Market Update 9/11/23

By Will Hubbard

Market snapshot

·??????? Stocks may rally if inflation data remains subdued. Otherwise, Energy may outperform the broader market in September.

·??????? Treasury yields rose in front of CPI data.

·??????? The Federal Reserve maintained a more hawkish stance than expected, causing the U.S. dollar to rise and gold to fall.

·??????? Market regime indicators show the market is in an Ideal economic environment stage, which is historically positive for stocks and bonds but with a substantial risk of a downturn for gold. Volatility is Low and Rising, which favors gold over equities and then bonds.

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The major U.S. stock indexes declined last week. The drop was led by the Industrials sector, which lost 2.92%. The Russell 2000 small-capitalization index lost 3.61%, the NASDAQ declined 1.93%, the S&P 500 dipped 1.29%, and the Dow Jones Industrial Average fell 0.75%. The 10-year Treasury bond yield moved up 9 basis points to 4.26%. Spot gold closed the week at $1,919.08, down 1.08%.

Stocks

The stock market declined during last week’s holiday-shortened trading schedule. Last week also saw some notable economic news.

On Tuesday (September 5), the Factory Orders Report (which measures the change in value of new orders placed with manufacturers) registered the single-largest month-over-month decrease since November 2022. Before that, the largest monthly drop was during the onset of the COVID-19 lockdowns. The slowdown could be due, in part, to seasonal changes related to manufacturing or a potential strike at the “Big Three” U.S. auto manufacturers if the United Auto Workers contract negotiations break down.

On Wednesday, S&P Global reported that the U.S. services economy experienced its slowest growth in seven months during August. S&P Global attributed the slowdown to a “renewed decline in new business” as costs rose faster than selling price inflation. Additionally, employment growth in August was the slowest since October 2022.

On Thursday, initial jobless claims came in strong, signaling the labor market remains resilient to higher interest rates amid a worker shortage. Claims peaked this summer at 265,000 and are still slightly higher than the lows experienced a year ago when initial claims were under 200,000.

Bespoke Investment Group noted that the month began weakly with nine out of 11 sectors experiencing a decline. Technology, the heaviest-weighted sector, was the second-most affected. Only two sectors, Utilities and Energy, are positive month to date. Bespoke Investment Group reports that if inflation fears persist, Energy may continue to do well while the rest of the market struggles.

Bonds

Last week, 10-year Treasury yields rose by 9 basis points to close at 4.26%. Year to date, yields have risen by 39 basis points, increasing from 3.87% to 4.26%.

A recent Reuters poll revealed that 23 out of 29 bond strategists believe rates on the 10-year Treasury have peaked in the current cycle. However, about half of those surveyed expressed low confidence in their opinion. This suggests that while data indicates that interest-rate increases can stop, a few more might be necessary to stabilize core inflation and keep the labor market from overheating.

Zhiwei Ren, portfolio manager at Penn Mutual Asset Management, said, “Currently there are two forces fighting. In the fourth quarter, we will see a weakening job market put pressure on consumer spending, which is needed to slow growth. This driver will make yields go lower.”

Gold

This week’s consumer price index (CPI) will be heavily monitored by gold traders. The yellow metal was down 1.08% last week, closing at $1,919.08 per ounce.

Gold traders stand to benefit from a less hawkish Federal Reserve and a declining U.S. dollar. As of now, the Fed continues to leave the door open for rate hikes, with Chairman Powell’s remarks on monetary policy remaining consistent with his June statement: “The [Federal Open Market] Committee will continue to assess additional information and its implications for monetary policy.” This suggests the Fed is considering ways to stop rate hikes while employment remains strong and inflation continues to run above their long-term 2% target.

If the Fed adopts a more dovish stance in its monetary policy, it could lead to a dip in the U.S. dollar’s value, potentially boosting gold prices. However, last week saw the greenback move higher, which put short-term downward pressure on the yellow metal.

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 60% short. It changed to 70% short on Tuesday’s close, reduced exposure to 10% short on Wednesday when the strategy realized some gains, changed to 50% long on Thursday, and changed to 100% long on Friday’s close. Our QFC Political Seasonality Index started last week in its risk-on posture and moved to its defensive posture on Tuesday’s close. (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 last week 140% long and remained there for the week. The Systematic Advantage (SA) strategy started the week 30% long, increased exposure to 60% long on Tuesday’s close, and reduced exposure back to 30% on Friday. Our QFC Self-adjusting Trend Following (QSTF) strategy was 200% 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 in a long, risk-on position 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 an Ideal economic environment stage (meaning inflation is falling and GDP is rising). Historically, an Ideal environment has occurred 28% of the time since 2003 and has been a positive regime state for stocks and bonds. Gold tends to underperform both stocks and bonds on an annualized return basis in an Ideal environment and carries a substantial risk of a downturn in this stage. From a risk-adjusted perspective, Ideal is one of the best stages for stocks, with limited downside.

The S&P volatility regime is registering a Low and Rising reading. From an annualized return standpoint, low and rising volatility favors gold over stocks, and stocks over bonds. The combination has occurred 27% of the time since 2003. Typically, this stage is associated with lower returns and higher volatility from equities and bonds.