Current market environment performance of dynamic, risk-managed investment solutions.
By Daniel Poppe
Market snapshot
• Stocks: The major U.S. stock market indexes were mixed last week. The NASDAQ Composite lost 1.83%, the S&P 500 fell 0.09%, the Russell 2000 gained 2.18%, and the Dow Jones Industrial Average rose 2.50%.
• Bonds: The 10-year Treasury bond yield fell from 4.26% to 4.22%.
• Gold: Spot gold rose 1.43%, closing above $4,900 an ounce.
• 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 Rising, which favors stocks over gold and then bonds.
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Stocks
The SPDR S&P 500 ETF (SPY), which tracks the performance of the S&P 500, finished the week above both its 50-day and 200-day moving averages.
Investors continue to digest fourth-quarter earnings reports. Results have generally met or exceeded expectations, and the broad market has remained near 52-week highs. According to FactSet’s Earnings Insight report, more than half of S&P 500 companies have reported results so far. Among those firms, revenue and earnings-per-share surprises have skewed to the upside. Blended earnings growth currently stands at 13%, a very healthy number. Valuations sit above both the five-year and 10-year averages, reflecting that strength.
Bonds
The iShares 7-10 Year Treasury Bond ETF (IEF), which tracks intermediate-term Treasury bonds, finished last week above both its 50-day and 200-day moving averages. Bond prices remain near their 52-week highs.
Markets reacted to a notable policy development last week. President Trump has nominated Kevin Warsh, a former member of the Federal Reserve Board of Governors, to succeed Federal Reserve Chair Jerome Powell, whose term expires in May. While Warsh brings substantial experience to the role, the nomination appeared to catch some investors off guard. The announcement was followed by a brief spike in market volatility, with gold and silver both posting double-digit losses on the day.
At its January meeting, the Federal Reserve left interest rates unchanged. Two policy meetings remain before Powell’s term ends, with the next scheduled for mid-March. According to CME Group’s FedWatch tool, market expectations currently point to no rate change at that meeting.
Gold
The SPDR Gold Shares ETF (GLD), which tracks the price of gold, finished the week above both its 50-day and 200-day moving averages.
Flexible Plan Investments (FPI) is the subadviser to the only U.S. gold mutual fund, The Quantified Gold Futures Tracking Fund, formerly The Gold Bullion Strategy Fund. Launched in 2013, the fund is designed to track the daily price changes in the precious metal in a more tax-efficient manner than its ETF counterpart, GLD.
FPI’s indicators
The QFC S&P Pattern Recognition strategy’s primary signal started the week with a 120% net long exposure to the S&P 500. Exposure increased to 170% net long on Monday, dipped to 160% net long on Tuesday, moved back to 170% net long on Thursday, and rose to 190% net long on Friday.
Our QFC Political Seasonality Index strategy was aggressive at the beginning of the week but shifted to a defensive posture on Tuesday. (Our QFC Political Seasonality Index—with all of the daily signals—is available post-login in our Weekly Performance Report section under the Domestic Tactical Equity category.)
The Volatility Adjusted NASDAQ strategy started the week with a 120% net long exposure to the NASDAQ 100. Exposure decreased to 100% net long on Monday, increased to 120% net long on Wednesday, and fell to 100% net long on Thursday.
The Systematic Advantage strategy held a 60% net long exposure to the S&P 500 throughout the week.
Our QFC Self-adjusting Trend Following strategy’s primary signal began the week 100% net long the NASDAQ 100 and increased to 200% net long on Friday.
The Volatility Adjusted NASDAQ, Systematic Advantage, QFC Self-adjusting Trend Following, and QFC S&P Pattern Recognition strategies can all employ leverage, so their investment positions may at times exceed 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.
FPI’s Growth and Inflation measure—one of our Market Regime Indicators—shows that we are in a Normal economic environment, defined by positive monthly changes in both prices and GDP. A Normal environment has occurred 75% of the time since 2003 and has been positive for stocks, bonds, and gold. Stocks have delivered the highest rate of return in Normal periods, while gold has ranked second but has also experienced high drawdowns.
Our S&P volatility regime is registering a Low and Rising reading, which favors stocks over gold and then bonds from an annualized return standpoint. The combination has occurred 22% of the time since 2003.