Market insights and analysis

By Tim Hanna

Market snapshot

•  Stocks: Equity indexes experienced mixed performance last week, but the S&P 500 Index, Dow Jones Industrial Average, and the NASDAQ Composite all hit record highs.

•  Bonds: The yield on the 10-year Treasury fell by 2 basis points to 4.15%. Rates continued to pull back last week from their mid-November peak following the Fed’s 50-basis-point rate cut in September.

•  Gold: Gold fell 0.37%, attempting to stabilize following its pullback from the late-October peak. The metal is now trading right below its 50-day moving average.

•  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 were mixed last week. The S&P 500 increased by 0.99%, the NASDAQ Composite was up 3.36%, the Dow Jones Industrial Average lost 0.53%, and the Russell 2000 small-capitalization index fell 1.03%. The 10-year Treasury bond yield fell 2 basis points to 4.15%, taking Treasury bonds higher for the week. Spot gold closed the week at $2,633.37, down 0.37%.

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

Last week, equity indexes experienced mixed performance. The S&P 500 Index, Dow Jones Industrial Average, and NASDAQ Composite all reached record highs, while the Russell 2000 Index declined after two weeks of outperforming larger-cap indexes. Growth shares outpaced value stocks by 5.53%, the largest weekly margin since March 2023.

 

 

Sector performance varied widely. The Consumer Discretionary, Communication Services, and Information Technology sectors each gained over 3%, while value-oriented sectors like Energy, Utilities, and Materials fell more than 3%. Although French and South Korean politics dominated geopolitical headlines the first half of last week, their impact on U.S. markets was minimal.

Last week also marked two years since OpenAI’s release of ChatGPT and the start of the artificial intelligence (AI) boom in the equity market and broader economy. Bespoke Investment Group found that since the day before the release of ChatGPT, the combined market cap of their Bespoke AI Basket has risen $13.1 trillion, or 131%. To put that into perspective, that accounts for almost 50% of the total increase in global market cap over the same period.

Only including the 50 stocks in the Bespoke AI Basket, AI names are approximately one-fifth of the global equity market cap.

AI stocks are seeing plenty of growth. The following chart shows that revenues for the Bespoke AI Basket constituents have risen 15% in aggregate since 2023, with operating cash flow rising over 16% for those names over the same period.

Earnings expectations in this space are particularly notable. AI Infrastructure stocks have seen next-12-month earnings per share (EPS) estimates rise around 80% from the period before ChatGPT’s release through last week. Implementation stocks have seen estimates rise 15%–25% over the last two years in aggregate.

Bespoke compared the current “AI-driven market” to historical tech milestones such as the release of Microsoft MS-DOS in 1981, AOL in 1991, Netscape in 1994, the iPod in 2001, Myspace in 2003, and the iPhone in 2007.

Since ChatGPT’s release on November 30, 2022, the NASDAQ has gained 80%, mirroring the 77.7% increase over the same two-year time frame following the Netscape web browser release in December 1994. These two releases look very similar and experienced bigger gains than any other major tech releases since 1980.

Isolating these two releases, the following chart shows the performance path comparison since their release dates. Bespoke extended the timeline to highlight the NASDAQ’s significant rally in the second half of the 1990s. For those who believe the AI boom is still in its early stages, the chart offers compelling evidence of potential further upside if the current trend follows a similar trajectory. However, the chart also highlights notable drawdowns during the five years following Netscape’s release. The NASDAQ Composite logged eight drawdowns of at least 8% and experienced one bear market in 1998 with a drawdown of around 30%.

Bespoke also analyzed the rolling two-year percentage change in the NASDAQ since its inception in the 1970s, comparing two-year periods following each major tech release mentioned in this section. Aside from the Netscape comparison, the release of AOL in 1991 also looks similar. Strong two-year moves are not unprecedented. Also, the 1990s internet boom was the only period that kept rallying for a few more years. Some similar or even larger rallies did not overlap with these releases, such as those during the late 1970s, the post-2008 financial crisis years, and the first years following the COVID crash in 2020.

When markets exhibit positive momentum, many of our momentum-based strategies adjust to a more risk-on positioning. If prices continue to rise, systematic trend-following algorithms are designed to identify and participate in the upward price momentum. Conversely, if volatility arises and prices decline, systematic momentum strategies are designed to identify the change and move to more defensive positioning. Mean-reversion strategies attempt to recognize and navigate sideways market conditions, offering an uncorrelated complement to momentum-based programs, which face challenges during trend-reversal inflection points.

An example of one of our systematic momentum methodologies is the Quantified STF Fund. The Fund dynamically trades the NASDAQ 100, identifying long-term trends within the market to determine its signal, ranging from 1X inverse to 2X long, with the flexibility to adjust its position daily. The Fund is used within some of our QFC strategies, including our QFC Self-adjusting Trend Following strategy, and can be used in our turnkey solutions. The following chart shows the one-year performance of the Quantified STF Fund (QSTFX, 47.13%) compared to the Invesco QQQ Trust (QQQ, 36.96%).

Bonds

Last week, the yield on the 10-year Treasury fell 2 basis points, ending at 4.15%. Against investor expectations, rates rose following the Federal Reserve’s 50-basis-point rate cut on September 18. Rates peaked around mid-November and continued to pull back slightly last week. Following the release of the Labor Department’s employment report, yields across the curve fell further on Friday.

T. Rowe Price traders noted, “Tax-exempt municipal bond yields were also lower, and munis outpaced Treasuries on a total return basis. Meanwhile, investment-grade corporate bonds generally performed well. About half of the week’s new investment-grade corporate issues were oversubscribed, and the amount of issuance was slightly below estimates.”

Gold

Gold fell 0.37% last week, attempting to stabilize following its pullback from the late-October peak. The yellow metal continues to trade near the upper end of its bullish channel price structure (black lines on the following chart). The “golden cross” (when the 50-day moving average crosses above the 200-day moving average), seen by technicians as a longer-term trend signal to the upside, remains in play, but the 50-day moving average is showing signs of rolling over now that price is trading in between the two moving averages.

Flexible Plan Investments 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 in a more tax-efficient manner than its ETF counterpart, GLD. The Fund is used within some of our QFC strategies (such as our QFC TVA Gold) and can be used within our more customizable turnkey solutions, such as our QFC Multi-Strategy Core and Explore offerings.

The indicators

The very short-term-oriented QFC S&P Pattern Recognition strategy started last week with 80% long exposure. Exposure changed to 160% long at Monday’s close and remained there to end last week. Our QFC Political Seasonality Index favored stocks until Wednesday’s close, when it moved to more defensive positioning. (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 last week with 100% long exposure to the NASDAQ, increased exposure to 160% long at Tuesday’s close, changed to 180% long at Wednesday’s close, and changed to 160% long at Thursday’s close. The Systematic Advantage (SA) strategy is 120% exposed to the S&P 500. Our QFC Self-adjusting Trend Following (QSTF) strategy signal started last week with 200% exposure and changed to 100% long exposure at Friday’s close. VAN, SA, and QSTF can all employ leverage—hence the investment positions may at times be more than 100%.

Our Classic model remained in stocks throughout 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 are in a Normal economic environment stage (meaning a positive monthly change in the inflation rate and a 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 Low and Falling reading, which favors stocks 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 higher returns and lower volatility for stocks relative to the other volatility regimes.