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 Jason Teed

Market snapshot

•  Stocks: The tech-driven rally continued in February, with both the NASDAQ 100 and S&P 500 reaching new highs. This surge highlights the market’s enthusiasm for AI-powered growth, though rotation within the tech sector may be ahead.

•  Bonds: Bond yields fell slightly last week, particularly for durations of six months and longer. Despite the deeply inverted yield curve, which typically signals market weakness, investors appear to anticipate a “soft landing.”

•  Gold: Gold rose 2.33% last week, driven by reports of challenges in regional banks and expectations of declining interest rates later this year. Falling interest rates make the metal more attractive than fixed-income securities, which afford less income as rates fall.

•  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 High and Rising, which favors stocks over gold and then bonds.

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The major U.S. stock market indexes were mostly up last week. The Russell 2000 gained 2.96%, the NASDAQ rose 1.74%, and the S&P 500 Index increased by 0.95%. The Dow Jones Industrial Average fell slightly for the week.

February brought a continuation of the tech-driven rally, with both the NASDAQ 100 and S&P 500 reaching new highs. This surge highlights the market’s enthusiasm for AI-powered growth, though rotation within the tech sector may be on the horizon. February also saw a strong earnings season and surprisingly resilient equities in the face of rising interest rates.

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

The AI narrative continues to dominate investor sentiment. Strong gains in the tech-heavy NASDAQ 100 reflect investor confidence in technology’s transformative potential. The outperformance of AI-focused companies like Nvidia underscores this focus. However, signs indicate that some of the “Magnificent 7” tech giants may be losing steam, which suggests investors could seek out fresh opportunities in the sector.

Robust fourth-quarter earnings, which exceeded expectations in many sectors, fueled the market in February. This resurgence in earnings supports the recent market highs and suggests the rally has more fundamental support than first thought.

Equities showed remarkable resilience against rising interest rates, indicating investors are focusing on growth and earnings in addition to accommodative Federal Reserve policy. Despite expectations of fewer rate cuts, equities seem well-positioned, particularly if the economy remains strong.

Additionally, value stocks appear to be outperforming growth stocks for the first time in a while. Traditionally, growth stocks, which often rely on loans to power growth, are more sensitive to interest rates than value stocks. This shift wasn’t entirely unexpected and suggests a change in the forces driving the recent bull market.

Despite recent optimism about a potential slowdown in inflation, the Federal Reserve might maintain a slower pace in cutting interest rates due to longer-than-anticipated price increases. This cautious approach is designed to bring inflation back to the Fed’s target level without disrupting the economy, emphasizing price stability even in the face of potential economic softening. Initially, investors anticipated the first rate cut as early as this month, but now they expect it no sooner than midyear.

Bonds

With the Fed’s stance in mind, let’s take a look at bonds. In February, the bond market experienced its second straight month of losses as yields rose. This shift presents an opportunity for contrarian investors seeking to lengthen the duration of their fixed-income portfolios. Anticipation of a Fed pivot toward rate cuts later this year could create a favorable environment for bonds, providing an opportunity investors shouldn’t ignore.

Bond yields fell slightly last week, particularly for durations of six months and longer. The yield curve is still deeply inverted, which usually signals upcoming market weakness, typically a recession. Despite this, market participants appear to be expecting a “soft landing” (i.e., taming inflation without triggering a recession).

Gold

Gold increased by 2.33% last week, driven by reports of challenges in regional banks and expectations of declining interest rates later this year. Falling interest rates make the metal more attractive than fixed-income securities, which afford less income as rates fall.

This rise in gold led to new all-time highs for the metal for the first time since December 2022. Typically, once gold hits new highs, it tends to trend upward, repeatedly hitting new highs on the way. In the current market environment, it may also have the further benefit of being a hedge against recession and expected falling rates.

Although gold has historically been linked to inflation over the long term, interest rates exert a more immediate influence on gold prices. This influence often supersedes gold's tendency to decrease (or at least not increase) in value in a low inflation environment.

Non-currency safe-haven assets, such as long-term Treasurys, were also up for the week, but not due to safe-haven behavior.

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 10 years ago to track the daily price changes in the precious metal.

The indicators

Our Political Seasonality Index was out of the market for the week, reentering on Friday’s (March 1) close. (Our QFC Political Seasonality Index is available post-login in our Weekly Performance Report section under the Domestic Tactical Equity category.) The equity exposure of the very short-term-oriented QFC S&P Pattern Recognition strategy remained at 0.7X long for the week, a break from the strategy’s recent frequent trading patterns.

Our intermediate-term tactical strategies are mixed in exposure. The Volatility Adjusted NASDAQ (VAN) strategy was 120% long for the week. The QFC Self-Adjusting Trend Following strategy was 2X long for the week. The Systematic Advantage (SA) strategy was 120% long for the week.

Our Classic strategy was fully invested for the week. The strategy can trade as frequently as weekly, but signals are generally longer-term in nature.

Flexible Plan’s Growth and Inflation measure, one of our Market Regime Indicators, currently indicates a Normal economic environment stage (meaning an increasing 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 equities on an annualized return basis in a Normal environment, albeit with higher risk, while bond returns tend to be positive but fairly low.

Our S&P volatility regime is registering a High and Rising reading. This environment favors equity over gold and then bonds from an annualized return standpoint. The combination has occurred 23% of the time since 2003. It is a stage of lower returns and high volatility for the major asset classes.



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