Market insights and analysis

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

4th Quarter | 2023

Quarterly recap



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

By Will Hubbard

Market snapshot

•  Stocks: Stocks rose for the quarter on continued positive economic news.

•  Bonds: Fixed income lagged throughout the quarter. This underperformance could present an opportunity for investors looking to diversify, as these asset classes might come to life on price appreciation.

•  Gold: Gold has been breaking out to all-time highs and showing signs of longer-term strength, despite a rising U.S. dollar.

•  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.


The major U.S. stock indexes were up last week. The Russell 2000 small-cap index added 1.89%, the NASDAQ increased by 1.35%, the S&P 500 rose 0.77%, and the Dow Jones Industrial Average gained 0.52%. The 10-year Treasury yield decreased 0.05% to 4.25%. Gold continued its strong performance, increasing 0.66%.

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.


Last week was uneventful for the equity market despite the close of the first quarter, a period that can sometimes introduce volatility due to rebalancing and economic updates. However, the economic news remained positive.

For the quarter, equities were up across the board, with U.S.-based stocks leading the way. The S&P gained 10.2%, developed international markets (ex-U.S.) returned about 5.6%, emerging markets (excluding China) grew around 3.2%, and emerging markets (including China) rose 2.2%.

During an election year, questions often arise about how potential political changes might affect the markets. With strong market performance in the first quarter, no doubt these questions will persist. We examined the historical performance of the S&P 500 during various quarters to gain some insight.

We analyzed data going back to the early 1970s. Our findings indicate that market performance in the first quarter was positive in 66% of the years in our study period, with nine of those years seeing market gains of 10.2% or more in the first quarter. During those years, the S&P 500 tended to maintain positive momentum for most of the rest of the year, averaging gains in Q2, small losses in Q3, and strong performance in Q4.

Using this data as a foundation, we then focused on what the market did during the 13 presidential election years within our study period.

First, we analyzed market returns in relation to the incumbent’s party for that year. For example, even though President Biden won the presidential election in 2020, we classified that year as Republican because the incumbent was from the Republican Party.

Our analysis revealed distinct patterns. In the five instances with a Democratic incumbent, the market's return from the second to the fourth quarter averaged 9.1%. For the eight instances under a Republican incumbent, the average return was 6.6%. It’s important to note that out of the 13 presidential election years we studied, only three experienced negative returns. Two of these downturns aligned with major financial crises: the dot-com bubble and the global financial crisis. Excluding these crises, only one election year, 2012, witnessed a negative fourth quarter since 1972.

Given the strong first quarter we’ve had this year, we wanted to examine the outcomes of similarly strong first quarters during election years. Since 1972, there have been only two instances where the market was up at least 10.2% in the first quarter of a presidential election year (a very small sample size), one in a year with a Democratic incumbent and one in a year with a Republican incumbent. As you can see in the following table, the market returns for the remainder of the year tended to be more subdued overall.

Given that we have so few historical precedents to draw from, the key takeaway for investors is to prioritize risk management. This limited history offers minimal statistical significance for current market conditions, necessitating heightened vigilance. For those seeking to identify confirmatory signals or emerging weaknesses, economic data can provide insights. However, investors should remain mindful that there is often a significant delay before real-world developments are reflected in survey and economic indicators, due to inherent lags in these data sources.

Last week, the market’s response to economic data was subdued, partly due to a shortened trading week and because most of the data was positive, with few surprises. Key releases included the final gross domestic product (GDP) figures for Q4 2023, unemployment claims, pending home sales, the University of Michigan’s Consumer Confidence Survey, and core personal consumption expenditures (PCE).

The final GDP for Q4 2023 was the biggest surprise, coming in at 3.4%, surpassing the forecast of 3.2%. Unemployment claims were slightly better than anticipated, at 210,000 compared to the expected 212,000. Pending home sales increased to 1.6%, higher than the forecast of 1.4%, possibly influenced by a warmer winter and an early start to spring and summer sales.

Consumer confidence, as measured by the University of Michigan’s survey, increased to 79.4, above the expected 76.5. This increase is attributed to consumer expectations of the Federal Reserve achieving an economic “soft landing,” taming inflation without sparking a recession. Core PCE also matched forecasts, further supporting the view that the Fed has effectively managed inflation.

Bespoke Investment Group also highlights some of the positives we’re seeing from a fundamental perspective. Economic growth, as evidenced by GDP and gross domestic income (GDI), is catching up to the pre-pandemic trend, corporate profits are on the rise, and PCE seems to be stabilizing.

The bottom line is that the economic data looks reasonable and the Federal Reserve appears to be on track to defeating the recent inflation run. Additionally, the presidential election year may offer some positive momentum for equities. The most important action for investors now is to assess their risk-management strategies to ensure they are prepared for any outcome.


Last week, the yield on the 10-year Treasury dropped five basis points to 4.25% following Federal Reserve Chair Jerome Powell’s remarks on future interest rates.

Year-to-date returns for fixed income have paled in comparison with the equity market’s broad strength. High-yield bonds provided some returns in the first quarter, mainly due to their correlation with equity risk. In contrast, less-credit-risky instruments such as investment-grade corporate debt and Treasurys struggled. High-yield bonds rose 1.5% in Q1, while State Street’s Aggregate Bond Index Fund lost 0.80%. Long-dated Treasurys, represented by the iShares 20+ year duration ETF (TLT), suffered a more significant loss of 3.70%.

If the Fed can lower rates without stifling inflation, these asset classes may come to life on price appreciation. The recent and ongoing underperformance of these asset classes might lead to a shift from equities to fixed income, as investors look to secure equity gains and diversify with bond allocations that may have been underperforming.

When it comes to the fixed-income market, past struggles do not guarantee future failures. Investors should weigh the consequences of being too underweight in this asset class, particularly if they’re trying to minimize potential downside risk.


Last week, gold added 0.66%, closing at $2,171.83 per ounce.

Throughout the first quarter, gold established a distinct performance trend. Typically, gold and the U.S. dollar move in opposite directions, with gains in one resulting in losses for the other. Recently, the U.S. dollar has been slowly adding value, increasing 3.1%. But instead of following its usual pattern of declining when the dollar rises, gold has been breaking out to all-time highs and showing signs of longer-term strength.

Some analysts suggest that gold's robust performance is being driven by expectations that inflation will rebound—a theory that only time will confirm. However, it's well-established that central banks hold significant gold reserves, and investors often leverage gold as a tool for rebalancing and mitigating portfolio risks, given its historical lack of correlation with other asset classes.

The key insight for gold is that its current rally seems more vigorous than previous uptrends. Investors might want to think about integrating gold into their portfolios, considering the unique investment benefits that this precious metal offers.

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 40% long, jumped to 160% long on Tuesday’s close, moved to 190% long on Wednesday, and dropped to 150% long on Thursday to close out the shortened week. Our QFC Political Seasonality Index started last week in its risk-off posture, switched to its risk-on position on Monday’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 140% long, increased exposure to 180% long on Monday’s close, moved to 200% long on Wednesday, and remained there for the rest of the week. Our Systematic Advantage (SA) strategy stayed 120% long all 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.

Comments are closed.