Current market environment performance of dynamic, risk-managed investment solutions.
By William Hubbard
Market snapshot
• Equities: Equities rallied across the board last week, with growth leading. The S&P 500 hit new all-time highs, rising 3.59%; the NASDAQ Composite gained at 5.19%; the Dow Jones Industrial Average added 2.96%; and the small-cap Russell 2000 gained 3.54%.
• Fixed income: Treasury yields declined, as softer labor data outweighed signs of strength elsewhere in the economy. The 10-year Treasury yield eased from 4.74% at the prior Friday's close to 4.65% on Friday, a decline of nine basis points.
• Gold and commodities: Gold was the week's standout, up 7.30%, as investors continue to look for defensive exposure despite equity tailwinds.
• Market indicators and outlook: Overall, it was a risk-on week with a defensive undertone: broad equity gains and an easier rate backdrop, but a strong bid for gold alongside them. Our strategies were active and diverse in their allocations, between looking for short opportunities to adding leveraged long positions.
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Equities
The economic data gave investors a more complicated picture than the equity tape. July's ISM Manufacturing PMI rose to 55.6, its strongest reading since May 2022, while the Services PMI remained in expansion at 54.1. At the same time, the labor data weakened. Job openings eased to 7.36 million. ADP reported just 44,000 private-sector jobs added in July, and Friday's payroll report showed a loss of 23,000 jobs even as the unemployment rate fell to 4.1%. Productivity rose 1.4% in the second quarter, while unit labor costs increased only 1.3%. That combination helped rates move lower and gave equities another tailwind, but the labor data are worth watching. Slower hiring can be constructive for inflation and interest rates as long as it remains orderly.
Bespoke Investment Group has noted that the S&P 500 broke out to a new all-time high after spending much of the summer in a consolidation. The breakout has been supported by a very strong earnings season, although some of the week's enthusiasm was clearly short term. SPY call volume hit a record on Tuesday, while call open interest did not rise nearly as much. The market trend remains constructive, but the difference between strong fundamentals and increasingly aggressive sentiment is something to keep in mind.
Fixed income
Fixed income had a better week as Treasury yields moved lower. The 10-year Treasury yield declined from 4.74% at the prior Friday's close to 4.65% on August 7, a drop of about nine basis points. That reversed some of the rise in yields from the second half of July and provided a modest tailwind for longer-duration bonds.
The data gave the bond market reasons to move in both directions. Manufacturing remained strong, but labor data softened as we highlighted in the previous section. The 10-year Treasury yield remains elevated, but last week's move showed that softer hiring can still pull yields lower even while the broader economy continues to expand.
Gold and commodities
Gold was the standout last week, gaining 7.30%. The U.S. Dollar Index slipped just 0.38%. A softer U.S. dollar likely helped at the margin, but a move that small does not explain a 7% jump in gold. Falling Treasury yields were also supportive, while the size of the move suggests investors were still willing to add protection even as equities moved sharply higher.
SPDR Gold Shares closed at 398.47 on August 7, about 4% above its 50-day moving average of 382.34, but still roughly 3% below its 200-day moving average of 411.70. The short-term trend has improved considerably, but gold has not yet fully repaired the longer-term decline. The Quantified Gold Futures Tracking Fund returned 7.41% for the week, closely tracking the move in gold futures.
Flexible Plan Investments (FPI) is the subadviser to the only U.S. gold mutual fund, The Quantified Gold Futures Tracking Fund (QGLDX). Launched in 2013, the fund is designed to track the daily price changes in the precious metal in a more tax-efficient manner than its ETF counterpart, GLD.
The indicators
QFC S&P Pattern Recognition Fund started the week in cash, then increased exposure to 50% long on Tuesday. On Friday, it dropped to 20% long to close out the week. Our QFC Political Seasonality Index started the week in its risk-on posture and ended the week in its risk-off posture, moving into that allocation on Friday’s close. (the QFC Political Seasonality Index is available – with all of the daily signals – post-login in our Weekly Performance Report section under the Quantified Fund Credit category).
Our intermediate-term tactical strategies have been varied in their degree of defensive positioning. The key advantage these strategies offer investors is their ability to adapt to changing market environments – participating during uptrends and moving to a defensive posture during downtrends.
The Volatility Adjusted NASDAQ strategy started the week 80% long, moved to 60% long on Tuesday’s close, decreased to 40% long on Wednesday’s close, and returned to 60% long on Friday to end the week. The Systematic Advantage strategy started the week 90% long, increased to 120% long on Wednesday’s close, and dropped to 90% long on Friday to end the week. Our QFC Self-adjusting Trend Following strategy started the week 100% long, increased to 200% long on Wednesday’s close, before dropping back to 100% long on Friday to end the week. These strategies can employ leverage, so their exposure may exceed 100% at times.
Our Classic model was fully risk-on all week. Most Classic accounts follow a signal that can change exposure within a week, though a few remain on platforms requiring up to a month to adjust to new signals.
FPI’s Growth and Inflation measure, one of our Market Regime Indicators, shows that we are in a Normal economic environment stage (characterized by falling inflation and growing GDP). Historically, a Normal environment has occurred 60% of the time since 2003 and has been a positive regime state for both stocks and gold. In a Normal environment, the worst historical drawdowns for the S&P 500 and gold have been 17.18% and 31.92%, respectively, while bonds have averaged a 3.2% annual return with a much smaller drawdown of 4.91%.
Our S&P volatility regime is registering a High and Falling reading, which has often coincided with higher drawdowns for stocks from an annualized return standpoint. This combination has occurred about 17% of the time since 2003. During such periods, equities and bonds tend to perform well but gold really shines, with a compounded growth rate of 15.56%. This also comes with higher expected drawdowns at around 30.48%.
Sources
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