Inspire Portfolio Strategy Insights

1. Capital Market Returns

• The markets reversed course in December with most asset classes and sectors experiencing losses.    
• The broad fixed income market (BB US Agg) returned -0.5% in the month as rates modestly rose across the maturity spectrum. For the year, the Agg is down 13%, capping one of the worst years on record for bonds.          
• The US large cap market (S&P 500) returned -5.8% in December, bringing the 2022 performance to -18.1%. Value continued to outperform in the month and exceeded growth by nearly 22% for the year. Energy stocks modestly outperformed the broad market for the month and finished the year up 65%! US small- and mid-cap stocks performed similarly to US large caps for the month although they are ahead ≈2-5% for the year. 
• International developed equities continued to outperform their US counterparts, driven largely by the weakness of the US dollar. Emerging market stocks also outperformed for the month, but were down 20% for the year. Mainland Chinese stocks once again posted positive returns (2.0%) in December; however, they finished the year down over 25%. Latin American stocks, on the other hand, declined in the month, but they were the only positive EM sector for the year (+8.9%). The US dollar (US Dollar Index) declined against most other currencies, but it ended the year up by 6.2%.

2. Global & Select Portfolios

• Given the selloff in the month of December, all of the diversified portfolios posted negative returns. The higher the allocation to equities, the weaker the absolute performance. 
• Seven out of eight of our Global and Select strategies outperformed their respective benchmarks for the trailing one-month period, with our Select strategies modestly underperforming their Global counterparts. For the trailing 12-month period, both our Global and Select strategies have outperformed their respective benchmarks, with our Select strategies outperforming by wide margins.

• All of our US asset class sleeves outperformed their benchmarks in December, while our Emerging Markets and International Developed significantly underperformed.  The Emerging Markets sleeve underperformed given the portfolio’s lack of exposure to China and overweight to Latin America.    
• 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: Inspire US Large Cap

The US large cap sleeve outperformed the S&P 500 Index by nearly 2% in the month of December by and is ahead by more than 11% over the last twelve months.  The main contributors to the twelve-month outperformance were the portfolio’s overweight positions to energy, industrials, and materials and underweight positions to communication services, IT and consumer discretionary.  Stock selection within consumer discretionary, IT, and industrials was also additive.  Main contributors included O’Reilly Automotive (+19.5%), Gartner Inc (+0.5%), PACCAR (+17.1%), and Caterpillar (+18.6%).

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

• Inflation, Money Supply, Employment, & Central Bank Response – The November CPI month-over-month reading was 0.1%, coming in below the consensus gain of 0.3%. Year-over-year inflation fell from 7.7 to 7.1%. Although inflation has come down, it will 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 growth of M2 is starting to moderate, and it actually declined in September, October, and November, with September being the largest monthly decline in the last 60 years. This is a good sign, but the Fed is still behind the inflation curve which means more interest rate increases are on the horizon. The Fed raised the Federal Funds rate 0.25% in March, 0.5% in May, 0.75% in June, July, September, and November, and 0.50% in December, representing the largest increases since 1994 and finishing the year at 4.3%. Based on Chair Powell’s recent comments, we should expect more rate increases in the months ahead (even if the currently benign unemployment rate increases and economic growth declines), and no decreases in 2023. 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, Yield Curve, Employment, & Consumer Confidence – Revised third quarter GDP came in at 3.2%, coming on the heels of negative growth rates for the first and second quarters. Although the 3Q datum supports the view that we are probably not quite in a recession, it doesn’t mean that everything is rosy. Most of the GDP growth was led by net exports which should not be as strong going forward. Clearly we are in a trend of slowing growth which could get worse especially if personal consumption, business investment, and home building continue to slow/decline going into 2023. In addition, the yield curve remains heavily inverted, which generally occurs leading up to a recession. The odds of a recession occurring in 2023 have greatly increased, meaning the Fed probably won’t be able to pull off a soft landing (bringing down inflation without triggering a recession). We will continue to keep a close eye on growth figures going forward.

• Corporate Profits – In last month’s commentary, we discussed how corporate earnings have been rising in 2022, but there are signs that earnings are starting to fall.  Indeed, profits declined modestly in the Q3 (versus Q2), and we expect profits to continue to fall particularly given the impact of higher interest rates and potentially slowing consumer demand. We will continue to keep a close eye on corporate earnings as this will impact equity performance going into 2023.
• Geopolitical Risks – It has become difficult to make sense of where things stand regarding the Russian/Ukrainian war, especially given the media’s conflicting reporting. Clearly Russia has ratcheted up its military operations since October, while Ukrainian President Zelenskyy has ratcheted up his rhetoric (even suggesting that Ukraine will take back Crimea which it lost to Russia in 2014).  What seems certain is that Russia is determined to continue course, and some say it is preparing to launch an unbridled offensive soon to end the war once and for all. It is reported that Putin is orchestrating an increase of troops in Belarus (north of Ukraine) while at the same time continuing his troop build-up on Ukraine’s eastern border.  Some are suggesting that Russia has now amassed nearly 700,000 soldiers versus only 100,000 for Ukraine.  A Russian onslaught could pave the way for sooner negotiations with Ukraine; however, as long as Ukraine keeps receiving military support (primarily from the US), the conflict could drag on which will continue to impact the global economy and the capital markets.  From a humanitarian standpoint, many observers are worried about the infrastructure damage that has occurred in Ukraine, making the situation more pronounced heading into the colder winter months.