Market insights and analysis

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

1st Quarter | 2022

Market insights and analysis

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

By Jason Teed

The major U.S. stock market indexes rebounded last week after recent sell-offs. The S&P 500 rose 3.82%, the Dow Jones Industrial Average gained 4.02%, the NASDAQ Composite was up 3.61%, and the Russell 2000 gained 2.43%. The 10-year Treasury bond yield rose 14 basis points to 1.48%, as bonds gave up some recent returns. Spot gold closed the week at $1,782.84, nearly unchanged from the previous week.

All 11 sectors were up last week. The Technology and Energy sectors were the best performers, rising 5.98% and 3.69%, respectively. The Consumer Discretionary sector was the worst performer for the week, up 2.52%.

Stocks

The day after Thanksgiving, news spread about a new variant of COVID: omicron. Anticipation of possible lockdowns worldwide, among other concerns, led to a sell-off in the S&P 500 of about 4%, but the markets quickly rebounded from those recent lows on news that the severity of the new variant was limited.

The market appears to be taking additional breaking information on the variant in stride, as there has been little market movement since the recent rebound. “Cautious optimism” seems to categorize investors’ current attitudes.

Inflation is also a concern. Last week, core inflation posted a year-over-year reading of 6.8%, the highest reading in nearly 40 years.

Many factors led to this “hot” reading, including both supply and demand, which is not always the case. Usually, inflation is caused by either high demand or limited supply.

Supply-side inflation can be more concerning since Federal Reserve policy is less able to deal with it. Supply problems in 2021 revolve around supply-chain issues caused by the pandemic (lockdowns, mandates), as well as a resulting labor shortage. When issues like these cause companies to reduce or stop production, supply falls and prices rise. The best solution to this type of inflation is policy that directly addresses the underlying issues. Currently, U.S. companies are investing in correcting supply-chain issues. However, these policies take time to enact, during which time inflation may continue.

Demand has also contributed to inflation this time around. Consumers are ready to begin spending their savings from the prior year and are looking forward to a more complete economic reopening. The Fed has much better tools for this type of inflation, such as the recently discussed acceleration of its tapering timetable. It has proven its ability to slow down the economy in past bouts with inflation.

Bonds

The 10-year Treasury rose to 1.48%, still off from its recent October high of 1.70%

Yields are still historically low, though rising overall. Term yields increased and credit spreads decreased for the week. Both indicate a healthy appetite for risk in the market. Overall, long-term Treasurys underperformed high-yield bonds, and longer-term bonds underperformed shorter-term bonds.

The yield curve shows a slight inversion from 20 to 30 years, suggesting the market may expect rates to decrease in the very long term. The most recent bond bull market lasted over three decades, so this expectation is realistic. Overall, the yield curve bears watching but continues to suggest a healthy economy going forward.

Gold

Spot gold was virtually unchanged last week after selling off following the run-up in November. Other safe-haven assets, such as long-term Treasurys, were down for the week as rates increased. Increasing rates are often a headwind for gold, but the metal nevertheless remained unchanged.

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 more than nine years ago to track the daily price changes in the precious metal.

The indicators

Our Political Seasonality Index began the week fully invested but exited on Tuesday’s close, remaining defensively positioned to begin this week. It will buy back into stocks in anticipation of a Santa Claus rally. (Our QFC Political Seasonality Index is available post-login in our Weekly Performance Report section under the Quantified Fund Credit category.) The very short-term-oriented QFC S&P Pattern Recognition strategy began the week with no equity exposure, moved to 1.6X long on Tuesday’s close, and remained there for the rest of the week.

Our intermediate-term tactical strategies are mostly positive, although to varying degrees. The Volatility Adjusted NASDAQ (VAN) strategy began the week 40% exposed, changed to 20% exposed on Wednesday’s close, and remained there to begin the week. The Systematic Advantage (SA) strategy began the week 120% exposed to the market last week, changed to 90% exposed on Monday’s close, and changed to 60% on Friday’s close. Our QFC Self-adjusting Trend Following (QSTF) strategy began the week 200% exposed, changed to 160% exposed on Tuesday’s close, and remained there for the rest of the week. VAN, SA, and QSTF can all employ leverage—hence the investment positions may at times be more than 100%.

Our Classic strategy exited the market on last Tuesday’s close. Tuesday (12/14/21), our systems generated a new buy signal for most of our Classic accounts to buy on that day’s close. As was pointed out last week, while it rarely does so, the strategy can trade as frequently as weekly. Some accounts are customized to deal with more restrictive trading rules and thus will buy back later pending any additional Classic signals to the contrary.

Flexible Plan’s Growth and Inflation measure, one of our Market Regime Indicators, shows that we remain in a Normal economic environment stage (meaning a positive monthly change in the inflation rate and 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 also 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 Rising reading, which favors equity over gold and then bonds from an annualized return standpoint. The combination has occurred 23% of the time since 2000. It is a stage of lower returns and higher volatility for all three major asset classes.



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