Current market environment performance of dynamic, risk-managed investment solutions.
By Daniel Poppe
Market snapshot
• Stocks: The major U.S. stock market indexes were mostly lower last week. The NASDAQ Composite fell 3.22%, the S&P 500 declined 2.10%, the Dow Jones Industrial Average lost 0.90%, and the Russell 2000 gained 0.47%.
• Bonds: The 10-year Treasury bond yield rose from 4.39% to 4.44%.
• Gold: Spot gold rose 0.04%, closing above $4,400 an ounce.
• Market indicators and outlook: 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. Normal is one of the best stages for stocks, with limited downside. Volatility is High and Rising, which favors stocks over gold and then bonds.
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Stocks
The SPDR S&P 500 ETF (SPY), which tracks the performance of the S&P 500, finished the week below both its 50-day and 200-day moving averages.
Markets continued to decline amid heightened geopolitical tensions. Higher oil prices are seen as potentially destabilizing to the economy, and stocks are shifting from a sideways pattern toward a downward trend. The S&P 500 and NASDAQ 100 are now near the 10% drawdown level that signifies correction territory.
Strong fourth-quarter earnings and continued developments in AI technology have not been enough to support equity prices against the rising threat of inflation created by recent world events. It’s unclear if the downturn will end anytime soon without a corresponding improvement in geopolitical conditions.
Bonds
The iShares 7-10 Year Treasury Bond ETF (IEF), which tracks intermediate-term Treasury bonds, finished last week below both its 50-day and 200-day moving averages.
The recent oil supply shock has also weighed on bond prices. After trending higher earlier this year, bonds have turned lower in recent weeks as inflation concerns have reemerged. Oil is a foundational commodity, and price changes can easily flow through to other goods in the broader economy. With oil prices rising sharply, investors are worried that the Federal Reserve may have limited room to cut interest rates.
The Fed last cut interest rates in December of last year. Since then, it has held rates steady while monitoring the effects of prior policy changes on inflation and unemployment. With inflation once again a key concern, there is growing skepticism that further rate cuts are likely in the near term.
The next meeting of the Federal Open Market Committee is scheduled for the end of April. According to CME Group’s FedWatch tool, markets are currently pricing in a high probability that rates will remain unchanged at the meeting.
Gold
The SPDR Gold Shares ETF (GLD), which tracks the price of gold, finished the week below its 50-day moving average but above its 200-day moving average.
Flexible Plan Investments (FPI) is the subadviser to the only U.S. gold mutual fund, The Quantified Gold Futures Tracking Fund, formerly The Gold Bullion Strategy Fund. Launched in 2013, the fund is designed to track the daily price changes in the precious metal in a more tax-efficient manner than its ETF counterpart, GLD.
FPI’s indicators
The QFC S&P Pattern Recognition strategy’s primary signal started the week with a 70% net long exposure to the S&P 500. Exposure changed to 130% net long on Monday, 100% net long on Tuesday, and 80% net long on Friday.
Our QFC Political Seasonality Index strategy was aggressive throughout the week. (Our QFC Political Seasonality Index—with all of the daily signals—is available post-login in our Weekly Performance Report section under the Domestic Tactical Equity category.)
The Volatility Adjusted NASDAQ strategy started the week with a 40% net long exposure to the NASDAQ 100. Exposure changed to 20% net long on Thursday.
The Systematic Advantage strategy started the week with a 30% net long exposure to the S&P 500. Exposure changed to 60% net long on Wednesday.
Our QFC Self-adjusting Trend Following strategy’s primary signal was 0% net long the NASDAQ 100 throughout the week.
The Volatility Adjusted NASDAQ, Systematic Advantage, QFC Self-adjusting Trend Following, and QFC S&P Pattern Recognition strategies can all employ leverage, so the investment positions may at times exceed 100%.
Our Classic model remained in stocks throughout last 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 platforms that are more restrictive 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 prices and a positive monthly change in GDP). Historically, a Normal environment has occurred 75% of the time since 2003 and has been a positive regime state for stocks, bonds, and gold. Stocks have the highest rate of return in Normal periods. Gold has the second-highest return but has also experienced high drawdown in these environments.
Our S&P volatility regime is registering a High and Rising reading, which favors stocks over gold and then bonds from an annualized return standpoint. The combination has occurred 28% of the time since 2003.