Market insights and analysis

How dynamic, risk-managed investment solutions are performing in the current market environment

4th Quarter | 2023

Quarterly recap

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Current market environment performance of dynamic, risk-managed investment solutions.

By Will Hubbard

Market snapshot

•  Stocks:  Market and economic data initially drove stocks higher before falling for the week. The S&P 500 continued to trade in overbought territory.

•  Bonds: Bond yields increased as investors anticipated Federal Reserve Chair Powell’s upcoming remarks.

•  Gold: Gold cooled off after a big week, and the U.S. dollar inched up.

•  Market indicators and outlook: Market regime indicators show we are 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 gold over stocks and then bonds.

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The major U.S. stock indexes were down last week. The Dow Jones Industrial Average lost 0.01%, the S&P 500 fell 0.13%, the NASDAQ dipped 0.70%, and the Russell 2000 small-cap index dropped 2.08%. The U.S. 10-year Treasury yield increased 0.23% to 4.31%. Gold lost 1.06% after a strong rally the previous week.

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, the market wasn’t sure what to make of the latest economic data, which included reports on the consumer price index (CPI), producer price index (PPI), unemployment claims, and retail sales.

Before Tuesday’s market opening, headline CPI came in at 3.2% year over year. Core CPI, which excludes volatile food and energy prices, rose 3.8% over the last 12 months. The data may have seemed better to traders than expected, despite being above forecasts. The market initially spiked on the news, marking the high for the week.

On Thursday, the PPI came in at 1.6% year over year, confirming the higher CPI figures from Tuesday and marking its biggest increase since a 1.8% rise in September 2023. This surge in the PPI index was primarily due to increased demand for goods rather than services, which have recently been the main inflation driver. This shift is likely the current cause of investor concern.

Against this economic backdrop, we are seeing some potential leadership changes in the S&P 500 Index. March 14 marked the 40th consecutive day that the S&P has traded in overbought territory.

Bespoke Investment Group notes that the S&P 500's sustained overbought condition wasn't driven by any single sector throughout. Instead, various sectors took turns leading the market higher at different times.

The Financials sector helped most of that time, trading in overbought territory for 39 days, with Industrials a close second at 30 days. Beyond that, the sectors trading in overbought territory are pretty diverse, indicating an impending rotation in market leadership that could potentially propel markets to new heights.

Last week’s remaining economic reports had a lesser impact. Unemployment claims were down slightly for the week at 209,000, below the expected 218,000. Retail sales were up 0.6%, under the anticipated 0.8%.

The bottom line for equities is that different data points seem to be telling different stories. On one hand, some indicators appear to be slowing or coming in higher than expected. On the other hand, markets are showing resilience by rotating sector leadership. Investors should review their portfolios in light of these mixed signals.

Bonds

Last week, the yield on the 10-year Treasury rose from 4.07% to 4.31%, with traders and investors anticipating Federal Reserve Chairman Jerome Powell’s remarks this week. The Fed’s two main priorities are achieving price stability (as defined by a 2% inflation target) and ensuring full employment. These targets are dynamic and difficult to forecast, even for the Federal Reserve.

For months, the Fed has signaled its expectation for multiple interest rate cuts this year, revising its initial outlook of possibly reducing rates by the end of 2023. Now, a quarter of the way into 2024, with both inflation and employment running hot, the Fed is leaving itself little opportunity to implement rate cuts, barring something catastrophic.

We’ve been dealing with an inverted yield curve on the two-year and 10-year Treasury since July 2022. Looking at yields, you wouldn’t think “normal” is in our sights, given that the spread increased two basis points last week.

The following chart depicts the two-year/10-year yield curve from 2020 onward. Values below zero since July 2022 indicate the period during which the curve has been inverted.

Meanwhile, as each month passes, the CME FedWatch tool indicates a decreasing likelihood of the Fed cutting rates. In January 2024, there was a 62% chance predicted for the fed funds rate to reach 450–475 basis points by June. Currently, it’s a toss-up whether the Fed will lower rates to the 500–525 range or keep them at the 525–550 level. Given the mixed signals and adjustments in guidance, Chair Powell has his work cut out for himself if he doesn’t want to disturb the market.

The key takeaway here is that the data suggests interest rates will remain higher than anticipated for longer than expected. But a premature pivot by the Fed could appear politically motivated, putting it in between a rock and a very hard place.

Gold

Gold fell 1.06% last week, closing at $2,155.90 per ounce. This decline followed a 4.61% gain from two weeks ago, marking a slight cooling in its recent performance. Despite the dip, gold remains up 5.27% for the year, just below all-time highs. The decrease is linked to the previous week’s significant rally and a slight increase in the U.S. dollar.

Flexible Plan Investments is the subadviser to the only U.S. gold mutual fund, The Gold Bullion Strategy Fund (QGLDX), designed at its introduction 10 years ago to track the daily price changes in the precious metal.

The indicators

The very short-term-oriented QFC S&P Pattern Recognition strategy started last week in cash. It went 40% long on Tuesday’s close, changed to 60% long on Thursday’s close, and ended the week 110% long. Our QFC Political Seasonality Index started last week in its risk-on posture, switched to its defensive position on Monday’s close, shifted back into its risk-on mode on Wednesday, and remained there for the rest of the week. (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 140% long, decreased exposure to 120% long on Monday’s close, and remained there the rest of the week. Our Systematic Advantage (SA) strategy started and ended the week 120% long. Our QFC Self-adjusting Trend Following (QSTF) strategy was 200% long all week. VAN, SA, and QSTF can all employ leverage—hence the investment positions may at times be more than 100%.

Our Classic model was long risk-on positioning all 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 more restrictive platforms and can take up to one month to generate a new signal.

Flexible Plan’s Growth and Inflation measure, one of our Market Regime Indicators, shows markets are in a Normal economic environment stage (meaning inflation is falling and GDP is rising). 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 Rising reading, which favors gold over stocks and then bonds from an annualized return standpoint. The combination has occurred 27% of the time since 2003.



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