Market insights and analysis

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

4th Quarter | 2023

Quarterly recap

News

rss

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

By Jason Teed

The performance of the major U.S. stock market indexes was mixed last week. The NASDAQ Composite gained 2.51%, bolstered by technology stocks; the S&P rose 0.32%; the Dow Jones Industrial Average lost 1.00% of its value; and the Russell 2000 fell 0.04%.

Only three out of 11 market sectors rose for the week. Technology and Communication Services were the top-performing sectors, rising 5.12% and 1.20%, respectively. Materials and Consumer Staples were the worst-performing sectors, declining 3.14% and 3.21%, respectively.

Stocks

Equities started last week on a downward trend before optimism about U.S. debt-ceiling negotiations and a rally in tech stocks caused the market to reverse course later in the week.

Progress in the talks between President Joe Biden and House Speaker Kevin McCarthy signaled a potential deal to raise the ceiling for two years, which would bring further stability to markets and the economy.

The debt ceiling has negatively affected the market in the past. In 2011, despite a debt-ceiling deal being reached at the eleventh hour, S&P gave the U.S. its first downgrade in credit rating.

While the U.S. has never defaulted due to a debt ceiling, it became clear in 2011 that the way the government was functioning (or not functioning, as the case may be) made a default a real possibility. Political polarization has only increased in the subsequent decade, though it does appear that cooler heads have prevailed this cycle.

Last week’s optimism benefited the Technology sector, with shares of major companies rising significantly. Nvidia, a leading player in the AI chip industry, projected that its current quarter sales would exceed Wall Street estimates by more than 50%. The stock spiked 24% on the day, raising the prospects and stocks for other semiconductor and technology stocks.

The AI revolution we are witnessing is poised to have a significant impact on the market, although its precise implications remain uncertain. We will likely see substantial shifts in the distribution of sectors and industries in terms of their contribution to economic growth and job opportunities in the near future.

Despite showing some moderation in recent months, inflation also remains an uncertain factor for the market. According to the Bureau of Economic Analysis, the personal consumption expenditures (PCE) price index saw a 0.4% increase in April, compared to a 0.1% increase in March. On a year-over-year basis, the index rose by 4.4% in April, slightly higher than the 4.2% gain in March.

Initially, the markets expected the Federal Reserve to pause rate increases, but it now seems that the Fed may need to raise rates at least once more to get inflation under control. Currently, the markets are not pricing in further rate increases, so any additional hikes could affect the market if and when they occur. The minutes from the Fed’s recent meeting show that the majority of members believe a rate increase may still be necessary.

Overall, the short-term market outlook appears good, with the debt-ceiling crisis seemingly close to a resolution. However, the longer-term prospects for the market aren’t as rosy, despite a potential boost from AI investment and economic growth.

Bonds

Treasury yields rose slightly last week, with the most significant rise observed in the two-year and three-year maturities. As a result, the yield curve, which is typically measured by the difference between the two-year and 10-year maturities, became steeper. The fed funds rate remains the highest-yielding maturity. Historically, this tends to occur just before the Federal Reserve pauses rate increases.

Both term and credit yields decreased last week, giving conflicting signals about bond market expectations of the economy. Overall, long-term Treasurys outperformed high-yield bonds (though both were down significantly), and longer-term bonds outperformed shorter-term bonds.

Gold

Spot gold fell 1.59% as the market calmed on expectations of a debt-ceiling deal.

Despite enjoying some recent tailwinds, the metal is still off the highs it reached at the beginning of May. Growing recognition that inflation may need to be fought more aggressively than previously thought has boosted the U.S. dollar, creating a drag on gold’s performance.

Non-currency safe-haven assets, such as long-term Treasurys, were nearly unchanged for the week. Longer-term rates rose for the period, suggesting that the metal was not performing as a safe haven for the week.

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

The indicators

Our Political Seasonality Index began last week fully invested. It exited the markets on Wednesday’s close and reentered on Friday’s close. (Our QFC Political Seasonality Index is available post-login in our Weekly Performance Report section under the Domestic Tactical Equity category.) The very short-term-oriented QFC S&P Pattern Recognition strategy’s equity exposure began the week 0.5X short. It changed to 0.8X long on Tuesday’s close, 1.6X long on Wednesday’s close, and 0.5X short on Friday’s close. The strategy has been much more active lately than in the earlier parts of 2022, and it has consistently profited from recent patterns.

Our intermediate-term tactical strategies are mixed in exposure. The Volatility Adjusted NASDAQ (VAN) strategy began the week 120% long, changed to 140% long on Wednesday’s close, and changed back to 120% long on Friday’s close. The Systematic Advantage (SA) strategy began the week 90% long and changed to 30% long on Wednesday’s close. Our QFC Self-adjusting Trend Following (QSTF) strategy was 2X long for the week. VAN, SA, and QSTF can all employ leverage—hence the investment positions may at times be more than 100%.

Our Classic strategy was fully invested for the week. The strategy can trade as frequently as weekly.

Flexible Plan’s Growth and Inflation measure, one of our Market Regime Indicators, currently indicates a Normal economic environment stage (meaning a positive monthly change in the 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 both stocks and bonds on an annualized return basis in a Normal environment, albeit with higher risk.

Our S&P volatility regime is registering a High and Rising reading, which favors equities over gold and then bonds from an annualized return standpoint. The combination has occurred 23% of the time since 2000. It is a stage of relatively low returns and higher volatility for the three major asset classes.



Comments are closed.