Market insights and analysis

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

2nd Quarter | 2024

Quarterly recap

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

By Will Hubbard

Market snapshot

•  Stocks: Last week’s strong economic data and comments from Fed Chair Powell spurred a significant rally in small caps and broad market participation.

•  Bonds: Bond prices advanced on the increased likelihood of a rate cut.

•  Gold: Gold prices continued to move higher supported by persistent wage gains and a weakening U.S. dollar.

•  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. In a flip of the recent script, the Russell 2000 small-capitalization index led the charge with a 6.01% gain, its largest weekly return of the year. The Dow Jones Industrial Average rose 1.61%, the S&P 500 gained 0.89%, and the NASDAQ increased by 0.25%. The 10-year Treasury yield fell to 4.16%, pushing bond prices higher. Gold gained 0.81%.

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’s no surprise that the largest stocks by market capitalization outperformed every other decile in the Russell 1000 Index, based on various metrics we discussed last week. However, last week’s economic data, including consumer price index (CPI) and producer price index (PPI) reports, unemployment figures, and comments from Federal Reserve Chairman Jerome Powell, changed the narrative.

Before last week, the small-cap Russell 2000 was up 0.75% for the year. Last week, it added an impressive 6.01%, ending the week up 6.76% for the year. As we noted last week in our market update, the first half of the year was dominated by the largest market cap securities in the Russell 1000. Last week, the market was strong overall, but the largest 100 securities by market cap were among the weakest performers in the Russell 1000.

Markets were further buoyed by strength in the 2,000 small-cap companies, indicating a broad market rally. The rest of the market (the troops) seem to finally be following the lead of major companies like Nvidia, Apple, and Microsoft (the generals).

The weak performance of the mega-cap securities followed better-than-expected inflation data. The core CPI increased by 0.1% month over month, compared to the anticipated 0.2%. The year-over-year headline CPI rose by 3.0%, slightly below the 3.1% forecast. This fueled a rally that continued through the week.

New unemployment claims came in at 222,000, better than the expected 236,000. While Friday’s PPI data exceeded expectations, it did little to slow the market’s advance. The core PPI rose 0.4% month over month, compared to the expected 0.2%. Headline PPI increased by 0.2%, more than the anticipated 0.1%. Higher PPI figures, reflecting wholesale prices, could negatively reflect in future CPI data as wholesale costs have to be accounted for in demand for final goods.

Fed Chairman Powell delivered his semiannual monetary policy report to Congress, stating that the Federal Reserve’s current policy target of 5.25% to 5.50%, which it has maintained since last July, has been effective in reducing inflation without stifling consumer spending or causing a spike in unemployment.

The official unemployment rate has softened to 4.1% as of June, which the Fed believes is appropriate given the current economic landscape. Chairman Powell noted that many metrics, such as the jobs-to-workers ratio, are returning to near pre-pandemic levels. He described the economy as “strong, but not overheated,” and indicated that the committee does not see sufficient data to justify lowering the federal funds rate target range.

In summary, last week saw small caps show signs of life for the first time in 2024, with broad market participation. Sustained market strength will require continued involvement from all securities and strong macroeconomic data, such as slowing inflation and strong employment.

Bonds

The 10-year Treasury rate fell from 4.28% to 4.18% on strong CPI data and employment figures, driving bond prices up.

The Federal Reserve, while not specifying a date for a rate cut, views inflation as a significant hurdle for reducing the overnight rate. The market is analyzing the economic projections and forecasting a lower fed funds rate in the near future, if not immediately, then certainly over the next few years.

The bottom line for fixed income is that the pre-pandemic mantra, “Don’t fight the Fed,” remains relevant even in a more normal rate environment. The Fed seems inclined to cut rates, and it looks like it’s on the path to do so. Investors should be cautious about overinvesting in money-market funds solely because they offer attractive rates compared to the past decade.

Gold

Last week, gold gained 0.81%, increasing from $2,392.16 to $2,411.43 per ounce.

Slowing CPI numbers pose a headwind for gold, but the advancing PPI suggests that current price levels are becoming the new base level of prices. With labor wages up and unlikely to decrease, the prices of goods and services are far more likely to remain elevated. The price of gold is adjusting to reflect this reality and is also being supported by a weakening U.S. dollar.

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 spent the week 160% long. Our QFC Political Seasonality Index was in its risk-on posture throughout the 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.)

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 180% long, increased exposure to its maximum of 200% on Tuesday’s close, and dropped exposure back to 140% long on Friday’s close. Our Systematic Advantage (SA) strategy started last week 120% long, increased exposure to 150% long on Tuesday’s close, and remained there for the rest of the week. 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.



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