Current market environment performance of dynamic, risk-managed investment solutions.
By Jerry Wagner
Market snapshot
• Stocks: Stocks hit new highs early in the week before declining, with the S&P 500 down 1.7%, the NASDAQ Composite falling 2.5%, and the Russell 2000 tumbling 3.7%. Despite a positive Q4 earnings season, technical divergences and inflation concerns present vulnerabilities, though historical patterns suggest a pause rather than a correction.
• Bonds: Interest rates have been trending lower since before Inauguration Day, despite inflation concerns. The long-term bond ETF (TLT) has been rallying but is approaching resistance as rates near support, with high-yield bonds reaching new highs.
• Gold: Gold rose for the eighth consecutive week, closing up 1.67% at near $2,935 per ounce after hitting a record high of $2,947.01. UBS and Goldman Sachs remain bullish, citing government buying, haven purchases, and U.S. dollar weakness.
• Market indicators and outlook: Short-term technical indicators are mixed but lean negative. The market regime indicators show a Normal economic environment stage, which historically favors gold over stocks and bonds. Volatility is Low and Falling, traditionally favoring stocks from a return standpoint.
Stocks made new highs early in the week but ended with losses after a two-day decline. The S&P 500 fell 1.7%, the NASDAQ Composite dropped 2.5%, and the Russell 2000 tumbled 3.7%. Bonds rose, with the U.S. Aggregate Bond ETF (AGG) gaining 0.3% and the 20-year Treasury Bond ETF (TLT) climbing 0.5%. Gold futures closed at $2,948.80, up $48.10 per ounce, or 1.66%.
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
Stocks hit a new high last Wednesday, but the gain was only 0.88% above the December 6 high and even smaller compared to its January 23 peak. The rally was immediately followed by three substantial sell-off days.
The market does appear vulnerable, as recent highs have not been accompanied by broader participation. The number of stocks making new highs has not increased, nor have advancing issues exceeded declining ones at levels seen in previous rallies. These divergences from rising market index prices worry stock technicians.
Higher-than-expected consumer price index (CPI) and producer price index (PPI) numbers from January continue to raise more fundamental concerns. These were backed up by last week’s ISM Manufacturing survey, which showed increases in prices paid and received. Such anxieties spill over into monetary policies, as they give the Federal Reserve little room to ease up on its inflation fight. In fact, Fed officials signaled last week that they remain comfortable holding rates steady.
The fourth-quarter earnings season ended on a positive note, with 71% of the 1,314 companies reporting beating earnings estimates and 66% surpassing revenue expectations. However, companies issued twice as much negative first-quarter guidance as positive, taking the shine off these reports.
There is some historical precedent for optimism, though. When stocks make new highs within 39 days of a previous high, markets have historically paused rather than corrected—and in more than 90% of cases, stocks were higher six months later.
And fun fact for market watchers: Since 1949, when the stock market is up at least 3% by Valentine’s Day, it has finished the year higher 94% of the time. This trend could make 2025 a “sweetheart” of a year.
The bottom line: It’s a mixed picture. I think we will continue to see short-term volatility and declines, while stocks remain in a long-term uptrend and will soon return to it. I will sit tight and let our dynamic, risk-managed strategies do the trading for me through it all.
Bonds
As the highlighted portion of the previous chart shows, interest rates have been trending lower since just before Inauguration Day, despite the inflation scares and Fed holding pattern discussed in the Stocks section. However, the housing market remains weak, as mortgage rates remain stubbornly high. Last week’s reports showed declining housing starts and weak builder sentiment, which are often indicators of an upcoming recession. The one bright spot: Building permits edged higher, perhaps indicating a quick turnaround.
With falling rates, the long-term bond ETF (TLT) has been rallying. However, it is now approaching overhead resistance just as interest rates near a support level, which could slow the recent decline in rates and limit further bond price gains. At the same time, TLT entered a seasonally strong period (beginning February 21) that historically extends until April 1.
Meanwhile, high-yield bonds continue to be influenced by stock and bond trends. The recent rally in bonds and the new highs in stocks have created ideal conditions, pushing high-yield bond prices to new highs.
Gold
Gold rose for the eighth consecutive week, a rare streak in market history. While continued gains may be difficult without a pause, multiple factors support gold’s strength. It’s no surprise that gold is far outpacing the S&P 500’s roughly 4% advance and the flat performance of bitcoin this year.
UBS reported last week that it was bullish on gold, driven by the following:
• Government buying
• Haven purchases
• Lowered rates
• Ongoing liquidity issues
Following suit, Goldman Sachs raised its year-end target for gold to $3,100 an ounce on central bank buying, predicting gold could reach $3,300 if economic policy uncertainty persists. And this as last week’s Global Economic Uncertainty Index hit its second-highest level ever, topped only by its May 2020 COVID reading.
At the same time, in the face of that uncertainty, the U.S. dollar continues to weaken, which has historically supported higher gold prices.
Flexible Plan Investments (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 short-term technical indicators of future stock market price changes I watch are mixed, with more leaning negative than positive. Recent weakness has most remaining bullish indicators hovering near sell levels, though some price patterns suggest early-week strength. Among our short-term tactical strategies:
• The QFC S&P Pattern Recognition strategy currently holds 120% exposure to the S&P 500 Index, supporting this outlook.
• Our QFC Political Seasonality Index (PSI) strategy has been out of the stock market since its close on February 18 and will reenter on February 25. (The PSI calendar—with all of the 2025 daily signals—can be found post-login in our Weekly Performance Report section under the Domestic Tactical Equity category.)
Our intermediate-term tactical equity strategies are mixed (the following strategies can use leverage, so the investment positions may exceed 100%):
• Classic continues 100% long equities.
• Volatility Adjusted NASDAQ was 120% net long the NASDAQ 100 on Friday.
• Systematic Advantage finished the week 90% net long.
• QFC Self-adjusting Trend Following had an active week. It moved to 2.0 exposure on the previous Friday’s close (2/14), reduced exposure to 100% invested on Tuesday’s close, and instituted an overnight 200% trade on Friday’s close before moving back to cash on Monday’s (2/24) close.
• QFC Dynamic Trends, one of our newest strategies, began and ended last week invested in the Quantified STF Fund (QSTFX).
Our QFC Managed Futures strategy, another new strategy, is 90% invested in our subadvised Quantified Eckhardt Managed Futures Strategy Fund (QETCX). As of February, QETCX was in a very mixed portfolio, trading long and short traditional commodities, foreign and domestic equity indexes, currencies, and 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 Low and Falling reading. This environment favors stocks over equities and bonds from an annualized return standpoint. Volatility, of course, favors bonds. Stocks are the next best, followed by gold. The Low and Falling combination has occurred 37% since 2003.