Market insights and analysis

By Jason Teed

Last week, the major U.S. stock market indexes experienced a significant decline. The S&P 500 lost 4.55%, the NASDAQ Composite fell by 4.71%, the Dow Jones Industrial Average dropped 4.44%, and the Russell 2000 lost 8.07%. Mid-cap and small-cap stocks were hit the hardest.

All stock market sectors fell for the week. Consumer Staples and Utilities were the top-performing sectors, declining 1.92% and 2.88%, respectively. Financials were the worst-performing sector, losing 8.50%.

Stocks

At the start of last week, the market was expecting a 50-point rate hike from the Federal Reserve this week. This was largely due to stronger-than-expected jobs reports and a decrease in the slowing of inflation. With this backdrop, markets were down on Wednesday (March 8), although not dramatically so.

However, on Thursday (March 9), regional banks began to suffer, signaling concern over the impact of rising interest rates and inflation on specific banks’ balance sheets. Silicon Valley Bank (SVB) sold off significantly, down about 60% on Thursday. On Friday, according to Reuters, California banking regulators closed SVB and “appointed the Federal Deposit Insurance Corporation (FDIC) as receiver for later disposition of its assets.”

SVB’s closure is the second-largest bank failure in history, after the collapse of Washington Mutual in 2008. This news led to significant market declines, especially in small-cap and mid-cap stocks.

Reuters provides a summary of the sequence of events leading to SVB’s collapse. Essentially, it was caused by a run on the bank.

The rising interest-rate environment caused cash to dry up for some venture capital (VC) firms (in which SVB specialized) as investments began to slow down in 2022. As a result, some SVB clients began making withdrawals to meet their liquidity needs.

To meet those withdrawal demands, SVB was forced to sell some hold-to-maturity assets (assets, such as bonds or CDs, which are intended to be owned until maturity) at a loss. Fear of liquidity by depositors led to a run on bank deposits, forcing regulators to step in.

Over the same weekend, Signature Bank of New York also failed, becoming the third-largest bank failure in history.

While the banks involved so far have been in more interest-rate-sensitive sectors such as venture capital and cryptocurrency, there is a small chance that other regional banks may fail in the coming days.

What happens now? Federal regulators have stepped in and guaranteed that all deposits will be recovered. Additionally, regulators have set up a mechanism to help other banks meet their obligations in case of significant withdrawals. These measures are in place to protect account holders and the broader financial system from the consequences of bank failures.

It is unlikely that contagion will spread beyond a few banks with balance-sheet issues. The rising rate environment was largely predictable, and banks had more than enough opportunity to prepare.

The recent bank failures, coupled with concerns over rising inflation and the state of the economy, have implications for future Fed interest-rate increases. The odds of a Fed rate increase for this month have fallen—in fact, the Fed may not hike rates at all, choosing to resume increases down the line. Markets could temporarily respond positively to these events.

Despite this, the fundamentals of the economy point to recession, although the stock market has not been pricing in this risk. But a new stage of the bear market, one in which true market risks are priced in, could lead to further volatility in the coming months. Investors should be prepared.

Bonds

Treasury yields mostly fell for the week. Maturities in the 2-to-10-year range fell the most, while some short-term maturities rose. Much of this activity was due to investors buying bonds as a safe haven, as well as the assumption that the Federal Reserve will need to slow rate increases.

This week’s market movements deepened the inversion of the yield curve, and credit spreads increased by 13 basis points. Both of these suggest increasing pessimism from the bond markets. Overall, long-term Treasurys outperformed high-yield bonds (though both were down significantly), and longer-term bonds outperformed shorter-term bonds.

Gold

Spot gold rose 0.63%, acting as a safe-haven security this week. The metal increased in value significantly on Thursday and Friday (March 9 and 10) after having sold off somewhat through Wednesday.

The metal had recently been enjoying some tailwinds: Inflationary pressures seemed to have subsided a bit, and economic indicators suggested that the economy was slowing. Additionally, it seemed that the markets in general had not been pricing in a recession. Due to these positive factors, the metal might behave more consistently as a safe haven in the coming months.

Non-currency safe-haven assets, such as long-term Treasurys, were also up for the week, as longer-term rates fell for the period. Last week bucked the recent trend of higher-than-typical correlations between stocks, bonds, and gold, highlighting the significance of last week’s market stress.

Flexible Plan Investments (FPI) is the subadvisor to the only U.S. gold mutual fund, The Gold Bullion Strategy Fund (QGLDX), designed at its introduction nine years ago to track the daily price changes in the precious metal.

The indicators

Our Political Seasonality Index was fully invested last week. (Our QFC Political Seasonality Index is available post-login in our Weekly Performance Report section under the Domestic Tactical Equity category.) The very short-term-oriented QFC S&P Pattern Recognition strategy’s equity exposure began the week 0.5X short. It changed to 0.2X short on Tuesday’s close, 0.7X long on Wednesday’s close, neutral on Thursday’s close, and 0.7X long on Friday’s close. The strategy has been much more active lately than in the earlier parts of 2022.

Our intermediate-term tactical strategies are mixed in exposure. The Volatility Adjusted NASDAQ (VAN) strategy began the week 20% long, changing to neutral on Monday, and to 20% long on Thursday’s close. The Systematic Advantage (SA) strategy began the week 90% exposed to the market. It changed to 30% exposed on Tuesday’s close, 60% on Thursday’s close, and 30% on Friday’s close. Our QFC Self-adjusting Trend Following (QSTF) strategy was 1X long for the week but exited on Friday’s close. VAN, SA, and QSTF can all employ leverage—hence the investment positions may at times be more than 100%.

Our Classic strategy was fully invested for the week. The strategy can trade as frequently as weekly.

Flexible Plan’s Growth and Inflation measure, one of our Market Regime Indicators, currently indicates a Normal economic environment stage (meaning a positive monthly change in the inflation rate and positive quarterly GDP reading). Historically, a Normal environment has occurred 60% of the time since 2003 and has been a positive regime state for equities, gold, and bonds. Gold tends to outpace both stocks and bonds on an annualized return basis in a Normal environment, albeit with higher risk.

Our S&P volatility regime is registering a High and Falling reading, which favors gold over bonds and then equities from an annualized return standpoint. The combination has occurred 13% of the time since 2000. It is a stage of relatively high returns and lower volatility for the three major asset classes.