Inspire Portfolio Strategy Insights

1. Capital Market Returns

• The capital markets started off the year with strong gains in January.
• The broad fixed income market (BB US Agg) returned 3.1% in the month as rates declined across the maturity spectrum.
• The US large cap market (S&P 500) returned 6.3% in the month, and now the one year return is only down 8.2%. Growth stocks finally outperformed value stocks, returning 8.3% versus 5.2%. US small- and mid-cap stocks continued their dominance, outperforming large caps by over 4%.    
• International developed equities continue to outperform their US counterparts, driven in part by the weakness of the US dollar. Emerging market stocks also outperformed for the month. Mainland Chinese stocks once again posted strong returns (9.5%) in January, as did Latin American stocks (9.9%). The US dollar (US Dollar Index) declined against most other currencies, and is now up just 3.4% for the year.

2. Global & Select Portfolios

• Given the rally in the month of January, all of the diversified portfolios posted positive returns. The higher the allocation to equities, the stronger 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 outperforming 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 asset class sleeves outperformed their benchmarks in January.      
• Over the trailing twelve months, all of our asset class equity sleeves posted positive results and significantly outperformed their secular benchmarks, most of which were negative.

3. Asset Class Model in the Spotlight: Inspire US Mid Cap

The US Mid Cap Sleeve outperformed the S&P MidCap 400 in January by 3.5% and is ahead nearly 4% for the year. The main contributors in the month were the portfolio’s stock selection within the consumer discretionary, health care, and industrials sectors. Contributors within consumer discretionary included Installed Building Products (+28.6%) and Lithia Motors (+28.5%).  Within health care, the main contributor was Neogen (+40.6%), and within industrials the main contributor was Simpson Manufacturing (21.2%). Stock selection and an overweight position to IT (which outperformed the overall index) also benefitted results.

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

• Inflation, Money Supply, Employment, & Central Bank Response – The December CPI month-over-month reading was -0.1%, matching the consensus decline and the first negative reading in 2 ½ years. Year-over-year inflation fell from 7.1 to 6.5%. 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 a couple more 0.25% 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 third quarter GDP came in at 2.9%, 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 an increase in inventories and 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, with over half of the companies in the S&P 500 reporting, profits have declined over 3.0% 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, 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 during the colder winter months. In addition to the Ukrainian situation, there is now even more tension between the US and China with news about the Chinese spy balloon(s) occupying US air space, and with the US downing one of the balloons.

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