Last week, equity markets pushed higher, capping the shortened holiday week. The Dow Jones Industrial Average rose 3.20%, the S&P 500 gained 4.0%, the NASDAQ finished the week up 4.6%, and the Russell 2000 small-capitalization index locked in 3.85%. The 10-year Treasury bond yield rose 3 basis points to 0.67%, as Treasury bonds declined for the week. Last week, spot gold closed at $1,775.95, up 0.23%.
The market continues to be driven by speculation about the impact of COVID-19 on the economy and whether the market will dip down again due to a second wave and lockdown easing. The market’s optimism in terms of the U.S. economic recovery has resulted in a steady rise upward. Even as cases are increasing, signaling that the pandemic is possibly worsening, the fear that was present in the first quarter—uncertainty—isn’t as pronounced at the moment.
The Service sector surged in June, showing readings around prepandemic levels. According to Bespoke Investment Group, “Like many other data points of late, the ISM’s reading on the service sector saw a massive rebound in the month of June with the headline index rising to 57.1; well above estimates of a reading of 50.2. Coming in 6.9 points higher than forecasts, the only larger beat relative to expectations of all months since at least 2008 was back in March of this year when the headline index exceeded forecasts by 9.5 points. That returns the index to just about where it stood in February of this year (57.3). That was also the first expansionary reading (those above 50) since March.”
It may be hard to believe (as we’re still in a global pandemic) that the markets have been in a mini bull run since the bottom in March, but that’s the picture the markets have painted. Examining two of our most-used trend-following strategies demonstrates how our quantitative strategies have navigated a very odd time, specifically a very positive week for the equity markets. Our QFC Self-adjusting Trend Following strategy held 1.6X long exposure all of last week, ending with a weekly gain of 7.88% after fees. Our QFC Classic strategy, often used as a risk-managed market-beta strategy, continues to be fully exposed to equities and gained 4.26% after fees last week.
Flexible Plan’s Growth and Inflation measure, one of our Market Regime indicators, shows that we are still in a Deflation economic environment stage (negative monthly change in the inflation rate and negative monthly GDP reading). Historically, deflation is the worst regime state for stocks, and bonds seem to do the best in this stage. However, we will see if history holds in such unprecedented times.
Flexible Plan Investments offers strategies in our All-Terrain suite that specifically invest using the Growth and Inflation Market Regime indicator. The strategies are able to capitalize on shifts in growth and inflation within the U.S. economy, attempting to position optimally for all possible directional combinations of growth and inflation.
Our Volatility composite (gold, bond, and stock market) has shifted to a High and Rising reading. This stage is where stocks experience their highest drawdowns when passively invested.
An advantage of using actively managed trend-following strategies is that they read what the market is “writing” by way of data. They aren’t concerned with the fear in the news, the economic numbers, or the beliefs and opinions of market participants. They objectively assess the data that the market gives them, and if they recognize a trend, they jump on. However, if a trend is unclear or risk is high, they have the ability to reduce or eliminate market participation. Having the ability to protect investors during times when market conditions are unfavorable will help preserve capital for when the market begins trending again.
PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. Inherent in any investment is the potential for loss as well as profit. A list of all recommendations made within the immediately preceding twelve months is available upon written request. Please read Flexible Plan Investments’ Brochure Form ADV Part 2A carefully before investing. View full disclosures.