Inspire Portfolio Strategy Insights

1. Capital Market Returns

• The markets were whipsawed again in August, with most asset classes and sectors experiencing losses.
• The broad fixed income market (BB US Agg) returned -2.8% in the month as rates increased across the maturity spectrum.  YTD the Agg is down 10.8%.        
• The equity markets were up the first half of the month and then retreated due to investor concerns about inflation and central bank response.  The US large cap market (S&P 500) returned -4.1% in August, bringing the YTD performance to -16.1%. Growth stocks underperformed value by a sizeable margin and are one of the worst performing asset classes so far this year (-23.2%).  Energy stocks continued their dominance in the month (+6.8%) and are up over 65% YTD.   US small and mid-cap stocks performed in line with US large-caps for the month and are ahead ≈1-2% YTD. 
• International developed equities performed in line with their US counterparts, while emerging markets equities significantly outperformed and were one of the few sectors with positive returns (+0.4%). Latin American stocks lead the way as oil and other commodities prices remained elevated in the month. The US dollar (US Dollar Index) was also a standout for the month, returning 2.2%.    

2. Global & Select Portfolios

• Given the strong selloff in August, all of the diversified portfolios posted negative returns.  The higher the allocation to equities, the weaker the absolute performance. 
• Most of our Global ETF strategies underperformed their respective benchmarks for the month, while our Select Strategies outperformed their Global counterparts as well as their benchmarks. Over the trailing 12-month period, all diversified strategies are ahead of their benchmarks.

• Our US asset class sleeves were at or above their benchmarks in August, with the Emerging Markets and International Developed sleeves underperforming.        
• Over the trailing twelve months, all of our asset class equity sleeves have significantly outperformed their secular benchmarks.

3. Asset Class Model in the Spotlight: US Small Cap

The US Small Cap sleeve outperformed the S&P 600 Index in the month of August, returning -4.0% versus -4.4%.  For the trailing one-year period, the sleeve has outperformed by nearly 5%.  Strong performance from the strategy’s energy, industrials, and communication services holdings were the main drivers of outperformance.  Key contributors included PBF Energy (+228%), Helmerich & Payne (+63.5%), Fluor Corp (+58.7%), and Scholastic Corp (+16.3%). A modest overweight to energy and an underweight to real estate also benefited results.

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

• Inflation, Money Supply, and Central Bank Response – The July CPI month-over-month reading was 0.0%, coming in below the consensus gain of 0.2%.  Year over year inflation fell from 9.1% to 8.5%.  The decline came primarily as a result of the 4.6% decline in energy.  Is inflation finally peaking?  Probably, but it will still remain elevated until the Fed consistently gets the growth of the money supply (M2) under control as that tends to be a leading indicator of inflation.  The last M2 reading came out on August 23^rd and showed that the growth of M2 is starting to moderate, which is a good sign.  However, the Fed is still behind the inflation curve which means more interest rate increases are on the horizon, even amid geo-political turmoil and negative 1q2021 and 2q2022 GDP.  The Fed raised the Federal Funds rate 0.25% in March, 0.5% in May, and 0.75% in June and July (the largest increases since 1994).  Based on Chair Powell’s recent comments in Jackson Hole, we should expect a rate hike in the 0.50% to 0.75% range in September.  The Fed Funds rate is now expected to finish the year above 3.5%.  We will continue to closely monitor monthly inflation readings and the Fed’s response as this will undoubtedly impact capital market returns and volatility in the months and years ahead. 
• GDP, Gross Domestic Income, Employment, and Consumer Confidence – Second quarter GDP figures were revised slightly higher (-0.6% versus -0.9%) but were still negative, coming on the heels of a -1.6% rate in the first quarter.  Although two consecutive quarters fits the rule-of-thumb definition of a recession, it would not be a complete surprise if the NBER (National Bureau of Economic Research, the official arbiter of calling recession dates in the US) doesn’t declare a recession for this time period given relatively strong employment (unemployment rose unexpectedly from 3.5% to 3.7%, but this is still considered very strong) and other factors.  In fact, it is possible that one of the first two quarters of GDP growth is eventually revised positive as more economic data comes in.  Gross Domestic Income (an alternative measure to GDP) is actually showing positive economic growth in the first and second quarters. Regardless of whether or not we are in an official recession, the GDP numbers are clearly showing that growth has slowed.  We will continue to keep a close eye on consumer confidence, spending, and growth figures going forward.
• 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.  However, corporate earnings are still rising in 2022, growing 6.1% in the second quarter.  We will continue to keep a close eye on profitability going forward particularly given the impact of higher interest rates and potentially slowing consumer demand.     
• Geopolitical Risks – As mentioned in our last commentary regarding the Russian/Ukrainian war, it seems that the balance of power is still decidedly in Russia’s favor as efforts to take over strategic regions in the eastern part of Ukraine have proven successful.  The focus of the fighting has now shifted to the south, which could mark a decisive phase of the conflict.  Ukraine has recently launched an offensive to retake territory that was seized at the start of the conflict.  Outside observers, especially those nations that have been providing military support to Ukraine (including the US), are watching to see if Ukraine has any chance to capitalize on their offensive and turn the direction of the war.