forecasts and represented a 0.2% slowdown from Q2. While GDP growth usually weighs on gold, our studies show that since 1972 (when gold’s price was deregulated), gold has been a top-performing asset class when GDP growth has been accompanied by inflation. Despite the Fed’s efforts, inflation is likely to remain, which is positive for gold.

Lastly, the U.S. dollar continues to strengthen. While the S&P usually rises with a soaring dollar, this is not usually the case for gold. Yet, gold has moved steadily higher despite the dollar’s appreciation, another sign of its strength in the present economic environment.

Flexible Plan Investments (FPI) is the subadvisor to the only U.S. gold mutual fund, The Gold Bullion Strategy Fund (QGLDX). Introduced 11 years ago, the fund is designed to track the daily price changes in the precious metal and provide more tax efficiency than its ETF counterpart, GLD.

The indicators

The very short-term technical indicators of future stock market price changes I watch are either bearish or about to turn in that direction. However, some price patterns suggest that the remainder of the week could be positive. The QFC S&P Pattern Recognition strategy currently has an 80% exposure to the S&P 500 Index. Last week, it was often inverse to the market and was a top performer, with a positive return in a down market.

Our QFC Political Seasonality Index (PSI) strategy has been in the stock market since its close on October 19. It returns to a brief defensive stance on November 15. November is usually a bullish month for stocks, marking the start of the traditional year-end rally and positive “November to May” seasonality for stocks. (The PSI calendar—with all of the 2024 daily signals—can be found post-login in our Weekly Performance Report section under the Domestic Tactical Equity category.)

FPI’s intermediate-term tactical equity strategies are a mixed bag. Classic continues 100% long equities. The Volatility Adjusted Nasdaq (VAN) strategy was 100% net long the NASDAQ 100 going into last week, increased exposure to 120% net long on Wednesday, and decreased exposure to 60% net long on Friday. The Systematic Advantage (SA) strategy was 120% net long throughout the week. Our QFC Self-Adjusting Trend Following (QSTF) strategy’s primary signal was at 200% net long going into last week, changed to 100% net long at Tuesday’s close, and changed to 0% on Thursday. On Election Day, it returned to a 100% investment position. Our new QFC Dynamic Trends strategy was fully invested in the Quantified STF Fund (QSTFX). VAN, SA, and QSTF can all employ leverage—hence, the investment positions may sometimes be more than 100%.

Our other new strategy, QFC Managed Futures, is 90% invested in our newest sub-advised fund, the Quantified Eckhardt Managed Futures Fund (QETCX). As of last Friday, QETCX was heavily trading interest rates and currencies, with just 19% allocated to equity indexes (with one-third of those positions being short foreign indexes). It’s quite a unique way to be invested going into the U.S. elections! That’s why our new strategy holding this fund should provide true diversification to a portfolio.

FPI’s Growth and Inflation measure, one of our Market Regime Indicators, shows that markets are in a Normal economic environment stage (inflation and GDP are growing).

Historically, a Normal environment has occurred 60% of the time since 2003. In a Normal climate, gold outperforms stocks and bonds on an annualized return basis, but it also carries the most downside risk. From a risk-adjusted perspective, Normal is one of the best stages for bonds, followed by gold and then stocks.

Our S&P volatility regime is registering a Low and Falling reading. This environment sees positive returns for all asset classes but at a below-average level. Still, it favors equities over gold and bonds from an annualized return standpoint. Volatility, of course, favors bonds. Stocks are the next best, followed by gold, which has had a high max drawdown during these periods (over 30%). The Low and Falling combination has occurred 37% of the time since 2003.