Market insights and analysis

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

1st Quarter | 2021

Market insights and analysis

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

Market Update 2/22/21

By Tim Hanna

Major U.S. indexes ended mostly lower last week, as inflation worries returned and longer-term yields saw their highest levels in almost a year. The Dow Jones Industrial Average was up by 0.1%, the S&P 500 decreased by 0.7%, the Russell 2000 small-capitalization index fell 1.0%, and the NASDAQ Composite was down 1.6%. The 10-year Treasury bond yield rose 13 basis points to 1.33%, as Treasury bonds fell for the week. Last week, spot gold closed at $1,784.25, down 2.19%.

Stocks

Last week, inflation fears were back on investors’ radars. Rising longer-term interest rates helped bank stocks outperform, with investors pricing in increased lending margins. On the growth side of the market, technology shares struggled, as the increase in rates theoretically raises the discount rate on future earnings. In addition to these factors, investors also tried to price in fiscal stimulus, corporate earnings, progress on vaccine distribution, and the pandemic outlook.

The U.S. Department of Labor’s producer price index increased by 1.3% (0.4% forecast) in January, the largest increase since December 2009. Retail sales increased 5.3% (1.1% forecast). Many analysts attribute the jump to the $600 direct payments to Americans that were approved in the December stimulus package. Investors feared that the data suggests the economy could overheat and result in inflation issues.

Bespoke Investment Group dived further into the retail sales data and echoes the thought that the $600 stimulus checks achieved their purpose. Bespoke noted that since the 1990s, retail sales beat expectations by more than 4% twice: after the 9/11 attacks in 2001 and in June of last year after the spring stimulus checks arrived during the lockdown due to the pandemic.

Another interesting finding was that the January sales report was only the fifth release since 1992 in which all 13 sectors showed month-over-month increases in sales. Last May was the most recent. Electronics & Appliances ranked highest with a change of 14.67%. The following table provides the change for each category.

Also worth noting is that market internals remain healthy, with last week’s breadth readings for the major U.S. averages at record highs. In the earlier part of the week, the S&P 500’s cumulative advance-decline (A/D) line and index price made a new high in unison. The Bespoke team stated, “Not only is the S&P 500’s cumulative A/D line confirming the direction of price levels, but the patterns for the Nasdaq and Russell 2000 are nearly identical.” Based on the current readings, breadth doesn’t seem to be a downside concern for equity markets.

Bonds

Treasury yields increased last week, sending bond prices lower. Expectations for higher inflation have been driving interest rates up; however, historically, these recent “higher” rates are not necessarily “high.” To put things into perspective, this recent rise puts the 10-year Treasury back to where it was in February of last year.

T. Rowe Price traders reported, “Investment-grade corporate bonds benefited from improving overnight demand from Asia and strengthening sentiment. Rising U.S. rates, manageable new issuance, and relatively light dealer inventories contributed to a strong technical backdrop.”

Fed minutes released on Wednesday (February 17) may have helped limit the rise in yields to some degree, as officials continued to be committed to their asset purchase program for “some time.” High-yield bonds also struggled last week, but not as much as government bonds, which were more directly affected by the sharp move in rates.

Gold

Last week, spot gold closed at $1,784.25, down 2.19%. Gold continued its slide last week, trading at levels not seen in eight months. The move down in gold has been attributed to a growing appetite for risk in financial markets with some speculating that the economic recovery could be stronger than expected if vaccine distribution continues improving and expansionary fiscal policy persists. The following chart shows the relationship last week between gold (blue) and the U.S. dollar (orange).

The decline in the U.S. dollar that began on Tuesday occurred after a sharp rise that sent gold to its lowest levels for the week. After the decline of the U.S. dollar began in earnest, the price of gold seemed to form a bottom and even begin to rally.

For over eight years, Flexible Plan has subadvised the only U.S. mutual fund designed to track the price of gold bullion, The Gold Bullion Strategy Fund (QGLDX).

The indicators

Our very short-term-oriented QFC S&P Pattern Recognition strategy started recognizing patterns in the equity market last week that suggested declines were coming. The strategy’s equity exposure started the week with a 40% short exposure, increased the short to 96% on Tuesday’s close, increased to 106% short on Thursday’s close, and remained there to close out the week.

Our intermediate-term tactical strategies are uniformly positive, although to various degrees. The Volatility Adjusted NASDAQ (VAN) strategy started the week with 180% long exposure to the NASDAQ, increased exposure to 200% long at Tuesday’s close, and remained there for the rest of the week. The Systematic Advantage (SA) strategy is 131% exposed to the S&P 500, our Classic strategy is in a fully invested position, and our QFC Self-adjusting Trend Following (QSTF) strategy was 200% exposed all of last week. VAN, SA, and QSTF can all employ leverage—hence the investment positions may at times be more than 100%.

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 Volatility composite (gold, bond, and stock market) continues to register a High and Rising reading, which favors stocks 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 medium returns for all asset classes but with substantial volatility for all but bonds.



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