Market insights and analysis

By Will Hubbard

Market snapshot

• Stocks: The equity market declined for the second-straight week and the NASDAQ 100 broke below its 50-day moving average, driven by mega-cap tech stocks. Investors, possibly influenced by improved interest rates, recovering portfolios, and anxiety about the continuation of this year’s strong rally, seem to be moving away from equities to money-market funds. As the market sputters, it’s a good time to review your dynamic risk-management processes and prepare for both potential equity downturns or a surge this fall.

• Bonds: Bond yields rose in anticipation of the continuation of a less-accommodative Federal Reserve. Higher rates offer an alternative to equity investing, luring some investors into money markets and bonds instead of equities.

• Gold: Bond yields and recent U.S. dollar strength weighed heavily on gold prices. Higher interest rates put pressure on gold by offering an income-producing alternative. However, gold’s diversification benefits remain and investors should maintain prudent portfolio-construction practices.

• FPI Market Regime indicators: Markets are in an Ideal economic environment stage (meaning inflation is falling and GDP is growing), a positive regime state for stocks and bonds, and one of underperformance and higher risk for gold. The S&P volatility regime is registering a Low and Falling reading, which favors stocks over gold, and gold over bonds, and is associated with higher returns and less volatility from equities and bonds.

• FPI strategy indicators: QFC S&P Pattern Recognition ended the week at 180% long equities. QFC Political Seasonality Index is in its risk-on posture. The Volatility Adjusted NASDAQ (VAN) strategy has a 160% exposure to equities. The Systematic Advantage (SA) strategy has a 60% exposure to equities. QFC Self-adjusting Trend Following (QSTF) was 200% all week. Our Classic model was in a long, risk-on position all week.

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The major U.S. stock indexes were mostly down last week. The NASDAQ, despite a 3.54% gain in Energy stocks, lost 1.90%; the Russell 2000 Index dropped 1.65%; the S&P 500 fell 0.31%; and the Dow Jones Industrial Average experienced the only gain, climbing 0.62%. The 10-year Treasury bond yield rose 12 basis points to 4.15%. Spot gold closed the week at $1,913.76, down 1.50%.

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

The stock market fell on tepid economic news last week. Consumer price index (CPI) data released on Thursday (8/10) showed no material change month over month. Core CPI, which excludes food and energy prices, declined to 4.7% from 4.8% year over year. Thursday’s jobless claims data was also in line at 231,000 versus 228,250 last week. Producer price index (PPI) data released on Friday came in a little hotter than expected at 0.3% compared to the anticipated 0.1%.

It might be surprising to see equities down for a second week despite a lack of notable negative data. Investors may be getting anxious after the strong rally experienced this year. Over the past year, the media has highlighted many economic concerns, most of which turned out to be less significant than anticipated. Investors, seeing improved interest rates and recovering portfolios, may be starting to ditch equities.

Last week, global money markets saw a $73 billion flow into money-market funds, the largest in four and a half months, while investors simultaneously pulled out of equities.

The S&P is down 2.8% and the NASDAQ is down 4.6% so far this month. According to Bespoke Investment Group, August is a traditionally weak month for stocks, and a modest decline in equity prices is typical. However, from a technical standpoint, the current weakness in the NASDAQ is notable. This week, the NASDAQ 100 broke below its 50-day moving average, driven predominantly by the major mega-cap tech names at the top of the index: Apple, Microsoft, Nvidia, and Tesla.

Before its recent decline, the NASDAQ spent 103 days above its 50-day moving average, which is uncommon. Since 1986, this phenomenon has occurred only 10 other times. Following the break of a 50-day moving average, the NASDAQ was negative nine out of 10 times the next week with an average return of -2.04%. Recovery typically took three months, and the outcomes varied quite a bit.

As the market sputters, it’s a good time to review your dynamic risk-management processes and prepare for both potential equity downturns or a surge this fall.

Bonds

Bond yields rose last week, adding additional strain to equities. The 10-year yields rose 12 basis points to 4.15%, and the two-year yields increased to 4.88%.

Higher rates offer an alternative to equity investing, luring some investors into money markets and bonds instead of equities. Higher rates also have a knock-on effect on equity valuation by requiring a higher future growth rate to substantiate current equity prices. Essentially, growth companies need to grow more in a higher interest rate environment than a low one to justify their market valuations.

Over the last two weeks, the resulting rate increases have coincided with a broad decline in the NASDAQ 100. The yield curve remains inverted.

Source: Flexible Plan Investments

Gold

Bond yields and the U.S. dollar have reacted strongly to changing expectations around the fed funds rate, causing gold to respond in kind. Last week, gold dropped 1.50%. Since a recent peak near July 19, the yellow metal declined 3.23%, while the dollar and 10-year Treasury yields both appreciated 2.56% and 11.38%, respectively.

Heading into this week, gold may face additional pressure as traders and investors anticipate the Federal Reserve’s July meeting minutes on Wednesday (8/16). Last year, it was expected that rates would rise and then quickly drop. According to CME Group’s FedWatch tool, the probability that rates for the September 20, 2023, meeting would be above 4.75% was less than 0.2% on September 1, 2022. Now, traders are debating if the Fed will hold rates between 5.25% and 5.5% or hike them another 0.25%. As of Friday (8/11), the probability was 90% for a pause and 10% for an increase.

Higher interest rates put pressure on gold by offering an income-producing alternative. However, the diversification benefits remain. It’s great that fixed income is finally providing income again, but investors should maintain prudent portfolio-construction practices.

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 150% long. It moved to 190% long on Monday’s close and dropped back to 90% on Tuesday. It jumped back to 190% long on Wednesday’s close before pulling back to 170% on Thursday’s close. With Friday’s weakness, it ended the week at 180% long. Our QFC Political Seasonality Index started the week in its risk-on posture and remained there for 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 Quantified Fund Credit 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 and reduced long exposure to 160% on Thursday’s close. The Systematic Advantage (SA) strategy started last week 30% long, increased exposure to 60% long on Monday’s close, and stayed there for the remainder of the week. 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.

Flexible Plan’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.