Market insights and analysis

By Will Hubbard

Market snapshot

•  Markets finished last week strong amid mixed economic data and trend signals.

•  Treasury prices continued to fall, causing some of the worst drawdowns in the asset class in decades.

•  Gold fluctuated with a volatile U.S. dollar, unable to recapture losses from early in the week.

•  Market regime indicators show the market is in a Normal economic environment stage, which is historically positive for stocks, bonds, and gold but with a substantial risk of a downturn for gold. The S&P volatility regime is registering a High and Rising reading, which favors stocks over gold, and gold over bonds from an annualized return standpoint.

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The major U.S. stock indexes made substantial gains last week. The Russell 2000 small-capitalization index jumped 7.56%, the NASDAQ advanced 6.61%, the S&P 500 gained 5.85%, and the Dow Jones Industrial Average increased by 5.07%. The 10-year Treasury bond yield fell 26 basis points to 4.57%. Spot gold closed the week at $1,992.65, down 0.68%.

For the latest information on our Quantified Funds, check out our weekly fund updates. You can also see the daily holdings of the funds here.

Stocks

As quantitative risk managers, Flexible Plan Investments (FPI) does not rely on speculative market forecasts to predict which investments will go up or down. Instead, we focus on how real data can be used to inform holistic investment decision-making.

Setting aside the complexities of the geopolitical climate, there are ample reasons for both optimism and concern in the current economic landscape. For instance, we recently noted a 4.9% increase in third-quarter GDP, and the latest data shows that the unemployment rate has remained stubbornly strong at 3.9%.

This coincides with new information that Americans are the wealthiest they’ve ever been, with total household net worth surpassing $154 trillion. The calculation of household net worth encompasses assets like stocks, bonds, bank deposits, pension benefits, and real estate, as well as liabilities such as mortgages and credit card debt.

Mortgage applications fell to their lowest level since 1995 last week, with a 2.1% decrease that surpassed the anticipated 1% decline.

A drop in mortgage applications could initially seem like a bad sign for the housing market and broader economic activity, given the high cost of housing. Yet, despite the decline, home prices may remain strong due to sustained demand driven by housing shortages in metro areas with robust job markets. Factors like higher wages and increased costs of building materials will likely help keep prices high, boosting the wealth effect. One way to alleviate the pressure on the housing market could be to make mortgages assumable so that people with 3% interest rates don’t feel “locked in.”

The Conference Board reported that October’s consumer confidence index came in lower than expected, continuing its decline from a revised higher figure in September. Dana Peterson, The Conference Board’s chief economist, said, “October’s retreat reflected pullbacks in both the Present Situation and Expectations Index.” She added that “rising prices, in general, for grocery and gasoline prices in particular” are areas of concern for consumers.

The latest ISM Manufacturing PMI figures remained below the expansion threshold of 50. Last week’s release showed a final indicator of 46.7, representing a contraction. ISM PMI has been declining since the March 2021 peak of 63.8, with the index first signaling a contraction in October of last year when it hit 50.

Historically, the “Santa Rally” phenomenon is supported by data from the past 20 years, during which the Russell 2000 and the S&P 500 have seen average returns of 2.94% and 2.76%, respectively, between now and year-end. Looking ahead to the first quarter, gold typically outperforms other asset classes with an average return of 4%, surpassing the Russell 2000 and S&P 500, which average returns of 2.29% and 1.85%, respectively.

At FPI, the priority isn’t whether the data is qualitatively “good,” but how it is quantitatively digested by the various asset classes. This approach allows us to extract actionable signals from the “noise” of complex economic data, like the examples discussed previously, to inform our decision-making process with a useful historical perspective.

Bonds

Last week, 10-year Treasury yields dipped from 4.83% to 4.57%.

The Federal Reserve maintained its target range for federal funds at 5.25% to 5.5%, in line with expectations of zero change. The release notes that economic activity in the third quarter was strong and that unemployment has remained low. It also acknowledged the strength of the banking system and that “tighter financial and credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation.”

Since February 2022, both housing real estate investment trusts (REITs) and Treasurys have taken quite a beating. 20-plus-year Treasurys are in the middle of a 40%-plus drawdown, and residential real estate can’t seem to catch a break. Since February 2022, residential real estate (represented by the Armada ETF Advisors fund HAUS) is down 23.14%, and long-term Treasurys (represented by iShares TLT) are down 34.79%.

As we near what some believe to be the peak of the interest-rate cycle, the downside risks for certain asset classes are diminishing, setting the stage for future buying opportunities. Having a systematic approach and a broad investment universe that considers these asset classes can help create opportunities to buy them when market conditions shift in their favor.

Gold

Over the last few years, we’ve seen an inverse relationship between gold and the U.S. dollar: when the dollar strengthens, gold typically weakens, and vice versa. However, this past week deviated from the pattern, with both gold and the dollar declining in value. Gold fell 0.68%, closing the week at $1,992.65 per ounce, and the dollar lost 1.2%.

The dollar (the purple line in the following chart) started the week off strong as the market anticipated the Fed’s move on interest rates. After the Fed’s announcement on Wednesday, the dollar peaked and gold (the white line in the following chart) found its footing.

Flexible Plan Investments is the subadviser to the only U.S. gold mutual fund, The Gold Bullion Strategy Fund (QGLDX), designed at its introduction 10 years ago to track the daily price changes in the precious metal in a more tax-efficient matter than its ETF counterpart, GLD.

The indicators

The very short-term-oriented QFC S&P Pattern Recognition strategy started last week 60% long. On Monday, it increased to 110% before dropping to 40% long on Tuesday. On Wednesday, it was 10% short at the close. On Thursday, it moved to 70% short. On Friday, it moved to 80% short. Our QFC Political Seasonality Index started the week in its defensive posture and moved to a risk-on positioning on Monday’s close, where it remained for the week. (Our QFC Political Seasonality Index is available—with all of the daily signals—post-login in our Weekly Performance Report section under the Domestic Tactical Equity category.)

Our intermediate-term tactical strategies have been varied in their degree of defensive positioning. The key advantages these strategies offer to investors are their ability to adapt to changing market environments, participate during uptrends, and adjust exposure to more defensive posturing during downtrends.

The Volatility Adjusted NASDAQ (VAN) strategy started the week 100% long and reduced exposure to 80% long on Monday’s close. On Thursday, the strategy reduced exposure to 60%. On Friday’s close, it reduced exposure further to 40% long. The Systematic Advantage (SA) strategy started the week 60% long and decreased exposure to 30% long on Monday’s close. On Tuesday, exposure increased to 90% long. On Wednesday, the strategy quickly took risk back down to 60% long before jumping on the equity momentum to close the week at 120% long. Our QFC Self-adjusting Trend Following (QSTF) strategy was 100% all week. VAN, SA, and QSTF can all employ leverage—hence the investment positions may at times be more than 100%.

Our Classic model was long risk-on positioning all week. Most of our Classic accounts follow a signal that will allow the strategy to change exposure in as little as a week. A few accounts are on more restrictive platforms and can take up to one month to generate a new signal.

FPI’s Growth and Inflation measure is one of our Market Regime Indicators. It shows that we are in a Normal economic environment stage (meaning a positive monthly change in the inflation rate and a 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 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.

The S&P volatility regime is registering a High and Rising reading, which favors stocks over gold, and gold over bonds from an annualized return standpoint. The combination has occurred 23% of the time since 2003. Typically, this stage is associated with higher returns and less volatility from equities and bonds.