Market insights and analysis

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

4th Quarter | 2023

Quarterly recap



Current market environment performance of dynamic, risk-managed investment solutions.

By Will Hubbard

Market snapshot

•  Stocks: The major U.S. stock market indexes rose last week, led by the Russell 2000 index. A “Santa rally” might be forming, but historical data tells a different story than the financial media.

  Bonds: The 10-year yield dipped on expectations of a pause or conclusion of rate hikes.

•  Gold: Gold closed at an all-time high last week as the U.S. dollar lost steam.

•  Market indicators and outlook: Short-term indicators for stocks are bullish, with an overall positive intermediate-term outlook for equities. Our Market Regime Indicators are currently positive for stocks, bonds, and gold.


The major U.S. stock indexes rose last week. The Russell 2000 small-capitalization index jumped 3.05%, the Dow Jones Industrial Average gained 2.42%, the S&P 500 increased by 0.77%, and the NASDAQ added 0.38%. The 10-year Treasury bond yield fell 27 basis points to 4.20%. Spot gold closed the week at $2,072.22 per ounce, up 3.57%.

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.


It’s hard to believe we’re in the final month of 2023. Despite recession calls and predictions of rising rates causing governments to default on sovereign debt and businesses to fold in droves, the economy continues to march on.

As we kick off December, we’re going to hear a lot from the financial media about how stocks tend to go up at this time of year, a phenomenon known as the “Santa rally.” Historical data supports this trend: Since 1983, December has recorded positive returns 75% of the time, with an average gain of 1.42%.

However, that doesn’t tell the whole story. The following chart from Bespoke Investment Group compares the S&P’s average performance in December from 1983 to 2022 (represented by the blue line) against the average for the past decade (shown in green). The long-term trend is notably strong, whereas the performance over the last 10 years, while approaching positive territory, remains slightly negative.

Trends change over time. As a result, strategies based on trends at a particular point in time may eventually lose their edge. That is why it is important for quantitative managers to test their algorithms by walking data forward and analyzing how trends and patterns evolve within a range of possible choices. The “strategy” of being long throughout December may not be as effective as it used to be. However, despite the difference in total return between the two lines in the previous chart, it’s clear that the “pattern”—an initial move down followed by a midmonth reversal to end the month higher—persists.

Bespoke took its research a step further. The following chart shows that in years when the market has risen by 15% through November, the average gain in December is closer to 2%, and the midmonth dip tends to be less pronounced. However, the general pattern still holds: The start of the month is relatively trendless, followed by a notably stronger performance toward the year’s end, usually beginning around December 20.

Flexible Plan Investment’s (FPI’s) QFC Political Seasonality Index (PSI) strategy will sell on Wednesday, December 6, and return to the market on December 21. While the financial media often proclaims that the Santa rally takes place during the entire month of December, our research and data show that it tends to occur closer to the end of the month.

Notable economic news from last week included data on new home sales, consumer confidence, the second Q3 GDP estimate, personal consumption, and manufacturing.

The number of new homes sold in October came in at 679,000, slightly below September’s revised figure of 719,000 but 17% above October 2022’s estimate of 577,000.

Consumers appear to be regaining confidence. The Conference Board’s consumer confidence index rose to 102 in November, breaking its three-month streak of declines.

If the Federal Reserve is worried that interest rates have risen too high, the second Q3 GDP estimate—which came in at 5.2%, revised up from 4.9%—may help allay some of those fears. In its news release, the Bureau of Economic Analysis said, “The increase in real GDP reflected increases in consumer spending, private inventory investment, exports, state and local government spending, federal government spending, residential fixed investment, and nonresidential fixed investment.”

However, Friday’s manufacturing report from the Institute for Supply Management (ISM) provided a reality check amid last week’s positive economic news. Manufacturing activity contracted in November for the 13th consecutive month. The Manufacturing PMI registered 46.7%, unchanged from October. According to the ISM, “A Manufacturing PMI above 48.7 percent, over a period of time, generally indicates an expansion of the overall economy.”

The bottom line is that, despite the bad news, we’re also seeing signs of optimism for stocks. Combined with historically favorable end-of-year conditions, those signs might help set up sustained market movements higher.


Last week, 10-year Treasury yields dipped from 4.47% to 4.20% on expectations that the Federal Reserve is done raising interest rates.

Inflation is still at a slightly elevated year-over-year rate of 3.5%, and the calls on the dot plot to hold rates seem to be misguided. Back in January, The Wall Street Journal reported that rates were likely to be cut in the second half of 2023 in order to avoid a recession. Instead, rates are at their highest levels since before the global financial crisis.

Now, rates seem to have bottomed, with the iShares 20+ Year Treasury bond ETF (TLT), rebounding 13% off a 10-year low. Despite the rebound, a decade’s worth of reinvested investment gains has been wiped out. The following 10-year chart shows the total return (top purple line) and price return (bottom purple line) of TLT. The green horizontal line indicates the current level of total return.

If the Fed continues to hold rates, fixed-income opportunities may present themselves, especially if a cut is on the horizon to try to mitigate an economic slowdown.

The main issue we’re seeing today is a flight to short-duration safety. It’s been 15 years since anyone received a decent interest payment on a checking account or money-market fund.

The biggest mistake we see investors making is to become complacent and invest in a money market or short-term CD because they think it’s giving an equity-like return with minimal risk. The risk is that any rate cut will immediately slash those interest rates. At that point, reallocating into longer-dated assets will not provide the benefit available today.

Investors considering fixed-income investments should be nimble and consider the longer-term implications of decisions to stick to the short end of an inverted yield curve. For more information on the opportunity costs of fleeing from equities to CDs and fixed-rate annuities, see FPI’s recent research.


Gold is at an all-time high. On Friday (December 1), the yellow metal closed at $2,072.22 per ounce, marking a 14% return for the year.

The following chart shows the 2023 performance of gold (represented by Sprott’s physical gold ETF, the purple line) and the U.S. Dollar Index (the white line). In early October, gold bottomed out for the year and then took off as interest rates remained high and the dollar lost steam. The dollar is down 0.25% and gold is up 14.33% through Friday’s close.

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 manner than its ETF counterpart, GLD.

The indicators

The very short-term-oriented QFC S&P Pattern Recognition strategy started last week 90% short, decreased exposure to 80% short on Tuesday’s close, and moved to cash on Friday. Our QFC Political Seasonality Index started the week in its risk-on posture, where it will remain until December 6. (Our QFC Political Seasonality Index is available—with all of the daily signals—post-login in our Weekly Performance Report section under the Quantified Fund Credit 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 80% long, moved to 120% long on Tuesday’s close, increased exposure to the maximum of 200% on Thursday, and remained there for the rest of the week. The Systematic Advantage (SA) strategy started the week 60% long, reduced exposure to 30% long on Monday’s close, increased exposure to 60% on Wednesday’s close, reduced back to 30% long on Thursday, and moved back to 60% long to end the week. Our QFC Self-adjusting Trend Following (QSTF) strategy was 200% long 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.

Flexible Plan’s Growth and Inflation measure, one of our Market Regime Indicators, shows markets are in a Normal economic environment stage (meaning inflation is falling and GDP is growing). 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 Low and Falling reading. From an annualized return standpoint, low and falling volatility favors stocks over gold, and gold over bonds. The combination has occurred 37% of the time since 2003. Typically, this stage is associated with higher returns and less volatility from equities and bonds.

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