Market insights and analysis

By Jason Teed

Market snapshot

• Seasonality could be surprisingly positive in September, which is typically a tough month for the stock market. 

• Treasury yields largely fell last week on signs of weakness in the labor market.

• Gold rose last week, likely due to reduced interest-rate expectations.

• Market regime indicators show the market is in an Ideal economic environment stage, which is historically positive for stocks and bonds but with a substantial risk of downturn for gold. Volatility is High and Rising, which has been positive for all asset classes but with the greatest risk for stocks.

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The major U.S. stock market indexes gained back some of August’s losses last week. The Russell 2000 small-capitalization index rose 3.63%, the NASDAQ Composite climbed 3.25%, the S&P 500 gained 2.50%, and the Dow Jones Industrial Average increased by 1.43%.

Last week’s gains were fairly broad, though defensive stocks lost for the week. Technology and Energy were the best-performing sectors, rising 4.42% and 3.78%, respectively. Utilities performed the worst, falling 1.73% as risk-off sectors suffered in the market rebound.

Stocks

September tends to be a tough month for the market. Whether this is a self-fulfilling prophecy remains to be seen. Historically, September is the only month that has averaged negative market performance in the U.S. These downturns frequently occur in the second half of the month, and this pattern has become even more pronounced over the past 10 years.

This year, however, seasonality might actually be a tailwind for the month. August is not typically a down month, but it was in 2023. Historically, when the market has risen more than 10% year to date and also experienced a decline in August, September usually shows net positive returns. But it’s worth noting that this specific combination of events has only occurred five times in recent history.

The release of the latest unemployment report was a major focus last week. Payrolls surpassed estimates, but the unemployment rate rose to 3.8%, marking its highest level in about 18 months. In addition, indicators suggest that the labor market is finally weakening. Although other economic measures, such as inflation, have shown signs of softening, the labor market has remained relatively resilient until now. However, the recent JOLTS (Job Openings and Labor Turnover Survey) report indicates emerging weakness in the labor market, following a post-pandemic period of strength.

These events would typically be headwinds for markets, as they suggest a slowdown in economic activity. Yet, as a result of the weakness in labor markets, investors anticipate that the Federal Reserve might begin decreasing interest rates earlier than previously expected. This has led to a drop in bond rates virtually across the entire yield curve—creating a tailwind for equities that could provide some additional upside for the market. According to the CME FedWatch Tool, the market largely expects yields to begin to lower in mid-2024.

One item that has likely helped sustain the U.S. economy, despite rising interest rates, is the savings consumers accumulated during the pandemic. This financial cushion has mitigated the impact of typical economic headwinds, maintaining a strong demand for consumer goods and labor. However, current measures indicate that this excess savings is nearly depleted, leaving consumers with only about one-third of a month's worth of consumption as a financial buffer. Once this cushion is gone, the economy could become more vulnerable to future headwinds. This depletion of savings may also lead to increased volatility in both the market and the broader economy.

Despite the tug-of-war between economic positives and negatives, investors largely believe that the Federal Reserve can achieve a soft landing for the economy. However, it’s reasonable to anticipate increased market volatility in the near future. Given the relatively low predictability of the markets since the pandemic began, responding to market events as they happen is likely the best course of action.

Bonds

Treasury yields largely fell last week. The two-year and three-year maturities fell the most. Rates at the very shortest and longest maturities eked out a small gain for the week. Aggregate moves reduced the yield-curve inversion, but it remains heavily inverted. Decreases in rates suggest the market believes the Fed may decrease interest rates sooner than expected.

Term yields increased and credit spreads decreased, indicating healthy economic expectations. Overall, long-term Treasurys underperformed high-yield bonds, and longer-term bonds underperformed shorter-term bonds.

Gold

Spot gold rose for the week along with equities, gaining 1.31%. This was likely due to reduced interest-rate expectations. As rates fall (or are expected to fall), gold becomes more attractive than interest-bearing assets.

Non-currency safe-haven assets, such as long-term Treasurys, were also down for the week.

Flexible Plan Investments (FPI) is the subadvisor 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

Our Political Seasonality Index began last week out of the market, entering on Wednesday’s (8/30) close. (Our QFC Political Seasonality Index is available post-login in our Weekly Performance Report section under the Domestic Tactical Equity category.) The very short-term-oriented QFC S&P Pattern Recognition strategy’s equity exposure was largely short for the week. Exposures for Monday through Friday, respectively, were at 0.5, 0.5, -0.2, -0.7, and -1.0.

Our intermediate-term tactical strategies are mixed in exposure. The Volatility Adjusted NASDAQ (VAN) strategy began last week 140% long. It changed to 120% long on Wednesday’s close and 140% on Friday’s close. The Systematic Advantage (SA) strategy was very active, trading nearly every day of the week. Exposures for Monday through Friday, respectively, were at 30%, 90%, 60%, 90%, and 90%. The strategy changed to 30% exposed on Friday’s close.

Our Classic strategy was fully invested for the week. The strategy can trade as frequently as weekly.

Flexible Plan’s Growth and Inflation measure, one of our Market Regime Indicators, currently indicates an Ideal economic environment stage (meaning a declining inflation rate and positive quarterly GDP reading). Historically, an Ideal environment has occurred 28% of the time since 2003 and has been a positive regime state for equities and bonds, but negative for gold. Equities tend to outpace bonds on an annualized return basis in an Ideal environment, albeit with higher risk.

Our S&P volatility regime is registering a High and Rising reading. This environment favors equity 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 relatively low returns for all three asset classes.