Inspire Portfolio Strategy Insights

Capital Market Returns

The capital markets posted very strong results in the fourth quarter of 2023.  

The broad fixed income market (BB US Agg) returned 6.8% in the quarter as rates decreased dramatically across the maturity spectrum due primarily to less investor concerns about inflation and a more dovish stance from the Federal Reserve. The index is up 5.5% for the year.

The US large-cap market (S&P 500) increased 11.7% in the quarter and finished the year up 26.3% as investors grew more confident that the Fed has pulled off a soft landing. Growth stocks continued their outperformance of value stocks this quarter (returning 14.2% versus 9.5%) and are ahead by over 30%(!) over the last year, driven by the strong performance of the mega-cap tech stocks. US small- and mid-cap stocks began to outperform large-caps later in the quarter and ended up 15.1% and 11.7%, respectively.  

International developed stocks underperformed their US counterparts over the trailing three and twelve months from both a local and US perspective. Emerging market stocks also underperformed for the quarter and have significantly underperformed most equity asset classes for the year, primarily due to underperformance from China. Mainland Chinese stocks returned -4.1% in the quarter and have been one of the worst performers over the last year (-13.5%). Latin American stocks returned 17.6% for the quarter and 32.7% for the year. The US dollar (US Dollar Index) declined 4.2% against most other currencies.

(Source: Bloomberg)

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Global & Select Portfolios

Given the strong capital market performance in the quarter, all the diversified portfolios posted positive returns. The higher the allocation to equities, the greater the performance.

Nearly all of our Select and Global (ETF-centric) strategies outperformed their secular benchmarks. The portfolios with a higher fixed income allocation posted weaker results, given the weak relative performance of IBD. For the trailing 12-month period, our Select strategies have outperformed their respective benchmarks, while our Global strategies have underperformed.

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(Source: Bloomberg; returns generated using Bloomberg Model Performance which may not match the performance of any specific account.)

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(Source: Bloomberg; returns generated using Bloomberg Model Performance which may not match the performance of any specific account.)

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All our asset class strategies, with the exception of US Small Cap, outperformed their benchmarks in the quarter.  

Over the trailing twelve months, our Emerging, International Developed, and US mid-cap sleeves significantly outperformed their secular benchmarks. Our US large-cap sleeve significantly underperformed, while our US small-cap sleeve performed in line with its secular benchmark.

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(Source: Bloomberg; returns generated using Bloomberg Model Performance which may not match the performance of any specific account.)

(Source: Bloomberg; returns generated using Bloomberg Model Performance which may not match the performance of any specific account.)

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Asset Class Model in the Spotlight: Inspire US Mid-Cap Sleeve

The US Mid Cap Sleeve outperformed the S&P MidCap 400 in the fourth quarter by over 2.5% and is ahead by nearly 10% for the year. The main contributors in the quarter were the portfolio's stock selection within the consumer discretionary, real estate, and healthcare sectors. The main contributor within consumer discretionary was Installed Building Products (+46.7%). Within real estate, the main contributor was Outfront Media (+41.6%); within health care, the main contributor was Bruker Corp (+18.0%). An underweight position to energy (which underperformed the overall index) also benefited results.

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

In the second quarter, we wrote that the stock market had been surprisingly strong in 2023 and that investors seemed too optimistic, thinking that inflation worries were behind us and that the US may avoid a recession. Sure enough, inflation started to tick back up towards the end of the summer, and the stock market declined. Then, starting in November, the capital markets staged a very strong rally as the Fed started signaling a more dovish tone, interest rates declined, and economic growth picked up. While the markets have rebounded, we still think that investors are being too optimistic. We would not be surprised to see another correction in 2024, especially if the economy starts showing more signs of an impending recession or inflation remains high. Regardless of how the market performs in the coming 6-12 months, we believe our current long-term positioning is appropriate. We remain underweight US large-cap stocks, especially to the mega-cap tech stocks that have driven most of the market this year and we believe are significantly overvalued. We are also overweight non-US developed large-cap, US small-cap, and US mid-cap equity. US small-cap in particular seems very attractive based on forward P/E valuations. On the fixed income side, we believe IBD's current shorter duration posture relative to the BC Agg is appropriate.

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(Source: Bloomberg)

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Inflation, Money Supply, and Central Bank Response – The November CPI month-over-month reading was 0.1%, which was above the consensus of no change. Year-over-year inflation has ticked down recently to 3.1%, given the recent decrease in energy prices. Based on Chair Powell's recent comments, we have reached a terminal level of interest rates around 5.5%, and they are expected to fall starting at the end of the 1st quarter. Based on this, many investors believe the inflation scare is behind us. However, core inflation remains high at 4.0% and well above the Fed's target of 2.0%. We will continue to closely monitor monthly inflation readings and the Fed's response, as this will continue impacting capital market returns and volatility in the months and years ahead.

GDP, Yield Curve, Employment, & Consumer Confidence – GDP, Yield Curve, Employment, & Consumer Confidence – The final third quarter GDP figure came in at 4.9%, below the consensus of 5.2%. This figure was very strong, as expected; however, we believe we are/will be in a trend of slowing growth, which could worsen, especially if personal consumption, business investment, and home building continue to slow/decline going into 2024. In addition, the yield curve remains inverted (which generally occurs leading up to a recession), and the Conference Board's leading index has never declined this much in six months without a recession. With inflation still running high and the labor market remaining strong, the Fed may be forced to keep rates high to try to bring down inflation, or at least keep them higher than investors believe. Therefore, the risk of a recession occurring in the next few quarters remains on the table. We will continue to keep a close eye on growth figures going forward.

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Corporate Profits – As we finish out 2023, corporate profits have so far remained fairly strong and were even revised higher (up 3.4% from the second quarter, but still down 0.6% from a year ago). We expect profits to fall (or at least have only modest gains), particularly given the impact of higher interest rates and potentially slowing consumer demand. We will keep a close eye on corporate earnings as this will impact equity performance going into 2024.