Inspire Portfolio Strategy Insights

Capital Market Returns

The capital markets posted mixed results in the second quarter of 2023.  

The broad fixed income market (BB US Agg) returned -0.8% in the quarter as rates increased across the maturity spectrum. The index is down 0.9% for the year. 

The U.S. large cap market (S&P 500) continued its rally and finished the quarter up 8.7%, with the one-year return now up 19.6%. Growth stocks outperformed value stocks in the quarter (returning 12.8% versus 4.1%) and are now ahead by 15.6% over the last year. U.S. small- and mid-cap stocks continued to underperform, returning 3.4% and 4.9%, respectively.  

International developed underperformed their U.S. counterparts over the trailing three months and are in line over the trailing year. Emerging market stocks were barely positive for the quarter and year and significantly underperformed all other asset classes. Mainland Chinese stocks returned -10.7% in the quarter, while Latin American stocks returned 14.0%. The U.S. dollar (U.S. Dollar Index) was flat against most other currencies in the quarter and is now down 2.2% over the previous twelve months.      

Global & Select Portfolios

Given the surprisingly strong equity gains in the quarter, all the diversified portfolios posted positive returns.

Our Select portfolios outperformed their Global counterparts while performing in line with their secular benchmarks for the trailing three-month period. For the trailing 12-month period, our Select strategies have outperformed their respective benchmarks, while our Global strategies have underperformed.  

All our asset class strategies, with the exception of U.S. Large Cap, outperformed their benchmarks in the quarter.  

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

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Asset Class Model in the Spotlight: Emerging Markets Sleeve

The emerging markets sleeve outperformed the MSCI Emerging Markets Index over the trailing three (12.1% versus 0.9%) and twelve (29.2% versus 1.8%) months. The main contributors to the outperformance were the portfolio’s lack of exposure to Chinese stocks (which were down over 10% in the quarter and comprise nearly 30% of the index) and overweight to Latin American stocks (which were up double digits). These same factors helped the portfolio outperform over the trailing one year.  We exclude state-owned enterprises (like those in China) where significant human rights abuses are known to occur. Security selection also benefited performance. In particular, the portfolio’s Brazilian, Chilean, Mexican, and Indonesian holdings performed very well relative to the index.    

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

The stock market has been surprisingly strong so far in 2023. It seems that investors have shrugged off most of the concerns they had about inflation in 2022 and are optimistic that the U.S. may avoid a recession. We feel that investors have been overly confident, and we would not be surprised to see a correction in the coming months, especially in overvalued areas of the market like the mega-cap, tech stocks. Those stocks have been responsible for 80%+ of the recent market gains and are very overvalued based on P/E valuations. The rest of the market is reasonably valued.       

Inflation, Money Supply, and Central Bank Response – The May CPI month-over-month reading was 0.1%, in line with expectations. Year-over-year inflation has fallen from over 8.0% in the previous quarter to 4.0% and will likely fall more as outsized readings in May and June 2022 drop off. However, inflation will likely pick up again towards the end of the summer, or at least will remain well above the Federal Reserve’s 2.0% target. Based on this and Chair Powell’s recent comments, we should expect more rate increases this year, with a terminal rate now above 5.5%. 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, Yield Curve, Employment, & Consumer Confidence – The final first quarter GDP figure was raised to 2.0% from 1.3%. Although this was stronger than expected, 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) and the Conference Board’s leading index has never declined this much in six months without a recession. With inflation still running hot and the labor market remaining strong, the Fed will likely keep rates high to try to bring down inflation.  Therefore, the odds of a recession occurring over the next few quarters have greatly increased. We will continue to keep a close eye on growth figures going forward. 

Corporate Profits – As we make our way through 2023, there are signs that earnings are starting to fall. Indeed, 1Q2023 profits fell the most since 4Q2020. 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.