The 1st quarter continued the rally that the markets kicked off in the last couple of months of 2023, although the strong momentum of the Small Cap market in the last half of December faded to start 2024. The S&P 500 Index was able to finish the quarter ahead of the Mid Cap index, with both outpacing the International index and the Small Cap Index lagging behind. Investors continued to be optimistic about the economic recovery as fear of higher interest rates seems to be off the table. The S&P 600 Small Cap index ended the quarter with an unimpressive gain of 2.45%, while the S&P 500 and the S&P 400 Mid Cap indexes posted gains of 10.55% and 9.94%, respectively. The S&P International 700 Index exhibited a similar track by starting the quarter in line with the US markets and finishing with a positive performance of 5.88%.

Over the past 12 months, the stock market witnessed a generally positive trajectory across all the major equity indexes. The S&P 500 experienced significant growth during this period, reflecting a strong rebound from the bear market of 2022, turning in a one-year number of 29.86%. Similarly, the S&P 400 and S&P 600, representing mid-cap and small-cap companies, also enjoyed overall gains. The S&P 400 Mid-Cap index posted a one-year return of 23.29%, outpacing the S&P 600 Small Cap index, which returned 15.83% during the same time frame. These indexes benefited from the broader market rally, driven by optimism about economic recovery and hopes that if a recession actually comes in 2024, it will be a relatively “soft landing”. As for the S&P International 700 index, it followed a similar pattern with variations influenced by regional economic factors and geopolitical events, fell short of the US Large Cap market, and slightly underperformed the US Small market with a respectable 12-month return of 15.63%. Overall, the past 12 months exhibited positive market sentiment even while facing continued headwinds of inflation numbers not falling as fast as the markets previously had hoped. Even though we are in the first innings of the new bull market and markets will probably still move higher over the next 12 to 24 months, there is a high probability that we could see some profit taking, which could give us a 10%+ correction during the next few months. If that happens, remain invested and stay focused on the long-term opportunities in a well-diversified global portfolio.

Economic Indicators and Calendars

(Source: Bloomberg)

Inflation came in at 0.30% (month over month) in January, beating the expectation of a 0.20% increase, and rose again by 0.40% (month over month) in February, which was in line with expectations. The estimates for the month over month number in March was for an increase of 0.3% but came in at +0.40% when released on April 10th, exceeding expectations by 10 bps. This hotter than expected number is not good as we need to see month over month numbers stay in the 0.0% to 0.20% territory for the next several months so that the CPI year over year number can come back towards the 2 to 2.5% level over the next 12 months.

(Source: Bloomberg)     (A= Advance; S= Second: T= Third)

GDP growth came in stronger than the initial expectation of +2% for the 4th quarter, with an actual +3.3% growth rate for the quarter in the Advance Release and, although being revised downward to 3.2% for the Second release, came in at 3.4% with the Third revision slightly higher than the initial release. The debate among economists and market pundits continued during the 4th quarter as to “how deep will the recession be,” even though there has been no definite proclamation of a recession for the past two years that it has been expected.  

According to the Bloomberg survey, the probability of a recession has dropped from 65% in July to only 40% currently. The yield curve (10s—2s) remains inverted; note that a recession is often called shortly after the inversion corrects.

(Source: Bloomberg)

The Unemployment rate rose to 3.9% in February after staying at 3.7% in December and January. In March, we saw the unemployment rate drop back to 3.8%, meeting expectations. It is still possible we could see unemployment rise above 4% in 2024 as the economy slows and if layoffs increase; however, with so many jobs still open and unfilled in the US, it may take some time before those laid off add to the unemployment rolls.

Nonfarm Payrolls continue to have solid monthly numbers, with March coming in at 303k new jobs, which is much stronger than the estimates of 210k. If job growth remains this strong in the face of a potential recession, the Federal Reserve will not be inclined to cut interest rates as soon as some analysts are predicting. We are now discounting the possibility that there will be no interest rate cuts in 2024.

(Source: Bloomberg)

The Federal Open Market Committee left the Federal Funds rate unchanged during the first two meetings of 2024 as no one believes there will be any further interest rate increases in this cycle. Based on Chair Powell’s recent comments, we should not be surprised if we don’t see a rate cut until later this year, if at all, as he has reiterated that they will remain data-driven. The data shows a stronger than expected economy, although many analysts fully expect the rate cut cycle to begin before the end of 2024. As the Federal Reserve was late to start raising interest rates, it is highly likely that they will be late to cut interest rates as the economy starts to slow, causing unnecessary damage to the economy in their efforts to avoid sparking more inflation.

• BLES underperformed the S&P Global 1200 index during the 1st quarter with a return of only 5.64% vs 9.00% for the global index.
• With the disappointing performance of the International markets in relation to the US Large Cap market during the 1st quarter, BLES diverged from the global index for the quarter in a negative way.
• It appears that the underperformance of BLES to the global index is attributable to strong underperformance in the African and Middle Eastern regions as well as weaker performance in Western Europe and the Asia Pacific regions.
• We believe the tilt to the smaller end of the large cap spectrum of BLES will show favor as the economic numbers continue to improve over the next 6 to 12 months.

(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.

• FDLS underperformed the MSCI All Country World ETF by -411 bps and underperformed the S&P 500 Index by -646 bps. After a weak start to the quarter, FDLS climbed during the last two months to peak in late March and finish with a quarterly return of only 4.09%.
• The equal weight exposure to different stocks in relation to the market cap weighted S&P 500 during the quarter was the main contributor to the underperformance for the 1st quarter.
• We continue to believe that the globally diversified allocation of FDLS to U.S. 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 as the new bull market gains momentum but will not always be in favor relative to the broad markets.

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.

• GLRY continued the strong upward ‘momentum’ from the rally that started in the 4th quarter of 2023, which saw broad markets break out from the correction. GLRY outperformed the S&P 400 Midcap index to start 2024 strong, ending the quarter up +13.05% versus +9.94% for the index.
• 2023 was a rollercoaster ride for investors, especially those outside of the Magnificent Seven or market-weighted indices. Q1 was a market for securities that didn’t participate as much in earlier bullish moves, and investors in midcap space saw high single or even double digit returns in the past three months.
• The rally has been tied to the view that the FED would cut interest rates sooner, which is historically good for equities and even more so small to midcap companies. Our expectation for 2024 is that market movement will be highly correlated to FED intent and then action (or inaction). We want to remain nimble in any environment, as a correction could come if the FED telegraphs that the interest rate cuts will be further down the road than expected.
• Looking ahead, the methodology has not changed, and we will continue looking for great companies using the FEVRR methodology. We will find companies that have strong financial health and sustainable earnings, which allows them to make strategic decisions in a similar or lower rate environment. We will also find companies that have attractive valuations and price momentum, which assists with entry and exit points.

(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.

• ISMD outperformed the S&P Small Cap 600 Index by 199 bps but underperformed the S&P Midcap 400 Index by 551 bps for the 1st quarter, giving ISMD a total quarterly return of only 4.44%.
• The mid-cap markets continued the strength of the previous quarter to start 2024 with momentum similar to the US Large Cap market, but the US Small Cap market gave up the momentum that led all markets to end the 4th quarter of 2023 to lag all other markets so far in the new year.
• The equal weighting of the 500 stocks in ISMD was in line with the market cap weighted small and midcap indexes, showing that the correlation in the small and midcap markets and ISMD remains strong.

(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.

• RISN returned +7.89% in the first quarter on a total return basis, outperforming the S&P Target Risk Moderate T.R. Index benchmark, which returned +3.08%.
• We attribute this quarter’s performance to our continued elevated allocation to equities, which began in July and remained through the first quarter. We increased the equity allocation to approximately 80% and have remained at that level. The overall U.S. stock market experienced a considerable increase in value in the first quarter, buoying our equity position for the period.
• Additionally, our improved screening criteria that we use to select the stocks within the equity allocation of the fund that focuses on Large Cap, biblically aligned stocks with good historical revenue/profit growth, low debt, high returns on invested capital that are selling at a lower P.E. ratio compared to their historical average has proven beneficial, and we will continue using this method for the foreseeable future.
• We continue to hold short term floating rate government bonds as the “defensive” position for the 20% of the fund that is not allocated to equities, and plan to remain here until it looks like the FED begins to lower short term rates.

—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.

• WWJD was up only 1.76% in the 1st quarter, underperforming the S&P International 700 TR Index return of 5.88%, a disappointing underperformance of -412 basis points.
• It appears that the underperformance of WWJD to the International index is attributable to strong underperformance in the Africa and middle east region as well as weaker performance in Western Europe and the Asia Pacific regions.
• Being highly correlated with the index during most of the quarter shows that the diversification of the fund with only 200 positions is well positioned to compete against the international index with 700 positions in the coming year.
• We remain confident that the discipline of the fund should allow for outperformance of WWJD in the coming year as it is equally weighted, and the index is market cap weighted.

(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.

• IBD was up only 0.05% in the 1st quarter, slightly underperforming the fixed income benchmark of the Bloomberg Barclays US Intermediate Credit Index, which was up only 0.20% as well.  
• The unexpected and dramatic increase in the yield curve brought negative to flat performance for intermediate bonds in Q1 as well as the longer end of the yield curve.
• With the high probability of the Federal Reserve having completed its process of raising interest rates over the past two years, it is possible that the yield curve could shift in a parallel fashion to the downside in the 2nd quarter, allowing for a return to positive performance during the next 3 to 6 months.

(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, and Central Bank Response

The February CPI month-over-month reading was 0.4%, which was in line with expectations. Year-over-year inflation is up to 3.2%, 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%, which are expected to fall starting in mid-2024. Many investors believe 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 remains on the table. We will continue to keep a close eye on growth figures going forward.

Geopolitical Risks

The global capital markets continue to face several geopolitical risks in 2024, which could significantly impact investor sentiment and market stability. One key concern is the ongoing war in Israel and the Middle East against the terrorist proxies of Iran in Hamas, Hezbollah, and the Houthi rebels. Although this has not caused a disruption in the oil supply from the Middle East yet, that could change if the conflict spreads due to increased belligerence from Iran. The Russia/Ukraine war appears to have reached a stalemate, but neither side is showing any willingness to negotiate an end to the fighting yet. Political conflicts with China can also introduce instability and raise concerns about the business environment in the next several months. The heated political environment here in the US is also something to consider as everyone shifts their attention to the presidential election in November. This could result in increased market uncertainty, fluctuations in stock prices, and the need for us to closely monitor global and domestic developments and assess their potential impacts.

The markets are flashing signals that we fully into the first leg of the new bull market and are glad to see good positive performance this past quarter. Although we don’t like to see a negative quarter, that does happen periodically, even during the first stages of a new bull market. We will not be surprised to see some profit taking during the second quarter, bringing us a fairly normal correction of -10% or more in the next few months. However, if this does happen, it would not change our conclusion that the new bull market is in the early innings. As we are still facing the same headwinds from the last couple of years – inflation, high interest rates, war in Ukraine, war in Israel and an upcoming presidential election– we need to remain patient and focused on long term opportunities.

Whatever may come, our Lord is still in control. We remain thankful for the provision, protection, and blessings that we receive from our Heavenly Father and are looking expectantly to what God has in store for the rest of 2024 and beyond.

We thank each of you for bringing Glory and Honor to our Heavenly Father and our Savior Jesus Christ as you serve your clients through Biblically Responsible Investing.