Inspire Portfolio Strategy Insights

1. Capital Market Returns

• The markets continued their rally in November, with most asset classes and sectors experiencing significant gains. 
• The broad fixed income market (BB US Agg) returned 3.7% in the month as rates fell across the maturity spectrum. YTD, however, the Agg is down 12.6%.        
• The US large-cap market (S&P 500) returned 5.6% in November, bringing the YTD performance to -13.1%. Value continued to outperform growth in the month and is one of the few indices that has been positive over the last 12 months. Energy stocks significantly lagged for the month (+1.3%) but are up nearly 70% YTD. US small- and mid-cap stocks underperformed US large caps for the month, although they are ahead ≈3-5% YTD. 
• International developed equities significantly outperformed their US counterparts, primarily driven by the weakness of the US dollar. In a dramatic reversal from the previous month, emerging market stocks were up nearly 15%. Mainland Chinese stocks rebounded strongly (13%) even as the country’s economic growth prospects continued to deteriorate. Latin American stocks, on the other hand, barely finished in positive territory (+0.5) in the month, but they remain the only positive EM sector YTD (+13.5%). The US dollar (US Dollar Index) suffered its worst month of the year (-4.8%), yet it is still up 8.2% YTD.

2. Global & Select Portfolios

• Given the month's strong equity and fixed-income performance, all diversified portfolios posted positive returns. The higher the allocation to equities, the stronger the absolute performance. 
• Our Global and Select strategies outperformed their respective benchmarks for the trailing 1- and 12-month periods, with our Select strategies outperforming their Global counterparts by wide margins.

• Our US Large Cap, International Developed, and US Mid and US Small sleeves outperformed their benchmarks in November.  The Emerging Markets sleeves underperformed given the portfolio’s lack of exposure to China and overweight to Latin America.    
• Over the trailing twelve months, all of our asset-class equity sleeves have significantly outperformed their secular benchmarks.

3. Asset Class Model in the Spotlight: Inspire Emerging Markets

The emerging markets sleeve underperformed the MSCI Emerging Markets Index in the month of November (13.6% versus 14.8%), which was somewhat of a surprise given the portfolio’s lack of exposure to Chinese stocks (which rebounded strongly in the month) and the portfolio’s overweight to Latin American stocks (which were relatively weak).  Although sector allocation hurt relative results, the portfolio’s stock selection was able to soften the damage.  In particular, the portfolios South Korean, Malaysian, South African, and Mexican holdings performed well.  The portfolio has outperformed by nearly 25% over the last twelve months (7.6% versus -17.4%).  The main contributors to the outperformance were the portfolio’s overweight position to South America and no exposure to China relative to the index.  The portfolio was overweight Brazil, Chile, Colombia, and Peru, which all posted stronger returns than the overall benchmark due to their economies’ dependence on commodities.  Having no exposure to China relative to roughly 30% exposure to the index also contributed as Chinese companies underperformed in 2022 (-27% YTD).  We exclude state-owned enterprises (like those in China) where significant human rights abuses are known to occur.  Security selection within the portfolio’s Malaysian, South Korean, and South African holdings also added to the portfolio’s outperformance over the last 12 months. 

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

• Inflation, Money Supply, and Central Bank Response – The October CPI month-over-month reading was 0.4%, coming in below the consensus gain of 0.6%. Year-over-year inflation fell from 8.2% to 7.7%. Although inflation has come down, it will remain elevated until the Fed consistently gets the growth of the money supply (M2) under control, as that tends to be a leading indicator of inflation. The growth of M2 is starting to moderate, declining 0.6% in September, the largest drop for any month going back at least 60 years. This is a good sign, but the Fed is still behind the inflation curve, which means more interest rate increases are on the horizon. The Fed raised the Federal Funds rate by 0.25% in March, 0.5% in May, and 0.75% in June, July, September, and November (the largest increases since 1994). Based on Chair Powell’s recent comments, we should expect more rate increases in December and the months ahead, but likely not at the 0.75% clip from the previous four meetings. The Fed Funds rate is now expected to finish the year well above 4.0%. We will continue to monitor monthly inflation readings closely and the Fed’s response, as this will undoubtedly impact capital market returns and volatility in the months and years ahead.

• GDP, Gross Domestic Income, Employment, and 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 everything is rosy. Most of the GDP growth was led by net exports, which should not be as strong going forward. 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. 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, profits declined 1.1% in Q3 (versus Q2), although they are still up 4.4% versus 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 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. What seems certain is that Russia is determined to continue its course, especially after the bombing of the Crimean Bridge in early October. Putin has now sent an additional 80,000 soldiers into Ukraine with plans to train and send in 220,000 more. It is impossible to say how long the conflict will last. Russia has ratcheted up its military operations to gain the offensive in the war. The Russian onslaught could pave the way for sooner negotiations with Ukraine; however, as long as Ukraine keeps receiving military support (including from the US), the conflict will likely 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 with Russia’s recent offensive, making the situation more pronounced heading into the colder winter months.