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.

By Jason Teed

The equity markets were mixed last week. The Dow Jones Industrial Average rose 1.82% and the S&P 500 was up 0.81%. The Russell 2000 small-cap index was down 0.40% for the week, and the tech-dominated NASDAQ Composite fell 2.06%. The 10-year Treasury bond yield rose 16 basis points to 1.57%, as Treasury bonds fell significantly for the week. Spot gold closed at $1,700.64, down 1.93%.

Despite these movements, the market appears to be on healthy footing with the Senate passing its own version of the COVID-19 relief bill, which is expected to be quickly passed by the House.

Stocks

The equity markets paused last week as some of the market’s largest gainers gave back some of their returns, a trend that we’ve seen in recent weeks. No major factors were affecting the markets last week, other than potentially overbought conditions in several market sectors as investors look for a productive place to park their cash.

In a previous Market Update, we discussed the recent proliferation of SPACs (Special Purpose Acquisition Companies), which have no other purpose or value than finding private companies to acquire and take public. These companies were increasing in value even without deals having taken place, suggesting that the market was particularly “bubbly” in this segment. We started to see the beginnings of a sell-off in this higher-risk segment in February. This likely indicates a healthier market environment.

Additionally, many market segments that were favored during last year’s lockdowns (such as tech and health-care companies) are struggling this year as the markets continue to normalize. As of now, Health Care and Technology are among the worst-performing sectors in terms of constituent companies above or below their 50-day moving average price. Energy and Financials, however, continue to perform well.

This rotation and flight out of riskier market segments should create favorable conditions for investors going forward as it indicates that the market is expecting a return to normal soon. In addition, sell-offs in frothy markets create an environment that is less susceptible to “bubble-bursting” and volatility.

Bonds

Treasury yields increased significantly, finishing the week up 16 points (ending at 1.57%) on the 10-year Treasury.

Yields have been rapidly increasing this year, though they are still low in historical terms. Credit spreads fell for the week and term spreads increased as interest rates rose, both indicating a relatively healthy economic environment. Overall, high-yield bonds outperformed Treasurys, and shorter-term bonds outperformed longer-term bonds.

Expectations for the intermediate term are for interest rates to remain relatively low, leading investors to seek yield in other places. This will likely lead investors to bid up the price of high yields and compress the credit spread as the economy continues to recover.

Gold

Last week, spot gold closed at $1,700.64, down 1.93%.

Other safe-haven assets did poorly last week, primarily due to increasing interest rates. As interest rates increase, gold becomes less attractive when compared to bonds, which creates selling pressure on the metal. Though the Federal Reserve is expected to keep interest rates low in the short term, if inflation begins to rise, many anticipate that the Fed will become more hawkish.

The metal is down 10.42% for the year. Gold enjoyed strong performance in 2020 but has recently experienced selling pressure from investors taking profits.

Flexible Plan is the subadvisor to the only U.S. gold mutual fund, The Gold Bullion Strategy Fund (QGLDX), designed at its introduction over eight years ago to track the daily price changes in the precious metal.

The indicators

Our Political Seasonality Index was fully exposed to the market all last week. (Our 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 began the week 1.6X long, moved to 2X long on Thursday (March 4), and remained there to begin the week.

Our intermediate-term tactical strategies are uniformly positive, although to various degrees. The Volatility Adjusted NASDAQ (VAN) strategy had a 100% exposure to the NASDAQ on Monday (March 1), decreased exposure throughout the week, and ended the week at 40% long as market volatility increased. The Systematic Advantage (SA) strategy is 100% exposed to the S&P 500, our Classic strategy is in a fully invested position, and our QFC Self-adjusting Trend Following (QSTF) strategy ended last week 80% exposed. 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 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 2000. It is a stage of normal returns for all asset classes with higher volatility overall.



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