Our Core Satellite strategies posted positive returns of 3.05%-5.74% for the month of December, depending on the version of the strategy invested in, outperforming benchmark returns for the month. Returns for the calendar year of 2021 also ended with strong outperformance above benchmarks, with total net returns of 17.12%-30.48%, depending on the version of the strategy invested in (more aggressive versions posting higher returns than more conservative versions, which is to be expected). Likewise, since inception performance relative to benchmarks continues to be strong, though slightly lower than the benchmark.
Our technical analysis-driven sector overweights to Financial and Healthcare sectors paid off in December, with each sector delivering better than average performance.
Early in Q1 we are swapping out Financials in favor of Consumer Staples, as we are seeing Financials show weakness and Staples coming into favor. We are maintaining current exposure to Healthcare.
We do expect that the overall market will continue to experience price declines, possibly leading to a bear market in Q1, and we will be watching the technicals closely for signs that our current sector selections are still the right choices, or if there are other sectors that begin exhibiting more resilience in the face of the expected continuation of market declines.
The Tactical Risk Management strategies were mostly flat in the month of December, posting returns of -0.12% to -0.18%, depending on the version of the strategy invested in. During the same period, benchmarks posted a gain of 1.11%-2.94% at month end, but that gain was short lived and has since evaporated early in the month of January. Over the entire calendar year of 2021, TRM delivered positive returns of 4.29%-10.09% depending on which version of the strategy invested in, with some versions of the strategy outperforming and some underperforming benchmarks. If the current perceived weakness in the stock market results in a full-fledged market selloff, as our analysis is strongly suggesting may be the case in the near future, we expect TRM strategies to soundly outperform benchmarks given our risk-off, defensive positioning.
Risk levels in the market remained elevated throughout the month of December as they have throughout the last quarter, and as the objective of TRM is to move assets into defensive positions during times of heightened market risk, TRM was largely on the sidelines throughout the month.
Our analysis of the market structure continues to favor the verdict that we are in the end stages of the run up off of the COVID lows from March 2020 and as such remains in defensive positions. The broader market formed a top in November with a bearish divergence with Money Flow, and then sold off several percentage points, adding to the fragile structure of the market. This process of a very short-term top accompanied by bearish divergence of Money Flow repeated itself in December, but with an even more pronounced divergence. As of early January, it is still too early to say if the final top is “in,” but it is increasingly looking like the stock market has run out of gas and a meaningful price decline is on the horizon.
Oh, 2021. What an interesting and eventful year it was. There were plenty of gives and takes. Some companies were given “passes” for their performance in a difficult and changing environment, while others faced the full brunt from missed expectations. Our investing factor, momentum, typically does not perform well in volatile, regime-shifts like this year. Though the theme underperformed broad market performance, we are pleased to have double-digit returns for the year and do so in a Biblically responsible way.
For 2021, FEVR returned 12.9% vs 28.8% for the S&P 500 and 13.4% Momentum Index. GLRY returned 16.0% vs. 25.5% for the S&P 400 Midcap and 13.37% Momentum Index.
FEVR had a rocky start to the year when rates ripped higher from February to March. As the summer progressed, optimism returned, and we launched almost to catch the broad market in November.
However, pessimism returned as winter took hold, and the broad market spread went from -5% to -15% in a matter of weeks.
GLRY, on the other hand, had a separate journey. We had home runs in Q1 that benefited from small/mid cap exuberance. After the March effect, we looked to reduce risk, though, and the summer was fairly quiet. Finally, the winter impacted mid-caps as well, but a positive outlook helped boost us into the end of the year.
Coming into 2022, we’re excited about the road ahead for equities. We are looking at the shifts from tech, specifically high growth/high valuation names, and watching to see if this will be a continuation down or a buying opportunity. We will continue to analyze the trends in work-from-home, the gig economy, and labor force changes. The metaverse launch and implementations could create brand new opportunities for companies. Rising rates could create profitable opportunities for banks in the right geographies and business lines.
No matter what comes next in 2022, we are motivated to continue finding opportunities for investors in a purpose-driven way. Have a blessed New Year!
For the month of December, the Inspire Tactical Balanced ESG ETF (RISN) returned 3.57%. The fund outperformed the S&P Target Risk Moderate Index for the month by +2.02% (according to Morningstar.com). We attribute this performance to the 80% exposure to the large cap US stock holdings. The US stock market decreased in December, and the filtered US large cap stocks held within the fund (Inspire 100 Index) outperformed the overall US large cap stock market (S&P 500) for the month. Our 20% allocation to Long-Term US Treasuries reduced the returns, decreasing by -1.87% for the month, again showing a strong negative correlation with the US large cap stock market. Year to date, the Inspire Tactical Balanced ESG ETF (RISN) returned 22.15% and has outperformed its benchmark (S&P Target Risk Moderate Index) by +15.22% according to Morningstar.com.
Item watching #1: We continue to monitor the US large cap stock market to see if the trend/momentum remains in an upward direction. The market seemed to overcome its fears from November and showed strong returns in December, so we will continue to monitor our allocation to the Inspire 100 Index and if a trend change occurs, we will reduce our exposure.
Item watching #2: We continue to monitor the price movements of gold. We decided to remove our gold allocation during the month of September 2021 and add to our Long-Term Treasury allocation. Gold had a positive return for the month of December and if this continues past our triggers, we will add a small allocation to gold back into the fund.
Item watching #3: We continue to monitor the long-term US treasury holding as the potential for higher interest rates and higher inflation may impact the performance of this holding in the future; at which point we would consider moving back into intermediate-term treasuries for that portion of the fund. Long-term US treasuries were negative for the month of December, but not enough to warrant a change in our allocation, so we will continue to monitor this asset class and adjust if things continue to trend lower.
Item watching #4: Intermediate term treasuries have very low volatility historically, but due to their lower duration, have not helped to offset price declines in the US stock market as much as have long-term treasuries. We will continue to try and keep an intelligent mixture of these two asset classes based on the current trends in interest rates and inflation. However, our goal is to always keep a small portion in these asset classes in the fund to help minimize the overall volatility and help offset potential major declines in the US large cap stock market.
Issachar lost -0.37% in December, while the IQ Hedge Multi-Strategy Index gained 0.66%, so Issachar underperformed its benchmark. Issachar spent most of December in cash, as our indicators pointed to higher risk. We try to follow the leading stocks and analyze their price and volume charts for clues about where the market may be heading. We made a few stock purchases, but the market was not rewarding us, so we quickly cut losses and waited for the next opportunity. The market began selling the higher P/E names and buying the more defensive stocks like consumer staples, real estate, and utilities, so we tried to reposition Issachar accordingly. Issachar was lightly invested into January, anticipating institutional buying that typically occurs at the beginning of the year. January is a big month for 401k and IRA contributions, so we will be looking for stocks to buy as institutional money pours into their best companies.
We are watching the actions of the Fed because they are now concerned about the inflation that they help create by printing money out of thin air. The Fed announced they would decrease their bond purchases and raise rates in 2022, which could create problems for the stock and bond market. If the Fed slows their asset purchases faster than the market expects, bond prices could fall causing rates to rise, and stocks could come under heavy selling pressure. The Fed has created more than $4.7 trillion of new money since the COVID Crash on 3/23/20, and that money had to go somewhere. We believe most of that "free money" has been used to bid up stock and bond prices to new heights. If the Fed does not take away the punch bowl of liquidity too fast, we should be okay, but if they don't, look out below.
The dollar has started to roll over, so the currency market may be telling us that yields are not headed higher. The dollar trended higher in 2021 as our higher rates enticed foreign investors seeking higher yields. However, if the defensive stock rally continues, the market could be preparing for an economic slowdown due to higher inflation. Higher inflation breeds higher volatility/risk, which does not favor the stock and bond market, so we may need to add shorts to our portfolio. Cash is always an option for Issachar if shorting is not optimal.
The junk bond market is trending above its 50-day moving average, trading near an all-time high, so that is a good sign indicating investors still have an appetite for risk. We do not see this as a high-risk environment, but there are a few signs of speculative fever. Currently, there are over 14,000 cryptocurrencies in circulation. Bitcoin and the NFT "metaverse" still do not interest us. Actually, it reminds us of the tulip-bulb mania era of the early 1600s, looking for a pin to prick the bubble. We do not believe we are there yet, but it could happen fast if the Fed makes the wrong move too fast. Could this be a year for Gold? We are cautiously bullish for now.
For I am the Lord your God who takes hold of your right hand and says to you, do not fear.