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

1st Quarter | 2024

Quarterly recap



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

Market Update 11/7/22

By Tim Hanna

The major U.S. stock market indexes were down last week. The S&P 500 decreased by 3.35%, the Dow Jones Industrial Average lost 1.40%, the NASDAQ Composite was down 5.65%, and the Russell 2000 small-capitalization index fell 2.55%. The 10-year Treasury bond yield rose 15 basis points to 4.16%, taking Treasury bonds lower for the week. Spot gold closed the week at $1,681.87, up 2.25%.


Equity markets finished the week lower as investors digested the Federal Reserve’s decision to raise the target range for the fed funds rate by 0.75% to 3.75%–4.00%.

October’s move up in stocks could be partially attributed to the notion that the Federal Reserve might soften its approach after last week’s meeting. But then investors were once again reminded that the Fed is prepared to raise rates higher and for longer than market participants may have expected, especially following October’s run-up.

Federal Reserve Chairman Powell maintained his stance that fighting inflation is the top priority even if the Fed’s restrictive policy results in a hard landing. Chairman Powell stated, “… It is very premature to be thinking about pausing. So people, when they hear lags, they think about a pause. It’s very premature, in my view, to think about or be talking about pausing our rate hike. We have a ways to go, our policy, we need ongoing rate hikes to get to that level of sufficiently restrictive. And we don’t, of course we don’t really know exactly where that is.”

Foreign central banks also continue to battle inflation. Last week, the Bank of England hiked rates by 75 basis points to 3.00%, the Norges Bank raised rates by 25 basis points to 2.50%, and the Reserve Bank of Australia increased rates by 25 basis points to 2.85%. European Central Bank (ECB) policymaker Joachim Nagel said the ECB also has a long way to go on hikes and that the central bank should start reducing its bond portfolio at the start of next year.

On the economic data front, the Institute for Supply Management (ISM) manufacturing purchasing managers index (PMI) came in at 50.2, slightly above the 50.0 forecast. ISM services PMI was 54.4, lower than the 55.5 expected. For both manufacturing and services PMI, readings above 50.0 indicate industry expansion while values below 50.0 indicate contraction. Unemployment claims were at 217,000, lower than the 220,000 forecast. Average hourly earnings rose 0.4% month over month compared to the 0.3% expected. Nonfarm employment change registered at 261,000, better than the 197,000 expected. The unemployment rate came in at 3.7%, right above the 3.6% forecast.

The S&P 500 Index traded below yearly lows set in June during the first half of October (the black horizontal line on the following chart) and then rallied to its 50-day moving average the second half of the month. The Index remains in its downward-sloping bear price channel, with bear market rallies unable to turn the longer-term trend positive. The upper trend line (the black negative-sloping line on the following chart) has remained in effect since the peak in January. Currently, price is trading around the middle of the channel and the S&P 500 is attempting to regain price action above the 50-day moving average. If successful, the next level of resistance would be at the 200-day moving average. The 200-day is a measure widely used by technicians to identify long-term trends and levels of support and resistance. Interestingly, October was the best monthly performance for the Dow Jones Industrial Average since 1976.

The S&P 500 Index has seen higher-than-average intraday swings this year as equity markets continue to see lower highs and lower lows in price. Intraday swings have been especially large during and after Federal Reserve meeting days, and last Wednesday (November 2) was no exception.

Bespoke Investment Group studied the timing of moves from Wednesday that showed a jump following the release of the Federal Open Market Committee (FOMC) statement and then subsequent sell-off as the news conference started and Chairman Powell began speaking. An AP report incorrectly quoted markets being up during his question, which Powell answered based on incorrect information. Markets sold off more than 2% after his answer. It’s clear that markets are listening to every word that comes out of Chairman Powell’s mouth—and, again, he hasn’t signaled anything in terms of cycle alterations, especially pausing.

The Federal Reserve appeared to be struck by how resilient the labor market has been. The unemployment rate is still near a 50-year low, and wage inflation is well above the level that would be consistent over time with 2.0% inflation. The employment report from October reflects a labor market that isn’t showing enough weakness yet for the Fed to be able to stop raising rates. Friday’s (November 4) numbers showed stronger growth in payrolls than expected but a slightly higher unemployment rate. Bespoke noted that full-time job creation ended in the first quarter of this year, with all job gains since then coming from workers who are part-time for noneconomic reasons.

Inflation data will be released this Thursday (November 10). Economists expect headline to run at around 8% annualized and core to come in around 6%. If actual is close to estimates, this would not represent any material slowing of inflation pressure. The Fed has reiterated that it wants a response in the inflation data, not just in one month’s print, before slowing its cycle.

Energy prices are likely to weigh on headline inflation. It appears that headline consumer price index (CPI) expectations could be too aggressive given recent drops in natural gas prices and continued drops in gasoline prices.

Whether this bear market rally is the one that reverses the longer-term trend or price rolls over in its bear channel to new lows, it’s more important than ever to invest in dynamically risk-managed strategies that are able to respond to changing market conditions. We’ve seen this in real time within a number of our momentum-based strategies as they’ve moved into more risk-on positioning over the past few weeks.

If prices continue higher with low volatility, systematic trend-following algorithms are designed to recognize the price momentum and participate in a risk-on fashion. If volatility resurfaces and prices turn south, systematic momentum strategies are designed to identify the change and move to more defensive positioning.

The following chart shows the year-to-date performance of the Quantified Managed Income Fund (QBDSX, -1.7%) compared to the iShares Core US Aggregate Bond ETF (AGG, -17.3%). The Quantified Managed Income Fund is an actively managed income fund that can seek various income classes as well as the safety of cash when market exposure is undesirable. The Fund is a key defensive component in several actively managed strategies at Flexible Plan Investments.


The yield on the 10-year Treasury rose 15 basis points, ending last week at 4.16% as the bond market continues to battle with a long-term trend of rising interest rates. Following brief trading activity below its 50-day moving average (black vertical line on the following chart), rates have been on a sharp rise with almost no relief.

The major catalyst for the rise last week was the Federal Reserve’s continued focus on fighting inflation by raising interest rates, possibly longer than market participants had expected in October. Investors continue to fear the ramifications of such an unprecedented rate-hike cycle. Last week, the two-year Treasury yield traded north of 4.70%, levels not seen since 2007.

T. Rowe Price traders reported, “Early in the week, investment-grade corporate bonds benefited from hopes for a dovish pivot by the Fed. … Bonds in the banking and automotive sectors outperformed, and demand for longer-maturity debt was strong. However, investment-grade corporates traded lower after the FOMC meeting. High yield corporate bonds also fell after the Fed policy meeting, with bonds in the media, telecommunications, and mining sectors declining more than the broad high yield market.”


Gold set a new 52-week low on Thursday (November 3) yet gained 2.25% for the week. Most of those gains come from Friday’s pop. The yellow metal is currently trading at its 50-day moving average and downward-sloping trend-line resistance following brief trading activity at yearly lows. The early July sell-off resulted in a death cross (when the 50-day moving average crosses below the 200-day moving average) that continues to widen as the yellow metal searches for a bottom. Since April, the majority of trading activity has been below its 50-day moving average, with tests of the 50-day experiencing significant resistance.

Year to date, the U.S. dollar’s strength (the purple line in the following chart) has made it difficult for gold to capture any significant upside other than during short-term retracements that have consistently rolled over to lower lows. A strong dollar is a restraint on global liquidity and a headwind for inflation in the U.S. In general, a stronger dollar lowers the price of imports. The U.S. dollar and other non-equity or bond exposures are available asset classes for consideration within certain strategies at Flexible Plan Investments.

While the fundamental case for gold in 2022 was strong as geopolitical tensions, recession fears, and the impact of Fed rate hikes held center stage, the technicals have not resembled that negative backdrop. Gold may see some upward movement due to mean reversion in the short term, but continued strength in the U.S. dollar would make any major trend reversal in gold unlikely this year.

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

The indicators

The very short-term-oriented QFC S&P Pattern Recognition strategy started the week with 60% long exposure. Exposure changed to 70% long at Tuesday’s close, 150% long at Wednesday’s close, 190% long at Thursday’s close, and 40% long at Friday’s close. Our QFC Political Seasonality Index favored stocks after Monday last week. It went back to cash at the close on Friday but will return to stocks briefly on the close on November 8.  Thereafter it will stay in stocks until the 11th when it returns to cash. (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 was 40% short the NASDAQ throughout last week. The Systematic Advantage (SA) strategy is 30% exposed to the S&P 500. Our QFC Self-adjusting Trend Following (QSTF) strategy was 100% short throughout last week. VAN, SA, and QSTF can all employ leverage—hence the investment positions may at times be more than 100%.

Our Classic model moved long into stocks at Tuesday’s (November 1) close 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 remain in a Normal economic environment stage (meaning a positive monthly change in the inflation rate and 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 Falling reading, which favors gold over bonds and then stocks from an annualized return standpoint. The combination has occurred 13% of the time since 2003. It is a stage of higher returns and lower volatility for bonds relative to the other volatility regimes.

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