In the second quarter, economic growth in the United States continued to slow in the wake of the torrid, stimulus-fueled growth seen last year. Early estimates are that U.S. Real (inflation-adjusted) Gross Domestic Product (GDP) declined another – 1.2% (annualized) in Q2 2022 after declining -1.6% in Q1 2022. While the eight-member Business Cycle Dating Committee of the National Bureau of Economic Research (NBER) is viewed as the official arbitrator of a “recession” determination, conventional wisdom is that two consecutive quarters of economic decline determines a recession. Therefore, it would be reasonable to conclude that we are already in a recession with the only questions remaining being “how long will it last?” and “how deep will it go?”
After such a dramatic spike, slowing economic growth was to be expected. However, the unfortunate slide into negative territory is attributable to other factors, most notably the on-going Russian military incursion into Ukraine which has significantly disrupted energy and agricultural markets in the midst of already fragile global supply chains.
Meanwhile, despite the high probability of entering a recession, the Federal Reserve Bank has been desperately fighting on the opposite front against inflation which at one point was viewed as transient, but now is considered a more persistent threat. Over the past 12 months, the bellwether inflation index, the Consumer Price Index (CPI), has jumped 8.6% which has caused widespread concerns as households face drastically higher prices in almost all categories, not the least of which are gasoline and good costs. As a result, the overnight Fed Funds Rate is now at up to 1.75% with more significant hikes to come as the Federal Reserve races to prevent inflation expectations settling into the general economic mindset. Further, Quantitative Tightening is underway as the Fed seeks to shrink is massive balance sheet.
Despite these economic headwinds, American workers are still sitting pretty at this point. Workers, for the first time in decades, find themselves with significant bargaining power given a very favorable labor market. The recently released jobs report showed 372,000 jobs were added to the economy in June and the unemployment rate remaining at a very low 3.6%, very close to its pre-pandemic reading of 3.5% (February 2020). Surprisingly, still after 30 months, the number employed is still below its February 2020 pre-pandemic level. This is due largely to labor supply constraints as the labor force participation rate, the share of adults working or seeking a job, remains stubbornly low (62.2% in June).
The international economy continues to follow that of the U.S. as both developed and emerging markets similarly face slowing economies, high inflation, and rising interest rates. As a result of the interest rate and inflation differentials, international currencies have been weakening versus the US dollar. This is beneficial for those countries’ export-focused industries, but also exacerbates inflationary pressures with higher priced imports and commodity prices.
Against this backdrop, going forward investors need to be alert to the significant risks of stagflation. Continued increases in inflation and interest rates will lead to lower bond prices and likely feed trough to repricing of equity valuations. Investors are left to discern when conditions will start to improve, and the bottom reached.
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 second quarter saw an acceleration of the correction that began in the first quarter. The S&P 500 regained its leadership position but in the negative direction finishing the quarter with a loss of -16.11%. All the major US markets continued to fall and breached the -20% bear market threshold, on a year-to-date basis, during the middle of June, found a slight support rally, then finished the quarter with negative momentum. The notable exception was the S&P International 700 Index, which didn’t hit the bear market line yet. After raising interest rates in March by 0.25%, the Federal Reserve increased the velocity of their rate increases by raising rates by 0.50% in May and 0.75% in June. The probability of rate increases of 0.5% to 0.75% at each of the remaining Federal Reserve meetings this year has kept the equity markets on slippery ground this quarter. The high flying inflation numbers, the war against Ukraine by Russia, and a slowing economy only gave additional fuel to the “Correction Process” mentioned last quarter, pushing the markets into bear market territory. We may still have several months before seeing the light of day of the next bull market cycle, but we do not believe it is time to panic. The opportunity for positive returns over the next 12 months could be higher than more downside risk. Don’t let fear drive investment decisions that would be better served by patience.
Source: Bloomberg
The past 12 months have been an emotional and volatile ride for all markets. From the rise of the Omicron Variant in the 4th quarter of 2021, the pain of inflation during the last half of 2021 and continuing into the first half of 2022, the slowing economy and rising interest rates, and the invasion of Ukraine by Russia, it is amazing that the markets aren’t down more than they already are. In the past 12 months, the S&P 500 had a total return of -8.86%, the S&P 400 Mid-cap index was down -12.71%, and the S&P 600 Small-cap index was down -14.82%. The US markets won the trifecta against the international markets (again) that fell the most with a return of -17.32%. With so much negativity in the markets and the financial media, “contrarians” are seeing all this as a signal that the bottom may have been reached and positive returns in the next two quarters are more likely. With this added information, we would not be surprised if the US markets finished 2022 in positive territory.
Source: Bloomberg
Economic Indicators and Calendar
Inflation - CPI Month over Month
Release Date & Time
Period
Survey
Actual
CPI MoM
01/12/2022 08:30
Dec
0.40%
0.50%
CPI MoM
02/10/2022 08:30
Jan
0.40%
0.60%
CPI MoM
03/10/2022 08:30
Feb
0.80%
0.80%
CPI MoM
04/12/2022 08:30
Mar
1.20%
1.20%
CPI MoM
05/11/2022 08:30
Apr
0.20%
0.30%
CPI MoM
06/10/2022 08:30
May
0.70%
1.00%
CPI MoM
07/13/2022 08:30
Jun
1.10%
1.30%
CPI MoM
08/10/2022 08:30
Jul
CPI MoM
09/13/2022 08:30
Aug
CPI MoM
10/13/2022 08:30
Sep
CPI MoM
11/10/2022 08:30
Oct
CPI MoM
12/13/2022 08:30
Nov
CPI MoM
1/10/2023 08:30
Dec
Source: Bloomberg
Inflation hit the 1.20% number (month-over-month) in March, in line with expectations, and fell to only 0.30% (month-over-month) in April. This relief was short lived as inflation spiked again in May to 1.0% and 1.3% in June (month-over-month). It appears that we may see the month-over-month numbers start to fall in the last half of 2022 as energy prices have peaked and the strong housing market is showing signs of slowing as mortgage rates have nearly doubled since the start of the year.
GDP growth came in weaker than the initial expectation of +0.8% for the 1st Quarter, with an actual -1.6% for the quarter in the Third revision. There has been a debate among economists and market pundits during the 2nd quarter whether we are already in a recession or if we will avoid the recession with a positive GDP number in Q2. Although there are valid arguments on both sides of this issue, we will have to wait until the end of July when the Advance number will be released for the 2nd Quarter.
Labor Market
Release Date & Time
Period
Survey
Actual
Revised
Unemployment Rate
1/7/2022 8:30
Dec
4.1%
3.9%
Unemployment Rate
2/5/2022 8:30
Jan
3.9%
4.0%
Unemployment Rate
3/4/2022 8:30
Feb
3.9%
3.8%
Unemployment Rate
4/1/2022 8:30
Mar
3.7%
3.6%
Unemployment Rate
5/6/2022 8:30
Apr
3.5%
3.6%
Unemployment Rate
6/3/2022 8:30
May
3.5%
3.6%
Unemployment Rate
7/8/2022 8:30
Jun
3.6%
3.6%
Unemployment Rate
8/5/2022 8:30
Jul
Unemployment Rate
9/2/2022 8:30
Aug
Unemployment Rate
10/7/2022 8:30
Sep
Unemployment Rate
11/4/2022 8:30
Oct
Unemployment Rate
12/2/2022 8:30
Nov
Nonfarm Payrolls (Change)
1/7/2022 8:30
Dec
444k
199k
647k
Nonfarm Payrolls (Change)
2/5/2022 8:30
Jan
51k
467k
588k
Nonfarm Payrolls (Change)
3/4/2022 8:30
Feb
424k
678k
504k
Nonfarm Payrolls (Change)
4/1/2022 8:30
Mar
469k
431k
714k
Nonfarm Payrolls (Change)
5/6/2022 8:30
Apr
386k
428k
398k
Nonfarm Payrolls (Change)
6/3/2022 8:30
May
323k
390k
436k
Nonfarm Payrolls (Change)
7/8/2022 8:30
Jun
270k
372k
Nonfarm Payrolls (Change)
8/5/2022 8:30
Jul
Nonfarm Payrolls (Change)
9/2/2022 8:30
Aug
Nonfarm Payrolls (Change)
10/7/2022 8:30
Sep
Nonfarm Payrolls (Change)
11/4/2022 8:30
Oct
Nonfarm Payrolls (Change)
12/2/2022 8:30
Nov
Nonfarm Payrolls (Change)
12/2/2022 8:30
Nov
Source: Bloomberg
The Unemployment rate has remained steady at 3.6% for the past three months and is not expected to fall for June due out on July 8th. It is possible we may see unemployment start to rise in the last half of 2022 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 strong monthly numbers and may remain strong in the face of a recession as those that are laid off in the coming months may be able to fill some of the 7 million job openings in the US. It is also possible that if the economy slows too much, many of those open jobs may evaporate like the memory of gasoline at $3 a gallon from this time last year.
Monetary Policy - Federal Reserve
Meeting Date
Rate Decision (%)
For
Against
FOMC Meeting
01/26/2022
.00-.25
9
0
FOMC Meeting
03/16/2022
.25-.50
8
1
FOMC Meeting
05/04/2022
.50-.75
9
0
FOMC Meeting
06/15/2022
1.50-1.75
10
1
FOMC Meeting
07/27/2022
FOMC Meeting
09/21/2022
FOMC Meeting
11/02/2022
FOMC Meeting
12/14/2022
Source: Bloomberg
With elevated inflation and strong employment, the Fed has indicated it will focus on curtailing inflation, even amid geo-political turmoil and negative 1q2021 GDP. It raised the Federal Funds rate 0.25% in March, 0.50% in May, and 0.75% in June (the largest increase since 1994). Based on Chair Powell’s recent comments, we should expect a rate hike in the 0.50% to 0.75% range in July. The Fed Funds rate is now expected to finish the year above 3.0%.
Inspire 100 ETF [NYSE: BIBL]
BIBL underperformed the S&P 500 Index by almost 300 bps due almost entirely to the selection of Healthcare stocks in the fund vs the index. Stock selection within Materials and an underweight to the Consumer Staples also detracted from results.
The underweight BIBL has to Consumer Discretionary to the S&P 500 – 2.55% vs 11.16% respectively was one of the areas that helped keep the fund as close as it was to the index for the quarter.
The three other sectors that were positive for BIBL vs the S&P 500 were Information Technology, Industrials and Communication Services
Although flirting with Bear Market territory in June the fund was able to finish the quarter in Correction territory, but just barely. No pun intended.
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
6/30/2022
. 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]
BLES performed in line with the S&P Global 1200 Index for the 2nd Quarter, underperforming by only 54 bps.
Global markets mirrored the US large-cap market as the correction touched Bear Market territory briefly before bouncing slightly to finish the quarter slightly above the Bear Market line.
We believe that the tilt to the smaller end of the large-cap spectrum of BLES will come back into favor as the economic recovery continues at a slower pace due to high inflation and rising interest rates.
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
6/30/2022
. 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%.
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
6/30/2022
. 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]
The US Mid Cap space is in no way immune to higher rates and further recession concerns, but the risks are different in size and scope.
Mid cap companies are nimbler from a structural standpoint than large cap, such as with supply chain or product offerings, but higher interest rates will have more of an impact on the bottom line than their larger counterparts.
We view avoiding major pitfalls will be more beneficial than theorizing which companies will perform the best in the near future.
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
6/30/2022
. 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]
Although in line with the Small Cap and Mid Cap markets, ISMD outperformed both the S&P Midcap 400 index and the S&P Small cap 600 Index by 211 bps and 80 bps respectively for the 2nd quarter.
Touching the Bear Market threshold in Mid-June the small and mid-cap markets finished the quarter still in Correction territory.
The equal weighting of the 500 stocks in ISMD helped minimize the negative momentum of the quarter vs the market cap weighting of the small and midcap indexes.
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
6/30/2022
. 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 -5.56% in the 2nd Quarter and fund outperformed the S&P Target Risk Moderate TR Index benchmark for the quarter, which returned -8.98%
This outperformance for the quarter is due to our positioning the fund in a conservative allocation with regards to the stock market
The shorter duration bond holdings have helped to minimize volatility in the fund for the quarter.
The first adjustment that we made to the allocation of the fund (RISN) in the 2nd quarter, was to reduce the allocation to stocks from an 20% allocation at the beginning of the quarter, to a 10% allocation at the end of April. Our indicators continued to gain momentum in the downward direction, causing us to continue to reduce our exposure to large cap US equities.
The second adjustment that we made to the allocation, was to adjust the allocation to gold. In the middle of May, our indicators turned negative for gold, and we decided to reduce our allocation from 20% down to 10% until the trend changes direction.
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.
For the time being, we do not anticipate this will be the case in the near term and may continue holding this more conservative allocation until things in the US economy and equity markets decide to change course.
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 down -15.36% in the 2nd quarter underperforming the S&P International 700 TR Index return of -13.78%; an underperformance of 158 basis points.
The underperformance is most likely due to the resurgence of Chinese stocks in the quarter. Although Chinese stocks are a large portion of the index, we have chosen not to hold any stocks in China due to the human rights abuses by the CCP.
Keep in mind that WWJD is equally weighted, and the index is market cap weighted and WWJD holds 200 positions vs. the index 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
6/30/2022
. 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 RISES - Although the yield curve stayed relatively flat in the 2nd quarter it rose in a parallel fashion across all maturities. Interest rates from 1 month to 30 years all went up in the 2nd quarter as the Federal Reserve accelerated the interest rates increases from 25 bps in March to 50 bps in May and 75 bps in June.
As of the end of the 2nd quarter, the 1-year US Treasury yield increased from 1.607% to 2.777 (a 117 bps increase) vs the 10-year US Treasury which rose from 2.341% to 3.016% (for a 67 bps rise). Some analysts are now predicting that the 10-year rate will hit 4% before the end of 2022.
The 2-year U.S. Treasury yield increased from 2.337% to 2.957%, the 5-year yield rose from 2.462% to 3.04% and the 30-year treasury rose from 2.45% to finish the quarter at 3.185%.
The recent talk about the “Yield Curve Inverting” has subsided as the debate continues on whether we are already in a recession or if the recession is still something we will have to deal with in the next 6 to 12 months. The probability of a recession has increased as the economy is slowing and although consumer demand has not abated there is a significant increase in inventories as the supply chain issues have started to see resolution.
Source: Bloomberg 06-30-2022
Inspire Corporate Bond ETF [NYSE: IBD]
IBD was down -3.72% in the 2nd quarter slightly underperforming, but inline with the fixed income benchmark of the Bloomberg Barclays US Intermediate Credit Index which was down -3.63%.
The parallel shift upward in the yield curve caused negative performance for the bond market in Q2 due to two interest rate increases by the Federal Reserve in the second quarter, one in May (50 bps) and one in June (75 bps).
Economic growth continues to slow and with the increased probability of a recession, it is highly likely that the yield curve could shift in a parallel fashion to the downside in the 3rd and/or the 4th 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
6/30/2022
. 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
Geopolitical Risks and Volatility – With the Russian/Ukrainian war past the 4-month mark, it still remains unclear how long the conflict will last or how it will end. Despite the increased sanctions and military aid from the West, Russia seems to have plenty of revenue from high oil prices to finance both the war and economic relief packages to keep its citizens appeased with the conflict. The key question seems to be what will a post-Russian victory look like and how will the West respond? With so much geo-political, fiscal, and monetary uncertainty, volatility (in both directions) will remain elevated in the coming weeks and months.
Inflation and Employment – The June CPI numbers remained elevated with a month-over-month reading of 1.3%. Over the past 12 months, inflation hit 9.1%, higher than the 8.8% reading analysts were predicting and showing the Fed is still behind the inflation curve. The US job market continues to show improvement with lower readings on initial and continuing jobless claims and unemployment remaining at 3.6% in June, essentially matching the pre-pandemic low of 3.5%. We will continue to closely monitor monthly inflation readings as this will undoubtedly impact capital market returns and volatility in the months and years ahead.
The Consumer and GDP – First quarter economic growth figures caught most economists by surprise as real GDP declined at a -1.6% annual rate versus the consensus growth of 1.0%. We will continue to keep a close eye on consumer confidence, spending, and growth. With many pundits saying we are technically already in a recession (two consecutive quarters of negative GDP growth), it wouldn’t be a surprise to see a rebound in the second quarter given that consumer spending and business fixed investment remain strong.
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 don’t expect to see a continuation of this rise in profits in 2022 and are watching earnings reports very closely going into the 3rd quarter. We are beginning to see negative earnings surprises, particularly in the consumer discretionary, communication services, and utilities sectors. The market hasn’t punished negative earnings surprises this much in years and has even punished positive earnings surprises. 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.
Closing Remarks
The markets remain solidly involved in the correction process and finished the quarter with negative performance even after bouncing off the “Bear Market” level as support. Markets can’t go down forever, and we may have several more months to run before we start the next bull market. We are facing the same headwinds from last quarter for the foreseeable future – inflation, rising interest rates, War in Ukraine, and slower economic growth. However, we need to remain patient. The more negative sentiment we see in the media, the higher the probability is that they are wrong, and this bear market may be over sooner than most pundits expect. 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 2022.
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
Q2 2022
In the second quarter, economic growth in the United States continued to slow in the wake of the torrid, stimulus-fueled growth seen last year. Early estimates are that U.S. Real (inflation-adjusted) Gross Domestic Product (GDP) declined another – 1.2% (annualized) in Q2 2022 after declining -1.6% in Q1 2022. While the eight-member Business Cycle Dating Committee of the National Bureau of Economic Research (NBER) is viewed as the official arbitrator of a “recession” determination, conventional wisdom is that two consecutive quarters of economic decline determines a recession. Therefore, it would be reasonable to conclude that we are already in a recession with the only questions remaining being “how long will it last?” and “how deep will it go?”
After such a dramatic spike, slowing economic growth was to be expected. However, the unfortunate slide into negative territory is attributable to other factors, most notably the on-going Russian military incursion into Ukraine which has significantly disrupted energy and agricultural markets in the midst of already fragile global supply chains.
Meanwhile, despite the high probability of entering a recession, the Federal Reserve Bank has been desperately fighting on the opposite front against inflation which at one point was viewed as transient, but now is considered a more persistent threat. Over the past 12 months, the bellwether inflation index, the Consumer Price Index (CPI), has jumped 8.6% which has caused widespread concerns as households face drastically higher prices in almost all categories, not the least of which are gasoline and good costs. As a result, the overnight Fed Funds Rate is now at up to 1.75% with more significant hikes to come as the Federal Reserve races to prevent inflation expectations settling into the general economic mindset. Further, Quantitative Tightening is underway as the Fed seeks to shrink is massive balance sheet.
Despite these economic headwinds, American workers are still sitting pretty at this point. Workers, for the first time in decades, find themselves with significant bargaining power given a very favorable labor market. The recently released jobs report showed 372,000 jobs were added to the economy in June and the unemployment rate remaining at a very low 3.6%, very close to its pre-pandemic reading of 3.5% (February 2020). Surprisingly, still after 30 months, the number employed is still below its February 2020 pre-pandemic level. This is due largely to labor supply constraints as the labor force participation rate, the share of adults working or seeking a job, remains stubbornly low (62.2% in June).
The international economy continues to follow that of the U.S. as both developed and emerging markets similarly face slowing economies, high inflation, and rising interest rates. As a result of the interest rate and inflation differentials, international currencies have been weakening versus the US dollar. This is beneficial for those countries’ export-focused industries, but also exacerbates inflationary pressures with higher priced imports and commodity prices.
Against this backdrop, going forward investors need to be alert to the significant risks of stagflation. Continued increases in inflation and interest rates will lead to lower bond prices and likely feed trough to repricing of equity valuations. Investors are left to discern when conditions will start to improve, and the bottom reached.
Sources:
Bureau of Economic Analysis
Bureau of Labor Statistics
International Monetary Fund
The Conference Board
The second quarter saw an acceleration of the correction that began in the first quarter. The S&P 500 regained its leadership position but in the negative direction finishing the quarter with a loss of -16.11%. All the major US markets continued to fall and breached the -20% bear market threshold, on a year-to-date basis, during the middle of June, found a slight support rally, then finished the quarter with negative momentum. The notable exception was the S&P International 700 Index, which didn’t hit the bear market line yet. After raising interest rates in March by 0.25%, the Federal Reserve increased the velocity of their rate increases by raising rates by 0.50% in May and 0.75% in June. The probability of rate increases of 0.5% to 0.75% at each of the remaining Federal Reserve meetings this year has kept the equity markets on slippery ground this quarter. The high flying inflation numbers, the war against Ukraine by Russia, and a slowing economy only gave additional fuel to the “Correction Process” mentioned last quarter, pushing the markets into bear market territory. We may still have several months before seeing the light of day of the next bull market cycle, but we do not believe it is time to panic. The opportunity for positive returns over the next 12 months could be higher than more downside risk. Don’t let fear drive investment decisions that would be better served by patience.
The past 12 months have been an emotional and volatile ride for all markets. From the rise of the Omicron Variant in the 4th quarter of 2021, the pain of inflation during the last half of 2021 and continuing into the first half of 2022, the slowing economy and rising interest rates, and the invasion of Ukraine by Russia, it is amazing that the markets aren’t down more than they already are. In the past 12 months, the S&P 500 had a total return of -8.86%, the S&P 400 Mid-cap index was down -12.71%, and the S&P 600 Small-cap index was down -14.82%. The US markets won the trifecta against the international markets (again) that fell the most with a return of -17.32%. With so much negativity in the markets and the financial media, “contrarians” are seeing all this as a signal that the bottom may have been reached and positive returns in the next two quarters are more likely. With this added information, we would not be surprised if the US markets finished 2022 in positive territory.
Economic Indicators and Calendar
Source: Bloomberg
Inflation hit the 1.20% number (month-over-month) in March, in line with expectations, and fell to only 0.30% (month-over-month) in April. This relief was short lived as inflation spiked again in May to 1.0% and 1.3% in June (month-over-month). It appears that we may see the month-over-month numbers start to fall in the last half of 2022 as energy prices have peaked and the strong housing market is showing signs of slowing as mortgage rates have nearly doubled since the start of the year.
Source: Bloomberg (A= Advance; S= Second: T= Third)
GDP growth came in weaker than the initial expectation of +0.8% for the 1st Quarter, with an actual -1.6% for the quarter in the Third revision. There has been a debate among economists and market pundits during the 2nd quarter whether we are already in a recession or if we will avoid the recession with a positive GDP number in Q2. Although there are valid arguments on both sides of this issue, we will have to wait until the end of July when the Advance number will be released for the 2nd Quarter.
Source: Bloomberg
The Unemployment rate has remained steady at 3.6% for the past three months and is not expected to fall for June due out on July 8th. It is possible we may see unemployment start to rise in the last half of 2022 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 strong monthly numbers and may remain strong in the face of a recession as those that are laid off in the coming months may be able to fill some of the 7 million job openings in the US. It is also possible that if the economy slows too much, many of those open jobs may evaporate like the memory of gasoline at $3 a gallon from this time last year.
Source: Bloomberg
With elevated inflation and strong employment, the Fed has indicated it will focus on curtailing inflation, even amid geo-political turmoil and negative 1q2021 GDP. It raised the Federal Funds rate 0.25% in March, 0.50% in May, and 0.75% in June (the largest increase since 1994). Based on Chair Powell’s recent comments, we should expect a rate hike in the 0.50% to 0.75% range in July. The Fed Funds rate is now expected to finish the year above 3.0%.
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.
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.
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
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.
THE YIELD CURVE RISES - Although the yield curve stayed relatively flat in the 2nd quarter it rose in a parallel fashion across all maturities. Interest rates from 1 month to 30 years all went up in the 2nd quarter as the Federal Reserve accelerated the interest rates increases from 25 bps in March to 50 bps in May and 75 bps in June.
As of the end of the 2nd quarter, the 1-year US Treasury yield increased from 1.607% to 2.777 (a 117 bps increase) vs the 10-year US Treasury which rose from 2.341% to 3.016% (for a 67 bps rise). Some analysts are now predicting that the 10-year rate will hit 4% before the end of 2022.
The 2-year U.S. Treasury yield increased from 2.337% to 2.957%, the 5-year yield rose from 2.462% to 3.04% and the 30-year treasury rose from 2.45% to finish the quarter at 3.185%.
The recent talk about the “Yield Curve Inverting” has subsided as the debate continues on whether we are already in a recession or if the recession is still something we will have to deal with in the next 6 to 12 months. The probability of a recession has increased as the economy is slowing and although consumer demand has not abated there is a significant increase in inventories as the supply chain issues have started to see resolution.
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 markets remain solidly involved in the correction process and finished the quarter with negative performance even after bouncing off the “Bear Market” level as support. Markets can’t go down forever, and we may have several more months to run before we start the next bull market. We are facing the same headwinds from last quarter for the foreseeable future – inflation, rising interest rates, War in Ukraine, and slower economic growth. However, we need to remain patient. The more negative sentiment we see in the media, the higher the probability is that they are wrong, and this bear market may be over sooner than most pundits expect. 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 2022.
We thank each of you for bringing Glory and Honor to our Heavenly Father and our Savior Jesus Christ through Biblically Responsible Investing.