The markets continued their descent in June with most asset classes and sectors in negative territory for the year. The broad fixed income market (BB US Agg) returned -1.6% in the month as rates increased across the curve. YTD the Agg is down over 10.4%. The equity markets continued their volatility in June driven primarily over investor concerns about the economy and inflation. The US large cap market (S&P 500) declined 8.3% in the month and is down nearly 20% YTD. US small and mid-cap stocks performed in line with US large-caps in June and are slightly ahead YTD. International developed and emerging markets equities have significantly outperformed their US counterparts (in local terms) both for the month and YTD. However, given the dollar’s strength, the returns have been similar from a US investor perspective. With the continued market declines in June, all of the Core Satellite portfolios posted negative returns. On a relative basis, the strategies modestly underperformed their benchmarks, with our Global strategies outperforming the Select strategies.
The “Core” portion of the portfolio underperformed for the month due to weaker performance from our large-cap equity positions (e.g., BIBL, BLES, and WWJD with the Global strategies) relative to the MSCI World Index. The “Satellite” portion of the portfolio went through a number of changes in the period, which on balance were additive. For the first part of the month, the portfolio switched out of Staples and into Utilities (while also retaining the allocation to Healthcare), and for the second half of the month, the portfolio moved all of the “Satellite” 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). The sector tilt to Utilities and Healthcare was additive for the period; however, the allocation to UUP was modestly negative. On the fixed income side, the 70/30 strategies have been negatively impacted by rising rates. On a relative basis, the portfolio performed in line with the BB US Agg for the month. YTD, however, the portion’s shorter duration (4 versus 6.8) has benefitted results as IBD has outperformed the BB US Agg by over 1.5%.
In the middle of May, we sold out of our two satellite positions and rotated those funds into the US Dollar (via ticker UUP). We believe all of the sectors are showing very poor strength and there are none that exhibit any sort of buy signal at the present time, hence our move into the US Dollar.
The “Core” portion of the portfolio is designed to capture the market beta (systematic risk/return) of the global equity markets, with the satellite sleeves providing an alpha (idiosyncratic risk/return) overlay in the form of sector tilts. As mentioned, all sectors are showing very poor strength and there are very few assets we see available to make money right now. However, we believe the US Dollar is one of them. After taking a hit after the COVID outbreak in 2020, it has been on an exponentially steepening uptrend. It is currently testing upper trend line resistance, which is a cautionary situation that we will need to watch, but if prices successfully break above that resistance, the ensuing rally could be meaningful. Additional caution is given by Money Flow, which suggests that a new high in price may not be accompanied by higher volumes of buyer capital to support a sustained rally, so that is another warning light we need to keep an eye on. However, even with these problematic signals, the US Dollar shows much more promise than any stock sector at the moment and thus has been added to Core Satellite portfolios as a strategic position.
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 July 1, 2022
Tactical Risk Management strategies were down -1.23% last month, solidly outperforming benchmarks by more than 2%. Over the prior three months, TRM strategies outperformed benchmarks by over 5% as stocks and bonds have plummeted.
The defensive position that TRM technical analysis signals led us to take back in September 2021 have provided a meaningful buffer against the steep selloff in stocks and bonds this year. While TRM has not been immune to losses, those losses have been smaller than benchmark losses, indicating the advantage that TRM strategy investors have benefited from during this volatile season in the market.
There is likely more downside in the broader market, and TRM will continue to hold it’s defensive posture until risk has abated.
Major moving averages continue to remain inverted as they fall, exhibiting negative momentum for prices. Price on the S&P 500 has accelerated the slope of decline with a breakdown of the lower trend line established from the initial stages of the selloff. Money Flow remains at depressed levels and Elliott Wave patterns strongly suggest that we have not yet seen the worst of the price declines in this bear market.
We continue to monitor the wave structure and technicals of the market closely for signs of a potential bottom in prices where we might attempt to add stocks back into the portfolio in anticipation of a rebound, even if short-lived. Such tactical positioning could help us add potential gains to the portfolio even in the context of a longer-term decline. Markets do not move in straight lines, so we will maintain a defensive posture, but seek to be opportunistic if or when a shorter-term corrective rally materializes within the longer-term downtrend.
While the outlook is gloomy for stocks, and on a lesser extent for bonds as well, investors are well-served by maintaining a calm and collected demeanor. When markets bottom, there will be opportunities to buy quality companies “at a discount”, but fear and panic cloud good judgement and cause investors to miss good opportunities, and can even exacerbate the damage done during a bear market. Our defensive positioning in TRM has shielded investors from the brunt of the recent market declines, and we will continue to seek providing that defense should the market continue to selloff, as it appears likely to do.
We hope that you had a great month!
We wanted to update you on the performance of our CW Active investment strategies. 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.
• CW Active Protection: -0.46%
• CW Active Balanced: -0.61%
• CW Active Growth: -0.77%
• DJ U.S. Conservative: -1.55%
• DJ U.S. Moderate: -4.16%
• DJ U.S. Aggressive: -6.91%
• US Large Cap Stocks (BIBL): -7.81%
• International Stocks (WWJD): -8.59%
• US Small/Mid Cap Stocks (ISMD): -6.65%
• US REIT Index (USRT): -5.19%
• US LT Treasuries (VGLT): -0.13%
• US IT Treasuries (VGIT): +0.55%
• US ST Treasuries (VGSH): -0.14%
• US ST Treasuries FLT (USFR): +0.18%
• Gold (GLD): -2.27%
• Div. Commodities (GSG): -7.19%
• Mortgage Back Sec. (RISR): -0.62%
• Throughout the month, our indicators stayed in a “downtrend” direction for stocks, real estate, and longer-term treasuries. Compared to the blended benchmarks, the outperformance of the models is due to our more conservative stance, given the current state of the economy with a possible recession on the horizon.
• We did not make any changes to the models for the month of June.
• 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 for the remaining part of 2022.
• We are researching other items to possibly add to the models that would do well in rising interest rate situations and increasing inflation scenarios. If we find something our team believes offers a good risk/reward opportunity, we will add it to the models in proportion to their expected risk offset potentials.
Large Cap (RISN): 37.5%
Gold (PHYS): 6%
Short Term Treasuries (USFR): 46.5%
Mortgage-Backed Securities (RISR): 10%
Large Cap (RISN): 56.25%
Gold (PHYS): 4%
Short Term Treasuries (USFR): 29.75%
Mortgage-Backed Securities (RISR): 10%
Large Cap (RISN): 75%
Gold (PHYS): 2%
Short Term Treasuries (USFR): 13%
Mortgage-Backed Securities (RISR): 10%
Large Cap: 3.75%
Gold: 9.75%
Short Term FL Rate Treasuries: 76.50%
Negative Duration MB Securities: 10%
Large Cap: 5.63%
Gold: 9.63%
Short Term FL Rate Treasuries: 74.74%
Negative Duration MB Securities: 10%
Large Cap: 7.50%
Gold: 9.50%
Short Term FL Rate Treasuries: 73%
Negative Duration MB Securities: 10%
Large Cap Blend (BIBL 100 Stocks): 10%
Gold (PHYS): 10%
Short Term Treasuries (USFR): 80%
For the month of June, FEVR was -9.72% vs -8.25% S&P 500 and -6.38% USA Momentum (MTUM). GLRY was -9.25% vs -9.65% S&P 400 Midcap and -6.38% USA Momentum (MTUM). FEVR had headwinds in Consumer Staples, specifically with food-related names, and benefited from Energy allocations. GLRY continued to drive forward with financial allocations, but the industrial sector and construction-related companies caused a performance drag. FED policy and changes to policy have certainly had a material impact on Momentum and the broad market, but we remain excited about 2H 2022. As energy dependence and international policy continue to challenge people, markets, and inflation, we believe there are still opportunities to be unlocked for long-term investors.
As July begins, there may be some style drift in FEVR/GLRY vs. the broad momentum index. As Momentum rotates into Energy and Health Care, the BRI-approved, FEVRR Process-selected options are limited, especially in Health Care. Many of the companies that make up these sectors invest and have practices that go against our shared values and some of the remaining companies fail our FEVRR Process, particularly in Financial Health. Even though this is a challenging time, our team will continue finding opportunities within our process and values mandate.
The Inspire Tactical Balanced ESG ETF (RISN) returned -1.11% for the month. The fund outperformed the S&P Target Risk Moderate Index (AOM) by 3.28%, which returned -4.39% (according to Morningstar.com). We attribute this performance to the fund's very conservative allocation for the month. No changes were made to the fund’s allocation during the month, and the fund holds a large allocation to floating rate short-term government bonds and a small allocation to gold and large-cap US stocks. The overall stock market (S&P 500-SPY) declined by -8.22% for the month.
For the last twelve months, the Inspire Tactical Balanced ESG ETF (RISN) returned -9.23% and has outperformed its benchmark (S&P Target Risk Moderate Index), which returned -12.11% (according to Morningstar.com).
Item watching #1: We continue monitoring the US Large Cap stock market to see if the trend/momentum remains downward. Not much has changed in our charting or expectations since May. Again, we do not anticipate that the worst is over and anticipate holding our smaller allocation to stocks for the foreseeable future. We have reduced our stock allocation to the lowest it has been at approximately 10% due to the increasing recession risks and continued downward momentum in US stocks.
Item watching #2: We continue to monitor the price movements of gold. We currently hold approximately 10% in gold. According to our charting system, gold has been in a downtrend, 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 are currently only allocated to short-term floating rate treasuries, which have held stable even through the higher-than-expected FED rate hikes. We expect that this holding will help weather the storm if interest rates continue to increase at a higher-than-expected rate. We do not anticipate moving into longer-duration bonds for the foreseeable future until core inflation gets under control.
Issachar lost 0% in June (a flat month), while the IQ Hedge Multi-Strategy Index lost -3.31. We took a few positions in the energy space in early June that were profitable initially, but heavy selling hit the sector, so we followed our discipline and exited near break-even. It was an ugly month for the S&P 500 index losing about -6%, so our risk management protected physical and mental capital. Inflation is high, and the Fed has started raising rates to reign in the excess money creation they created. We believe the Fed could put us in a recession that may last longer than most because of the seemingly anti-American Biden policies. Short selling is too risky/volatile to justify the potential gain in this environment. We think Cash is a good place until the market produces fundamentally sound companies with buyable setups.
As they stated, the Fed has not started to unwind its bloated $9 trillion balance sheet as of June 30th, so that is a key metric we are watching for market direction. We suspect the Fed will leave its balance sheet alone, raise rates another 50bps on July 27th and see how the market responds. The Fed is political, and Jay Powel is a politician who may not want to wreck the economy before the November elections, so he will likely walk softly.
The dollar is very strong, gold is in a down-trend, rates are rising, and commodities have come back down to pre-covid levels. This could mean that we are officially in a recession (two quarters of negative GDP), and the market is adjusting to an economic slowdown. If we have entered a recession, I expect companies to start laying off workers to cut costs which could begin the 3rd and final wave of bear market selling. We believe there could be a wave of capitulation selling in the coming weeks that could wash out the weaker hands. If that happens, that could mark a bottom producing an incredible buying opportunity. Cash is king for now, but we are prepared to come back when stocks offer better entry points. Good always overcomes evil, the light will reveal the darkness, and God is still on the throne of Grace. Praise Jesus!
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
