Market insights and analysis

By Will Hubbard

Market snapshot

• Stocks mostly rose last week on Federal Reserve commentary and bullish sentiment powered by Nvidia.

• Bond yields fell as prices rallied off April lows, though they remain negative for the year.

• Gold took a hit as the U.S. dollar rose against the Japanese yen.

• 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 mostly up last week, with the S&P 500 and NASDAQ 100 hitting all-time highs. The NASDAQ added 2.4%, the S&P 500 increased by 1.36%, the Dow Jones Industrial Average gained 0.33%, and the Russell 2000 small-cap index lost 2.07%. The yield of the 10-year bond fell from 4.5% to 4.43%. Gold lost 1.44% to close at $2,293.78 per ounce.

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

It was a light week for economic data. The Institute for Supply Management (ISM) released its Purchasing Managers’ Index (PMI) for Manufacturing and Services. Job-related data such as the Job Openings and Labor Turnover Survey (JOLTS), unemployment claims, and the unemployment rate were also published.

The ISM Manufacturing PMI came in at 48.7 for May, down from April’s 49.2. Readings below 50 indicate contraction. Timothy Fiore, chair of the ISM Manufacturing Business Survey Committee, noted, “Demand remains elusive as companies demonstrate an unwillingness to invest due to current monetary policy and other conditions.” Since October 2022, the only expansionary reading for ISM Manufacturing PMI was in March 2024.

On the other hand, ISM Services PMI has remained strong, with very few months of contraction since early in the COVID-19 pandemic. The most recent reading came in at 53.8, well above the expected 51.0. Anthony Nieves, chair of the ISM Service Business Committee, stated, “The increase in the composite index in May is a result of notably higher business activity, faster new orders growth, slower supplier deliveries and despite the continued contraction in employment.”

On the jobs front, the JOLTS report showed 8.1 million job openings, slightly down from last month’s reading of 8.36 million and close to the expected 8.37 million. Unemployment claims were also little changed, with 229,000 initial claims compared to the anticipated 220,000. The official unemployment rate from the Bureau of Labor Statistics (BLS) remained steady at 4%, with 6.6 million people unemployed.

Last week in equities, the S&P 500 reached a new all-time high despite poor breadth. According to a recent Forbes article, 76% of the S&P 500’s year-to-date gains through May were attributed to Microsoft, Apple, Nvidia, Alphabet, Amazon, and Meta.

Bespoke Investment Group found that since 1990, the S&P 500 has made new highs 17 times with similarly weak participation from index constituents, typically resulting in positive stock performance one month to one year out. Historically, the average gain one month out is 0.56% with negative breadth, and 4.12% after a year. With the presidential election in November and the potential for a post-election relief rally, the year could end strongly.

The market has yet to fully experience the impact of zero days to expiration (zero DTE) options, which are highly risky and volatile due to their same-day expiration. These options allow an investor to control a substantially larger position in a company for minimal premium outlay, creating a leverage effect. Market makers must then offset the options trades they make with individual stock positions, risking a self-fulfilling prophecy where more option buying then requires more purchasing of the underlying stock, driving its price up beyond what it would naturally be.

The current unknown is, if participants stop buying or scale back will it have a magnified downside impact, similar to the margin buying preceding the Great Depression? While options differ from the margin buying in the 1920s, the effect of leverage is always the same: magnification of returns on the way up and the way down.

Bonds

Bonds have continued to struggle this year, despite a small reprieve last week. The 10-year yield dropped from 4.5% to 4.43%.

In price terms, bonds have rallied off the late-April lows but are still trading at substantial losses compared to equity indexes. The total return for the 20-year Treasury, represented by XTWY (BondBloxx Bloomberg Twenty Year Target Duration U.S. Treasury ETF), is -7.43% year to date, and -1.06% year to date for the five-year duration ETF. However, both were up last week, with the 20-year duration gaining 1.83%.

Investors concerned about central bank policy can take advantage of the current inverted yield curve by looking to the short-term to mid-term duration fixed-income space. This offers some protection against yield volatility if rates go down and reduces the impact of any surprise rate hikes.

Bespoke Investment Group analyzed forward S&P 500 returns under various central bank policy regimes. The firm categorized these regimes into deciles based on the number of central banks tightening or easing. It found that six-month forward S&P 500 returns are strongest during easing cycles and weakest during strong tightening cycles. Currently, there is mixed hike/ease activity from central banks, but as central bank policies begin to align, it could indicate a time to move toward fixed income or back into equities.

The bottom line for fixed income is that rates still offer attractive yields at the shortest end of the curve. However, investors should consider extending duration to retain some of today’s yields if rates go down and to prevent losing purchasing power in the event of a surprise hike. Most economists haven’t correctly predicted the easing cycle, and Bespoke’s data suggests uncertainty around whether now is the right time to cut rates.

Gold

Last week, gold lost 1.44%, dropping from $2,327.33 to $2,293.78 per ounce. The week started strong, with gold advancing nearly 2% for the week through Thursday (June 6). However, stronger-than-expected jobs data and the Federal Reserve’s tempering expectations for rate cuts caused gold to fluctuate. On Friday (June 7), the U.S. dollar surged to a 34-year high against the Japanese yen, further contributing to gold’s decline.

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 50% long. On Monday, it increased long exposure to 80% where it remained all week. Our QFC Political Seasonality Index started the week in its risk-on posture and moved to risk-off positioning on Friday’s close. (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 the week 200% long, dialing exposure back to 140% on Thursday’s close where it ended the week. Our Systematic Advantage (SA) strategy started and ended the week 120% 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 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.

The S&P volatility regime is registering a Low and Falling reading, which favors stocks 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 higher returns and lower volatility for stocks relative to the other volatility regimes.