Market insights and analysis

By Will Hubbard

Market snapshot

•  Stocks: Stocks rallied after the Federal Reserve held rates steady and Japan raised rates.

•  Bonds: Interest rates fell in further anticipation of year-end rate cuts.

•  Gold: Gold continued to push to new heights despite ongoing outflows. Central banks have been some of the largest buyers.

•  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 Falling, which favors stocks over gold and then bonds.

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The major U.S. stock indexes were up last week. The S&P 500 gained 2.29%, the NASDAQ rose 2.85%, the Dow Jones Industrial Average increased by 1.97%, and the Russell 2000 small-cap index added 1.60%. The 10-year Treasury yield decreased by 0.11% to 4.2%. Gold inched up 0.44% amid mixed inflation expectations.

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

Market performance was mixed leading up to the Federal Open Market Committee (FOMC) announcement on March 20. The statement provided a constructive view of the economy, noting, “Job gains have remained strong, and the unemployment rate has remained low. Inflation has eased over the past year but remains elevated.” This reflects the Federal Reserve’s dual mandate of maintaining price stability, with a 2% inflation target, and keeping the unemployment rate ideally around 5% based on current conditions.

The committee decided to keep the interest rate steady at 5.25% to 5.50%, suggesting inflation and employment are still not at levels to warrant rate cuts. Yet, the Fed appears to be bending to pressures to cut rates. In the Q&A session following the rate announcement and in the full statement, Federal Reserve Chairman Jerome Powell said, “We believe the policy rate is likely at its peak for this tightening cycle and if the economy evolves broadly as expected, it will likely be appropriate to begin dialing back policy restraint at some point this year.” Powell also noted that shifts in the economic outlook could lead to policy adjustments.

The pressure to cut rates is coming from all sides. Citizens, businesses, and politicians argue that the current rate environment is presenting economic challenges. Senator Elizabeth Warren, in a letter to Powell, expressed that rates have been “too high for too long,” impacting climate change initiatives. Powell acknowledged these pressures, stating that the Fed still intends to reduce rates later this year but will hold steady as long as necessary.

The market reacted positively to the possibility of rate cuts in 2024, rallying into Wednesday’s close. This rally accounted for nearly all of last week’s gains, as shown in the following 30-minute line chart for the NASDAQ 100 (white), S&P 500 (purple), and Russell 2000 (yellow).

Bespoke Investment Group highlighted an interesting data point on how central bank activity affects the market. Going into last week, investors were anxious about the Bank of Japan’s rate decision and the FOMC announcement on Wednesday. Those announcements went as expected, driving the indexes to all-time highs.

Bespoke’s analysis revealed that instances when the S&P 500, STOXX 600, and Nikkei 225 simultaneously hit 52-week highs have been rare since 1987, occurring only 13 times without a prior occurrence in the preceding six months. The data shows that the returns following these instances are generally positive across one-, three-, six-, and 12-month periods. While one-, three-, and six-month returns align with the historical median, the data indicates significantly better performance one year after these occurrences.

That being said, Bespoke notes that the S&P is up 25% off its October lows, has hit 52-week highs on 22 days, and has closed in overbought territory for 46 consecutive days. However, pullbacks and corrections are normal and healthy for any market, so investors should consider this recent performance with caution. It may be wise to make portfolio adjustments to mitigate the potential impacts of an upcoming pullback.

Currently, the outlook for equities is influenced by the Federal Reserve’s stance, which is inclined against rate hikes and suggests potential rate cuts. With the S&P 500's strong performance since October, investors might find it prudent to reassess their equity positions, especially if the prospect of a market correction could cause undue stress.

Bonds

Last week, the yield on the 10-year Treasury dropped 11 basis points to 4.2% in response to Fed Chairman Powell’s remarks.

This week, fixed-income markets are poised to process significant developments following two major central bank moves: the Bank of Japan’s decision to end its negative interest rate policy last week and the Swiss National Bank’s rate cut. Tom di Galoma, managing director and co-head of rates trading at BTIG, expects three rate cuts this year, Reuters reports. He said, “Very rarely do you see a central bank go one time. They usually have in their mind that they are going to cut more than once.”

The CME FedWatch tool indicates potential coordinated central bank rate cuts ahead. For the December 2024 Fed meeting, the tool projects a 34.8% probability the target range will be between 4.50% and 4.75% and only a 0.6% probability of maintaining the current rate of 5.25% to 5.50% (see the following chart).

Last week, Federal Reserve Chairman Powell spoke cautiously but matter-of-factly about lowering rates. He emphasized the need for more evidence demonstrating progress toward the Fed’s dual mandate of controlling inflation and unemployment to justify future rate cuts.

 Investors might want to reassess their “safe” investments in money-market mutual funds and other high-yielding, short-duration fixed-income assets. If rates move lower, these investments could take a hit.

Gold

Last week, gold gained 0.44%, closing at $2,165.44 per ounce. This uptick occurred despite recent outflows from physically backed gold ETFs, which experienced $2.9 billion in outflows through February, marking the ninth consecutive month of money leaving the yellow metal.

Despite outflows, consumers and central banks are among the largest buyers of gold, according to the World Gold Council. Central banks recorded a historic high in gold purchases in 2022 and nearly matched that record in 2023, falling short by just 45 tons.

Gold appears to be at a pivotal point. While cryptocurrency advocates push for the complete digitization of currency, central banks worldwide are consistently purchasing gold. Investors may want to keep an eye on what central banks are doing with gold.

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 110% long, changed to 180% long on Monday’s close, reduced to 120% long on Tuesday’s close, changed to 80% long on Wednesday following the spike after the Fed announcement, scaled back to 60% long on Thursday, and moved to 40% long on Friday’s close. Our QFC Political Seasonality Index started the week in its risk-on posture, switched to its defensive position on Wednesday’s close, 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 120% long, increased exposure to 140% long on Wednesday’s close, and remained there the rest of the week. Our Systematic Advantage (SA) strategy started the week 120% long, moved to 90% long on Monday’s close, moved to 120% long on Tuesday (before the Fed announcement), moved back to 90% long on Wednesday, changed to 120% long on Thursday, and remained there to finish the week. 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 growing). 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.

The S&P volatility regime is registering a Low and Falling reading, which favors stocks over gold, and gold over bonds from an annualized return standpoint. The combination has occurred 37% of the time since 2003. Typically, this stage is associated with higher returns and less volatility from equities and bonds.