Current market environment performance of dynamic, risk-managed investment solutions.
By Will Hubbard
Market snapshot
• Equities: The major U.S. indexes finished mostly higher on a tech-led advance. The S&P 500 rose 1.26%, the NASDAQ Composite gained 1.74%, and the large-cap NASDAQ 100 added 1.70%. The Dow Jones Industrial Average slipped 0.48%.
• Fixed income: Treasury yields advanced, with the 10-year ending the week at 4.56%.
• Gold and commodities: Gold fell 0.06%. The U.S. dollar was up 0.09%.
• Market indicators and outlook: Most of our tactical strategies benefited from the strength in technology shares, while our fixed-income strategies remained defensively positioned as yields climbed. Market regime indicators show the market is in a Normal economic environment stage, which is historically positive for stocks, bonds, and gold, though gold has also experienced meaningful drawdowns in this environment. 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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Equities
Information Technology led the market, gaining 3.43% for the week. However, participation was relatively narrow, with only five of the S&P 500’s 11 sectors finishing higher. Bespoke Investment Group has noted the divergence between rising headline indexes and weaker participation beneath the surface.
Rising technology-component costs may also bear watching. According to Bespoke, Apple raised iPad and Mac prices, while Microsoft increased Xbox prices for the third time in 13 months. These increases may be linked in part to memory costs, which have climbed to more than 2.5 times over the same period. Rising component costs are beginning to feed through to sticker prices, and the margin and inflation signal is worth tracking under the rally.
Why it matters: Concentrated leadership can carry the indexes, but it also leaves the advance dependent on a single sector. Bonds remained firm alongside stocks, favoring equities for the week, though narrow sector participation raises questions about the breadth and durability of the move.
Fixed income
The 10-year Treasury yield finished the week at 4.56%, its highest level in several weeks. As yields rose, Treasury prices declined, making duration a headwind during the period.
The move reflected continued expectations for resilient economic growth and fewer near-term Federal Reserve rate cuts. Investors also weighed the longer-term implications of persistent federal borrowing and Treasury issuance, which have contributed to elevated yields this year.
While stocks continued to move higher, bonds offered little diversification during the week. Rising yields alongside rising equity prices suggest investors remained comfortable taking risk rather than seeking the safety of Treasurys.
Gold and commodities
Gold was essentially flat for the week, with spot bullion falling 0.06%. Neither the safe-haven bid nor the risk-on rally in equities pulled it far from where it started.
A firmer U.S. dollar gets much of the credit for capping the move. The U.S. Dollar Index ticked up 0.09%. Because gold is priced in U.S. dollars, even a small increase in the greenback can make the metal more expensive for buyers using other currencies. That seemed to be enough of a headwind to keep gold from gaining traction.
As previously noted, Bespoke Investment Group has reported a sharp increase in memory-chip prices, which has contributed to higher hardware prices from Apple and Microsoft. So far, however, those cost pressures have not materially affected broader inflation measures such as core personal consumption expenditures, the Fed’s preferred inflation gauge. A relatively stable inflation outlook may have limited demand for gold as an inflation hedge during the week.
Flexible Plan Investments (FPI) is the subadviser to the only U.S. gold mutual fund, The Quantified Gold Futures Tracking 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.
The indicators
Our equity signals moved firmly risk-on this week. The QFC Self-adjusting Trend Following strategy remained levered at 200% long throughout the week. The QFC S&P Pattern Recognition strategy maintained a 200% net-long position throughout the week. Our QFC Political Seasonality Index was in its risk-on posture throughout the week. (The QFC Political Seasonality Index is available—with all 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 advantage these strategies offer investors is their ability to adapt to changing market environments, participating during uptrends and moving to a defensive posture during downtrends.
The Volatility Adjusted NASDAQ strategy started the week 80% long, moved to 60% long on Monday’s close, and returned to 80% long on Tuesday’s close. It increased to 100% long on Thursday’s close and remained there through the end of the week. The Systematic Advantage strategy started the week 60% long, increased to 120% long on Thursday’s close, and dropped to 90% long on Friday to end the week. These strategies can employ leverage, so their exposure may exceed 100% at times.
Our Classic model was fully risk-on all week. Most Classic accounts follow a signal that can change exposure within a week, though a few remain on platforms requiring up to a month to adjust to new signals.
FPI’s Growth and Inflation measure, one of our Market Regime Indicators, 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 drawdowns 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.