Market insights and analysis

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

4th Quarter | 2023

Quarterly recap

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

By Jason Teed

Market snapshot

•  Stocks: The major U.S. stock market indexes continued to rise last week on the Fed's signal of potential rate cuts in 2024 and increased investor confidence. Sectors such as Energy showed weakness, but the recent market rally is widespread overall.

•  Bonds: The yield curve fell but became even more inverted. A steep inversion often suggests an upcoming recession, but market participants appear to be expecting a soft landing for the economy. 

•  Gold:  Gold rose 0.75% 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.

•  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 Low and Falling, which favors stocks over gold and then bonds.

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The major U.S. stock market indexes continued to rise last week, driven by a combination of positive factors and investor confidence. The Russell 2000 small-capitalization index rose 5.55%, the Dow Jones Industrial Average gained 2.92%, the NASDAQ Composite increased by 2.85%, and the S&P 500 was up 2.49%.

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 Federal Reserve recently signaled a potential shift toward rate cuts. This announcement came only weeks after the Fed said it had no intentions to do so, a development often described as “the Fed blinking.” This strategic pivot suggests a broader change in the economic environment.

Against this backdrop, the stock market is showing signs of investor confidence. The S&P total return index set records, and the Dow Jones Industrial Average crossed the 37,000 threshold for the first time. However, the Dow’s ascent to 37,000 took over two years. This slow climb shows that the market, despite reaching peaks, has also experienced periods of stagnation.

The recent rally in stock prices isn’t confined to just a few sectors; it’s widespread. More than 85% of S&P 500 stocks are now trading above their 50-day moving averages, an indicator of market strength. However, not all of the news is good. The manufacturing sector, which has been in a slump, needs a boost for the market rally to continue into 2024. And the Energy sector has been particularly weak in recent months. But this could be good for the overall economy: lower energy prices can lead to lower inflation readings.

With the Fed considering lowering interest rates, people are looking at economic data in a new way. In this new era, good economic news might be more warmly received. This is different from before, when good news often hurt the markets.

The Federal Reserve’s decision to keep rates unchanged and announce that it may lower them by half a percent in 2024 was a big deal. The markets responded with notable gains in the S&P 500, NASDAQ, and long-term Treasurys. This reaction was somewhat unusual: It added momentum to an already rallying market, rather than reversing a downward trend.

The Fed’s acknowledgment that interest rates are nearing the peak in the rate cycle and its discussion about rate cuts signal an end to the tightening cycle. Fed Chair Jerome Powell’s comments on making “real progress” on inflation and the possibility of easing policy before reaching the 2% core inflation target marked a significant shift in the Fed’s approach.

In light of these developments, the better-than-expected retail sales data for November provides a glimmer of hope. This strong performance, particularly in areas excluding autos and gas, shows the consumer market is holding up well, which is crucial for the economy’s well-being. These results suggest that the Federal Reserve might successfully achieve a gradual and controlled economic slowdown without causing a recession, often referred to as a “soft landing.”

Bonds

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

Typically, a significant inversion in the yield curve suggests an upcoming market downturn, often a recession. However, despite this steep inversion, market participants appear to be expecting a soft landing.

Gold

Gold rose 0.75% 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 up for the week—though their gains were not due to safe-haven behavior.

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 Political Seasonality Index was out of the market 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 began the week slightly exposed to the market and ended it with slightly inverse positions, expecting the strong market performance to wane.

Our intermediate-term tactical strategies are mixed in exposure. The Volatility Adjusted NASDAQ (VAN) strategy began the week 140% long, changing to 120% long on Thursday’s close. The QFC Self-adjusting Trend Following strategy was 2X long for the week. The Systematic Advantage (SA) strategy began the week 120% long, changed to 60% long on Monday’s close, and changed to 30% long on Thursday’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 Low and Falling reading. This environment favors equity over gold and then bonds from an annualized return standpoint. The combination has occurred 37% of the time since 2003. It is a stage of moderate returns and low volatility for all three asset classes.



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