Market insights and analysis

By Tim Hanna

Market snapshot

•  Stocks: The S&P 500 rose to another all-time high on AI hopes and news from China.

•  Bonds: The 10-year Treasury rose 1 basis point to 3.75%, and price action remained below the 50-day moving average. Data releases suggested further moderation in inflationary pressures.

•  Gold: Gold rose 1.39%, setting a new high and continuing to trade above the upper end of its bullish price channel.

•  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 Falling, which favors gold over bonds and then stocks from an annualized return standpoint.

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The major U.S. stock market indexes were mostly up last week. The S&P 500 increased by 0.64%, the NASDAQ Composite was up 0.96%, the Dow Jones Industrial Average gained 0.59%, and the Russell 2000 small-capitalization index fell 0.13%. The 10-year Treasury bond yield rose 1 basis point to 3.75%, taking Treasury bonds lower for the week. Spot gold closed the week at $2,658.24, up 1.39%.

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

Last week, the S&P 500 Index reached new highs. The Index is well above its 200-day and 50-day moving averages. Last week’s move occurred with little volatility, but since the October 2023 low, the market has faced three sell-off attempts: in April, mid-July to early August, and early September.

The S&P 500’s gains last week were driven by developments in China and continued optimism around artificial intelligence (AI). Chinese officials announced measures to boost consumption, property demand, and equity market liquidity. Specifically, the People’s Bank of China lowered its repurchase rate, medium-term lending facility rate, and reserve requirement ratio. Officials also hinted at a potential cut of the loan prime rate and announced several fiscal spending measures. Upcoming bond issuance is expected to reach around half the amount spent to counter the global financial crisis. The Shanghai Composite and Hong Kong’s Hang Seng indexes jumped 13% for the week on the news.

China’s rate cuts and announced economic measures coincided with six major central bank decisions last week. Only the Reserve Bank of Australia maintained rates amid the global easing campaign.

Against this backdrop, Bespoke Investment Group analyzed global monetary policy, noting that 37 central banks have cut rates over the last three months, the most since the global financial crisis. Currently, Brazil, Japan, and Russia are the only central banks raising rates.

Global policy rates peaked in December 2023, and GDP-weighted policy rates have fallen 66 basis points as of last Friday. If you exclude Argentina’s and Turkey’s extremely high rates, which skew the average, rates peaked much lower and have fallen about 33 basis points. The monetary easing cycle is broad but moderate.

Bespoke also examined global monetary policy and its impact on global stock market performance. Historically, both low (bottom quintile) and moderately high levels benefit equity markets (see the following chart). Returns are typically weakest when rates are highest. The current state falls into the eighth decile.

The following chart shows how changes in rates impact equity market returns. Significant declines (bullish) or increases (bearish) in rates have the most impact on stock market performance. Less extreme declines, like the current one (fourth decile), have led to more stable, moderate returns.

Next, Bespoke looked at the impact of policy rates and changes on non-equity asset classes. Commodities tend to perform well during large interest-rate hikes. However, the current rate of change is the worst backdrop for commodities. Interestingly, the current level of rates (eighth decile) is the strongest backdrop for commodities (second chart below).

In fixed-income markets, the analysis paints a clearer picture. Long-term bond returns are overwhelmingly a function of yields. High policy rates mean higher fixed-income returns. Notably, large declines in rates also drive outsized bond market performance.

As we approach the end of 2024, let’s take a look at how factor performance has broken down so far this year. The following chart compares the performance of stocks that score highly on an attribute to those that score poorly, showing the relative performance of various factors. Among the universe of Russell 3000 stocks, each factor shows the relative performance of the highest quintile by each attribute against the lowest quintile. Year to date, high-momentum stocks have been the clear winners, with the highest-momentum stocks outperforming the lowest-momentum stocks by just under 20%. Notable high-momentum stocks include Nvidia (NVDA), Meta (META), Eli Lilly (LLY), JP Morgan (JPM), Costco (COST), Broadcom (AVGO), and General Electric (GE). In contrast, liquidity, value, and growth factors have not been major market drivers this year.

Research suggests that economic conditions play a key role in forecasting market performance following rate cuts. The S&P 500 averaged a nearly 12% decline one year after initial cuts during a recession, while non-recessionary cuts aimed at “normalizing” policy averaged a 13% gain, according to a study of the last 10 easing cycles by Ryan Detrick, chief market strategist at Carson Group. Michael Arone, chief investment strategist for State Street Global Advisors, noted, “The linchpin to the whole thing is that the economy avoids recession.”

While it’s impossible to predict which direction markets will trend in the coming months, real-time response to trend changes is critical to meeting one’s long-term investment goals. This uncertainty underscores the importance of incorporating dynamically risk-managed investment strategies that can adapt to changing market conditions.

When markets exhibit positive momentum, many of our momentum-based strategies adjust to a more risk-on positioning. If prices continue to rise, systematic trend-following algorithms are designed to identify and participate in the upward price momentum. Conversely, if volatility arises and prices decline, systematic momentum strategies are designed to identify the change and move to more defensive positioning. Mean-reversion strategies attempt to recognize and navigate sideways market conditions, offering an uncorrelated complement to momentum-based programs, which face challenges during trend-reversal inflection points.

The following chart shows the year-to-date performance of the Quantified STF Fund (QSTFX, 23.53%) compared to the Invesco QQQ Trust (QQQ, 19.45%). The Quantified STF Fund dynamically trades the NASDAQ 100, identifying long-term trends within the market to determine its signal, ranging from 1X inverse to 2X long, with the flexibility to adjust its position daily. The Fund is used within some of our QFC strategies and can be used in our turnkey solutions. The Fund has navigated this year’s market price structure well, starting the year with 200% long exposure, reducing to 100% in mid-April, and increasing to 200% leverage on May 9 during the first bout of volatility. During the July to August sell-off, there was a step down in signal, most notably to 80% long on July 25 and then to 0% exposure on August 5. As volatility decreased and markets attempted to recover, the Fund increased long exposure, with the signal returning to 2X long on August 16. The Fund stepped down exposure at the start of September, moving to 0X by September 5. With the recent reduction in volatility, the Fund signal moved to 2X on September 12.

Bonds

Last week, the yield on the 10-year Treasury rose 1 basis point, ending at 3.75%. The core (less food and energy) personal consumer expenditures (PCE) price index, the Federal Reserve’s preferred inflation gauge, rose 0.1% in August, slightly below expectations. The index climbed 2.2% on a year-over-year basis, close to the Federal Reserve’s 2.0% long-term inflation target and the lowest since February 2021. In addition, personal incomes and spending both surprised on the downside in August, further suggesting a moderation in inflationary pressures.

The 10-year Treasury has remained below its 50-day moving average for the past few months, a shift from the rising rates of recent years. With the recent decline in yields, it is now trading at the bottom of the sideways channel that began in the latter half of 2022.

T. Rowe Price traders noted, “It was a busy week in the primary market for municipal bonds, which limited activity in the secondary market. The new issues experienced strong demand, with multiple deals seeing oversubscription.

“Meanwhile, issuance was heavy in the short-maturity investment-grade (IG) corporate bond market. … The firmer macro backdrop—partly driven by China stimulus headlines—was broadly supportive for sentiment in the high yield bond market. The high yield market traded mostly flat, however, amid average volumes.”

Gold

Gold rose 1.39% last week, setting another new high and continuing to trade above the upper end of its bullish channel price structure. The “golden cross” (when the 50-day moving average crosses above the 200-day moving average), seen by technicians as a longer-term trend signal to the upside, remains in play. After consolidation since April, momentum has pushed the metal to a new value zone, setting a new price structure above the consolidation zone, marked by the black lines on the following chart.

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 in a more tax-efficient manner than its ETF counterpart, GLD. The Fund is used within some of our QFC strategies (such as our QFC TVA Gold) and can be used within our more customizable turnkey solutions, such as our QFC Multi-Strategy Core and Explore offerings. In addition to alternative and bond strategies, our QFC Multi-Strategy Explore: Low Correlation strategy is currently allocated to QFC TVA Gold.

The indicators

The very short-term-oriented QFC S&P Pattern Recognition strategy started last week with 50% short exposure. Exposure changed to 30% short at Monday’s close, 50% short at Tuesday’s close, 0% exposed at Thursday’s close, and 30% short at Friday’s close. Our QFC Political Seasonality Index favored defensive positioning throughout last 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 with 60% long exposure to the NASDAQ, changed to 80% long exposure on Wednesday’s close, changed to 100% long exposure at Thursday’s close, and decreased exposure to 80% long at Friday’s close. The Systematic Advantage (SA) strategy is 120% exposed to the S&P 500. Our QFC Self-adjusting Trend Following (QSTF) strategy signal was 200% long throughout last week. VAN, SA, and QSTF can all employ leverage—hence the investment positions may at times be more than 100%.

Our Classic model remained in stocks throughout last 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 platforms that are more restrictive and can take up to one month to generate a new signal.

Flexible Plan’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 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.

Our S&P volatility regime is registering a High and Falling reading, which favors gold over bonds and then stocks from an annualized return standpoint. The combination has occurred 13% of the time since 2003. It is a stage of higher returns and lower volatility for bonds relative to the other volatility regimes.