Market insights and analysis

By Jerry Wagner

Market snapshot 

•  Stocks: Major indexes posted mild gains last week, with the S&P 500 up 0.7%, as the market enters a critical year-end rally period amid mixed signals and high valuations.

•  Bonds: Bond prices fell again last week as yields continued to rise, with the 10-year Treasury yield breaking above key moving averages.

•  Gold: Gold prices continued to decline last week, extending a post-election downtrend. A strengthening U.S. dollar weighed on the metal, which has performed strongly in 2024 despite its recent pullback.

•  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 High and Falling volatility regime, historically favorable conditions for various asset classes but particularly gold and bonds.

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This past week saw mild gains for the major stock market indexes. The S&P 500 rose 0.7%, the NASDAQ climbed 0.8%, and the Russell 2000 gained 0.1%. Bonds struggled. The U.S. Aggregate Bond ETF (AGG) fell 0.3%, and the 20-year Treasury Bond ETF (TLT) dropped 1.4%. Gold futures closed at $2,621.40, down $1.51 per ounce, or 0.06%. 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.

Note: Many of the Quantified Funds paid a dividend on December 27, 2024. Be aware that many stock reporting services, such as Yahoo Finance, do not reflect stock prices inclusive of dividend changes. This can create the appearance of a sharp price drop and may result in year-to-date returns being underreported from the day that a dividend is paid, as the then current share price is reduced by the dividend amount. For funds that declare dividends and are held on clients’ behalf in Flexible Plan Investments (FPI) strategies, dividends are immediately reinvested. So while the share price declines, the account is credited with the dividend amount. As a result, the change in account value reflects only the market movement on that particular day.

Stocks

The S&P 500, the world’s most benchmarked index, is at a critical short-term inflection point, entering what is usually the year-end rally period. It has once again dropped below its 50-day moving average. This can lead to a minor correction so long as stocks stay above their longer-term average.

On Friday, the stock market experienced a rare 1%-plus decline during Christmas week—the 13th occurrence since 1980. Historically, when this happens, stocks have risen 83% of the time during the next five days (the remainder of the Santa Claus rally period).

However, seasonality has been inconsistent as a predictive tool this year. While it accurately called the positive first quarter, it badly missed in April, August to October, and December (so far). Geopolitical events—including two wars, a volatile presidential election, and the Federal Reserve’s shifting stance on interest rates—have disrupted the market’s usual patterns.

These events have also left the market badly oversold and primed for a potential rally. Yet, high stock valuations, low dividend yields, and weak market internals (such as declining breadth and the percentage of stocks making new highs and exceeding their moving averages) have frightened many traders away from stocks.

Economic news has been sparse, but last Thursday brought some good news. The Conference Board’s Leading Economic Index rose for the first time in three months. Historically, this has been a good buy signal for equities, with prices rising more than 80% over most time frames of up to 1 year later, accompanied by fairly moderate drawdowns.

High valuations in the U.S. stock market may be keeping a lid on further moves in the near term. The numbers, including trailing price-to-earnings (P/E) ratios in the 98th percentile, indicate that we are near historic heights. This year’s gains have been largely driven by the “Magnificent Seven” stocks: Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla. They accounted for more than 50% of the S&P 500’s gains this year and a third of its capitalization.

The S&P ended the year with the highest P/E ratio in the world and the second-lowest dividend yield. This may be a good time to consider diversifying your portfolio with global stocks. FPI offers global stock and bond strategies using either mutual funds or ETFs, including ones focused on emerging markets. These strategies are dynamically managed to seek profits when these asset classes rise, while aiming to provide downside protection during market declines.

We’re able to do this by using momentum investing as our primary strategy with these types of assets. Momentum has consistently proven to be one of the best factor investing methodologies over the years, as demonstrated once again this year in the following chart.

The bottom line: It’s a mixed picture. While stocks remain in a long-term uptrend, 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. Every time the Fed speaks, bond prices have tumbled as yields go up, as shown in the following chart.

While the Fed has lowered the short-duration fed funds rate with two rate cuts totaling 75 basis points, it has simultaneously reduced liquidity in the bond market through quantitative tightening and reverse repos, which has pushed bond prices higher. The Fed continues to speak from both sides of its mouth, and bond traders know it.

The longer-term bond ETF (TLT) has broken through its intermediate-term moving average support, while the 10-year Treasury bond yield has climbed above its short- and intermediate-term moving averages.

Meanwhile, the high-yield bond market has again demonstrated that it can be influenced by both stock and bond trends. While these markets often diverge, both have recently moved lower, with high-yield bonds following suit.

Gold

Gold has moved steadily lower since the November election, as the market appears unfazed by media speculation that President-elect Trump’s policies will result in higher inflation in 2025. December continued this downward trend, defying the usual seasonal strength for gold during this period. Despite this recent pullback, gold has performed strongly throughout 2024, outpacing traditional portfolio asset classes.

At the same time, the U.S. dollar continues to strengthen, gaining momentum following the election, with only a brief pause in late November. Historically, a rising dollar has tended to weigh on gold prices, and that relationship is playing out again as the year draws to a close.

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 mixed. Recent weakness has most of the remaining bullish indicators hovering near their sell levels, though some price patterns suggest that the remainder of the week could be positive. Supporting this outlook, the QFC S&P Pattern Recognition strategy currently holds 200% exposure to the S&P 500 Index.

Our QFC Political Seasonality Index (PSI) strategy has been in the stock market since its close on December 16. (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. The 2025 PSI predictions will be posted in this spot next week.)

FPI’s intermediate-term tactical equity strategies are a mixed bag. Classic continues 100% long equities (although just one signal away from a sell). The Volatility Adjusted NASDAQ (VAN) strategy was 40% net long the NASDAQ 100 on Friday. The Systematic Advantage (SA) strategy finished the week 90% net long. Our QFC Self-adjusting Trend Following (QSTF) strategy was defensively positioned Monday through Wednesday last week, moved to a 100% net long position Thursday through Monday, and moved back to cash on Monday’s (December 30) close. Our newest strategy, QFC Dynamic Trends (DT), was 100% invested in the Quantified STF Fund (QSTFX) as of December 30, 2024. VAN, SA, DT, and QSTF can employ leverage, so the investment positions may exceed 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 December 30, QETCX was solely trading traditional commodities, long and short, with 0% allocated to equity, currency, or bond rate indexes. Daily asset class holdings for QETCX since inception can be viewed here.

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 High and Falling reading. This environment favors gold over equities and bonds from an annualized return standpoint. Volatility, of course, favors bonds. Gold is the next best, followed by stocks. The High and Falling combination has occurred 13% of the time since 2003.