Inspire Portfolio Strategy Insights

Capital Market Returns

The capital markets declined in the month of February, giving up much of their gains from the previous month.

The broad fixed income market (BB US Agg) declined 2.6% in the month as rates increased across the maturity spectrum.

The US large cap market (S&P 500) fell 2.4% in the month, although the one year return is now down only 7.7%. Growth stocks continued to outperform value stocks, returning -1.2% versus -3.5%, even though value stocks are ahead by 10.5% over the last year. US small- and mid-cap stocks maintained their dominance, outperforming large caps by around 1% for the month and 4-7% for the year.    

International developed equities continue to outperform their US counterparts, despite the recent rebound in the dollar. Emerging market stocks, on the other hand, significantly underperformed for the month and were down 6.5%. Mainland Chinese stocks retreated in February (-4.4%), as did Latin American stocks (-6.2%). The US dollar (US Dollar Index) rose against most other currencies (+2.6) after suffering significant weakness over the previous four months.

Global & Select Portfolios

Given the capital market declines in the month of February, all of the diversified portfolios posted negative returns with all strategies performing in a relatively tight range.

Our Global portfolios modestly outperformed both their Select counterparts and their secular benchmarks for the trailing one-month period.  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. 

Our two non-US strategies (Emerging markets and International Developed) outperformed their benchmarks in February.  Our US strategy results were mixed, with the Large and Small Cap strategies underperforming, while our Mid Cap strategy outperformed.      

Over the trailing twelve months, all of our asset class equity sleeves significantly outperformed their secular benchmarks, all of which were negative. 

Asset Class Model in the Spotlight: Inspire US Small Cap

The US Small Cap sleeve underperformed the S&P 600 Index in the month of February, returning -2.4% versus -2.2%. For the trailing one-year period, the sleeve has posted a return of 0.6% and outperformed its index by over 4%. Strong twelve-month performance from the strategy’s energy, communication services, IT, and industrials holdings were the main drivers of outperformance.  Key contributors included PBF Energy (+140%), Quinstreet Inc (+51%), and Fluor Corp (+50%). A modest underweight to real estate also benefited results.

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

Inflation, Money Supply, Employment, & Central Bank Response – The January CPI month-over-month reading was 0.5%, in line with expectations.  Year-over-year inflation fell from 6.5% to 6.4%. It is important to watch the growth of the money supply (M2) as that tends to be a leading indicator of inflation. The growth of M2 is definitely starting to moderate, and it actually went negative for the first time in the last 60 years. This is a good sign, but the Fed seems to still be behind the inflation curve and it is unlikely that inflation will fall below the Fed’s 2% target anytime soon. Based on Chair Powell’s recent comments, we should expect more rate increases in the coming months (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, the Fed’s response, and the growth of the money supply as this will undoubtedly impact capital market returns and volatility in the months and years ahead. 

GDP, Yield Curve, Employment, & Consumer Confidence – Revised fourth quarter GDP was lowered from 2.9% to 2.7%, mostly due to downward revisions of consumer spending and net exports.  Although the 3Q and 4Q GDP data supports the view that we are probably not quite in a recession (that is, as of 12/31/2022), it doesn’t mean that everything is rosy. 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, with most of the companies in the S&P 500 reporting, profits have declined over 3% from a year ago. 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 and is determined to continue course. Some are suggesting that Russia has now amassed nearly 700,000 soldiers versus only 100,000 for 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. In addition to the Ukrainian situation, there is now even more tension between the US and China with news about the Chinese spy balloons and also with increased threats of sanctions against China for its perceived support of Russia. There also has been increased tension regarding Taiwan, as the US has increased its defense coordination with the country and as both China and the US have dialed up the rhetoric in recent weeks.