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

2nd Quarter | 2024

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

Market Update 9/3/24

By Will Hubbard

Market snapshot

•  Stocks: Stocks were mixed in anticipation of a Federal Reserve rate cut. Economic indicators showed strength, but a shift from tech stocks to consumer staples reflected cautious investor sentiment.

•  Bonds: Bond yields rose slightly as markets adjusted to expectations of a smaller Federal Reserve rate cut.

•  Gold: Gold declined slightly due to a stronger U.S. dollar and modestly rising bond yields.

•  Market indicators and outlook: 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 High and Rising, which favors stocks over gold and then bonds.

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The major U.S. stock market indexes had mixed performance last week. The Dow Jones Industrial Average hit a new high with a 1.07% gain, the S&P 500 rose 0.27%, the Russell 2000 small-capitalization index lost 0.01%, and the NASDAQ Composite fell 0.91%. The 10-year Treasury, still off its recent highs, added 10 basis points to close at 3.9%. Gold lost 0.37%.

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

Technology stocks, particularly the “Magnificent 7” (Apple, Nvidia, Microsoft, Amazon, Tesla, Alphabet, and Meta), have long been driving market activity. Recently, however, we’ve seen markets struggle to reach new highs, despite a sharp rally earlier this month. This hesitancy, combined with increased volatility since August, raises questions about whether the broader market is on edge due to the anticipation of an upcoming rate cut in September and concerns about weakening economic data.

Last week’s economic and market data was mixed. While tech stocks faltered, economic indicators—including consumer confidence, gross domestic product (GDP) growth, unemployment claims, and core personal consumption expenditures (PCE)—showed strength.

The Conference Board’s consumer confidence index exceeded expectations, rising to 103.3 from the previous 101.9, surpassing the anticipated decline to 100.9. GDP growth also surprised to the upside, reaching 3.0%, beating the 2.8% annualized estimate. Unemployment claims were consistent with expectations at 231,000, and PCE saw a modest month-over-month increase of 0.2%.

At the same time, there was a notable shift in market behavior. Technology stocks, represented by the sector SPDR ticker XLK in the following chart, continued to struggle, ending the week down 1.73%. In contrast, consumer staples, represented by SPDR ticker XLP, held up well, finishing the week up 0.47%.

In addition to the sector rotations we’re seeing domestically, markets across the globe are looking good and behavior is generally bullish. According to SentimenTrader.com research analyst Jason Goepfert, nearly two dozen developed countries, including the U.S. equity market indexes, were in a medium-term uptrend as of Friday. Over the last 50 years, there were only 11 instances where all country markets were above their 50-day moving average with a rising 200-day moving average. The last time this happened was December 30, 2020.

SentimenTrader’s research* suggests that such an occurrence is very likely to generate substantial mean returns in the stock market here in the U.S. (14.3% return with an average maximum loss of 2.5%—max of 7.6%—for the S&P 500 since 1975). Expectations are also high for foreign markets (11.7% return with an average max loss of 1.8%—max of 5.3%—for the MSCI Developed Market Index).

While Jason’s research doesn’t endorse any specific investment strategies, we believe these trends present favorable conditions for equity markets. We aim to position our funds, including the Quantified Common Ground Fund (QCGDX), the Quantified Market Leaders Fund (QMLFX), the Quantified STF Fund (QSTFX), and the Quantified Global Fund (QGBLX), to capitalize on such market environments, in line with our broader strategic approach. (See disclosures on all of these funds.)

While past performance has been positive in similar conditions, it’s important to note that investing always carries risks, and results may vary.

In summary, while fundamental macroeconomic data remains positive, domestic markets have not yet broken through to new highs. The recent shift from high-performing technology stocks to consumer staples reflects some disconnect between strong economic data and cautious investor behavior. However, positive performance from all other developed countries could be the tide that lifts all boats. History suggests that when markets behave this well, the next year is generally very positive. We remain on alert for technical changes in consumer behavior and are broadly optimistic about the continued advancement of non-U.S. markets.

Bonds

The bond market has entered a calm period ahead of the anticipated Federal Reserve rate cut in September. Yields have come down from their recent highs. The 10-year Treasury closed at 3.90% last week, up 10 basis points.

However, underlying tension remains as investors assess stronger-than-expected economic data, such as robust second-quarter GDP growth and consumer confidence.

The expected range for the new federal funds rate has been volatile over the last month. At the beginning of August, there was an 85% probability of a target range between 475 and 500 basis points, according to CME’s FedWatch. Now, there is a 100% probability of a rate cut, with a 70% chance of a range between 500 and 525 basis points.

While bond yields surged in 2022 and 2023 due to inflation, they are now under pressure as the Federal Reserve prepares to ease monetary policy to support large purchases like homes and automobiles.

Gold

Last week, gold dropped 0.37% to close at $2,503.39 per ounce. The metal’s movement was fairly mute, pressured by a stronger U.S. dollar, which hit a two-week high, and modestly rising bond yields. With rate cuts on the horizon, investors favored bonds, opting to lock in current rates rather than invest in the more volatile gold market.

Reuters reports that TD Securities commodity strategist Daniel Ghali says speculative positioning in gold is “effectively maxed out” for now. He noted that gold’s recent pressure from the dollar aligns with this positioning view.

Despite short-term pressures, gold remains a favored asset class for its diversification benefits and perceived role as a hedge against market volatility.

Flexible Plan Investments is the subadviser to the only U.S. gold mutual fund, The Gold Bullion Strategy Fund (QGLDX), designed at its introduction 11 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 20% long, moved to 20% short on Monday, moved back to 20% long, returned to 20% short on Wednesday, and moved back to 20% long on Friday. Our QFC Political Seasonality Index was in its risk-off 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 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 100% long, reduced exposure to 80% on Tuesday’s close, moved back to 100% long on Wednesday, dropped back to 80% on Thursday, and increased exposure to 120% long on Friday’s close. Our Systematic Advantage (SA) strategy remained 30% long throughout the week. Our QFC Self-adjusting Trend Following (QSTF) strategy was 200% long for the 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 U.S. stocks, with 100% 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.

FPI’s Growth and Inflation measure is one of our Market Regime Indicators. It shows that we are in a Normal economic environment stage (meaning a positive monthly change in prices and a positive monthly change in GDP). 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.

Our S&P volatility regime is registering a High and Rising reading, which favors equities over gold and then bonds from an annualized return standpoint. The combination has occurred 23% of the time since 2003. It is a stage of high risk for both equities and gold.

 

* If you’re interested in exploring more of SentimenTrader’s research, we learned that they currently have a promotion for 50% off the first year of their research report bundle, priced at $295 instead of $590 for new subscribers. Visit sentimentrader.com for more information.



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