Market insights and analysis

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

4th Quarter | 2023

Quarterly recap

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

By Will Hubbard

Market snapshot

•  Stocks: U.S. stocks largely declined last week. The small-cap index bucked the trend, moving higher based on strong moves in less than 1% of the index names.

•  Bonds: Bond prices dipped and yields climbed as traders anticipated further delays in Federal Reserve interest-rate cuts.

•  Gold: Gold had a volatile week. It started poorly, rallied as inflation concerns increased following the release of CPI and PPI data, and then ended the week down 0.53%.

•  Market indicators and outlook: Market regime indicators show we are 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. Normal is one of the best stages for stocks, with limited downside. Volatility is Low and Rising, which favors gold over stocks and then bonds.

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The major U.S. stock indexes were mostly down last week. The Russell 2000 small-cap index added 1.13%, the Dow Jones Industrial Average lost 0.11%, the S&P 500 fell 0.42%, and the NASDAQ dipped 1.34%. The U.S. 10-year Treasury yield increased 0.10% to 4.28%. Gold lost 0.53% after a strong rally.

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

Last week, the market digested the latest inflation-related data metrics, including consumer price index (CPI) and producer price index (PPI) data, along with retail sales. The combination of these factors dampened what had otherwise been a strong rally in the equity market.

On Tuesday, the CPI data came in with a higher-than-expected increase of 0.3% for January and 3.1% year over year. Original estimates had projected a 0.1% increase for the month and a 2.9% rise compared to a year ago. Shelter prices drove the jump, increasing by 0.6% last month, while food prices rose universally, both for home cooking and dining out.

Despite Federal Reserve members advocating for interest-rate cuts, the CPI figures seem reasonable. Prices remain high across goods and services. The longer this persists, the more likely they are to stay elevated. The Federal Reserve can only get back to its 2% target if price increases slow down long enough for the year-over-year changes to become minimal.

PPI data also exceeded expectations, rising by 0.3% in January. The biggest surprise was the core figure, which excludes food and energy prices due to their volatile nature. Core PPI jumped 0.5%, compared to the estimated 0.1% increase.

Retail sales data was good—or bad, depending on your perspective. January retail sales declined 0.8%, more than the expected slowdown of 0.3%. If you’re the Federal Reserve or one of the investors hoping for a rate cut, then this is good news. A slowdown in retail sales serves as a leading economic indicator, potentially signaling a softening economy, which could prompt a rate cut. Conversely, for investors focused on navigating market conditions regardless of Fed actions, a slowing economy may lead to a reevaluation of investment prices and strategies.

In other stock-related news, the Russell 2000 has shown positive performance in 2024, primarily due to one stock: Super Micro Computer (SMCI). On February 15, the stock was up over 240% year to date. While it has since retraced some of those gains, it was still up 180% as of Friday’s (2/16) close.

The recent gains aren’t just another WallStreetBets “HODL” (hold on for dear life), but rather a different kind of HODL—the artificial intelligence (AI) HODL. Super Micro Computer specializes in liquid cooling technology for AI supercomputers and graphics cards. Capitalizing on the current AI trend, SMCI’s shares have rocketed in recent quarters, with CEO Charles Liang noting that the company can handle demand of up to $25 billion in sales. As of Super Micro’s recent quarter-end, it is about 58% of the way to its max capacity.

Why is this interesting? Nvidia is set to release its latest quarterly results this week, and AI is the hottest investment today. In fact, a recent report from Bespoke Investment Group shows that AI-linked companies, defined as companies in at least four AI-themed ETFs, now make up more than 10% of global equity market capitalization.

Investment themes come and go. While AI is poised to continue disrupting a number of industries, Mark Zuckerberg’s comment in Meta Platforms’ most recent conference call highlights where we’re at in the cycle: “It’s at the phase where we’re not really pushing it super proactively. We’ve sort of made it available, and as people use it, we’re learning … what are the basic ways that people want to engage with it.”

The bottom line is that getting caught up in hype can lead to short-term gains and longer-term pain if the cycle isn’t managed appropriately. The fervor surrounding hot investment themes is often emotionally driven, as people strive to be at the forefront. But being at the cutting edge doesn’t guarantee sustained gains. Therefore, it’s important to invest based on data—not emotions—to navigate through various trends successfully.

Bonds

The yield on the 10-year Treasury rose from 4.18% to 4.28% last week on reduced expectations for rate cuts.

As previously discussed, both CPI and PPI data currently suggest an economy that is running hotter than expected. For the Fed to consider rate cuts, there must be a decrease in inflation, which would likely occur alongside a decrease in economic activity or an increase in unemployment—factors that also contribute to an economic slowdown.

Current expectations for a Fed rate cut are quickly diminishing. According to the CME FedWatch Tool, the likelihood of a 0.25% rate cut in May decreased from 50.9% in January to 33%, while the probability of a 0.5% rate cut dropped from 33% in January to 2.5%.

The primary factors driving the situation are still unemployment and inflation. If employment remains strong and demand does not naturally subside, rates will likely stay higher for longer. Meanwhile, ETF prices are reflecting the odds of policy rate cuts as they are traded. Looking at momentum-based trends in these types of investments can help in understanding investors’ expectations and could be a valuable tool in deciding when and how much to allocate.

Gold

Gold has been a fairly uneventful investment so far this year, fluctuating between approximately $1,975 per ounce and $2,075 per ounce. Gold lost over 1.5% early last week before gaining back most of its losses in response to inflation data to end down 0.53%. Meanwhile, the greenback jumped nearly 0.80% early last week but ended with only a 0.23% gain.

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.

The indicators

The very short-term-oriented QFC S&P Pattern Recognition strategy started last week in cash. On Monday’s close, it moved to a negative 10% allocation. On Wednesday’s close, it jumped to 30% long. On Thursday’s close, it moved back to zero exposure, where it ended the week. Our QFC Political Seasonality Index started the week in its risk-on posture. On Thursday’s close, it switched to its risk-off mode. (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 140% long. It decreased exposure to 120% long on Wednesday’s close. On Thursday’s close, the strategy moved back to 140% long. On Friday’s close, the strategy moved to 160% long. The Systematic Advantage (SA) strategy started the week 120% long and reduced exposure to 60% long on Wednesday’s close. On Thursday, the strategy moved back to 120% long, where it ended 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 rising). 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.

Our S&P volatility regime is registering a Low and Rising reading, which favors gold over stocks and then bonds from an annualized return standpoint. The combination has occurred 27% of the time since 2003.



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