Active Strategy Review & Insights

Overall, how did the strategy do? What was the performance compared to expectations/benchmarks (overperform, underperform, etc.)? 

The capital markets posted mixed results in the second quarter of 2023. The broad fixed income market (BB US Agg) returned -0.8% in the quarter as rates increased across the maturity spectrum. The index is down 0.9% for the year. The US large cap market (S&P 500) continued its rally and finished the quarter up 8.7%, with the one-year return now up 19.6%.  Growth stocks outperformed value stocks in the quarter (returning 12.8% versus 4.1%) and are now ahead by 15.6% over the last year. US small- and mid-cap stocks continued to underperform, returning 3.4% and 4.9%, respectively. International developed underperformed their US counterparts over the trailing three months and are in line over the trailing year. Emerging market stocks were barely positive for the quarter and year and significantly underperformed all other asset classes. Mainland Chinese stocks returned -10.7% in the quarter, while Latin American stocks returned 14.0%. The US dollar (US Dollar Index) was flat against most other currencies in the quarter and is now down 2.2% over the previous twelve months.      

Given the surprisingly strong equity returns in the quarter, all of the Core Satellite portfolios posted positive returns. On a relative basis, both the Global and Select strategies underperformed their benchmarks, with the Global strategies underperforming by wider margins. For the trailing year, the Global strategies underperformed, while the Select strategies performed in line with their benchmarks.   

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Why did we see this performance?

The “Core” portion of the Global strategies underperformed the MSCI World Index in the quarter due to weak relative performance coming from BLES (3.0%), WWJD (1.7%), BIBL (4.9%), and ISMD (3.7%) versus 6.8% for the MSCI World.  BIBL and BLES were negatively impacted as they didn’t own the high-flying, mega-cap tech stocks that drove most of the market performance due to Inspire’s screening. The weak performance was partially offset by the strong relative performance from FDLS (8.4%). The “Core” portion of the Select strategies performed in line with the MSCI World Index for the quarter; however, not owning the mega-cap tech stocks in our large cap sleeve also hurt performance. The “Satellite” portion of the strategies underperformed as two sectors we held over the course of the quarter (healthcare and consumer staples) underperformed the MSCI World Index. Healthcare was up 3.9% and consumer staples was down 2.4%.  On the fixed income side, the bond portion of the 70/30 strategies outperformed the BC US Agg in the quarter by 0.7% given IBD’s shorter duration (4.1 versus 6.8 years) as interest rates rose. For the year, IBD outperformed the BB US Agg by nearly 2.0% as rates increased significantly.  

Satellite Strategies Held During Quarter

Are there any adjustments you plan to make to continue or correct this trend?

As the stock market works through what seems to be an increasingly important inflection point, patience and objectivity are critical. Our analysis of the market sectors shows concerning weakness in the current leaders – technology, consumer discretionary and other “risk on” sectors. As Core Satellite operates and trades with an intermediate-term outlook rather than a short-term outlook, we have kept our overweight positions in Consumer Staples and Healthcare, despite their relative underperformance the past few months. 

The technical structure, momentum, and relative strength indicators that inform Core Satellite portfolio decisions all point to a strong likelihood of a potentially large downturn in stocks once the current corrective rally is complete, which seems to be at or near completion right now. Prudent investing necessitates resisting the urge to chase rising prices and instead stick with a disciplined approach, in season and out of season, which generates a consistent investment methodology that is more likely to outperform over a market cycle than a haphazard, undisciplined, ‘chase-prices-wherever-they-go’ approach. We believe that our current sector overweights to more defensively natured sectors are the appropriate footing to position investors ahead of an expected slide in stock prices. That said, we continue to monitor sector data for changes in the big picture and seek to adjust portfolio allocations as that picture evolves.

What are 3 things you are monitoring right now for these strategies and why?

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)

Overall, how did the strategy do? What was the performance compared to expectations/benchmarks (overperform, underperform, etc.)? Why did we see this performance?

The stock market successfully continued its rally over the past quarter, suggesting to some that prices are headed to new all-time highs and the painful bear market of 2022 is firmly in the rearview. However, behind the simple price increases of the S&P 500 there are troubling signs that have not only persisted but have become even more troubling as prices moved higher.

The technical analysis we employ for the Tactical Risk Management (TRM) strategies indicates that market risk is highly elevated and there seems to be a high probability of a nascent collapse in stock prices which would likely erase all the gains of this year and more, taking stock prices back below the lowest point in the 2022 slide.

The bright spot is that Money Flow for S&P 500 corrected out of its bearish, non-confirmation position, catching up and making a short term high to match the short term high of prices, so that cannot be ignored…but just barely, and in such a small margin relative to the extreme price high that maybe it actually should be ignored. But the other major indices have not followed suit, with NASDAQ, Dow Jones Industrial Average and the NYSE Composite still struggling with low Money Flow relative to price action. 

Additionally, while the more tech heavy NASDAQ and S&P 500 have had a great run, the much broader NYSE Composite index has failed to rally in equal fashion, suggesting that a few mega cap tech stocks are simply giving a “head fake” for investors through their outsized influence on the price of the NASDAQ and S&P 500. That situation is generally not tenable for a long period of time, and a sinking tide will eventually bring all ships lower, even the preponderance of big tech stocks. And as seen in the chart below, NYSE Comp is currently struggling against overhead resistance of a long-term trend line that has repelled prices no less than seven times since November of 2021.

And perhaps most compelling for the bearish outlook is the Elliott Wave structure of the market, which, somewhat ironically, has been strengthened by the rally of the past months. In every rise or decline of markets, they move in waves rather than a single straight line. These waves form a series of impulsive declines (in a bear market) or rallies (in a bull market) followed by a corrective rally (in a bear market) or decline (in a bull market). The impulsive moves are longer and stronger than the smaller corrective moves, and as such you get the typical zig zag patterns of the stock market. The rally of the past months has increasingly played along with path and pattern that would be expected of a normal corrective rally in the context of a broader, bigger downtrend. In short, this corrective rally (if it proves out as such) will soon come to an end and be followed by a longer and stronger downtrend. That is the real risk showing in the charts right now with multiple points of confirmation. 

There is always the chance that the higher probability outcomes do not come to pass and that the underdogs pull through, but in investing we like to go with the more probable outcomes as they materialize more often than not. Right now, in our analysis a renewed downturn seems more likely than a continued rally.

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 quarter, and our expectations for the quarter ahead. 

How did the CW Active strategies perform for the quarter?

• CW Active Protection: +2.29% 
• CW Active Balanced: +3.81% 
• CW Active Growth: +4.81% 

How did the static blended benchmarks perform for the quarter?

• DJ U.S. Conservative: +0.91%
• DJ U.S. Moderate: +3.30%
• DJ U.S. Aggressive: +6.21%

What changes were made to the investment strategies during this quarter?

• At the beginning of the quarter, we removed ISMD from the models and added WWJD as our international stock indicators improved. We also decided to add a satellite holding of a traded BDC, which was paying a good dividend and displaying some predictable volatility. 
• Within our core large cap holding (RISN) within our CW Active Growth and CW Active Balanced models we enhanced our stock selection method by incorporating some additional financial based screens. We also increased our overall equity holdings from around 50% to 75% within our CW Active Growth model. 
• Through April and May when the US was nearing a debt ceiling breach, we decided to remove the short-term floating rate fund that we were using and replace it with the basic cash position until the coast was clear, at which point we moved back into our short-term holding which is now paying between 4% - 5%. 
• In June, we saw that our BDC holding was at a higher price than we thought it warranted and decided to sell and capture a short-term price gain.
• At the end of the quarter, we decided to replace our allocation in WWJD for a hand-picked group of 25 small/mid cap stocks that we felt had good prospects and were selling a discount to their average PE ratios. This represents about 5% of the CW Active Balanced and 10% of the CW Active Growth model. 

What are our expectations for the quarter ahead?

• We will continue to monitor the stock selections within RISN and the CW models to see if any changes are warranted as well as the overall stock allocation within each model.
• For the time being, we feel that our short-term floating rate fund is positioned well as our “protective” sleeve within the models and do not anticipate a change in that soon. 
• We may consider adding other asset classes like gold or international stocks back into the mix if our indicators improve enough to warrant a change. 
• The headwinds of increasing inflation and rising interest rates do not seem to be prevailing and we anticipate that could mean additional increase in the stock market between now and the end of the year…albeit with some increased volatility along the way.

• After being down for most of the quarter, the broad mid-cap index (S&P 400 Mid Cap Index), as well as GLRY, rallied in June as the tech/AI rally pulled markets higher giving GLRY a great Q2 finish by being up +5.86% vs the S&P 400 Index that was up only +4.84%.
• In line with last quarter’s note, lower volatility helped momentum thematically.  The VIX Index closed below 13 for a day, and the daily average was much lower than Q1.
• Higher-for-longer rates have had an outsized impact on smaller companies versus larger counterparts.  Within the space, sector allocation will be paramount as economic data is released and consumer sentiment shifts post-summer.

Overall, how did the strategy do? What was the performance compared to expectations/benchmarks (overperform, underperform, etc.)?

• Inspire Tactical Balanced ETF (RISN): +5.78%
• S&P Target Risk Moderate Index (AOM): +1.87%

• S&P 500 Index (SPY): +8.68%
• Inspire 100 Index (BIBL): +4.92%

What do we attribute the under/over performance to, compared to the benchmark for the month?

• We attribute this performance to the more aggressive stock allocation we held/increased during the quarter. We started the quarter with around 60% and ended with around 75% stock allocation within the fund. 
• We also attributed this performance to the updated stock selection process implemented at the beginning of the quarter. This selection process allows us to select what we believe are great, biblically aligned companies with strong financials selling at a discount to their historical average valuations. 

What has been the performance for the past 12 months compared to the benchmark?

• Inspire Tactical Balanced ETF (RISN): +1.57%
• S&P Target Risk Moderate Index (AOM): +5.41%

• S&P 500 Index (SPY): +18.17%
• Inspire 100 Index (BIBL): +12.86%

What do we attribute the under/over performance to, compared to the benchmark for the past 12 months?

• Although returns have improved compared to our benchmark, our conservative stock position has limited the performance in periods when the stock market stages a recovery. 
• We are hopeful that the more aggressive stock allocation paired with our new stock selection method will continue to improve our performance compared to our benchmark.

What are three things you are monitoring right now for these strategies and why?

• Item #1:  We continue to monitor the US Large Cap stock market to see if the trend/momentum continues in an upward direction. We will monitor our individual stock selections and adjust/rebalance as needed.
• Item #2: We continue to monitor the price movements of gold. Gold has been removed from the fund and we will monitor this asset class to see if it provides opportunities in the future. 
• Item #3: We continue to monitor the US Treasury holdings within the fund. We anticipate holding reduced duration or floating rate treasuries for the foreseeable future, however, the trend of rising interest seems to be slowing, so we may consider adding intermediate and long-term treasuries when the opportunity arises.