Inspire Portfolio Strategy Insights

1. Capital Market Returns

• The markets continued their decent in September, with most asset classes and sectors experiencing losses.
• The broad fixed income market (BB US Agg) returned -4.32% in the month as rates increased across the maturity spectrum. YTD the Agg is down 14.6%.
• The equity markets experienced significant losses due to investor concerns about inflation and central bank response.  The US large cap market (S&P 500) returned -9.2% in September, bringing the YTD performance to -23.9%. Growth underperformed value by nearly 1% in the month and is one of the worst performing asset classes so far this year (-30.7%).  Energy stocks experienced similar losses to the overall market (-9.6%) but are up nearly 45% YTD.  US small and mid-cap stocks performed in line with US large-caps for the month and are ahead ≈1-2% YTD. 
• International developed equities performed in line with their US counterparts, while emerging markets equities underperformed by 2.5%.  Latin American stocks continued their dominance and were only down 3.3% in the month.  The US dollar (US Dollar Index) was one of the few areas that was positive for the month (+3.2%) and is up nearly 14% YTD.

2. Global & Select Portfolios

• Given the strong selloff in September, all of the diversified portfolios posted negative returns. The higher the allocation to equities, the weaker the absolute performance.
• Both our Global and Select strategies performed similarly to their respective benchmarks for the month, although those strategies with higher allocations to fixed income outperformed given the lower relative duration of IBD versus the BB US Agg. Over the trailing 12-month period, our Select strategies outperformed their benchmarks, while our Global strategies performed similarly.

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• Our US Mid, US Small, and International Developed sleeves underperformed their benchmarks in September, while the Emerging Market sleeve outperformed. Our US Large cap sleeve performed in line with its benchmark.
• 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 US Large Cap

The US large cap sleeve performed in line with the S&P 500 Index in the month of September and is ahead by more than 5% over the last twelve months.  The main contributors to the twelve-month outperformance were the portfolio’s overweight positions to energy, utilities, and materials and underweight positions to communication services and IT.  Stock selection within industrials and communication services was also additive.  Main contributors within industrials  included PACCAR (+9.5%) and Cintas Corp (+3%).  Within communication services, the main contributor was Fox Corp.

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

• Inflation, Money Supply, and Central Bank Response – The August CPI month-over-month reading was 0.1%, coming in above the consensus decline of 0.1%. Year over year inflation fell from 8.5% to 8.3%, but was still higher than the 8.1% rate analysts were predicting. Is inflation finally peaking? Probably, but it will still 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. Although the growth of M2 is starting to moderate, which is a good sign, the Fed is still behind the inflation curve which means more interest rate increases are on the horizon, even amid geo-political turmoil and negative 1q2021 and 2q2022 GDP. The Fed raised the Federal Funds rate 0.25% in March, 0.5% in May, and 0.75% in June, July, and September (the largest increases since 1994). Based on Chair Powell’s recent comments, we should expect yet another 0.75% rate hike in November. The Fed Funds rate is now expected to finish the year above 4.0%. 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, Gross Domestic Income, Employment, and Consumer Confidence – Second quarter GDP figures were revised slightly higher (-0.6% versus -0.9%) but were still negative, coming on the heels of a -1.6% rate in the first quarter.  Although two consecutive quarters fits the rule-of-thumb definition of a recession, it would not be a complete surprise if the NBER (National Bureau of Economic Research, the official arbiter of calling recession dates in the US) doesn’t declare a recession for this time period given relatively strong employment (unemployment rose unexpectedly from 3.5% to 3.7%, but this is still considered very strong) and other factors.  In fact, it is possible that one of the first two quarters of GDP growth is eventually revised positive as more economic data comes in.  Gross Domestic Income (an alternative measure to GDP) is actually showing positive economic growth in the first and second quarters. Regardless of whether or not we are in an official recession, the GDP numbers are clearly showing that growth has slowed.  We will continue to keep a close eye on consumer confidence, spending, and growth figures going forward.
• Corporate Profits – Much of the strong equity results in 2021 were driven by remarkable corporate profitability (the S&P 500 profits rose 45%, an all-time high).  We mentioned that we didn’t expect to see such a rise in profits in 2022.  However, corporate earnings are still rising in 2022, growing 6.1% in the second quarter.  We will continue to keep a close eye on profitability going forward particularly given the impact of higher interest rates and potentially slowing consumer demand.     
• Geopolitical Risks – As mentioned in our last commentary regarding the Russian/Ukrainian war, it seems that the balance of power is still decidedly in Russia’s favor as efforts to take over strategic regions in the eastern part of Ukraine have proven successful.  The focus of the fighting has now shifted to the south, which could mark a decisive phase of the conflict.  Ukraine has recently launched an offensive to retake territory that was seized at the start of the conflict.  Outside observers, especially those nations that have been providing military support to Ukraine (including the US), are watching to see if Ukraine has any chance to capitalize on their offensive and turn the direction of the war.