Market insights and analysis

By Will Hubbard

Market snapshot

•  Stocks rallied through the short holiday week.

•  Bond yields dropped and prices rose, showing the first real signs of life following the September rate cut.

•  Gold dipped but remains close to all-time highs.

•  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 stocks over gold, then bonds.

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Markets inched higher during the short holiday week. The S&P 500 rose 1.08%, the NASDAQ increased by 1.14%, and the Dow Jones Industrial Average was up 1.44%. The 10-year Treasury bond yield fell from 4.40% to 4.17%. Gold continued to struggle, dropping 2.69% to close at $2,643.15.

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 shortened Thanksgiving holiday week brought its share of highlights. Not only did the Detroit Lions hold on to their first-place spot in the NFC with a 23-20 win over the Chicago Bears, but all of the major market indexes managed to post modest gains. On the economic front, the news was light and generally unremarkable.

The Conference Board Consumer Confidence Index came in at 111.7, slightly below the forecast of 111.8 but up from October’s reading of 109.6. The increase was driven largely by optimism about the labor market. Dana Peterson, chief economist at The Conference Board, noted, “Compared to October, consumers were also substantially more optimistic about future job availability. …”

The Federal Open Market Committee (FOMC) released the minutes from its early November meeting, during which it cut rates again. The minutes revealed that officials are leaning toward a more gradual approach to future rate cuts, indicating that the economy may not be ready for back-to-back reductions.

The second estimate of third-quarter real gross domestic product (GDP) came in at 2.8%, matching expectations. The number is the quarterly figure, reported in an annualized format. The Bureau of Economic Analysis attributed the increase primarily to higher consumer spending, federal government spending, and nonresidential fixed investment.

Core personal consumption expenditures (PCE) inflation was unchanged from the prior month at 0.3%, aligning with expectations. Unemployment claims came in at 213,000, slightly below the expected 215,000.

We’re also looking at what factors can continue to drive the market higher. For instance, sentiment seems to be very strong. Bespoke Investment Group reported that its net number of economic indicators accelerating year over year hit +17 in October (data available through November), the highest since 2021.

Bespoke noted that housing was the only indicator with more negative than positive momentum, potentially due to weather-related factors like hurricanes.

As we move into the end of the year, we anticipate more bullish activity, including the post-election relief rally and the potential “Santa rally.” While these trends align with the current optimism among investors, we remain vigilant for potential headwinds, including challenges tied to the incoming administration.

In his December 2 Substack post, “Unlocking the Secrets of American Corporate Profitability: Why Profit Margins Soar” from Stocks, Quants, and Global Shocks, Damien Cleusix explored some recent drivers of U.S. stock market profitability. He highlighted the Kalecki-Levy profit equation, which breaks corporate profitability into five components: net investment (+), dividends (+), household savings (-), government savings (-), and (-) foreign savings. This framework shows that corporate profitability is a combination of investment and dividends, minus savings. Any time a potential consumer saves, it reduces available profitability.

Cleusix noted that corporate profitability is on the rise, but it comes at a time when net investment is down, dividends are increasing, and savings are declining.

Household savings have dropped sharply, from the COVID-era peak of around 20% to below 5%, which benefits corporations since people are spending. Meanwhile, both government and foreign savings have been trending negative, indicating ongoing deficit spending. The deficit spending is getting to be problematic, as it indicates that the government is becoming a larger and more active force in headline economic growth.

Shifting the growth in profitability away from federal and foreign deficit spending would be ideal, but it might require a large mindset shift and pretty tough austerity measures. An economy slowing due to reduced government expenditures could lead to a recession. Such a downturn could result in reduced business and household spending and increased savings, creating further challenges.

The bottom line is that economic data is the strongest it has been in three years. For continued progress, both business and government spending must continue.

At Flexible Plan Investments (FPI), our models are designed to adapt to changing conditions and course-correct as major economic shifts occur.

Bonds

The 10-year U.S. Treasury yield dropped 23 basis points last week, from 4.40% to 4.17%, showing the first real signs of life following the Federal Reserve’s rate cut in September.

As Daniel Poppe noted last week, investors have strongly favored risk-on assets since the rate cut, driven by expectations of policies favoring speculators over savers. This sentiment appears to have been reinforced by Donald Trump’s reelection, with markets anticipating a continuation of pro-growth, market-friendly policies. Public filings also indicate that President-elect Trump holds between $1 and $5 million in Ethereum, and his campaign accepts cryptocurrency contributions, a move that highlights his pro-risk-asset behavior.

This preference for risk assets may explain why bonds have faced headwinds in recent months. The following chart shows the percentage change in the U.S. 10-year Treasury (orange) and the BondBloxx 10-year target duration ETF (blue). The September rate cut prompted a brief rally (as seen in the blue peak), but bonds remained under pressure until the recent drop in yields.

Bonds have been out of favor for some time. Even with higher rates, investors seem to be expecting that double-digit equity market returns will continue with President-elect Trump in office.

Gold

Gold has had a strong year, reaching a peak of nearly 36% year-to-date gains before cooling off. It ended last week up 28.12% for the year, despite a nearly 3% decline for the week.

Gold remains a historically uncorrelated diversifier within a portfolio. When rebalanced appropriately, it can contribute positively to risk-adjusted returns.

FPI 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.

The indicators

The QFC S&P Pattern Recognition strategy started last week 40% long and jumped to 80% long on Friday. Our QFC Political Seasonality Index started the week in its risk-on posture and moved to its defensive mode on Wednesday’s close. (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 and ended the week 100% long. The Systematic Advantage (SA) strategy started last week invested 150% long, shifted to 120% long on Wednesday’s close, and remained there for the rest of the week. Our QFC Self-adjusting Trend Following (QSTF) strategy was 200% long all week. VAN, SA, and QSTF can all employ leverage—hence the investment positions may at times be more than 100%.

Our Classic model was long risk-on positioning all 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 more restrictive platforms and can take up to one month to generate a new signal.

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

Our S&P volatility regime is registering a High and Rising reading, which favors stocks 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 high risk for both equities and gold.