Market insights and analysis

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

3rd Quarter | 2020

Market insights and analysis

rss

Updates on how dynamic, risk-managed investment solutions are performing in the current market environment.

By Tim Hanna

After a rally on Monday, the major indexes pulled back and finished last week relatively flat. The NASDAQ Composite finished the week up 0.79%, the S&P 500 gained 0.19%, the Dow Jones Industrial Average was up 0.07%, and the Russell 2000 small-capitalization index declined 0.23%. The 10-year Treasury bond yield fell 4 basis points to 0.74%, as Treasury bonds rose for the week. Last week, spot gold closed at $1,899.29, down 1.61%.

Stocks

Stocks led the week with a pop on Monday (October 12), but retraced throughout the week as earnings season kicked off with a disappointing start. Third-quarter earnings began with top health care companies and big banks reporting. The major banks, which have lagged during the COVID-19 recovery, issued a cautious outlook on the economy. In the race to a vaccine, Johnson & Johnson and Eli Lilly paused vaccine trials last week due to safety concerns.

Investors also had to assess the potential impact of renewed lockdowns in Europe due to a second wave of COVID-19, lack of progress in stimulus negotiations in the U.S., and weekly U.S. unemployment claims setting a two-month high (increasing to almost 900,000). On a positive note, core retail sales beat forecasts (rising 1.5%) and preliminary University of Michigan October consumer sentiment surprised to the upside.

Interestingly, the jump on Monday (a gain of more than 3% for the NASDAQ 100) helped the market avoid larger weekly losses. Bespoke Investment Group studied performance on Mondays throughout the year and discovered that “two-thirds of this year’s Nasdaq gains have come on Mondays.”

Bonds

Treasury yields decreased most of the week, experienced a rise after the retail sales report, and finished the week down 4 basis points (ending at 0.74%) on the 10-year Treasury. Interest rates are still historically low, and central banks remain accommodative. The municipal bond market, which produced moderately positive returns last week, saw an increase in issuance and activity. T. Rowe Price traders noted, “30-day visible supply reached a 52-week high.” On the corporate bond front, T. Rowe Price adds, “Primary issuance levels contracted throughout the week and finished well below expectations. Trading volumes were somewhat light in the high yield market, as macroeconomic concerns appeared to keep many investors on the sidelines.”

Market consensus is that the Treasury yield curve is expected to continue steepening. The following chart shows the yield curve during October over the last two years. Remarkably, just one year ago, investors were receiving more yield on monthly Treasury bills than today’s 30-year Treasury bonds.

Gold

Last week, spot gold closed at $1,899.29, down 1.61%. Last week’s flight to safety prioritized the U.S. dollar over gold as the safe-haven asset of choice. The following chart shows the daily returns of the U.S. dollar (DXY; the orange line) versus gold (GLD; the blue line) for last week.

The metal remains in a trading range that was established a month ago. This range formed right below gold’s longer-term descending-triangle price pattern. The bottom of the triangle is now technically a resistance level for the metal.

The indicators

Flexible Plan’s Growth and Inflation measure, one of our Market Regime Indicators, shows that we remain in a Stagflation economic environment stage (meaning a positive monthly change in the inflation rate and negative monthly GDP reading). Historically, Stagflation has been a positive regime state for gold, which tends to outpace both stocks and bonds during such an environment.

Our Volatility composite (gold, bond, and stock market) 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.

With the NASDAQ experiencing the largest gyrations of the week, let’s examine how our most used trend-following strategy faired in what ended up being a difficult week for trend-following systems. Our QFC Self-adjusting Trend Following (QSTF) strategy started the week 200% invested and changed to 160% exposure on Tuesday (October 13). The timing of leverage reduction proved to be advantageous last week, with the strategy returning almost 2% while the NASDAQ 100 returned just over 1%.

The very short-term-oriented QFC S&P Pattern Recognition strategy’s equity exposure has increased to 196% bullish. Our Political Seasonality Index bought at Monday’s (October 19) close but sells again on October 22.

Our intermediate-term tactical strategies are uniformly positive, although to various degrees. The Volatility Adjusted NASDAQ (VAN) strategy has a 100% exposure to the NASDAQ, the Systematic Advantage (SA) strategy is 137% exposed to the S&P 500, our Classic strategy is in a fully invested position, and our Self-adjusting Trend Following (STF) strategy remains 160% invested. VAN, SA, and STF can all employ leverage—hence the investment positions may at times be more than 100%.



Comments are closed.