By Jason Teed The major U.S. stock market indexes were down last week. The S&P 500 was down 0.21%, and the NASDAQ Composite lost 1.54% for the week. The 10-year Treasury bond yield rose 19 basis points to 3.13%, continuing a strong upward trend for the year. Spot gold closed the week at $1,883.81, down 0.69%. Five out of 11 sectors were up last week. Energy was the best performer, up an astonishing 10.17%. The Real Estate and Consumer Discretionary sectors were the worst performers, down 3.78% and 3.37%, respectively. Stocks Stocks went on a roller-coaster ride last week as the market grappled with the implications of a more hawkish Federal Reserve. Markets initially responded positively to Wednesday’s 50-basis-point increase to the Fed’s target rate. The S&P gained nearly 3.0% in a single day—a counterintuitive response considering rising rates tend to be detrimental to stock returns. However, the market appeared to be cheering the Fed’s softer language. This optimism was dashed the following day when the S&P fell about 3.6%—and continued to fall for the remainder of the week. Equity markets are contending with several unique factors, some of which haven’t been seen for decades. But stock market prices and valuation ultimately revolve around expected forward corporate earnings. This is one area where the U.S. is still strong. Corporate earnings and revenue beats remain near record levels despite equity movements suggesting otherwise. The earnings per share (EPS) beat rate is in a downtrend. That is off the highest levels in the last 20 years, however, and current levels are still near multi-decade highs. Sales beats look even rosier, with a less pronounced decline in recent months. Despite the rise in inflation, most companies have been able to pass on their increased costs to consumers, while even thickening profit margins in some cases . This suggests the baseline economic condition in the U.S. is fairly strong and may be less affected by headwinds than other developed countries. However, the hawkish Federal Reserve policy will affect corporate earnings and remain a drag on the economy in an effort to bring down inflation. The impact will most likely be seen in growth companies, which are far more likely to borrow to support continued growth than value companies. Additionally, when interest rates rise, price-to-earnings (PE) valuations (the earnings required to support a given stock price) tend to fall. This is because lower PE ratios reflect higher yields, which are necessary to compete with higher bond rates. For example, as expectations for the Fed rate in December have increased, the estimated PE multiple for the S&P has fallen. This suggests that the stock market will likely face further headwinds and that value stocks may outperform growth stocks in the coming months. The stock market tends to precede the economy because it represents investors’ estimates of forward-looking corporate earnings. With that in mind, some indicators suggest that the current downward movements in the stock market are justified. Some leading indicators, such as the ISM New Orders, are slowing. The U.S. remains the best-performing region in terms of Purchasing Managers’ Index (PMI) readings, but global readings are slowing. China, in particular, has fallen dramatically. So, where do we go from here? While estimates are that the U.S. will not have a recession in the next 24 months (at about 35%–40% among economists), they have been rising. If Fed policy should experience such a “hard landing,” the equity markets are likely to react more strongly than they did to the 2020 recession. During that time, market participants largely expected a friendly Fed and government stimulus to support the economy. In past recessions, the Wilshire 5000 has fallen to between 60% and 80% of gross domestic product (GDP). Even at current prices, the Wilshire is about 170% of the Q1 U.S. GDP, suggesting significant further downside is possible should the worst-case scenario occur. This scenario isn’t likely, but it is possible. Additionally, many market uncertainties remain, not least of which are the consequences of the Russian–Ukraine crisis, including the impact of Russian sanctions on the price of oil on the global economy. For these reasons, volatility should be expected in the coming months. Though the economy currently looks healthy, future performance will be even harder to predict than usual. Bonds Parts of the yield curve rose and others fell last week, resulting in a healthier-looking curve overall. Yields rose the most in the 20-to-30-year range, though they rose on the short end as well. Rates fell among active Treasurys at six-month and one-year maturities. The term yield rose 17.3 basis points, and credit spreads rose by about 4 basis points. These are conflicting signals with regard to expected economic growth. The term yield suggests increasing growth, and the credit yield suggests a potentially risk-off environment. Overall, long-term Treasurys underperformed high-yield bonds, and longer-term bonds underperformed shorter-term bonds. The yield curve is healthier than we’ve seen in recent weeks with little signs of inflection. The market expects that rates will continue to rise as the Federal Reserve begins to combat inflation, even after the 50-basis-point increase this month. Overall, economic messaging from the bond market appears to be mixed, attempting to balance the likelihood of a potential recession with the certainty of rising rates. Gold Spot gold was down last week, continuing to fall after its peak in early March. The metal is down about 8% from its March 9 high. One major reason is the rise of the U.S. dollar. Despite inflation, the U.S. dollar remains strong compared to other currencies. The U.S. dollar index is up about 8% year to date. This is likely due to the aggressive monetary policy the Federal Reserve is expected to pursue relative to other central banks. Compared to the economies of other developed nations, the U.S. economy is on the surest footing, and it is dealing with slightly higher inflation than the eurozone. For these reasons, it’s likely that the U.S. Federal Reserve will be both willing and able to raise interest rates faster than other developed countries. These larger increases in interest rates domestically make the U.S. dollar a more attractive currency. This produces downward pressure on the price of gold when viewed through the lens of a U.S. investor. Other safe-haven assets, such as long-term Treasurys, were also down for the week as rates increased—despite a clearly risk-on environment. Rising rates can make investment difficult for passive investors as few asset classes offer protection. In the longer term, gold is likely to continue an upward trajectory as inflation continues. 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 spent last week fully invested in the market, remaining there to begin this week. (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’s equity exposure began the week neutral to the market, changed to 0.8X long on Monday, changed to neutral on Tuesday, and changed to 0.8X long on Friday where it began this week. Our intermediate-term tactical strategies have mixed exposure. The Volatility Adjusted NASDAQ (VAN) had a 60% inverse exposure to the markets. The Systematic Advantage (SA) strategy began last week 90% exposed to the market, changed to 60% exposed on Monday’s close, changed to 30% exposed on Friday’s close, and remained there to begin this week. Our QFC Self-adjusting Trend Following (QSTF) strategy was neutral to the market for the week. VAN, SA, and QSTF can all employ leverage—hence the investment positions may at times be more than 100%. Our Classic strategy remained out of the markets for the week. The strategy can trade as frequently as weekly. Our strategies mostly remain relatively underexposed to the market, having exited several weeks ago. Volatility remains high, and the overall market direction appears to be downward. Flexible Plan’s Growth and Inflation measure, one of our Market Regime Indicators , shows that we continue to be in the Stagflation economic environment stage (meaning a positive monthly change in the inflation rate and negative quarterly GDP reading). This environment has occurred only 9% of the time since 2003 and favors gold and bonds, while equities tend to fall. Gold tends to significantly outpace both stocks and bonds on an annualized return basis in this environment, with a lower risk of drawdown than equities. From a risk-adjusted perspective, Stagflation is one of the best stages for gold. 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.