Inspire Portfolio Strategy Insights

Capital Market Returns

Despite a very bumpy ride, the capital markets posted strong gains in the first quarter of 2023. 

The broad fixed income market (BB US Agg) returned 3.0% in the quarter as rates declined across the maturity spectrum. The index is down 4.8% for the year.

The US large cap market (S&P 500) rallied at the end of March to finish the quarter up 7.5%, cutting the one-year loss to 7.7%. In a huge reversal from 2022, growth stocks outperformed value stocks in the quarter (returning 14.4% versus 1.0%), although value stocks are ahead by 5.0% over the last year. US small- and mid-cap stocks struggled significantly in March, and their relative outperformance to large caps for the three- and twelve-month periods has now been erased.      

International developed equities posted strong gains in the quarter and continue to outperform their US counterparts over the trailing year. Emerging market stocks, on the other hand, underperformed US large caps by over 2.5% for the quarter and are down 10.7% for the year. Mainland Chinese stocks returned 4.7% in the quarter, while Latin American stocks returned 3.9%. The US dollar (US Dollar Index) declined against most other currencies (-1.3%) in the quarter and is now up only 3.2% over the previous twelve months.

Global & Select Portfolios

Given the capital market 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, both our Global and Select strategies have outperformed their respective benchmarks, with our Select strategies outperforming by wide margins.

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

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

Asset Class Model in the Spotlight: International Developed Sleeve

The International Developed sleeve outperformed the MSCI EAFE in the quarter by 2.5% and is ahead by over 5.5% over the last twelve months. The main contributors in the quarter were the portfolio’s stock selection within the utilities, communication services, information technology, and financial sectors. Main contributors included E.ON (+26%), Telecom Italia (+45%), STMicroelectronics (+50.5%), and London Stock Exchange (+15%). In addition, an overweight to the outperforming information technology sector and an underweight to the underperforming financials sector benefited results.

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

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Inflation, Money Supply, Employment, & Central Bank Response – The February CPI month-over-month reading was 0.4%, in line with expectations. Year-over-year inflation fell from 6.4% to 6.0%. 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 could expect at least one more rate increase 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 2.7% to 2.6%, mostly due to downward revisions of consumer spending. 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.

Banking stress – Before the recent banking woes bubbled to the surface, the global economy was already entering a period of slowing growth. Now there seems to be more risk that the US economy will enter a recession as banks are more concerned with shoring up their finances than providing additional loans that are necessary for the economy to grow. More banks may fall, but as of now, the threat to the broader financial markets seems to be contained, especially given that the Federal Reserve is likely to slow down or even eliminate future interest rate increases. While financial stress levels are still elevated, they have improved significantly since the news first broke about the banking sector.

Corporate Profits – As we are heading into 2023, 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 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.