Inspire Portfolio Strategy Insights

1. Capital Market Returns

• In April, the markets continued their descent, with most asset classes and sectors in negative territory for the year.
• The broad fixed income market (BB US Agg) declined 3.8% as bond yields experienced their largest monthly increase since 2009.    
• The US large-cap market (S&P 500) returned -8.7 % in the month and is down 12.9% YTD, marking the worst start to a year (through the first four months) since 1939. Growth stocks had their worst month since 2008 (declining over 12%) and are underperforming value stocks by nearly 14% YTD.  Energy stocks continued their dominance in April and have been one of the few segments with positive returns YTD.  US small and mid-cap stocks slightly outperformed US large-caps in April and are more or less, even with large-caps YTD.
• International developed and emerging markets stocks were also negative for the month, but they outperformed the US large-cap market by 2-3%.  In local terms (removing the currency effect), they significantly outperformed as the dollar surged 4.5% in April and is up over 6% YTD.  Chinese shares fell another 10% in April and are down over 22% YTD.  In a dramatic reversal from previous months, Latin American stocks declined 13% but are still up over 10% YTD.

‍

2. Global & Select Portfolios

• With the continued market declines in April, all diversified portfolios posted negative returns.
• All of our Global strategies outperformed their respective benchmarks in the month. The Select strategies performed better than their Global counterparts, with all beating their respective benchmarks. For the three-month period, the Global strategies outperformed their benchmarks, with the Select strategies outperforming by an even wider margin.

‍

• All of our US asset class sleeves outperformed their benchmarks in April.  OurInternational Developed sleeve slightly underperformed its benchmark, while our Emerging Markets sleeve underperformed by nearly 3.5%.
• Over the trailing three months, our US andEmerging Markets sleeves significantly outperformed their benchmarks, while the International Developed sleeve was in line.

3. Asset Class Model in the Spotlight: US Large Cap Sleeve

The US large-cap sleeve outperformed the S&P 500 Index in April and is ahead by more than 6% over the last three months.  The main contributors to the three-month outperformance were the portfolio’s overweight positions in energy and materials (both positive) and underweight positions in communication services and IT (both negative).  Stock selection within materials and IT was also additive.  Main contributors within materials included Newmont (+53%) and Freeport-McMoran (+20%).  Within IT, the main contributors included Fleetcor (+4.7%) and Gartner (-1.1%).

4. Outlook and items we are monitoring in the coming month(s):

• Geopolitical Risks and Volatility – With the Russian/Ukrainian war nearing the 3-month mark, it remains unclear how long the conflict will last or how it will end.  Since our last commentary, the Russians have regrouped and are now focusing their attention on the eastern part of Ukraine.  Meanwhile, Europe has increased its pressure on Russia by imposing new sanctions on oil imports.  Putin’s resolve remains strong, and Russia seems to have plenty of revenue from high oil prices to finance both the war and economic relief packages to keep its citizens appeased with the conflict.  As outside countries become more willing to support Ukraine and apply further sanctions against Russia, the negative economic and market impacts will continue.  With so much geopolitical, fiscal, and monetary uncertainty, volatility (in both directions) will remain elevated in the coming weeks and months.
• Inflation, Employment, and the Federal Reserve – The March CPI numbers remained elevated with a month-over-month reading of 1.2%.  Over the past 12 months, inflation hit 8.5%, the fastest annual pace since 1981.  The US job market continues to improve with lower readings on initial and continuing jobless claims and unemployment remaining at 3.6% in April, matching the pre-pandemic low of 3.5%.  With elevated inflation and strong employment, the Fed has indicated it will focus on curtailing inflation, even amid geopolitical turmoil and negative first quarter 2022 GDP.  It raised the Federal Funds rate 0.25% in March and 0.5% in May.  Based on Chair Powell’s recent comments, we should expect at least 0.5% increases at each remaining meeting this year, with 0.75% increases off the table for now.  That would bring the Fed Fund rate to at least 2.5% by the year’s end.  In addition, the Fed communicated that it will start Quantitative Tightening in June by selling $47.5 billion worth of its $8.9 trillion balance sheet per month and doubling that amount to $95 billion in September.  We will continue to monitor monthly inflation readings closely, and the Fed’s response as this will undoubtedly impact capital market returns and volatility in the months and years ahead.
• Yield Curve, the Consumer, and GDP – Economic growth figures caught most economists by surprise as real GDP declined at a 1.4% annual rate versus the consensus growth of 1.0%.  The biggest drivers of the negative growth were the widening trade deficit (imports surged and exports fells) and the decline in inventories.  In previous commentaries, we mentioned the rapid build-up of inventories that had propelled growth in 2021 and would likely be a drag on growth in 2022.  We will keep a close eye on consumer confidence, spending, and growth. We wouldn’t be surprised to see a rebound in the second quarter, given that consumer spending and business fixed investment remain strong.

• Corporate Profits – Much of the strong equity results in 2021 were driven by remarkable corporate profitability (the S&P 500 profits rose 45%, an all-time high).  We mentioned that we didn’t expect to see such a rise in profits in 2022 and are watching earnings reports very closely going into the second quarter.  Since our last commentary, with over two-thirds of the companies in the S&P 500 now reporting, we are beginning to see negative earnings surprises, particularly in the communication services and financial sectors.  We will keep a close eye on profitability going forward, particularly given the impact of higher interest rates and potentially slowing consumer demand.