The markets had an amazing reversal in July with most asset classes and sectors experiencing significant gains with the exception of emerging markets. The broad fixed income market (BB US Agg) returned 2.4% in the month as rates decreased across most maturities. YTD the Agg is still down 8.2%. The equity markets had a spectacular month with stocks rallying in the latter half of the month as investors digested news about the economy, inflation, and central bank response. The US large cap market (S&P 500) returned 9.2% in July, bringing the YTD performance to -12.6%. US small and mid-cap stocks outperformed US large-caps and are ahead by nearly 1.8% YTD. International developed and emerging markets equities significantly underperformed their US counterparts for the month. Emerging market stocks were especially weak, pulled down by poor performance from Chinese shares (-6.2%). Latin American stocks, on the other hand, were up 4.3% and are up 3.7% so far this year due to the surge in commodity prices.
With the rebound in July, all of the Core Satellite portfolios posted positive returns. On a relative basis, the strategies underperformed their benchmarks, with our Global and Select strategies performing similarly.
The “Core” portion of the portfolio outperformed for the month due to stronger performance from our US equity positions (i.e., BIBL and ISMD) relative to the MSCI World Index. BIBL performance in particular was additive as the ETF outperformed the secular US large cap indexes by nearly 2%. The “Satellite” portion of the portfolio underperformed as the allocation to UUP (Invesco DB US Dollar Index Bullish Fund, which tracks the performance of the US dollar relative to a basket of six major currencies) underperformed the broader market (UUP was up 1.3%, while the broader market was up 9.2%). On the fixed income side, the 70/30 strategies have been negatively impacted by rising rates, but that reversed in July as IBD was up over 2%. On a relative basis, the portfolio underperformed the BB US Agg for the month given its shorter duration to the benchmark (4 versus 6.8 years). On a YTD basis, however, IBD has outperformed the BB US Agg by over 1.3%.
While the stock market experienced a positive move higher in the month of July, it is still in the context of a broader downtrend. As of yet, we are not seeing substantial improvement in the technical structure of the market that would signal a risk on approach. As such, Core Satellite portfolios will continue to hold positions in the US Dollar as the satellite position, as that is one of the only markets we are seeing that exhibits price strength which could help offset the likely additional downside in the stock market that expect in the coming weeks and months.
We continue to monitor the relative strength and momentum signals of all major economic sectors, watching for markers of improvement that could give us an opportunity for an attractive entry point. We are not currently seeing strength in any sector, and until we do, the US Dollar remains our preferred market to seek upside in a risk-averse season.
Quadrant Interpretation:
• Strengthening: Performance < benchmark but momentum is UP
• Leading: Performance > benchmark, relative strength is UP
• Weakening: Performance > benchmark, relative strength is DOWN
• Laggard: Performance < benchmark and momentum is DOWN
• Benchmark: S&P 500 (S&P 500 Sectors)
• 12 weeks of data as of August 1, 2022
Tactical Risk Management strategies posted positive returns for the month of July, though not as positive as benchmarks due to the strategy continuing to be on defensive footing. Over the past three months and even the past year, the defensive posture of TRM has delivered benefit to investors through outperformance relative to benchmarks.
July saw a reprieve from the onslaught of selling pressure the markets have been under this year, and while we are thankful for a breather, our analysis continues to point toward lower prices to follow as the selloff resumes to fresh new lows. With TRM, we are not attempting to time the short term ups and downs of the market, hence we did not make an attempt to jump into a risk-on position during the rally in July, but rather are more concerned with managing risk. As long as the level of risk remains at elevated levels, TRM will continue to hold a defensive posture, which investors seeking to avoid the turbulence of a volatile market such as we are experiencing now appreciate.
There is likely more downside in the broader market, and TRM will continue to hold it’s defensive posture until risk has abated.
The market has posted good performance for July, but the overall structure of the price action suggests that it is just a bounce before a renewed sell off. We are watching the indicators and trend lines carefully to see if that expectation plays out, or if not, watching to see our risk signals evaporate as the market gains stability and gives us cause to consider moving back into stocks.
Elliot Wave analysis is showing a high likelihood that the recent bounce in stocks is a second wave correction of the previous first wave down of this bear market. IF that is true, then wave three down is currently on deck and could begin any day now. Third waves are typically the longest and strongest waves, which means that should it materialize, it will exceed the losses of the first wave lower, in both velocity of down moves and overall price declines.
There is a lot of bearish potential in the market right now, and as such TRM will continue to hold defensive positions until the pattern clears, which is not expected anytime soon, though we would love to be proven wrong.
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.
• CW Active Protection: -0.45%
• CW Active Balanced: -0.41%
• CW Active Growth: -0.38%
• DJ U.S. Conservative: 2.95%
• DJ U.S. Moderate: 5.33%
• DJ U.S. Aggressive: 7.88%
• US Large Cap Stocks (BIBL): 9.61%
• International Stocks (WWJD): 4.68%
• US Small/Mid Cap Stocks (ISMD): 9.26%
• US REIT Index (USRT): 6.33%
• US LT Treasuries (VGLT): 3.77%
• US IT Treasuries (VGIT): 1.41%
• US ST Treasuries (VGSH): 0.16%
• US ST Treasuries FLT (USFR): 0.02%
• Gold (GLD): -1.95%
• Div. Commodities (GSG): -4.83%
• Mortgage Back Sec. (RISR): -6.67%
• Throughout the month, our indicators stayed in a “down trend” for stocks, real estate, and longer-term treasuries. The under-performance of the models compared to the blended benchmarks is due to our more conservative stance given the current state of the economy with possible recession on the horizon. The markets stage a potential recovery attempt in July and since our models held a very small allocation to stocks, we did not participate in that rebound.
• We decided to remove our allocation to RISR which is the mortgage-backed securities floating rate fund. It began a downtrend and due to the recovery of the long-term treasury markets, we felt it made sense to remove this holding for the time being.
• We will keep our eye on the current trend direction and see if any asset classes change direction enough to warrant an increase in our allocations. Due to higher-than-expected inflation, interest rate increases (which we believe will be higher than the FED is predicting), and possible recessionary pressures due to rising rates; we do not anticipate high returns for the more growth focused assets classes the remaining part of 2022.
• We are researching other items to possibly add the models that would do well in rising interest rate situations as well as increasing inflation scenarios. If we find something that our team believes offers a good risk/reward opportunity, we will add it to the models in proportion to their expected risk offset potentials.
For the month of July, FEVR gained 8.65% vs the S&P 500 return of 9.21% and the Momentum (MTUM) return of 5.17%. GLRY rose 8.56% vs the S&P Midcap 400 return of 10.92% and the Momentum (MTUM) return of 5.17%. Within FEVR, Information Technology and Health Care contributed to the strong performance, more specifically HCA Healthcare. Consumer Discretionary was the lowest performer at 1.91% for the month, which was discussed previously to be a smaller position than benchmark weighting via our FEVRR process. Within GLRY, Industrials and Real Estate boosted performance, while Health Care was a laggard and only rising 0.28% for the month.
As mentioned in previous monthly commentaries, but worth noting again, FEVR and GLRY will not be as correlated with the MTUM benchmark for the near future. The market has shifted to even more exposures in Health Care and Energy, and our BRI options are limited within some of those spaces. Additionally, our FEVRR process seeks to reduce unnecessary risk, specifically within the Energy sector and low credit quality companies. For these reasons, we will continue to unlock BRI, momentum-based investments uncovered by our FEVRR process, but the sector exposure may not align with other momentum investment vehicles.
We are excited to finally have a very positive month after a volatile six months, and we look forward to finding opportunities into this second half of the year!
For the month, the Inspire Tactical Balanced ESG ETF (RISN) returned -0.06%. The fund under-performed the S&P Target Risk Moderate Index (AOM) by -3.07%, which returned 3.76% (according to Morningstar.com). We attribute this performance to the very conservative allocation that the fund held for the month.
The management team diversified the “defensive” allocation of the fund into floating rate, short and intermediate term treasuries due to an increase in momentum in those asset classes. The fund is also holding a small allocation to gold and large cap US stocks.
The overall stock market (S&P 500-SPY) increased by 7.77% for the month.
For the last twelve months, the Inspire Tactical Balanced ETF (RISN) returned -11.17% and has under-performed its benchmark (S&P Target Risk Moderate Index) which returned -9.35% (according to Morningstar.com). We attribute this underperformance to the lack of stock holdings within the fund so far in 2022. As the stock market increases the fund will continue to underperform until the management team decides to reallocate the holdings into a more aggressive stock allocation.
Item watching #1: We continue to monitor the US Large Cap stock market to see if the trend/momentum remains in a downward direction. Again, we do not anticipate that the worst is over and anticipate holding our smaller allocation to stocks for the foreseeable future. However, we do not try and predict where the markets are going, but rather depend on our charting methods to tell us when the momentum has shifted enough to warrant a reinvestment in the stock market.
Item watching #2: We continue to monitor the price movements of gold. We currently hold approx. 5% in gold. Gold has been in a downtrend according to our charting system and if this trend continues, we may reduce the fund’s gold allocation even further.
Item watching #3: We continue to monitor the US Treasury holdings within the fund. We diversified the funds allocation to treasuries at the end of July and will continue to monitor that allocation and make changes as we see the trends unfold.
Issachar lost 0% in July (a flat month), while the IQ Hedge Multi-Strategy Index gained 2.19%, so Issachar underperformed its benchmark. Issachar remained in cash in July while the market found a bottom and rallied higher. The perceived potential reward was not worth the perceived risk in July, but the market has improved. We are looking for fundamentally sound stocks with attractive technical buy points, but the market is overbought and due for some backing and filling. The Fed continued to raise rates in July to tame inflation, and we are officially in a recession of two consecutive quarters of declining GDP. The market may have bottomed because the Fed raised rates 75bps instead of the 1% hike the market was anticipating, so the Fed may achieve a soft landing. The Fed is known for overdoing it, so this could be a bit of a reprieve versus a crash landing. We believe A tradeable bottom is in, but THE bottom formed after capitulation selling is still in the cards.
We are watching the Fed see how fast they sell bonds to shrink their $9 trillion balance sheet to reign in inflation. If they raise rates too high and reduce their balance sheet too quickly, they could throw us into a deeper recession which would not be good for the stock market. Junk bonds have turned up with stocks, which indicates that investors' appetite for risk is increasing, which is a good sign. Yields are dropping, suggesting that maybe the market sees a deeper recession ahead. If Germany's economy worsens due to reduced Russian natural gas supply, we could see a global recession in the works. More deficit spending, Fed money creation, and not robust sales/earnings seem to be the driver behind this overbought bear market rally, so we will wait for more evidence before joining the free money printing party. Unfortunately, some influential, evil-minded people may want to destroy America and bring us under a one-world government. Still, we believe God has his mighty hand of favor on America, and we win in the end. Thanks for Your Trust, and Praise Jesus!
For whoever finds me finds life and obtains favor from the Lord. Proverbs 8:35
Mutual Funds involve risks, including the possible loss of principal. An investment in the Fund may not be appropriate for all investors. The Adviser's judgment about the attractiveness, value, and potential appreciation of particular asset classes and securities in which the Fund invests may prove incorrect and may not produce the desired results. There is no guarantee that any investment will achieve its objectives, generate positive returns, or avoid losses.
Investors should carefully consider the investment objectives, risks, charges, and expenses of the Issachar Fund (LIONX). This and other important information about the Fund are contained in the prospectus, which can be obtained by calling 1-866-787-8355. The prospectus should be read carefully before investing. The Fund is distributed by Northern Lights Distributors, LLC, member FINRA/ SIPC. Horizon Capital Management Inc. and Inspire Investing are not affiliated with Northern Lights Distributors, LLC. NLD Review code: 5199-NLD-02/01/2022
