Market insights and analysis

By Will Hubbard

The major U.S. stock indexes finished with strong gains last week. The Technology sector led performance, rising 4.44% for the week. The S&P 500 added 2.58%, the Dow Jones Industrial Average gained 1.25%, the NASDAQ Composite jumped 3.25%, and the Russell 2000 small-capitalization index rose 0.52%. The 10-year Treasury bond yield moved up 2 basis points to 3.76%. Spot gold closed the week at $1,957.98, down 0.16%.

Stocks

Equity markets continued their upward march last week. The S&P 500 Index is in bull market territory, and the NASDAQ added another 2% to its massive year-to-date gain.

Experts hold differing opinions on whether this rally will last and push the market to new highs. Doubters note that the economy has slowed down, and there is concern about what is driving the market higher in the short term.

In a recent article, Yahoo Finance compiled insight from multiple Wall Street experts. Some believe that the fundamentals do not support the current bull market, leaving investors such as Morgan Stanley’s Mike Wilson to label it “a fluke.” Others, such as economist Jeremy Siegel, remain critical of the Federal Reserve’s stance on interest rates, citing the potential for higher interest rates to cause a recession. Those with a bullish perspective, on the other hand, see declines in inflation and advancements in artificial intelligence contributing to economic expansion, rather than contraction.

As technicians, we at Flexible Plan Investments (FPI) look to history to help inform investment decisions. According to Bespoke Investment Group, when the market is extended well into overbought territory, it typically implies better-than-average forward returns over the next year. The S&P 500 closed more than 2.5 standard deviations above its 50-day moving average for the last five trading sessions.

Since 1952, 19 of these streaks have occurred. Of those 19 streaks, only three were negative. These streaks had an average (mean) return of 11.39% and a median return of 14.39%. The average return of the S&P 500 over that time was 8.69%.

We see these sustained and elevated trading days as a sign of strong bullish behavior that helps set up the next run. Just because the market is overbought doesn’t mean you should write off the next year of performance.

The bullish narrative is further supported by economic data released last week. The consumer price index data surpassed expectations, registering an annualized rate of 4.0% compared to the anticipated 4.1%. On Wednesday (June 14), the Federal Reserve announced it was keeping interest rates at 5.25%, aligning with market projections. In its prepared statement, the Federal Open Market Committee (FOMC) left the door open for future rate hikes, with its primary indicators being ongoing job growth, historically low unemployment levels, and an annualized inflation rate above their 2% target.

On Thursday, retail sales showed an increase in consumer spending. A 0.2% decline was anticipated, but the actual number was a 0.3% gain. This is primarily attributed to increased auto sales, which are up 20% year over year. Excluding auto sales, retail sales were up 0.1%, in line with expectations.

On Friday, the University of Michigan released its consumer sentiment report, which came in above the expected 60.1 at 63.9, the highest reading in over four months.

Bonds

Bond yields remained mostly flat last week. The 10-year Treasury picked up 2 basis points of yield to end the week at 3.76%.

After declining significantly during the recent cycle of interest-rate increases, bonds have exhibited relatively subdued performance this year. Long-term Treasurys were down 0.11% year to date as of Friday’s (June 16) close.

The yield curve remains inverted, with two-year yields leading the five-year and 10-year yields, respectively. Over the last week, the spread between the two-year and five-year yields, as well as the five-year and 10-year yields, have widened. Typically, this signals a risk-off forward-looking investor. However, due to the unprecedented nature of the recent rate increases, this trend has become the new norm as of late.

Gold

After falling 0.16% last week, gold is still near its all-time high, despite being below $2,000 per ounce.

Gold is a highly volatile asset and is typically associated with being an inflation or volatility hedge. Its returns are uncorrelated with stocks and bonds over the long term. As a result, we monitor it for opportunity amid a turbulent economic backdrop, which is why it is included in a variety of portfolios.

Gold can provide diversification when nothing else is working, so it is important both to own gold as part of a diversified portfolio and to rebalance it regularly. For more information about investing in gold, please check out FPI’s white paper, “The role of gold in investment portfolios” (for financial professionals only).

Flexible Plan Investments is the subadviser 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

The very short-term oriented QFC S&P Pattern Recognition strategy started last week 80% short. It moved to 140% short on Tuesday’s close and to 170% short on Wednesday’s close. It further reduced exposure to 90% on Thursday’s close. On Friday, it ended the week 20% short. Our QFC Political Seasonality Index started last week in its risk-off mode. It switched to its risk-on positioning at the close 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 140% long and moved to 160% long on Tuesday’s close. The Systematic Advantage (SA) strategy started last week 60% long and increased exposure to 120% long on Friday’s close. Our QFC Self-adjusting Trend Following (QSTF) strategy was 200% 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 in a long, risk-on position 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.

FPI’s Growth and Inflation measure, one of our Market Regime Indicators, shows markets are in an Ideal economic environment stage (meaning inflation is falling and GDP is growing). Historically, an Ideal environment has occurred 28% of the time since 2003 and has been a positive regime state for stocks and bonds. Gold tends to underperform both stocks and bonds on an annualized return basis in an Ideal environment and carries a substantial risk of a downturn in this stage. From a risk-adjusted perspective, Ideal is one of the best stages for stocks, with limited downside.

The S&P volatility regime is registering a Low and Falling reading. From an annualized return standpoint, low and falling volatility favors stocks over gold, and gold over bonds. 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.