Inspire Portfolio Strategy Insights

Capital Market Returns

The equity markets posted mixed results in the second quarter of 2024, with growth stocks and emerging markets having a strong quarter while the small and mid-cap markets as well as the value stocks were mostly negative. The bond market was relatively quiet with mostly flat performance.   

The broad fixed income market (BB US Agg) returned 0.07% in the quarter as rates increased slightly across the maturity spectrum. The index is up 2.63% for the past year. 

The U.S. large cap market (S&P 500) increased 4.28% in the quarter and is up 24.56% in the past 12 months fueled mainly by NVIDIA.  Growth stocks continued their outperformance of value stocks this quarter (returning 8.33% versus -2.17%) and are ahead of value by over 20% for the last year driven by the strong performance of the mega-cap tech stocks. U.S. mid-cap stocks underperformed US large-cap, along with U.S. small cap stocks with both indexes down more than 3% for the quarter.  

International developed stocks underperformed their U.S. counterparts over the trailing three and twelve months from both a local and U.S. perspective. Emerging market stocks also underperformed for the quarter and have significantly underperformed most equity asset classes for the year primarily due to underperformance from China.  Mainland Chinese stocks declined 2.08% in the quarter and are down 8.76% over the past 12 months. Latin American stocks were down -12.20% for the quarter and are down -5.59% for the past year. The U.S. dollar (U.S. Dollar Index) increased 1.94% against most other currencies during the quarter.      

Global & Select Portfolios

Given the tilt to small and mid-cap stocks in our strategies, all the diversified portfolios posted negative returns for the quarter. The lower the allocation to equities, the better the relative 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 Global strategies slightly outperformed the Select strategies.    

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

Over the trailing twelve months, the International Developed sleeve slightly outperformed the secular benchmark. Our other sleeves (Large Cap, Mid Cap, and Small Cap and Emerging Markets), on the other hand, underperformed.    

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Asset Class Model in the Spotlight: Inspire U.S. Small Cap

The US Small Cap sleeve underperformed the S&P 600 Index in the 2^nd quarter, returning -3.68% versus -3.11% for the index. For the trailing one-year period, the sleeve has posted a return of 2.67% and underperformed its index which returned 8.66%. Weak performance in the quarter and year to date from the strategy’s Consumer Staples, Industrials, and Materials holdings were the main drivers of the underperformance. Although this is disappointing, we still believe that the quality of our small cap selection process will bear fruit when the market turns its attention to the broader markets and small and mid-cap stocks come into favor.

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 335 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 U.S. large cap stocks, especially 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-U.S. developed large-cap, US small-cap, and U.S. mid-cap equity. U.S. 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 May CPI month-over-month reading was flat at 0.0%, which was below the expected 0.1%. Year-over-year inflation is down to 3.3%. 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 late 2024. Many investors are of the belief that the inflation scare is well behind us. However, core inflation remains high at 3.4% 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 first quarter GDP figure came in at 1.4%, below the consensus of 2.5%. This was a weaker quarter as consumer spending is starting to slow and we believe we are in a trend of slowing growth which could get worse especially if personal consumption, business investment, and home building continue to slow for the remainder of 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 the last half of 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 2025.