In the first quarter of 2023, the US economy slowed from prior quarters but still maintained positive momentum. As a result, the much-anticipated recession, what some have called “the most predicted recession in history,” was held off yet again! Early estimates indicate that for the first quarter of 2023, U.S. Real (i.e., inflation-adjusted) Gross Domestic Product (GDP) grew 1.0% (annualized). This tepid growth comes on the heels of the economy’s surprising strength during the second half of 2022.
Despite this unexpected strength, the consensus view remains that the US economy will likely enter an official recession in 2023. The Treasury yield curve, inverted since last summer, confirms that outlook. Interestingly, forecasts are that the expected recession will be rather shallow and short. Specifically, modest declines in Real GDP are likely to be experienced in the remaining three quarters of 2023. But, given the strength seen in the first quarter, overall growth for the calendar year is projected to come in at 0.7%
While investors have been pleasantly surprised by the economy’s resilience, with the stock market responding favorably, the first quarter still had its challenges. Most notably, significant shocks were seen by some of the nation’s largest regional banks. These mid-sized financial institutions suffered substantial losses in their bond holdings as a result of the dramatic increase in interest rates in 2022. Those most at risk were those who had high levels of uninsured deposit exposure coming from concentrations in certain markets. At this point, with the support of regulators as well as other banks, the risk seems to be contained with little danger of contagion. However, investors should not be surprised if similar flare-ups occur in the coming months; it is difficult, if not impossible, to raise interest rates so dramatically without things breaking!
Along with the not-so-bad news about economic growth in the first quarter of 2023, the inflationary environment continues to improve. While still unacceptably high, inflation has begun to subside. The most recent reading came in at 5.0% (12-month Consumer Price Index change, March 2023), down from much higher levels, 9.1% in June, but still a long way away from the Fed’s target of getting back to 2.0%.
Perhaps the most puzzling economic indicator is the continued strength of the U.S. labor market. Despite restrictive monetary policies and recession worries, the Unemployment Rate for March came in at 3.5%, equaling a five-decade low, and average hourly earnings grew 4.2% over the prior 12 months. This bodes well for workers but will contribute to inflation’s continued persistence.
Against this backdrop of a growing economy, a healthy labor market, and softening inflation, all eyes are on the Federal Reserve as they consider the best path forward for monetary policy. Recent statements from the Federal Reserve officials signal that there are further Fed Funds rate hikes to come. Current market forecasts are that the “terminal rate” for Fed Funds is a half percent higher at 5.50%. Once reaching that level, some believe that there might be a need to quickly pivot to lowering rates if a recession materializes. Meanwhile, the Federal Reserve indicates its resolve to fiercely fight inflation is unwavering. It plans to leave overnight rates at those higher levels for the foreseeable future.
Slow growth, high inflation, and high interest rates are vexing investors in the international markets as well, but markets have been generally strong as low expectations have been exceeded. US-based investors are well-advised to ensure that they have sufficient global exposure in their portfolios, as the possibility of relative outperformance is tangible.
Looking forward, the economy and the markets give every appearance of being at an inflection point currently, either putting the recent slowdown in the rearview mirror or entering into a stagflationary period which might be difficult to emerge from. Therefore, investors must be steadfast in maintaining their investment strategy’s alignment with their financial goals . . . making investment decisions with their minds than with their hearts!
Sources: Bureau of Economic Analysis Bureau of Labor Statistics International Monetary Fund The Conference Board
Dr. Erik Davidson, CFA
Chief Economic Advisor
DR. ERIK DAVIDSON, CFA is the Chief Economic Advisor for Inspire Investing. Previously, Dr. Davidson served as the Chief Investment Officer for Wells Fargo Private Bank, leading an investment team of over 400 professionals who managed more than $200 billion in assets. Dr. Davidson holds a doctorate degree from the DePaul University’s Kellstadt Graduate School of Business and is a professor at Baylor University teaching behavioral finance.
The Stock Market
The rally that started in the fourth quarter of 2022 continued to start the new year but lost steam in early February and pulled back until late March before finding support and rising to end the first quarter. The S&P 500 and the international markets regained momentum and finished the 1st quarter neck and neck, with the international markets edging out the S&P, 8.05% to 7.48%, respectively. The US mid-cap market was up 3.79%, edging out the US small-cap index that finished the quarter up 2.54%. The high inflation numbers, the continuing war against Ukraine by Russia, and a slowing economy have kept us in the “Correction Process” as the tug of war between the perma-bears and the new bulls continued in the quarter. While we may have a few more months before we can declare that a new Bull Market has begun, it is evident that the Bear market has lost much of its strength. We believe that it’s highly likely that the opportunity for positive returns over the next 12 to 18 months is higher than more downside risk. Although there are pundits out there that are still extremely pessimistic, one fact remains – all bear and bull markets eventually come to an end.
(Source: Bloomberg)
The past 12 months have given us not only the correction we have been expecting since the Pandemic recovery but ushered in a simultaneous bear market in global stocks and bonds. The good news is that the worst year in the equity and bond markets is behind us, and it appears that the low of the markets in September and October of 2022 was the low of the bear market. The curvature of the market pattern for the past 12 months gives credence to the belief that although the market will remain volatile in the first half of 2023, the lows should continue to be higher than the previous lows. We still have the potential of 1 or 2 more interest rate increases, a stubbornly high inflation rate, and an economy that is expected to slow to the point that confirms the much-anticipated recession will be headwinds for the remainder of the year. Over the past year, the S&P 500 had a total return of -7.75%, the S&P 400 Mid-cap index was down -5.17%, the S&P 600 Small-cap index was down -8.88%, and the international markets fell only -2.72%. It seems like some of the pundits and talking heads on the financial news networks are even more bearish now than at the first of the quarter, with some still expecting another 20% to 30% downside from here. With so much negativity in the markets and in the financial media, “contrarians” believe that this could be a confirming signal that the bottom may have been in October.
(Source: Bloomberg)
Economic Indicators and Calendar
Inflation - CPI Month Over Month
Release Date & Time
Period
Survey
Actual
CPI MoM
01/12/2023 08:30
Dec
-0.10%
-0.10%
CPI MoM
02/14/2023 08:30
Jan
0.40%
0.50%
CPI MoM
03/14/2023 08:30
Feb
0.40%
0.40%
CPI MoM
04/12/2023 08:30
Mar
0.20%
0.10%
CPI MoM
05/10/2023 08:30
Apr
CPI MoM
06/13/2023 08:30
May
CPI MoM
07/12/2023 08:30
Jun
CPI MoM
08/10/2023 08:30
Jul
CPI MoM
09/13/2023 08:30
Aug
CPI MoM
10/12/2023 08:30
Sep
CPI MoM
11/14/2023 08:30
Oct
CPI MoM
12/12/2023 08:30
Nov
CPI MoM
1/12/2024 08:30
Dec
(Source: Bloomberg)
Inflation rose to 0.5% (Month over Month) in January, above expectations of 0.40%, and fell to 0.40% (Month over Month) in February. The expectation for the month-over-month number in March to fall to 0.20% was released on April 12th and fell more than expectations to 0.10%. If we can see month-over-month numbers stay in the 0.0% to 0.20% territory for the next several months, then the CPI year-over-year number will come back towards the 2.5% level over the next 12 to 18 months.
GDP growth came in stronger than the initial expectation of 2.6% for the 4th Quarter, with an actual 2.9% for the quarter in the Advance Release but came in line with the Third revision at 2.6%. The debate among economists and market pundits changed during the 1st quarter from “When will the recession start” to “When will the recession end.” Although there has been no definite proclamation of a recession yet, it is highly likely we will hear that announcement sometime before the end of 2023.
Labor Market
Release Date & Time
Period
Survey
Actual
Revised
Unemployment Rate
1/6/2023 8:30
Dec
3.7%
3.5%
Unemployment Rate
2/3/2023 8:30
Jan
3.5%
3.4%
Unemployment Rate
3/10/2023 8:30
Feb
3.4%
3.6%
Unemployment Rate
4/7/2023 8:30
Mar
3.6%
3.5%
Unemployment Rate
5/5/2023 8:30
Apr
Unemployment Rate
6/2/2023 8:30
May
Unemployment Rate
7/7/2023 8:30
Jun
Unemployment Rate
8/4/2023 8:30
Jul
Unemployment Rate
9/1/2023 8:30
Aug
Unemployment Rate
10/6/2023 8:30
Sep
Unemployment Rate
11/3/2023 8:30
Oct
Unemployment Rate
12/8/2023 8:30
Nov
Unemployment Rate
1/6/2024 8:30
Dec
Nonfarm Payrolls (Change)
1/6/2023 8:30
Dec
207k
223k
290k
Nonfarm Payrolls (Change)
2/3/2023 8:30
Jan
198k
517k
239k
Nonfarm Payrolls (Change)
3/10/2023 8:30
Feb
223k
311k
472k
Nonfarm Payrolls (Change)
4/7/2023 8:30
Mar
224k
236k
326k
Nonfarm Payrolls (Change)
5/5/2023 8:30
Apr
Nonfarm Payrolls (Change)
6/2/2023 8:30
May
Nonfarm Payrolls (Change)
7/7/2023 8:30
Jun
Nonfarm Payrolls (Change)
8/4/2023 8:30
Jul
Nonfarm Payrolls (Change)
9/1/2023 8:30
Aug
Nonfarm Payrolls (Change)
10/6/2023 8:30
Sep
Nonfarm Payrolls (Change)
11/3/2023 8:30
Oct
Nonfarm Payrolls (Change)
12/8/2023 8:30
Nov
Nonfarm Payrolls (Change)
1/6/2024 8:30
Dec
Source: Bloomberg
The Unemployment rate ticked down to 3.4% in January after dropping to 3.5% in December. We saw an increase in February to 3.6% and a subsequent drop back to 3.5% in March. It is possible we could see unemployment start to rise in the 2nd quarter of 2023 as the economy slows and layoffs increase; however, with so many jobs still open and unfilled in the US, those laid off may not add to the unemployment roles for long, if at all.
Nonfarm Payrolls continue to have solid monthly numbers and may remain strong in the face of a recession as those laid off in the coming months may be able to fill some of the 9 million job openings in the US. If the employment picture remains this robust in the face of rising interest rates, the Federal Reserve will not be inclined to curb its enthusiasm for higher interest rates as they want to see unemployment rise to 5 or 6%.
Monetary Policy - Federal Reserve
Meeting Date
Rate Decision (%)
For
Against
FOMC Meeting
02/01/2023
0.25
12
0
FOMC Meeting
03/22/2023
0.25
11
0
FOMC Meeting
05/03/2023
FOMC Meeting
06/14/2023
FOMC Meeting
07/26/2023
FOMC Meeting
09/20/2023
FOMC Meeting
11/01/2023
FOMC Meeting
12/13/2023
Source: Bloomberg
The Federal Open Market Committee raised the Federal Funds rate by 0.25% in February and 0.25% in March, as expected. Due to the slowing economy and the banking crisis that came to light during the last month of the quarter, the interest rate increases are likely closer to the end than some thought just a few months ago. Based on Chair Powell’s recent comments, we should expect a rate hike of 0.25% at the May meeting and possibly at the June meeting, with a potential terminal rate of 5.25%. As the Federal Reserve was late to start raising interest rates, it will not be surprising to see that they may have already raised interest rates too high, causing unnecessary damage to the economy and the banking sector in their efforts to bring inflation down.
(Source: Bloomberg)
Inspire 100 ETF [NYSE: BIBL]
BIBL underperformed the S&P 500 Index by 222 bps for the quarter after outperforming the index during the first two months of the quarter.
The performance divergence between BIBL and the S&P 500 index is due to the strong performance in the Communications Sector (20.5%) and the Information Technology Sector (24.09%) for the index in the mega-cap stocks that are not held in BIBL.
The exposure to smaller regional banks in BIBL in the Financial Sector also hurt the performance of the fund in relation to the S&P 500 during the last two weeks of the quarter, being down -13.20% during March.
We believe that when the next bull market starts, BIBL is still well positioned to outperform the S&P 500 due to the tilt to the smaller side of the market cap spectrum and its strong core positioning benefiting from both value and growth exposure.
Past performance is no guarantee of future results. The performance data quoted here represents past performance. Current performance may be lower or higher than the performance data quoted above. Investment return and principal value will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. For performance data current to the most recent month end, please call 877.658.9473.
Performance data as of
3/31/2023
. You cannot invest directly in an index. The S&P 500 is a stock market index that measures the stock performance of 500 large companies listed on stock exchanges in the United States. The Inspire 100 Index is a rules based, passive index which tracks the stock performance of the one-hundred highest Inspire Impact Scoring companies in the United States with market capitalizations above $13B. The performance quoted represents past performance and does not guarantee future results. Investment return and principal value of an investment will fluctuate so that an investoror’s shares, when sold or redeemed, may be worth more or less than the original cost. Current performance may be lower or higher than the performance quoted. Performance data current to the most recent month end may be obtained by visiting www.inspireETF.com. Total annual operating expenses are 0.42%. Net expense ratio for the fund is 0.35%. The Fund’s adviser has contractually agreed to reduce fees and/or absorb expenses until at least March 31, 2023.
Inspire Global Hope ETF [NYSE: BLES]
The Global markets index mirrored the fund as both rallied into January, as BLES outperformed nicely until early March.
When the US Banking crisis came to light, BLES diverged from the global index for the last two weeks of the quarter as BLES underperformed the S&P Global 1200 Index for the 1st Quarter by 260 bps.
We still believe that the tilt to the smaller end of the large-cap spectrum of BLES will continue to show favor when the economic numbers start to improve in the next 6 to 12 months.
Past performance is no guarantee of future results. The performance data quoted here represents past performance. Current performance may be lower or higher than the performance data quoted above. Investment return and principal value will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. For performance data current to the most recent month end, please call 877.658.9473.
Performance data as of
3/31/2023
. You cannot invest directly in an index. The S&P Global 1200 Index is a free-float weighted stock market index of global equities from Standard & Poor’s. The index covers 31 countries and approximately 70 percent of global stock market capitalization. Inspire Global Hope Large Cap Equal Weight Index tracks the stock performance of 400 of the most inspiring large cap companies from around the globe. The performance quoted represents past performance and does not guarantee future results. Investment return and principal value of an investment will fluctuate so that an investor’s shares, when sold or redeemed, may be worth more or less than the original cost. Current performance may be lower or higher than the performance quoted. Performance data current to the most recent month end may be obtained by visiting www.inspireETF.com. Total annual operating expenses are 0.49%.
Inspire Fidelis Multi Factor ETF [NYSE: FDLS]
FDLS was launched on August 24,2022, as a global, all-cap, multi-factor ETF.
FDLS outperformed the MSCI All Country World ETF and outperformed the S&P 500 Index to start the quarter with strong momentum until the first week of March.
The exposure to different stocks in relation to the S&P 500 during the last two weeks of the quarter caused dramatic underperformance for the quarter to the ACWI ETF and the S&P 500 Index by over -400 bps each.
We believe that the diversified allocation of FDLS to US large, mid, and small-cap, international, and emerging markets stocks, as well as the disciplined multi-factor approach, will be a good complement to our other ETFs when the next bull market starts.
Past performance is no guarantee of future results. The performance data quoted here represents past performance. Current performance may be lower or higher than the performance data quoted above. Investment return and principal value will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. For performance data current to the most recent month end, please call 877.658.9473.
Performance data as of
3/31/2023
. You cannot invest directly in an index. The S&P Global 1200 Index is a free-float weighted stock market index of global equities from Standard & Poor’s. The index covers 31 countries and approximately 70 percent of global stock market capitalization. Inspire Global Hope Large Cap Equal Weight Index tracks the stock performance of 400 of the most inspiring large cap companies from around the globe. The performance quoted represents past performance and does not guarantee future results. Investment return and principal value of an investment will fluctuate so that an investor’s shares, when sold or redeemed, may be worth more or less than the original cost. Current performance may be lower or higher than the performance quoted. Performance data current to the most recent month end may be obtained by visiting www.inspireETF.com. Total annual operating expenses are 0.49%.
Inspire Momentum ETF [NYSE: GLRY]
GLRY had a great 1st quarter. Performance outpaced mid-cap and momentum indices and was in line with large-cap during a riskier time period.
The 1st quarter was incredibly volatile, with the mid-cap index having a 14% spread between high and low in only three months.
Markets were gaining a footing again until the bank run hit in mid-March. Volatility is back at lower levels, and investors are bracing for earnings season. If this season is uneventful, volatility should continue its descent, which would help momentum investors.
Past performance is no guarantee of future results. The performance data quoted here represents past performance. Current performance may be lower or higher than the performance data quoted above. Investment return and principal value will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. For performance data current to the most recent month end, please call 877.658.9473.
Performance data as of
3/31/2023
. You cannot invest directly in an index. The S&P SmallCap 400 Index measure the mid cap segment of the U.S. equity market. Investment return and principal value of an investment will fluctuate so that an investor’s shares, when sold or redeemed, may be worth more or less than the original cost. Current performance may be lower or higher than the performance quoted. Performance data current to the most recent month end may be obtained by visiting www.inspireETF.com. Total annual operating expenses are 1.02%. Net expense ratio for the fund is 0.80%. The Fund’s adviser has contractually agreed to reduce fees and/or absorb expenses until at least March 31, 2023.
Inspire Small/Mid Cap ETF [NYSE: ISMD]
ISMD outperformed the S&P Mid Cap 400 Index and the S&P Small Cap 600 Index by 41 bps and 165 bps, respectively, for the 1st quarter.
The small and mid-cap markets rallied for a very strong start to the quarter but retreated in early February as they re-tested the lows we saw in December before finding support and climbing slightly until the end of March.
The equal weighting of the 500 stocks in ISMD was in line with the market cap weighting of the small and midcap indexes showing that the correlation between the small and midcap markets and ISMD remains strong.
Past performance is no guarantee of future results. The performance data quoted here represents past performance. Current performance may be lower or higher than the performance data quoted above. Investment return and principal value will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. For performance data current to the most recent month end, please call 877.658.9473.
Performance data as of
3/31/2023
. You cannot invest directly in an index. The S&P Small Cap 600 Index measure the small cap segment of the U.S. equity market. The Inspire Small/Mid Cap Impact Equal Weight Index tracks the stock performance of 500 of the most inspiring small and mid cap companies in the U.S. The performance quoted represents past performance and does not guarantee future results. Investment return and principal value of an investment will fluctuate so that an investor’s shares, when sold or redeemed, may be worth more or less than the original cost. Current performance may be lower or higher than the performance quoted. Performance data current to the most recent month end may be obtained by visiting www.inspireETF.com. Total annual operating expenses are 0.48%.
Inspire 500 ETF [NYSE: PTL]
Past performance is no guarantee of future results. The performance data quoted here represents past performance. Current performance may be lower or higher than the performance data quoted above. Investment return and principal value will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. For performance data current to the most recent month end, please call 877.658.9473.
. You cannot invest directly in an index. The S&P Small Cap 600 Index measure the small cap segment of the U.S. equity market. The Inspire Small/Mid Cap Impact Equal Weight Index tracks the stock performance of 500 of the most inspiring small and mid cap companies in the U.S. The performance quoted represents past performance and does not guarantee future results. Investment return and principal value of an investment will fluctuate so that an investor’s shares, when sold or redeemed, may be worth more or less than the original cost. Current performance may be lower or higher than the performance quoted. Performance data current to the most recent month end may be obtained by visiting www.inspireETF.com. Total annual operating expenses are 0.48%.
Inspire Tactical Balanced ETF [NYSE: RISN]
RISN returned -1.34% in the 1st Quarter and 2.44% (annualized) since inception on July 15th, 2020. The fund underperformed the S&P Target Risk Moderate TR Index benchmark for the quarter, which returned 4.79%, but has outperformed the index since inception (7-15-2020), which returned 1.33% (annualized).
We attribute this performance for the quarter to our continued positioning of the fund in a conservative allocation with regard to the stock market and other equity asset classes. Halfway through the first quarter, our indicators improved enough to increase our stock allocation to approx. 40%. However, the market changed direction and gave back its initial gains from February 2nd to March 15th. The fund performed better than the overall market for this period, given the lower overall equity allocation, but still lags the market for this quarter because we did not capture much of the initial market increase in January.
As mentioned above, the first adjustment made to the fund allocation (RISN) this quarter was to increase our stock allocation in February. We have positioned the remainder of the “defensive” allocation into short-term floating rate treasuries, which are currently getting a decent yield and have a very steady price while interest rates continue to rise. We felt this is a good place to hold our “defensive” portion of the fund until the interest rate curve normalizes.
Moving forward, we will continue to monitor these allocations, and as our indicators improve for US Large Cap stocks, we will begin to move back into a more aggressive allocation.
Past performance is no guarantee of future results. The performance data quoted here represents past performance. Current performance may be lower or higher than the performance data quoted above. Investment return and principal value will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. For performance data current to the most recent month end, please call 877.658.9473.
Performance data as of
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. You cannot invest directly in an index. The S&P Target Risk Moderate Index is designed to measure the performance of moderate stock-bond allocations to fixed income while seeking to increase opportunities for higher returns through equities. The performance quoted represents past performance and does not guarantee future results. Investment return and principal value of an investment will fluctuate so that an investor’s shares, when sold or redeemed, may be worth more or less than the original cost. Current performance may be lower or higher than the performance quoted. Performance data current to the most recent month end may be obtained by visiting www.inspireETF.com. Total annual operating expenses are 0.71%.
Inspire International ETF [NYSE: WWJD]
WWJD was up 6.21% in the 1st quarter, underperforming the S&P International 700 TR Index return of 8.05%, an underperformance of 184 basis points.
Although highly correlated, the underperformance is most likely due to the geographic underweight to China as we have chosen not to hold any stocks in China due to the human rights abuses by the CCP.
We remain confident that one factor that may allow for the outperformance of WWJD in the coming year is that it is equally weighted and holds 200 positions versus the index being market cap weighted with 700 positions.
Past performance is no guarantee of future results. The performance data quoted here represents past performance. Current performance may be lower or higher than the performance data quoted above. Investment return and principal value will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. For performance data current to the most recent month end, please call 877.658.9473.
Performance data as of
3/31/2023
. You cannot invest directly in an index. The S&P International 700 measures the non-U.S. component of the global equity market through an index that is designed to be highly liquid and efficient to replicate. The Inspire Global Hope Ex-US Index intends to track the price movements of a portfolio of 200 of the most inspiring, biblically aligned large cap companies outside of the United States. The performance quoted represents past performance and does not guarantee future results. Investment return and principal value of an investment will fluctuate so that an investor’s shares, when sold or redeemed, may be worth more or less than the original cost. Current performance may be lower or higher than the performance quoted. Performance data current to the most recent month end may be obtained by visiting www.inspireETF.com. Total annual operating expenses are 0.69%.
The Bond Market
The yield curve fell across the spectrum except for the shortest part of the curve (six months and shorter), bringing a rally to the fixed-income markets. Interest rates for the 1-month to 6 months maturities all went up in the 1st quarter, while the 1-year to the 30-year bonds fell as the Federal Reserve let up on the gas pedal slightly, with interest rate increases of only 25 bps in both February and March.
As of the end of the 1st quarter, the 1-year US Treasury yield decreased from 4.710% to 4.619% (a nine basis point decrease) vs. the 10-year US Treasury, which fell almost 41 bps from 3.877%to 3.47%. Analysts failed in their prediction that the 10-year rate would hit 4.5% by now.
The 2-year U.S. Treasury yield decreased from 4.429% to 4.027%, the 5-year yield fell from 4.005% to 3.576% (a decrease of almost 43 bps), and the 30-year treasury fell from 3.966% to finish the quarter at 3.651% (a decrease of 31 bps).
The probability of a recession is still high as the economy is slowing. However, with strong employment numbers and consumer spending, a recession is still avoidable if the Federal Reserve will not push its rate increase process too far.
(Source: Bloomberg as of 03-31-2023)
Inspire Corporate Bond ETF [NYSE: IBD]
IBD was up 1.76% in the 1st quarter, slightly underperforming the fixed income benchmark of the Bloomberg Barclays US Intermediate Credit Index, which was up 2.47%.
The unusual gyrations in the yield curve caused positive performance for intermediate bonds in Q1 but hurt the bonds on the shortest end of the yield curve.
As economic growth continues to slow, and with the increased probability of a recession in the year ahead, the yield curve could likely shift in a parallel fashion to the upside in the 2nd quarter.
Past performance is no guarantee of future results. The performance data quoted here represents past performance. Current performance may be lower or higher than the performance data quoted above. Investment return and principal value will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. For performance data current to the most recent month end, please call 877.658.9473.
Performance data as of
3/31/2023
. You cannot invest directly in an index. The Bloomberg Barclays US Intermediate Credit Index measures the performance of investment grade, US dollar-denominated, fixed-rate, taxable corporate and government-related debt with less than ten years to maturity. The Inspire Corporate Bond Impact Equal Weight Index is comprised of 250 investment grade, intermediate term corporate bonds issued by some of the most inspiring large cap “blue chip” companies in the United States. The performance quoted represents past performance and does not guarantee future results. Investment return and principal value of an investment will fluctuate so that an investor’s shares, when sold or redeemed, may be worth more or less than the original cost. Current performance may be lower or higher than the performance quoted. Performance data current to the most recent month end may be obtained by visiting www.inspireETF.com. Total annual operating expenses are 0.44%.
Things to Watch
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.
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 support 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 that could worsen, 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. 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 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 broke about the banking sector.
Corporate Profits
As we are heading into 2023, there are signs that earnings are starting to fall. Indeed, most companies in the S&P 500 are reporting that profits 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 closely monitor 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 the course. Some suggest 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 both China and the US have dialed up the rhetoric in recent weeks.
Closing Remarks
The markets have started to show signs that this Bear Market may be ready to go into hibernation as we started the year with a positive quarter, even with the volatility we saw in the last half of the quarter. Although we are glad to see a positive quarter, we may have several more months to run before we get the next bull market started. As we are still facing the same headwinds from the last four quarters – inflation, rising interest rates, War in Ukraine, and slower economic growth – we must remain patient and focused on long-term opportunities.
Beware of the negative sentiment we see in the media and the majority of the so-called market experts, as they could be wrong, and this bear market may be over sooner than most pundits expect. By the time the majority of people feel good about the stock market again, the next bull market will already be several months old.
Whatever may come, our Lord is still in control. We remain thankful for the provision, protection, and blessings that we received from our Heavenly Father and are looking expectantly to what God has in store for the remainder of 2023.
We thank each of you for bringing Glory and Honor to our Heavenly Father and our Savior Jesus Christ through Biblically Responsible Investing.
Darrell W. Jayroe, CFA, CFP®, CKA®
Senior Portfolio Manager
Darrell Jayroe, CFA, CFP, CKA, serves as Inspire’s Senior Portfolio Manager responsible for leading the firm’s Investment Committee, as well as serving as Lead Portfolio Manager for Inspire’s ETFs and SMA strategies. Darrell has been with the firm since 2016. Prior to joining Inspire, Darrell was a Vice President and Sr. Portfolio Manager for the Bank of Oklahoma trust department for 12 years where he was responsible for managing accounts for high net worth families, trusts, foundations and institutions. Darrell started his career as an investment advisor in 1994 with PaineWebber in Oklahoma City. Darrell received a B.A. and Masters degree from Southern Nazarene University in Bethany, Oklahoma. He is a CFA (Chartered Financial Analyst) charter holder and is a CFP® (Certified Financial Planner®) licensee. He is a member of the CFA Institute and a member and Past President of the CFA Society of Oklahoma. He is also a member of Kingdom Advisors and holds the CKA® (Certified Kingdom Advisor®) designation. Darrell and his wife, Beth, have been married since 1982 and have two daughters, a son in law and three grandchildren.
Contents
Q1 2023
In the first quarter of 2023, the US economy slowed from prior quarters but still maintained positive momentum. As a result, the much-anticipated recession, what some have called “the most predicted recession in history,” was held off yet again! Early estimates indicate that for the first quarter of 2023, U.S. Real (i.e., inflation-adjusted) Gross Domestic Product (GDP) grew 1.0% (annualized). This tepid growth comes on the heels of the economy’s surprising strength during the second half of 2022.
Despite this unexpected strength, the consensus view remains that the US economy will likely enter an official recession in 2023. The Treasury yield curve, inverted since last summer, confirms that outlook. Interestingly, forecasts are that the expected recession will be rather shallow and short. Specifically, modest declines in Real GDP are likely to be experienced in the remaining three quarters of 2023. But, given the strength seen in the first quarter, overall growth for the calendar year is projected to come in at 0.7%
While investors have been pleasantly surprised by the economy’s resilience, with the stock market responding favorably, the first quarter still had its challenges. Most notably, significant shocks were seen by some of the nation’s largest regional banks. These mid-sized financial institutions suffered substantial losses in their bond holdings as a result of the dramatic increase in interest rates in 2022. Those most at risk were those who had high levels of uninsured deposit exposure coming from concentrations in certain markets. At this point, with the support of regulators as well as other banks, the risk seems to be contained with little danger of contagion. However, investors should not be surprised if similar flare-ups occur in the coming months; it is difficult, if not impossible, to raise interest rates so dramatically without things breaking!
Along with the not-so-bad news about economic growth in the first quarter of 2023, the inflationary environment continues to improve. While still unacceptably high, inflation has begun to subside. The most recent reading came in at 5.0% (12-month Consumer Price Index change, March 2023), down from much higher levels, 9.1% in June, but still a long way away from the Fed’s target of getting back to 2.0%.
Perhaps the most puzzling economic indicator is the continued strength of the U.S. labor market. Despite restrictive monetary policies and recession worries, the Unemployment Rate for March came in at 3.5%, equaling a five-decade low, and average hourly earnings grew 4.2% over the prior 12 months. This bodes well for workers but will contribute to inflation’s continued persistence.
Against this backdrop of a growing economy, a healthy labor market, and softening inflation, all eyes are on the Federal Reserve as they consider the best path forward for monetary policy. Recent statements from the Federal Reserve officials signal that there are further Fed Funds rate hikes to come. Current market forecasts are that the “terminal rate” for Fed Funds is a half percent higher at 5.50%. Once reaching that level, some believe that there might be a need to quickly pivot to lowering rates if a recession materializes. Meanwhile, the Federal Reserve indicates its resolve to fiercely fight inflation is unwavering. It plans to leave overnight rates at those higher levels for the foreseeable future.
Slow growth, high inflation, and high interest rates are vexing investors in the international markets as well, but markets have been generally strong as low expectations have been exceeded. US-based investors are well-advised to ensure that they have sufficient global exposure in their portfolios, as the possibility of relative outperformance is tangible.
Looking forward, the economy and the markets give every appearance of being at an inflection point currently, either putting the recent slowdown in the rearview mirror or entering into a stagflationary period which might be difficult to emerge from. Therefore, investors must be steadfast in maintaining their investment strategy’s alignment with their financial goals . . . making investment decisions with their minds than with their hearts!
Sources:
Bureau of Economic Analysis
Bureau of Labor Statistics
International Monetary Fund
The Conference Board
The rally that started in the fourth quarter of 2022 continued to start the new year but lost steam in early February and pulled back until late March before finding support and rising to end the first quarter. The S&P 500 and the international markets regained momentum and finished the 1st quarter neck and neck, with the international markets edging out the S&P, 8.05% to 7.48%, respectively. The US mid-cap market was up 3.79%, edging out the US small-cap index that finished the quarter up 2.54%. The high inflation numbers, the continuing war against Ukraine by Russia, and a slowing economy have kept us in the “Correction Process” as the tug of war between the perma-bears and the new bulls continued in the quarter. While we may have a few more months before we can declare that a new Bull Market has begun, it is evident that the Bear market has lost much of its strength. We believe that it’s highly likely that the opportunity for positive returns over the next 12 to 18 months is higher than more downside risk. Although there are pundits out there that are still extremely pessimistic, one fact remains – all bear and bull markets eventually come to an end.
The past 12 months have given us not only the correction we have been expecting since the Pandemic recovery but ushered in a simultaneous bear market in global stocks and bonds. The good news is that the worst year in the equity and bond markets is behind us, and it appears that the low of the markets in September and October of 2022 was the low of the bear market. The curvature of the market pattern for the past 12 months gives credence to the belief that although the market will remain volatile in the first half of 2023, the lows should continue to be higher than the previous lows. We still have the potential of 1 or 2 more interest rate increases, a stubbornly high inflation rate, and an economy that is expected to slow to the point that confirms the much-anticipated recession will be headwinds for the remainder of the year. Over the past year, the S&P 500 had a total return of -7.75%, the S&P 400 Mid-cap index was down -5.17%, the S&P 600 Small-cap index was down -8.88%, and the international markets fell only -2.72%. It seems like some of the pundits and talking heads on the financial news networks are even more bearish now than at the first of the quarter, with some still expecting another 20% to 30% downside from here. With so much negativity in the markets and in the financial media, “contrarians” believe that this could be a confirming signal that the bottom may have been in October.
Economic Indicators and Calendar
(Source: Bloomberg)
Inflation rose to 0.5% (Month over Month) in January, above expectations of 0.40%, and fell to 0.40% (Month over Month) in February. The expectation for the month-over-month number in March to fall to 0.20% was released on April 12th and fell more than expectations to 0.10%. If we can see month-over-month numbers stay in the 0.0% to 0.20% territory for the next several months, then the CPI year-over-year number will come back towards the 2.5% level over the next 12 to 18 months.
(Source: Bloomberg) (A= Advance; S= Second: T= Third)
GDP growth came in stronger than the initial expectation of 2.6% for the 4th Quarter, with an actual 2.9% for the quarter in the Advance Release but came in line with the Third revision at 2.6%. The debate among economists and market pundits changed during the 1st quarter from “When will the recession start” to “When will the recession end.” Although there has been no definite proclamation of a recession yet, it is highly likely we will hear that announcement sometime before the end of 2023.
Source: Bloomberg
The Unemployment rate ticked down to 3.4% in January after dropping to 3.5% in December. We saw an increase in February to 3.6% and a subsequent drop back to 3.5% in March. It is possible we could see unemployment start to rise in the 2nd quarter of 2023 as the economy slows and layoffs increase; however, with so many jobs still open and unfilled in the US, those laid off may not add to the unemployment roles for long, if at all.
Nonfarm Payrolls continue to have solid monthly numbers and may remain strong in the face of a recession as those laid off in the coming months may be able to fill some of the 9 million job openings in the US. If the employment picture remains this robust in the face of rising interest rates, the Federal Reserve will not be inclined to curb its enthusiasm for higher interest rates as they want to see unemployment rise to 5 or 6%.
Source: Bloomberg
The Federal Open Market Committee raised the Federal Funds rate by 0.25% in February and 0.25% in March, as expected. Due to the slowing economy and the banking crisis that came to light during the last month of the quarter, the interest rate increases are likely closer to the end than some thought just a few months ago. Based on Chair Powell’s recent comments, we should expect a rate hike of 0.25% at the May meeting and possibly at the June meeting, with a potential terminal rate of 5.25%. As the Federal Reserve was late to start raising interest rates, it will not be surprising to see that they may have already raised interest rates too high, causing unnecessary damage to the economy and the banking sector in their efforts to bring inflation down.
(Source: Bloomberg)
Past performance is no guarantee of future results. The performance data quoted here represents past performance. Current performance may be lower or higher than the performance data quoted above. Investment return and principal value will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. For performance data current to the most recent month end, please call 877.658.9473.
(Source: Bloomberg)
Past performance is no guarantee of future results. The performance data quoted here represents past performance. Current performance may be lower or higher than the performance data quoted above. Investment return and principal value will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. For performance data current to the most recent month end, please call 877.658.9473.
(Source: Bloomberg)
Past performance is no guarantee of future results. The performance data quoted here represents past performance. Current performance may be lower or higher than the performance data quoted above. Investment return and principal value will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. For performance data current to the most recent month end, please call 877.658.9473.
—Matt Melott, Manager
Past performance is no guarantee of future results. The performance data quoted here represents past performance. Current performance may be lower or higher than the performance data quoted above. Investment return and principal value will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. For performance data current to the most recent month end, please call 877.658.9473.
(Source: Bloomberg)
Past performance is no guarantee of future results. The performance data quoted here represents past performance. Current performance may be lower or higher than the performance data quoted above. Investment return and principal value will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. For performance data current to the most recent month end, please call 877.658.9473.
Past performance is no guarantee of future results. The performance data quoted here represents past performance. Current performance may be lower or higher than the performance data quoted above. Investment return and principal value will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. For performance data current to the most recent month end, please call 877.658.9473.
—Jacob Chandler, Manager
(Source: Bloomberg)
Past performance is no guarantee of future results. The performance data quoted here represents past performance. Current performance may be lower or higher than the performance data quoted above. Investment return and principal value will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. For performance data current to the most recent month end, please call 877.658.9473.
(Source: Bloomberg)
Past performance is no guarantee of future results. The performance data quoted here represents past performance. Current performance may be lower or higher than the performance data quoted above. Investment return and principal value will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. For performance data current to the most recent month end, please call 877.658.9473.
The yield curve fell across the spectrum except for the shortest part of the curve (six months and shorter), bringing a rally to the fixed-income markets. Interest rates for the 1-month to 6 months maturities all went up in the 1st quarter, while the 1-year to the 30-year bonds fell as the Federal Reserve let up on the gas pedal slightly, with interest rate increases of only 25 bps in both February and March.
As of the end of the 1st quarter, the 1-year US Treasury yield decreased from 4.710% to 4.619% (a nine basis point decrease) vs. the 10-year US Treasury, which fell almost 41 bps from 3.877%to 3.47%. Analysts failed in their prediction that the 10-year rate would hit 4.5% by now.
The 2-year U.S. Treasury yield decreased from 4.429% to 4.027%, the 5-year yield fell from 4.005% to 3.576% (a decrease of almost 43 bps), and the 30-year treasury fell from 3.966% to finish the quarter at 3.651% (a decrease of 31 bps).
The probability of a recession is still high as the economy is slowing. However, with strong employment numbers and consumer spending, a recession is still avoidable if the Federal Reserve will not push its rate increase process too far.
(Source: Bloomberg)
Past performance is no guarantee of future results. The performance data quoted here represents past performance. Current performance may be lower or higher than the performance data quoted above. Investment return and principal value will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. For performance data current to the most recent month end, please call 877.658.9473.
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 support 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 that could worsen, 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. 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 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 broke about the banking sector.
Corporate Profits
As we are heading into 2023, there are signs that earnings are starting to fall. Indeed, most companies in the S&P 500 are reporting that profits 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 closely monitor 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 the course. Some suggest 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 both China and the US have dialed up the rhetoric in recent weeks.
The markets have started to show signs that this Bear Market may be ready to go into hibernation as we started the year with a positive quarter, even with the volatility we saw in the last half of the quarter. Although we are glad to see a positive quarter, we may have several more months to run before we get the next bull market started. As we are still facing the same headwinds from the last four quarters – inflation, rising interest rates, War in Ukraine, and slower economic growth – we must remain patient and focused on long-term opportunities.
Beware of the negative sentiment we see in the media and the majority of the so-called market experts, as they could be wrong, and this bear market may be over sooner than most pundits expect. By the time the majority of people feel good about the stock market again, the next bull market will already be several months old.
Whatever may come, our Lord is still in control. We remain thankful for the provision, protection, and blessings that we received from our Heavenly Father and are looking expectantly to what God has in store for the remainder of 2023.
We thank each of you for bringing Glory and Honor to our Heavenly Father and our Savior Jesus Christ through Biblically Responsible Investing.