Market insights and analysis

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

1st Quarter | 2024

Quarterly recap

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

By Will Hubbard

Market snapshot

•  Stocks: Equities rose on macroeconomic data.

•  Bonds: Bonds may no longer be a “buy and hold” asset due to the high risks associated with static investments. While there may be times to rotate into fixed income for stability, investors should be cautious about reentering the bond market solely based on higher yields. 

•  Gold: Gold hit all-time highs with a year-to-date return of 17.07%, supported by both technical momentum and concerns over a sovereign debt crisis and potential inflation. Gold remains above key moving averages, making it a strategic investment opportunity to monitor.

•   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 indexes were up last week. The NASDAQ added 2.15%, the Russell 2000 small-cap index gained 1.79%, the S&P 500 increased by 1.60%, and the Dow Jones Industrial Average was up 1.35%. The U.S. 10-year Treasury yield decreased from 4.5% to 4.42%. Gold posted a 2.32% return.

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’s economic news was light, with key releases including the producer price index (PPI), consumer price index (CPI), retail sales, and unemployment claims. Despite mixed news, market indexes continued their upward trend, with the major markets, except small caps, reaching new highs. Small caps may soon achieve new highs if momentum continues.

The PPI, both headline and core, rose 0.5% month over month, higher than the expected 0.3% and 0.2%, respectively. This suggests ongoing inflation pressures on the supply side that may eventually affect consumers.

The core CPI increased by an expected 0.3% month over month, while the headline CPI came in at 0.3%, slightly below the expected 0.4%. Retail sales were flat, below the anticipated 0.4% rise.

Unemployment claims came in at 222,000, roughly in line with the expected 219,000.

These releases provide insight into consumer sentiment. We haven’t seen any deflation after the inflation experienced over the last few years—just a slowdown in inflation increases. Wage growth has helped offset price increases, but consumer spending is crucial for economic growth.

GDP is made up of four components: consumer spending, investment (capital expenditure), government spending, and the difference between exports and imports. According to estimates by U.S. Bank, consumer spending accounted for 68% of GDP in the first quarter of 2021, which is why we keep such a close eye on it.

The following chart shows retail sales and food service spending. The red lines indicate spending trends over different periods. We’ve returned to more normal retail sales growth rates after the post-COVID surge in spending (blue circle), which some point to as the cause of recent inflation pressures. Current spending levels (top red line) have been above trend. The question now is, will consumers resume spending at historical rates, or will they pull back closer to either the middle red line that extends back to the early 1990s or to the red line that represents spending after the global financial crisis?

Right now, it looks like consumers are poised to resume the historical trend. A strong consumer outlook would be bullish for stocks, which is why we closely monitor consumer-centric economic releases.

In summary, stocks have extended their gains since October 2023’s lows and the small April retracement, supported by economic data. However, a shift in the data could lead to significant market volatility.

Bonds

Since the sharp rise in rates through 2022, the question of when and how to invest in bonds continues to come up in conversation.

Historically, bonds have been a “safe haven” investment during uncertain times due to their low correlation with equities. However, bonds can correlate with equities during crises, which can be devastating if invested in long-duration assets.

On the flip side, the yield curve remains inverted, offering a premium to investors willing to accept reinvestment risk if rates come down, as Federal Reserve Chairman Jerome Powell reiterates in his remarks.

Bill Gross, known as the “Bond King,” recently published an article called, “They Just Wanna Sell You a Bond Fund.” In it, he argues that the concept of total return, coined by PIMCO in the early 1980s, was great back then but may not be today.

Gross states that credit must grow at 5.5%—the average yield of all credit previously issued (not just government)—to pay those bills as they come due. He notes that recent credit growth has come from Treasurys (10% annually), while business and household credit growth has been between 1 and 2%. This combination has driven nominal GDP growth at the 5.5% rate. Gross predicts that 10-year rates next year will exceed 5%, not closer to 4%.

The following chart shows the growth of public debt outstanding from the Treasury’s “Debt to the Penny” dataset.

The key implication of Gross’s statements and the growth in public debt since 2020 is that the increasing demand to grow public debt to facilitate economic growth will result in higher yield demand by bond fund holders, causing rates to trend higher—not lower, as many expect.

The bottom line for fixed income is that it’s no longer an asset to “buy and hold.” There will be times to own it, at which point you’ll want to rotate from equities or other risk assets into traditionally less volatile fixed-income investments. However, the risk of holding them as a static investment is high, and investors should be cautious about investing more in the asset class solely because yields are substantially higher than they were five years ago.

Gold

Gold hit all-time highs last week. The metal rose 2.32%, closing at $2,415.22 per ounce, bringing its year-to-date return to 17.07%.

The bullish sentiment is supported not only technically, by momentum, but also by ongoing concerns about a sovereign debt crisis. Although Bill Gross did not explicitly mention this in his article, it’s clear that the current issuance of U.S. Treasurys is unsustainable.

Investors are also worried that the Federal Reserve might pivot from its quantitative tightening stance too soon, potentially causing a resurgence of inflation.

Gold remains well above its 50-day and 200-day moving averages, even after the pullback earlier in the month. After many years of stagnation, gold appears to be gaining traction. Investors should continue to monitor it for entry opportunities or consider it as a strategic portion of their portfolio.

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 80% short, increased short exposure to 130% on Monday, moved to 140% short on Tuesday’s close, moved to 90% short on Wednesday, moved to 130% short on Thursday, and reduced exposure to 80% short on Friday where it ended the week. Our QFC Political Seasonality Index started last week in its risk-off posture, moved to risk-on positioning on Tuesday’s close, and switched back to its risk-off posture on Friday. (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 160% long on Wednesday’s close, and switched to 180% long on Friday. Our Systematic Advantage (SA) strategy started and ended last week 90% 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.

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.



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