Inspire Portfolio Strategy Insights

Capital Market Returns

The capital markets posted mixed results in the first quarter of 2024, with the equity markets once again having a strong quarter while the bond markets were mostly negative or flat (with the exception of high yield, which was up nearly 1.5%).  

The broad fixed income market (BB US Agg) returned -0.8% in the quarter as rates increased slightly across the maturity spectrum. The index is up 1.7% for the year.

The US large cap market (S&P 500) increased 10.5% in the quarter and is up 29.9% for the year as the stock market rally broadened beyond the “Magnificent Seven.” Growth stocks continued their outperformance of value stocks this quarter (returning 11.4% versus 9.0%) and are ahead of value by nearly 20% over the last year, driven by the strong performance of the mega-cap tech stocks. US mid-cap stocks performed similarly to US large-cap, while US-small cap stocks significantly lagged and were up only 2.5% in the quarter.  

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 China's underperformance. Mainland Chinese stocks returned 0.7% in the quarter and have been one of the worst performers over the last year (-16.8%). Latin American stocks returned -4.0% for the quarter and 22.6% for the year. The US dollar (US Dollar Index) increased 2.7% against most other currencies.  

Global & Select Portfolios

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

All of our Select and Global (ETF-centric) strategies underperformed their secular benchmarks. The portfolios with a higher fixed income allocation posted stronger results, given the higher relative performance of IBD versus the BB US Agg. For the trailing 12-month period, both our Select and Global strategies underperformed their respective benchmarks, although the Select strategies outperformed the Global strategies.

All our asset class strategies underperformed their benchmarks in the quarter.  

Over the trailing twelve months, our Emerging Markets and International Developed sleeves significantly outperformed their secular benchmarks. Our U.S. sleeves (Large Cap, Mid Cap, and Small Cap), on the other hand, underperformed.   

Asset Class Model in the Spotlight: Inspire Emerging Markets Sleeve

The emerging markets sleeve slightly underperformed the MSCI Emerging Markets Index over the trailing three months (1.2% versus 2.4%) and significantly outperformed over the trailing twelve months (23.6% versus 8.2%). The main contributors to the outperformance over the twelve-month period were the portfolio’s lack of exposure to Chinese stocks (which were down over 16.8% and comprise over 25% of the index) and overweight to Latin American stocks (which were up 22.6%). We exclude state-owned enterprises (like those in China) where significant human rights abuses are known to occur. Security selection also modestly benefited performance. In particular, the portfolio’s Brazilian, Mexican, and Chilean holdings performed very well relative to the index.

As it relates to China, its economy continues to struggle.  Long-term economic growth has fallen to 5%, versus the 10 – 15% growth rates in previous decades. One of the primary headwinds has been, and will continue to be, the country’s demographic problems. For example, although the country abandoned its one-child policy in 2016, the average number of lifetime births among women is around 1, well below the replacement rate. It appears that the total population has now crested at about 1.4 billion and will continue falling.

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

While the markets have been strong since November, we think that investors are overly optimistic. As a case in point, the S&P 500 has had over 275 days without a daily decline of 2% or more, which is the most since 2018. 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 higher than expected.    

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 still seems 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.  For more information, please see the latest piece on Inspire’s risk and return assumptions and our long-term, strategic asset allocations.  

Inflation, Money Supply, and Central Bank Response

The March CPI month-over-month reading was 0.4%, which was above the expected 0.3%. Year-over-year inflation is up to 3.5% given the recent increase in energy prices. Based on Chair Powell’s recent comments, we have reached a terminal level of interest rates around 5.5%, and rates are expected to fall starting in mid-2024. Many investors are of the belief that the inflation scare is well behind us. However, core inflation remains high at 3.8% and well above the Fed’s target of 2.0%, so we will likely see a slower lowering of interest rates than investors initially thought. 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

The final fourth quarter GDP figure came in at 3.4%, beating the consensus of 2.0%. This was another strong quarter, driven by consumer spending; however, we believe we are/will be 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 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. We have now had over 630 consecutive days of yield curve inversion, the longest on record. 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 is still on the table. We will continue to keep a close eye on growth figures going forward.

Corporate Profits

As we head into 2024, corporate profits have so far remained strong.  Currently, the market is expecting earnings to keep improving over the next several quarters.  We will continue to keep a close eye on corporate earnings as this will impact equity performance going into 2024.