Market insights and analysis

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

3rd Quarter | 2020

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 8/31/20

The major stock market indexes posted strong gains last week. The NASDAQ 100 (the leader for the week) was up 3.8%, the S&P 500 Index rose 3.2%, the Dow Jones Industrial Average gained 2.6%, and the Russell 2000 (the worst performer for the week) gained 1.7%. The 10-year Treasury bond yield rose about 9 basis points, as Treasury bonds fell slightly for the week. Last week, spot gold continued its move upward, rising 1.3%. Lately, the metal has performed more as an inflation hedge than a safe-haven asset. It is up nearly 30% year to date.

Safe-haven assets

Overall, safe-haven asset classes have not been performing well. The exception is gold, which is rising due to physical demand and for its role as a potential inflation hedge. This is likely to continue, considering the sizable debt that the U.S. government has recently acquired. Long-term Treasurys were down more than 3% last week, as demand for yield increased on government bonds. U.S. bonds, in aggregate, were down about half a percentage point as well.

Sectors

While the market itself has recovered to previous levels, a major shift has occurred in the distribution of those assets when looking at sector and industry performance. All sectors, except Utilities (which is often considered a reliable safe haven in times of market tumult), were up for the week. Technology continues to outpace the rest of the market, perhaps because that sector adapted to and benefited from the major consumer behavioral changes mandated by the pandemic. Zoom, the video conferencing company, is up more than 330% year to date. Netflix, which provides entertainment to those socially distancing at home, is up 61%. Innovative companies such as these will continue to lead the way in the coming months and are responsible for a large portion of the equity market’s recovery.

Economic metrics

Overall, the market continues to post positive numbers, and with good reason. Many economic metrics continue to improve, and corporations are beginning to surprise to the upside again. The majority of the economic reports that were released last week either surprised to the upside or are improving.

Consumers have become more accustomed to living with the coronavirus and the changes resulting from the pandemic. Companies are also adapting, reaching customers in creative ways (such as drop-off test-drives of cars and contactless transactions at auto dealerships, or restaurants moving to a primarily to-go business model). All of this is resulting in an increase in consumer spending and improved sentiment.

Housing data

Real estate continues to be a strong performer for the year, with demand easily outstripping supply. Many locations throughout the U.S. have seen strong appreciation in home values where many had anticipated a drop in market activity. The reverse has been true. Demand has remained somewhat stable and supply is decreasing. Homeowners seem to be more reluctant to sell their homes in times of uncertainty. This decrease in supply is what has fueled the real estate boom this year.

Additionally, with many companies moving to a remote-work model, many families are reassessing their living situation, deciding to move to less-crowded or less-expensive places. This has been a boon for homebuilders, which have seen a strong rebound over recent years, and specifically after this year’s brief bear market.

COVID news is improving

News about the COVID pandemic seems to be more positive. Earlier this year, we knew little about the virus, which spread quickly among unprepared populations. Doctors are now more familiar with the virus, and hospitals are continuing to develop protocols for treatment. We also know that masks can help reduce the spread of the disease if used in spaces where social distancing is more difficult.

Several companies are now in the race to develop a vaccine. According to the Motley Fool, Moderna, Pfizer, and AstraZeneca are the U.S. front-runners—all of which are in phase 3 or phase 2/3 trials. Once approved, “Moderna is set to deliver 500 million doses annually, with the possibility of increasing that to 1 billion as of next year. AstraZeneca says its manufacturing capacity is 3 billion doses. Pfizer and its partner BioNTech aim to produce more than 1.3 billion doses by the end of 2021,” reports the Motley Fool.

While it’s likely that life will not return to normal for us in the near future, the end may be in sight. As a result, a lot of pent-up demand in the markets is just waiting to be unleashed—particularly from people who haven’t gone on vacation in 2020, spent time with friends, attended a concert, or any of the other activities that are so important to us. No doubt, when they are safely able to do so, we’ll see a major increase in consumer spending to make those things happen.

 

 

Flexible Plan strategy update

Our top-performing strategies for the week were those with asset allocations to the NASDAQ, as well as other equity-related trend-following strategies. All versions of our Self-adjusting Trend Following strategy were at the top for the week, followed by our QFC Multi-Strategy Explore: Equity Trends offering—all of which have access to these trend-following strategies. Volatility-Adjusted NASDAQ also did well, after having jumped back into the markets following this year’s decline. The Market Leaders sector strategies were also among the week’s top performers.

Among the Flexible Plan Market Regime indicators, our Growth and Inflation measure continues to show that we remain in a Stagflation economic environment stage (meaning a positive monthly change in the inflation rate and negative monthly GDP reading). We do, however, expect a reversion to a more normal market environment. In the current regime, gold tends to perform the best, followed by bonds, and then equities.

Our Volatility composite (gold, bond, and stock market) maintains its Low and Falling reading, which favors equity over gold and then bonds (although all have positive returns in this regime stage).

 

 

 



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