The capital markets declined in the month of February, giving up much of their gains from the previous month. The broad fixed income market (BB US Agg) declined 2.6% in the month as rates increased across the maturity spectrum. The US large-cap market (S&P 500) fell 2.4% in the month, although the one-year return is now down only 7.7%. Growth stocks continued to outperform value stocks, returning -1.2% versus -3.5%, even though value stocks are ahead by 10.5% over the last year. US small- and mid-cap stocks maintained their dominance, outperforming large caps by around 1% for the month and 4-7% for the year. Despite the recent rebound in the dollar, developed international equities continue to outperform their US counterparts. Emerging market stocks, on the other hand, significantly underperformed for the month and were down 6.5%. Mainland Chinese stocks retreated in February (-4.4%), as did Latin American stocks (-6.2%). The US dollar (US Dollar Index) rose against most other currencies (+2.6) after suffering significant weakness over the previous four months.
Given the capital market declines in the month of February, all of the Core Satellite portfolios posted negative returns. On a relative basis, the strategies outperformed their benchmarks, with the Global and Select strategies performing similarly. For the trailing year, both the 100% Equity Core Satellite portfolios and the 70% Equity/30% Fixed portfolios have handily outperformed their secular benchmarks.
The “Core” portion of the portfolio performed in line with the MSCI World Index in the month. For the year, the portfolio has outperformed with relatively solid performance coming from BLES (-5.4%), WWJD (-5.7%), and ISMD (0.0%) versus -7.3% for the MSCI World, which overcame the weaker performance from BIBL (-9.2%). The “Satellite” portion of the portfolio outperformed for the month as both the consumer discretionary and technology sleeves beat the MSCI World Index (returning 0.5% and 4.3%, respectively). On the fixed income side, the 70/30 strategies have been negatively impacted by rising rates, and that was the case again in February as IBD was down 1.8% versus -2.6% for the BB US Agg. For the year, IBD has outperformed the BB US Agg by over 3.0% given its shorter duration (4.1 versus 6.8 years).
The sector satellites our technical analysis led us to invest in last month proved to be good moves and generated positive returns relative to benchmarks. This past month we increased the focus of our satellite positions on technology and consumer discretionary and removed materials. There is strong momentum and money flow behind those two sectors, and we believe that overweighting there puts portfolios in a good position for strong outperformance as the stock market continues to run higher off the recent bottom.
Since the last update, the S&P 500 price chart has broken above key overhead resistance, confirming what potentially could be a longer term change of trend from down to up. There are still additional obstacles to overcome in the short term which could result in a renewed downtrend, and we remain alert to such a possibility. Our Core Satellite strategy is designed to rotate out of struggling sectors and into those which are performing better, so if our technical indicators begin flashing the warning sign we will follow those signals into more defensive sectors or assets, as we did last year, seeking to limit losses during bearish periods.
Tactical Risk Management (TRM) continues to hold outperformance over the past year relative to the benchmark, though last month TRM fared poorly verses the benchmark as it was positioned more bullishly than the conservative benchmark as the stock market slid lower these past few weeks.
The market is at a crossroads, with the possibility of a positive trend change showing up several weeks ago which gave us reason to enter back into stocks in order to benefit from a potential rally higher should that positive trend change develop.
After an initial pop, prices have come down modestly, making the S&P about even on the year for returns. This was not surprising, as I wrote last month, “there remains some reason for caution, and that there are some significant barriers in the technical formation of the price action of stocks which will need to be cleared for the rally to have a longer term lifespan, and as we approach those barriers we will be watching especially close for any signs of a renewed downturn taking shape”.
Currently, the probabilities are (ever so slightly) still in favor of at least moderately higher prices in the near future, and we believe that our bullish “risk on” stance is the appropriate one for investors right now. But that could change very quickly if key support levels are invalidated, and the market is testing those levels right now.
From an Elliott Wave perspective, there is a good possibility that the run up from October lows to February highs was a complete Wave 2 corrective pattern to the previous large move downward markets experienced most of last year. While such a reprieve has been welcome, if the Wave 2 analysis is correct, that means that Wave 3 is on deck to take prices much lower. Third waves are often the longest and strongest price trends in Elliott Wave theory, which means that should this potential become reality, that the next move lower could be worse than the blistering declines of 2022.
This is obviously of great importance and we are monitoring the technicals very closely for signs that might confirm Wave 3 down is underway. There are alternative analyses of the pattern which would see prices trend higher, but they seem to be the underdogs and could be completely invalidated with just a few more bad days in the market.
Give that fair warning, a renewed slide lower has not yet been confirmed by the market, and it still seems most likely that there is at least a little bit more gas in the tank for a stock rally, even if it may be short lived. As such, we are maintaining our risk on stance for the moment, but have our trading fingers on a hair trigger to reposition portfolios defensively should the bear case materialize and risk levels become unsuitably elevated again.
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 our expectations for the month ahead.
For the month of January, GLRY pulled back -0.18% vs S&P Midcap 400 (MDY) -1.86% and USA Momentum (MTUM) -4.04%. Real Estate and Consumer Discretionary sectors were the primary drivers for outperformance. Consumer Discretionary was an intentional underweighting, and Real Estate investments benefited from a more concentrated allocation versus the broad market, which included considerable discretionary spending investments, such as hotels. Energy was a headwind, both from an overweight and selection standpoint to the broad market. To note though, Energy was the second-best performing sector in GLRY versus the momentum benchmark.
As we go into March (still feeling like it’s January), we remain hopeful and cautious. Our FEVRR process is additive to our momentum objective, as we continue investigating companies with strong balance sheets that are willing to be nimble in a dynamic market. The volatility also provides opportunity, as investors look to position for the next wave of momentum to build.
We attribute this performance to the very conservative allocation that the fund held for the month with regards to the percentage of stock compared to treasuries and other protective asset classes. Since the benchmark held a higher stock allocation it captured more of the stock market decline for the month giving us a better monthly return number compared to the benchmark.
We attribute this performance to the continued defensive position held by the fund through 2022. We are currently not capturing much of the market increase when the stock market stages a rally, and there have four rallies since the end of 2021. Additionally, since the stocks that we hold are based on the Inspire 100 Index, when we are allocated to stocks, the underperformance of the Inspire 100 compared to the S&P 500 has added to the underperformance compared to the benchmark.
We also held a portion of US Treasuries (long and intermediate term) at the beginning of 2022, but due to rising interest rates their price decline added to the underperformance even though our overall allocation to stocks was at its lowest since inception of the fund, the alternative asset classes did not give us a boost as all correlations went to 1 on the downside in 2022.
At the end of January 2023 our long-term indicators pointed to a potential change in trend for the US Large Cap market so we increased our allocation within the fund by 10% and will continue to monitor that trend and increase the allocation more if the trend continues.
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