The markets reversed course in December, with most asset classes and sectors experiencing losses. The broad fixed income market (BB US Agg) returned -0.5% in the month as rates modestly rose across the maturity spectrum. For the year, the Agg is down 13%, capping one of the worst years on record for bonds. The US large-cap market (S&P 500) returned -5.8% in December, bringing the 2022 performance to -18.1%. Value continued to outperform in the month and exceeded growth by nearly 22% for the year. Energy stocks modestly outperformed the broad market for the month and finished the year up 65%! US small- and mid-cap stocks performed similarly to US large caps for the month, although they are ahead ≈2-5% for the year. International developed equities continued to outperform their US counterparts, driven largely by the weakness of the US dollar. Emerging market stocks also outperformed for the month but were down 20% for the year. Mainland Chinese stocks once again posted positive returns (2.0%) in December; however, they finished the year down by over 25%. Latin American stocks, on the other hand, declined in the month, but they were the only positive EM sector for the year (+8.9%). The US dollar (US Dollar Index) declined against most other currencies, but it ended the year up by 6.2%.
With the weak equity and fixed-income performance in Decembxer, all Core Satellite portfolios posted negative returns. On a relative basis, the strategies modestly underperformed their benchmarks, with the Select strategies underperforming their Global counterparts. For the trailing year, the 100% Equity Core Satellite portfolios performed in line with their benchmarks, while the 70/30 portfolios outperformed by 1-4%.
The “Core” portion of the portfolio outperformed for the month due to strong performance from BLES and WWJD relative to the MSCI World Index. This was partially offset by weaker performance from ISMD, FDLS, and BIBL. The “Core” portion also outperformed for the year, with strong relative performance coming from BLES (-16.0%), WWJD (-14.6%), and ISMD (-13.7%) versus -18.1% for the MSCI World, which overcame the weaker performance from BIBL (-23.4%). However, the “Satellite” portion of the portfolio underperformed for the month as all three sector sleeves trailed the MSCI World Index. On the fixed income side, the 70/30 strategies have been negatively impacted by rising rates, although IBD was up 0.3% in December versus -0.5% for the BB US Agg. IBD has outperformed the BB US Agg by over 3.5% for the year, given its shorter duration (4 versus 6.8 years).
The stock market is currently attempting to decide whether it will continue the heretofore short-lived rally off the lows of last year’s brutal decline or whether the current pop in prices will lose steam and reverse course. We believe that our most recent shift into Consumer Discretionary, Technology, and Materials sectors should benefit our investors as those sectors seem best poised to outpace the broader market during this current period of positive price momentum. However, we are closely monitoring the market for signs of a turn, in which case it would be likely our technical indicators would signal a move into more defensive sectors, such as Healthcare or Consumer Staples. For now, we like our current bullish allocation setup and are expecting to generate positive returns to start off the New Year.
While the short-term action of the market has been bullish, we also continue to see many headwinds to the continued upside in stocks, and there is a danger of a renewed downturn in the broad market. As an aggressive strategy, Core Satellite is designed to position for upside potential rather than primarily seeking to avoid downside risk, and our current exposure to tech, materials, and discretionary put us in what we believe to be the three sectors exhibiting the most upside potential at this current time.
If the market should break out above previous resistance and put together a sustained rally, these allocations should serve our investors well. In the event that prices stall and turn lower in a new leg down, Core Satellite will seek to rotate assets into sectors that are displaying more resilience to that decline than the broad market. If there are no favorable sectors based on our analysis, then we will consider reallocating to a different asset class, such as we did with US Dollar futures recently, which benefited our investors by helping to shield them from the extensive market declines of previous months.
Tactical Risk Management delivered a solid outperformance relative to benchmarks and the broader market in 2022. With stocks down double digits and the bond market suffering one of the worst years it has ever experienced, TRM was able to shield our investors from the full extent of the price declines, outperforming by over 5% compared to benchmarks.
TRM is our most conservative strategy and is designed to measure risk. When the risk is elevated, we move defensively. When risk abates, we move back into risk assets. TRM is not an attempt at picking tops and bottoms in the market because, as we know, risk can remain elevated for some time, and prices may continue to inflate. Likewise, risk could be normal, and prices could go down, as they do in normal market activity. However, the elevated risk is a precondition for a significant market drop, and so moving defensively in elevated risk environments reduces our chances of participation in significant market declines while allowing for standard market participation during times of normal risk levels, which is what conservative investors seek to achieve with TRM.
As of year-end, none of these three criteria have materialized; however, there are some bright patches beginning to show that suggests we might be getting close to the end of a decline – maybe. While the indicators above have not flashed green yet, they are not quite as deeply red as they were.
I believe we are entering an important inflection point for the financial markets here in Q1 2023, and it is time for the market to decide whether it is time for at least an intermediate-term relief rally, or if there is still room to fall before risk assets see some relief. We will continue to watch for indicators of risk abatement and the accompanying opportunity to enter back into stocks, but if risk remains elevated as determined by our TRM technical analysis, we will continue to hold our defensive position which has served us so well over the past year.
At Inspire Advisors – The Chandler Team, we focus on three main strategies that are diversified and actively managed “in house” by The Chandler Team. Below is an overview of how the strategies performed, what changes were made during the month, and what our expectations are for the month ahead.
We will keep our eye on the current trend directions and see if any asset classes change direction enough to warrant an increase in our allocations. The two assets classes that we feel are most likely for us to add in the near term, would be the international stocks (WWJD) and possibly some gold (GLD). These two assets’ classes are showing the most promise according to our technical indicators and may be added to the models in the near future.
For December, GLRY returned -6.13% vs -5.53% S&P Midcap 400 (MDY) and -3.93% USA Momentum (MTUM). Versus the broad market, the biggest challenge to GLRY was Consumer Discretionary and Information Technology names, specifically in the semiconductor and automotive industries. The Industrials sector had the most negative impact on the challenging month, as attention shifted to a slowing economy. Health Care was a positive for the month and, alongside Financials, was buoyed by strong selection.
This past year was certainly a challenge for investors, as multiple outlets reported 2022 as the worst year for 60/40 portfolios since being tracked. FED policy and geopolitical uncertainty stunned us all again and again. Thankfully, we serve a big God, and He makes it easier to embrace the investing ideal of being long-term investors and big picture thinkers. We can invest and work through times of uncertainty, especially by investing in companies that honor Him. With the past behind us, we are excited to see what 2023 holds, and we will stand true to our long-term, momentum, and BRI framework.
Issachar lost -0.20% in December, while the IQ Hedge Multi-Strategy Index lost -0.97%, so Issachar outperformed its benchmark. Issachar traded lightly in December as risk continues to be elevated. We took small positions in Muni-bond ETFs and energy. The market was not rewarding us for taking risk, so we cut our losses small and returned to an all-cash position. We are in a down-trending Bear Market, and the Fed is not on our side.
The S&P 500 lost over -18% (the largest loss since 2008), and the NASDAQ 100 lost over -32%, while we lost less than -8% in 2022. January is when institutional money typically repositions itself for the new year, so I will study where big money flows to gain an edge. When "big money" buys or sells a stock, they do so by leaving "footprints in the sand" that we like to follow. Big mutual funds and pension plans create the trends we want to follow. Ships can't turn as quickly as a kayak, and kayaks can get out of the water when it is unsafe. The water is not safe currently. However, there will be another incredible opportunity once the market bottoms and a new uptrend begins, but we should protect capital until then. Buying the dips has worked every time, but one!
The Fed reduced its balance sheet by another $33 billion last month as they continue to drain liquidity! The Fed is expected to raise rates again on February 1st, which is fundamentally bad for stocks and bonds. Higher rates cause P/E ratios to contract, and growth stocks typically fall the hardest. TSLA crashed over -65%, AAPL fell more than -26%, and AMZN dropped over -49% in 2022. I do not see these former leaders returning anytime soon. The next bull market will have new leaders, and we expect the charts to pull us in and push us out.
Bottom Line: Issachar is in Cash, keeping our powder dry for the next opportunity! The Fed is still fighting inflation by raising rates and decreasing its balance sheet, which drains liquidity, making it hard for stocks to advance. The market is a forward-looking discounting system; if the price/volume charts look like "big money" is coming back, we will put our opinions aside and follow the money. Sometimes we win by not losing. Grace & Peace to everyone, and Happy New Year!
For it is by grace you have been saved, through faith, and this is not from yourselves, it is the gift of God not by works so that no one can boast. Ephesians 2:8-9
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