The equity markets continued their volatility in May; most markets started in negative territory and then rallied at the end of the month to finish relatively flat. The US large cap market (S&P 500) returned 0.18% in the month but is down nearly 12.8% YTD. US small and mid-cap stocks outperformed US large-caps and are slightly ahead YTD. International developed and emerging markets equities slightly outperformed their US counterparts, primarily due to dollar weakness. The broad fixed income market (BB US Agg) returned 0.6% in the month as rates were relatively unchanged on the longer end of the curve and slightly lower on the shorter end. YTD, the Agg is down nearly 9% as bonds are on course for their biggest yearly loss since the 1920s. All of the Core Satellite portfolios posted positive returns for May, a welcome reprieve after suffering negative monthly returns for most of the year. Both the overall equity and fixed income portions of the portfolio were positive. On a relative basis, the strategies outperformed their benchmarks, with our Select strategies modestly outperforming our Global Strategies.
Our portfolios have generally outperformed relative to their benchmarks. The “Core” portion of the portfolio has outperformed, especially within the Select Strategies, due to strong performance from our US and Emerging Markets equity sleeves. The “Satellite” portion of the portfolio (which includes our sector tilts in Staples and Healthcare) underperformed for the trailing one- and three-month periods as our healthcare holdings significantly underperformed the broader market even though healthcare stocks in general performed better than the overall market. This was partially offset by the strong performance from our consumer staples sleeve. The strategies have been impacted by rising rates on the fixed income side, although we did see positive absolute performance in May, which marked the first positive month YTD. On a relative basis, the fixed income portion’s duration is over two years lower than BB US Agg (4 versus 6.5), so while we slightly underperformed in May, we have outperformed by over 1.5% YTD has benefited performance.
We are poised to rotate out of Consumer Staples and into the Utilities sector, given the deterioration in the positive momentum of Consumer Staples and the continued stronger momentum in Utilities. Over the past few weeks, the Utilities sector also boasts a positive uptrend in price, whereas Consumer Staples faces overhead resistance and a short-term downtrend in price.
These portfolios are designed to be a core position with the goal of capturing the market beta (systematic risk/return) of global equity markets, with the satellite sleeves providing an alpha (idiosyncratic risk/return) overlay in the form of sector tilts. Sectors we are watching closely are Staples and Healthcare (current overweight as of 5/31), but we are also keeping an eye on Energy, Utilities, and others.
• Both the Healthcare and Staples sectors have continued to perform well. They are still showing positive technical indicators, though, as mentioned above, Consumer Staples has deteriorated and seems at risk of slipping further. We are moving out of Staples and into Utilities, which shows a more robust technical position.
• Energy has outperformed all other sectors significantly YTD. Oil prices reached price highs not seen since the fracking boom leading up to 2014. However, from a technical perspective, while the Energy sector has had very strong upward price movements, such lofty prices seem to be at significant risk for correction due to a bearish divergence in money flow, i.e., prices have risen on less and less buying demand, which leaves the sector fragile and with little apparent support for further advancement. A retracement in the Energy sector seems to be highly likely over the near term.
A summary of the returns from the S&P sectors shows that the dispersion is very evident over shorter periods (1-12 months), though over longer stages, those differences begin to disappear. The point is that there is value to be gained by understanding where the momentum is and positioning accordingly.
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 June 1, 2022
Tactical Risk Management strategies were relatively flat for the month as our defensive position, primarily in lower duration intermediate bonds, managed to hold its own in an environment that has the S&P 500 down nearly 20% off its highs and the broad US bond market experiencing the sharpest selloff since the 1920s.
TRM analysis flashed the warning sign back in September, prompting our investment team to move TRM portfolio assets into a defensive posture. This tactical shift to reduce risk in the portfolio has paid off by protecting investors from the damaging volatility of the past several months.
At present, both the stock market and the bond market are under significant pressure. Stocks continue to exhibit a high degree of risk, with the probability of further declines seeming very likely. Elliot Wave structure strongly suggests that the high we saw in the stock market in January could have marked a long-term top that perhaps may not be revisited for months, or even years, as the inordinately long bull markets we have experienced over the past many years have (perhaps) finally come to an end. The beginning of a nasty bear market (perhaps) is just getting started.
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 judgment and cause investors to miss good opportunities and 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. We will continue to seek to provide that defense should the market continue to sell off, as it appears likely to do.
We hope that you had a great month of May!
We wanted to give you an update on the performance of our CW Active investment strategies. At Inspire Advisors – The Chandler Team, we focus on three main strategies that are all diversified and actively managed “in house” by our 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: -0.87%
• CW Active Balanced: -0.94%
• CW Active Growth: -1.01%
• DJ U.S. Conservative: 1.00%
• DJ U.S. Moderate: 0.98%
• DJ U.S. Aggressive: 1.01%
• US Large Cap Stocks (BIBL): 0.43%
• International Stocks (WWJD): 2.07%
• US Small/Mid Cap Stocks (ISMD): 2.21%
• US REIT Index (USRT): -5.40%
• US LT Treasuries (VGLT): 0.02%
• US IT Treasuries (VGIT): 1.22%
• US ST Treasuries (VGSH): 0.76%
• US ST Treasuries FLT (USFR): -0.14%
• Gold (GLD): -2.29%
• Div. Commodities (GSG): 6.63%
• Mortgage Back Sec. (RISR): -0.43%
• Throughout the month of May, our indicators all stayed in a “down trend” direction for stocks, real estate, and longer-term treasuries throughout the month. The underperformance 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.
• We decided to reduce our gold allocation due to the short-term trend change that occurred at the end of April thru the month of May. We anticipate that this allocation to gold may increase if inflation continues to increase, and if investors flock to traditional inflation hedges like precious metals and commodities.
• We also decided to add a 10% allocation to a rising interest rate fund that carries a negative duration investing in treasuries and mortgage-backed securities. We feel that this extra hedge may help to offset some year-to-date losses in the models if interest rates continue to raise higher than expected.
• 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 those to the models.
• Large Cap – 3.75%
• Small/Mid Cap – 0%
• Intl. Cap – 0%
• REIT – 0%
• Gold – 13.5%
• Long Term Treas. – 0%
• Inter. Term Treas. – 0%
• Short Term FL Rate Treas. – 72.75%
• Div. Commodities – 0%
• Negative Duration MB Securities – 10%
• Large Cap – 5.63%
• Small/Mid Cap – 0
• Intl. Cap – 0%
• REIT – 0%
• Gold – 15.25%
• Long Term Treas. – 0%
• Inter. Term Treas. – 0%
• Short Term FL Rate Treas. – 69.12%
• Div. Commodities – 0%
• Negative Duration MB Securities – 10%
• Large Cap – 7.5%
• Small/Mid Cap – 0%
• Intl. Cap – 0%
• REIT – 0%
• Gold – 17%
• Long Term Treas. – 0%
• Inter. Treas. – 0%
• Short Term FL Rate Treas. – 65.5%
• Div. Commodities – 0%
• Negative Duration MB Securities – 10%
For the month of May, FEVR decreased -0.65% vs. 0.23% S&P 500 and -0.60% MTUM (US Momentum). GLRY rose 4.36% vs. 0.75% S&P 400 Midcap and -0.60% MTUM (US Momentum).
Energy was one of the primary drivers of returns, but FEVR’s allocation to companies related to food/energy, such as Darling Ingredients and Bunge Ltd, provided great tailwinds. Information Technology accounted for 275% of losses, dragging the strategy into negative territory for the month.
GLRY had a strong month, with the primary drivers being financials, health care, and, ironically, information technology. Our FEVRR process uncovered opportunities in financials, specifically within the insurance industry, which led to a 0.51% bump in selection performance versus the broad sector index. Within information technology, we were also able to avoid some very volatile companies to protect the downside.
Going forward, we are excited about the opportunities available. Still, we are also cautious of potential pitfalls, like the bullwhip effect, that we expect to see impacting businesses in a meaningful way. To navigate this rocky terrain, we combine our repeatable FEVRR process and the fundamental research conducted by our team. As everyone gets excited for the summer months, we are excited about what we get to do and will continue uncovering investors' opportunities.
For the month of May, the Inspire Tactical Balanced ESG ETF (RISN) returned -1.01%.
The fund underperformed the S&P Target Risk Moderate Index for the month by -1.55% (according to Morningstar.com). We attribute this performance to the very conservative allocation that the fund held for the month. For much of the month, the fund held a reduced allocation to US equities and a larger allocation to US Treasuries and Gold. The overall stock market (S&P 500) rose by 0.23% for the month of May.
For the last twelve months, the Inspire Tactical Balanced ESG ETF (RISN) returned -6.01% and has outperformed its benchmark (S&P Target Risk Moderate Index) which returned -7.32% according to Morningstar.com.
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. We have reduced our stock allocation to the lowest it has been at approx. 10% due to the increasing recession risks.
Item watching #2: We continue to monitor the price movements of gold. We currently hold approx. 10% in gold, reducing our allocation during the month. We anticipate increasing this allocation if inflation increases more than expected in the near term.
Item watching #3: We continue to monitor the US Treasury holdings. We are currently only allocated to short term floating rate treasuries which have held stable even through the higher-than-expected FED rate hike on May 5th. We expect that this holding will help us to weather the storm if interest rates continue to increase at a higher-than-expected rate.
Issachar lost -0.38% in May, while the IQ Hedge Multi-Strategy Index lost -0.26%, so Issachar slightly underperformed its benchmark. The market flashed a buy signal on April 26, so we took a few positions as the system suggests. It could be just an oversold bounce as the S&P 500 has been down for seven straight weeks, but it does look promising. Issachar is about 40% invested in energy, agriculture, retail, transportation, and utility stocks. Since the market is forward-looking, maybe it is saying that inflation has peaked, and Powell might not need to raise rates as aggressively as the market was anticipating. That is my current read on the market, so I have purchased stocks that could benefit if the Fed does not hit the inflation brakes too hard.
I believe the Fed is political and Powell is a politician with political friends invested in the stock market, so he will likely do what is necessary to appease his people. Junk bonds are trading above their 50-DMA, indicating that investors have increased their risk appetite, which could be good for us. Treasury bonds (TLT) bottomed on 5/6/22, and the dollar is down over -3% since peaking on 5/12/22, which tells me that rates may have peaked. The short-term trend is up, so I have dipped my toe in the water and will buy more if we are rewarded for taking risk. If I am wrong and our positions do not work out as planned, I do not intend to stay wrong.
William O'Neil founded Investor's Business Daily (IBD) to share his money management secrets that helped him become a self-made billionaire. IBD declared April 26 as a Follow Through Day (FTD), a 1% index gain on greater volume at least four days after a bottom. IBD claims that every bull market started with an FTD in the last 100 years, but not every FTD leads to a bull market. Since no one knows if the FTD will work, the system suggests followers buy stocks with great fundamentals and technical chart patterns and add to them if they are profitable. I have studied several systems and models that have worked very well for many years until they don't, and no one rings a bell when they stop working. I follow O'Neil's time-tested system because I believe it is logical, and I understand how and why it works.
The Fed has indicated it will start to unwind its balance sheet beginning in June, so maybe it will slowly decrease its balance sheet and only raise rates two more times. I believe the Fed can manufacture a soft-landing and avoid a throwing us into a deep recession, which may be what the market is excited about. I believe there are evil forces in the market trying to crash the economy and stock market to bring in more government power and control (Marxism/Socialism). However, I believe good overcomes evil, the light will reveal the darkness, and God will be glorified. Praise Jesus!
Blessed are the peacemakers, for they shall be called sons of God. Matthew 5:9
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
