Market insights and analysis

By Daniel Poppe

Market snapshot

•  Stocks: Last week, the major U.S. stock market indexes declined as stocks cooled off ahead of earnings season.

•  Bonds: Treasury yields across the Treasury term structure have soared over the past month.

•  Gold: Gold’s breakout, which began in March, shows no signs of slowing. The yellow metal continues to hit new highs, contrasting sharply with the fall in Treasury prices. 

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

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The major U.S. stock market indexes were down last week. The NASDAQ Composite was down 0.79%, the S&P 500 decreased by 0.93%, the Dow Jones Industrial Average lost 2.23%, and the Russell 2000 small-capitalization index fell 2.86%. The 10-year Treasury bond yield rose 20 basis points to 4.40%, taking Treasury bonds lower for the week. Spot gold closed the week up 4.48%.

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

Stocks remained relatively stable over the last two weeks. The SPDR S&P 500 ETF (SPY), which tracks the performance of the S&P 500, is still far above both its 50-day moving average and 200-day moving average.

This recent lack of movement may stem from investors adopting a wait-and-see stance as they prepare for more data on Q1 2024 earnings, inflation, and interest rates. The upcoming earnings season could spark movement in stocks again. Inflation is well off its recent highs but remains stubbornly above the Federal Reserve’s long-term target of 2%. The Fed’s dual mandate is a balancing act between keeping inflation low and employment high. With unemployment holding below 4%, quarterly GDP growth above 3%, and inflation above 3%, it’s unclear whether the Fed has much reason to immediately lower interest rates. Nevertheless, CME Group’s Fed Watch Tool indicates a better-than-even chance of a rate cut in June.

The short-term pullback in stocks raises the worry that they may have moved too high too fast. Bespoke Investment Group observed that the S&P 500 recently ended a 53-day streak of closing at least one standard deviation above its 50-day moving average. Bespoke’s analysis indicates that this could forewarn some near-term weakness in equity prices.

Following such occurrences, the S&P 500 typically declines over the next week and month (see the table below). However, on average, it returns to positive territory after three months.

It remains to be seen whether enthusiasm for artificial intelligence (AI) and the potential for the Federal Reserve to cut rates has driven the market to unsustainable levels, possibly leading to a near-term pullback. Bespoke observed that “AI” stocks have recently underperformed, finding that a basket of these stocks has started to lag behind an equal-weight version of the S&P 500, as illustrated by the following graph.

This suggests that the recent market dip could be a correction due to the initial overshoot in “AI” stock prices, fueled by the significant attention drawn by developments such as OpenAI’s ChatGPT.

Bonds

The 10-year Treasury bond yield climbed significantly higher last week, increasing by 20 basis points to 4.40%. While it hasn’t reached its recent peak, it’s still close, despite the Fed not raising rates since July 2023. The iShares 7-10 Year Treasury Bond ETF (IEF) remains above its 200-day moving average but has fallen below its 50-day moving average.

Treasury yields have risen substantially over the past month, possibly due to growing skepticism about the Federal Reserve's willingness to bring interest rates back down from its previous hiking campaign. While higher rates benefit new lenders, they could also pose challenges for borrowers, including the government and companies with high leverage levels.

Gold

Gold has been on a tear since mid-February, reaching another new high last Friday. Because of this tremendous momentum, the SPDR Gold Trust ETF (GLD), which tracks the price of gold bullion, is currently far above both its 50-day and 200-day moving averages.

Gold and other alternative assets have been prospering, possibly indicating that investors are not confident inflation is completely under control. Alternative assets are often seen as hedges against inflation, and stocks also offer some protection against it. This might explain why gold and stocks have performed well this year while bonds have struggled.

Flexible Plan Investments (FPI) 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 in a more tax-efficient manner than its ETF counterpart, GLD.

FPI’s indicators

The Quantified Pattern Recognition Fund (QSPMX) started last week with 150% long exposure. Exposure changed to 180% long at Monday’s close, 190% long at Wednesday’s close, 200% at Thursday’s close, and 170% at Friday’s close.

Our QFC Political Seasonality Index strategy favored stocks throughout last 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.)

The Volatility Adjusted NASDAQ strategy held an exposure of 200% to the NASDAQ last week.

The Systematic Advantage strategy was 120% exposed to the S&P 500 going into Monday (April 1). At Monday’s close, the strategy changed to a 90% exposure.

Our Quantified STF Fund (QSTFX) was 200% long throughout last week.

Volatility Adjusted NASDAQ, Systematic Advantage, the Quantified STF Fund, and the Quantified Pattern Recognition Fund can all employ leverage—hence the investment positions may at times be more than 100%.

Our Classic model remained in stocks throughout last 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 platforms that are more restrictive and can take up to one month to generate a new signal.

FPI’s Growth and Inflation measure is one of our Market Regime Indicators. It shows that we are in a Normal economic environment stage (meaning a positive monthly change in the inflation rate and a positive monthly GDP reading). 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 Falling reading, which favors equities over gold and then bonds from an annualized return standpoint. The combination has occurred 37% of the time since 2003. It is a stage of high returns for equities and high risk for gold.