Market insights and analysis

By Jason Teed

The major U.S. stock market indexes rose last week. The tech-heavy NASDAQ Composite led the way with a 2.09% return, the Russell 2000 jumped 1.27%, the S&P 500 gained 1.13%, and the Dow Jones Industrial Average increased by 0.24%. Most of the week’s returns were driven by a large increase in the indexes on Wednesday (November 30) in response to comments from the Federal Reserve.

Nine of the 11 sectors were up for the week. Communication Services was the best performer, gaining 3.31%. Financials and Energy were down for the week, falling 0.64% and 1.97%, respectively. Energy has been performing well recently even though oil prices have been falling since May.

Stocks

In his comments on Wednesday (November 30), Federal Reserve Chair Powell said the Fed may begin slowing interest-rate hikes as soon as this month. Virtually all stock market gains from last week occurred on that day.

However, his comments also suggested that while rate increases may slow, the Fed may have to keep them elevated for an extended period. Powell still believes it is possible to produce a “soft landing”: to reduce inflation without causing the economy to go into a severe recession.

While inflation does appear to be slowing, economic reports are mixed. This suggests additional slowing is needed before inflation is fully tamed. For example, in November, the U.S. added 263,000 jobs, more than the expected number of around 200,000. This suggests the Fed may have more work to do.

That being said, the third-quarter earnings season was not particularly good. The growth rate of the S&P on average was 2.5%, making it the worst quarterly growth rate since the third quarter of 2020 (which fell by 5.7%). Additionally, many companies are further reducing their forecast earnings in the coming quarters. Economists are expecting earnings to fall about 2.5% for the fourth quarter of the year.

Price-earnings (PE) ratios for the markets are also a bit high to call a market bottom. The following chart shows the lowest PE ratios achieved in historical bear markets. While our market is currently in the range of the lowest possible, we’re not yet at the average. With companies continuing to revise earnings lower, we may see even lower ratios as time goes on.

But not all of the news is bad. The S&P crossed back above its 200-day average for the first time since March on optimism of a soft landing and a less-severe-than-predicted recession.

Seasonality also supports an extension of the rally we’ve seen since mid-October. Our current model of the market’s seasonality shows about 5% of seasonal gains remaining for the year. The latter half of December tends to be particularly strong.

Additionally, China has also likely contributed to equity returns for the week and the month. MCHI, the iShares MSCI China ETF, was up 12.19% last week alone. This was a result of a loosening of certain COVID restrictions in the country. China has maintained a “zero-COVID” policy from the beginning of the pandemic. With the rise of the more contagious but less severe omicron variants of COVID, this policy had led to significant lockdowns in the country, which have an economic impact. Loosening these policies has created optimism amid global recession concerns.

Ultimately, a double-dip recession and a continuation of this bear market seem likely. The exact timing, depth, and duration of both are difficult to determine. But the predicted recession may not be as severe as some originally feared. Economists largely expect that the worst of the market turmoil will be behind us by mid-2023. Barring any new information, that seems reasonable; however, the market is rarely predictable.

Bonds

Treasury yields were mixed for the week. Yields in the three- to six-month range rose while all others fell in response to comments from the Federal Reserve that suggested its hawkish stance may be softening and that the maximum terminal rate that the Fed targets may be lower than originally expected.

The yield curve continues to be deeply inverted—the deepest since the early 1980s. The term yield fell 65 basis points, and credit spreads rose about 29 basis points. Both spread changes signal increased expectations for future economic performance. Overall, long-term Treasurys outperformed high-yield bonds, and longer-term bonds outperformed shorter-term bonds.

Gold

Spot gold rose 2.43% for the week. The metal has risen about 10% since the end of October as the U.S. dollar has weakened.

This year, we’ve seen major headwinds for gold. For example, rising interest rates pushed up the value of the U.S. dollar.

These headwinds may be subsiding, however, as the Fed appears to be winding down rate increases. The market appears to be switching the focus of its concerns from inflation to recession. A recession may create a tailwind for gold, since it historically has functioned as a safe haven in recessions. During such times, interest rates tend to fall. This makes gold relatively more attractive than the dollar, which may further bolster the metal.

Non-currency safe-haven assets, such as long-term Treasurys, were strongly up for the week. Falling rates helped fuel increases for the major asset classes. The higher correlation among bonds, equities, and gold this year due to rising rates has made investing across the spectrum more difficult for investors. While those asset classes rose for the week, this relationship is still in play.

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

The indicators

Our Political Seasonality Index was fully invested last week. (Our QFC 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 0.7X short. It changed to 0.3X short on Monday’s close, 0.7X long on Tuesday’s close, 0.6X on Wednesday’s close, and 0.4X long on Thursday’s close. The strategy was very active on a relative basis as it doesn’t often trade each day of the week.

Our intermediate-term tactical strategies are mixed in exposure. The Volatility Adjusted NASDAQ (VAN) began the week with a 60% inverse exposure to the markets. It changed to neutral on Monday’s close, 40% short on Thursday’s close, and 20% inverse on Friday’s close. The Systematic Advantage (SA) strategy began the week 60% exposed to the market. It changed to 30% exposed on Tuesday’s close and back to 60% exposed on Wednesday, where it remained for the rest of the week. Our QFC Self-adjusting Trend Following (QSTF) strategy began the week neutral to the markets. It changed to 1X on Wednesday’s close, remaining there for the rest of the week. VAN, SA, and QSTF can all employ leverage—hence the investment positions may at times be more than 100%.

Our Classic strategy was fully invested for the week. The strategy can trade as frequently as weekly.

Flexible Plan’s Growth and Inflation measure, one of our Market Regime Indicators, currently indicates a Normal economic environment stage (meaning a positive monthly change in the inflation rate and positive quarterly GDP reading). Historically, a Normal environment has occurred 60% of the time since 2003 and has been a positive regime state for equities, gold, and bonds. Gold tends to outpace both stocks and bonds on an annualized return basis in a Normal environment, albeit with higher risk.

Our S&P volatility regime is registering a High and Falling reading, which favors gold over bonds and then equities from an annualized return standpoint. The combination has occurred 13% of the time since 2000. It is a stage of relatively high returns and lower volatility for the three major asset classes.