The capital markets started off the year with strong gains in January. The broad fixed income market (BB US Agg) returned 3.1% in the month as rates declined across the maturity spectrum. The US large cap market (S&P 500) returned 6.3% in the month, and now the one-year return is only down 8.2%. Growth stocks finally outperformed value stocks, returning 8.3% versus 5.2%. US small- and mid-cap stocks continued their dominance, outperforming large caps by over 4%. International developed equities continue to outperform their US counterparts, driven in part by the weakness of the US dollar. Emerging market stocks also outperformed for the month. Mainland Chinese stocks once again posted strong returns (9.5%) in January, as did Latin American stocks (9.9%). The US dollar (US Dollar Index) declined against most other currencies and is now up just 3.4% for the year.
With the strong equity and fixed income performance in January, all of the Core Satellite portfolios posted positive returns. On a relative basis, the strategies outperformed their benchmarks, with the Select strategies exceeding their Global counterparts. For the trailing year, both the 100% Equity Core Satellite portfolios and the 70% Equity/30% Fixed portfolios outperformed their benchmarks.
The “Core” portion of the portfolio outperformed for the month due to strong performance from BIBL, ISDM, BLES, WWJD, and FDLS relative to the MSCI World Index. The “Core” portion also outperformed for the year, with strong relative performance coming from BLES (-4.7%), WWJD (-4.5%), and ISMD (2.6%) versus -7.5% for the MSCI World, which overcame the weaker performance from BIBL (-9.1%). The “Satellite” portion of the portfolio outperformed for the month as all three sector sleeves (consumer discretionary, materials, and technology) beat the MSCI World Index. On the fixed income side, the 70/30 strategies have been negatively impacted by rising rates, but that has reversed course in the last couple of months. In January, IBD was up 2.1% versus 3.1% for the BB US Agg. For the year, IBD has outperformed the BB US Agg by nearly 1% given its shorter duration (4.1 versus 6.8 years).
The sector satellites that 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 has performed well in its duty of sheltering investors from the brunt of stock market declines this past year and continued to outperform benchmarks over the one-year time frame. In the most recent couple of months, the stock market has become more constructive and has managed to put together a decent recovery from the bottom we saw last October. During that rally, TRM has underperformed as we remained on a defensive footing, biding our time for the risk in the market to dissipate and for the fledgling rally to prove that it has staying power prior to us putting client assets back into riskier positions. Our conservative clients, which TRM is designed to serve, appreciate this wait-and-see approach, and it has served well throughout the years.
In last month’s update, I wrote about the criterion that we need to see before moving back into stocks and out of our defensive stance:
In order for TRM to go back into risk assets, we would need to see all or at least some of the following:
1) Elliot Wave structure tilted toward a higher probability for upward price movement;
2) Money Flow confirming a bullish divergence at a price bottom (price makes new low while Money Flow does not);
3) And preferably some accompanying confidence from bullish readings on Williams %R, upward sloping moving averages, and breakouts above chart pattern resistance.
As of this writing, the market has successfully completed all three of the above requirements to confirm that, as far as we can tell, the rally seems to have at least an intermediate-term staying power, and we believe that it is more likely than not that modestly higher prices are yet to come before the next big test.
With this confirmation, we have begun moving TRM back into a risk-on position, seeking to benefit from a continuation of the current rally. I will add that 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, and should our indicators show an elevation of risk to unfavorable levels, we will move assets back into a defensive positioning as needed.
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 February, 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.
Update as of February 2nd, 2023: Our indicators have improved enough to warrant in increase to our allocations. We have moved slightly into US large cap stocks, international stocks, and small/mid cap stocks. For our Balanced and Growth models we will continue to increase allocations if the trend continues.
Happy New Year!
For the month of January, GLRY rose +8.51% vs +9.25% S&P MidCap 400 (MDY) and -0.55% MSCI USA Momentum Factor (MTUM). GLRY’s outperformance to MTUM came from both allocation (sector weight) and selection. Real Estate and Materials had tailwinds with the change in rates and reopening news, and fifteen securities had double-digit positive returns. Compared to the broad, mid cap market, GLRY saw headwinds being light Consumer Discretionary companies, which saw a rise with the odds of a soft-landing increasing.
As we have stated before, our hope and outlook are for some resolve and a reduction in volatility coming into 2023. The FED is expected to slow the pace of hikes; consumers are beginning to accept and budget the higher prices, and COVID policies are being reduced. A reduction in volatility does not necessarily mean higher asset prices but instead a reduction in sector whipsaws, which could benefit momentum-style investing.
After a challenging season, we are excited to see this market strength to start the new year, and we will continue finding opportunities in our BRI and FEVRR framework.
