The third quarter saw an acceleration of the rally that began in mid-June as the market appeared to hit support. The S&P 500 regained its momentum until mid-August when the markets turned down for the remainder of the quarter finishing the quarter with a loss of -4.89%. All the major US markets continued to fall in the last half of the quarter and remained in Bear Market territory (down more than -20%) on a year-to-date basis as the 3^rd quarter came to an end. After raising interest rates in March by 0.25%, 0.50% in May, and 0.75% in June, the Federal Reserve maintained its aggressive stance by raising interest rates by 0.75% in both July and September. The probability of rate increases of 0.75% in November and December has kept the equity markets on edge this quarter. The high inflation numbers, the war against Ukraine by Russia, and a slowing economy only gave additional fuel to the “Correction Process” and it appears that the Bear Market is not over yet as we may still have several months to go before we see the light of day of the next Bull Market cycle. That being said we do not believe it is time to panic and we continue to believe the opportunity for positive returns over the next 12 months could be higher than more downside risk. As fear is still driving the market sentiment I am reminded of this quote from Warren Buffet “Be fearful when others are greedy and greedy when others are fearful.”

The past 12 months have given us the rise of the Omicron Variant in the 4^th quarter of 2021, the pain of inflation during the last half of 2021 and continuing in the first 3 quarters of 2022, the slowing economy, rising interest rates, and the war on Ukraine by Russia. All of these headwinds have kept the markets on a downward trajectory for the past 12 months. In that time, the S&P 500 had a total return of -15.50%, the S&P 400 Mid-cap index was down -15.29%, and the S&P 600 Small-cap index was down -18.89%. The US markets still outpaced the international markets that fell the most with a total return of -24.47%. It seems like all 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 signal that the bottom may be in and is being tested. If the contrarians are correct then positive returns in the next 2 quarters are more likely, but there is a low probability that the US markets actually finish 2022 in positive territory.

Economic Indicators and Calendar

(Source: Bloomberg)

Inflation fell to 0.0% (Month over Month) in July, beating expectations 0.20%, and rose to 0.10% (Month over Month) in August. The expectation is for the month-over-month number in September to be 0.20% and will be released on October 13^th. 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 year.

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

GDP growth came in weaker than the initial expectation of +0.3% for the 2^nd Quarter, with an actual -0.6% for the quarter in the Third revision.  The debate among economists and market pundits continued during the 3^rd quarter whether we are already in a recession or if we will slip into recession by the end of the year.  Although there are valid arguments on both sides of this issue, we will have to wait until the end of October when the Advance number will be released for the 3^rd Quarter to see if we see 3 quarters in a row of negative GDP growth. 

Source: Bloomberg

The Unemployment rate ticked down to 3.5% in July after being steady at 3.6% in the 2^nd quarter but jumped to 3.7% in August.  We saw an unexpected drop in the unemployment figure when the September data was released back down to 3.5.%. It is still possible we could see the unemployment start to rise in the 4^th quarter 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 11 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 their enthusiasm for higher interest rates as they seem to want to see unemployment rise to 5 or 6%.

Source: Bloomberg

With elevated inflation and strong employment, the Fed has indicated it will focus on curtailing inflation, even amid geo-political turmoil and a negative 2q2022 GDP number.  The Federal Open Market Committee raised the Federal Funds rate by 0.25% in March, 0.50% in May, and 0.75% in June, July and September.  Based on Chair Powell’s recent comments, we should expect a rate hike of 0.75% at both the November and December meetings.  As the Federal Reserve was late to start raising interest rates it will not be surprising to see them raise interest rates too high causing unnecessary damage to the economy in their efforts to bring inflation down.

• BLES underperformed the S&P Global 1200 Index for the 3^rd Quarter by only 32 bps. 
• Global markets mirrored the US large cap market as the correction/Bear Market continued to look for a support level by testing the lows of mid-June.
• We still believe that the tilt to the smaller end of the large cap spectrum of BLES will come back into favor when the economic numbers start to improve in 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 was launched on August 24^th as a global, all-cap, multi-factor ETF.  
• Although FDLS was down for its first five weeks it slightly outperformed the MSCI World Diversified Multi-factor Index by 24 bps as well as outperforming the S&P 500 by 131 bps.
• 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.

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 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.
• Multiple gains and retracements in a variety of time periods and across multiple asset classes over the past quarter have been headwinds to momentum style investing
• Strategies remain slightly uncorrelated to other momentum names due to BRI commitment and financial health screening
• We see clarity starting to form by end of Q4, regardless of the outcomes achieved.

—Matt Melott, 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.

• Although in line with the Small Cap and Mid Cap markets, ISMD underperformed the S&P Midcap 400 index and outperformed the S&P Small cap 600 Index by -179 bps and +94 bps respectively for the 3^rd quarter.
• Touching the Bear Market threshold in Mid-June the small and mid-cap markets rallied for 6 weeks before falling the last half of the quarter to test the lows of the 2^nd quarter.
• The equal weighting of the 500 stocks in ISMD were in line with the market cap weighting of the small and midcap indexes showing that the correlation in the small and midcap markets is 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 -3.49% in the 3rd Quarter and outperformed the S&P Target Risk Moderate TR Index benchmark for the quarter by 184 bps, which returned -5.33%. 
• We attribute this performance for the quarter to our positioning of the fund in a conservative allocation with regard to the stock market at the end of January. Also, our short-duration positioning has helped to minimize volatility for the quarter.
•  The first adjustment that we made to the allocation of the fund (RISN) this quarter, was to the treasury holdings of the fund. We have positioned the majority 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.
•  The second adjustment that we made to the allocation, was to adjust the allocation to gold. Our indicators turned down for Gold and we decided to remove it from the fund’s holdings until the trend looks more favorable.    
• 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. 

—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 down -9.84% in the 3^rd quarter outperforming the S&P International 700 TR Index return of -10.38%; an outperformance of 54 basis points. 
• The outperformance is most likely due to the weakness in Chinese stocks in the quarter relative to the Emerging markets. 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.
• WWJD is equally weighted, and the index is market cap weighted and WWJD holds 200 positions vs. the index with 700 positions.

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 down -2.71% in the 3^rd quarter, slightly outperforming the fixed income benchmark of the Bloomberg Barclays US Intermediate Credit Index which was down -3.08%.  
• The shift upward in the yield curve caused negative performance for the bond market in Q3 due to two interest rate increases by the Federal Reserve in the third quarter, one in July (75 bps) and one in September (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 upside again the 4^th quarter.

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.

Geopolitical Risks and Volatility

With the Russian/Ukrainian war entering its 8^th month, 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. However, Ukraine has recently launched an offensive and seem to have momentum in their effort to retake territory that was seized at the start of the conflict.  Outside observers, especially those nations that have been providing military support to Ukraine (including the US), are watching to see if Ukraine has any chance to capitalize on their offensive and turn the direction of the war in their favor.   The key question still remains - what will a post-war Russia 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 August CPI month-over-month reading was 0.1%, coming in above the consensus decline of 0.1%.  Year over year inflation fell from 8.5% to 8.3% but was still higher than the 8.1% rate analysts were predicting.  We will continue to closely monitor monthly inflation readings and the Fed’s response as this will undoubtedly impact capital market returns and volatility in the months and years ahead.  

The Consumer and GDP

Second quarter GDP figures were revised slightly higher (-0.6% versus -0.9%) but were still negative, coming on the heels of a -1.6% rate in the first quarter.  Although two consecutive quarters fits the rule-of-thumb definition of a recession, it would not be a complete surprise if the NBER (National Bureau of Economic Research, the official arbiter of calling recession dates in the US) doesn’t declare a recession for this time period given relatively strong employment (unemployment fell unexpectedly from 3.7% to 3.5%, as this is still considered very strong) and other factors. Regardless of whether or not we are in an official recession, the GDP numbers are clearly showing that growth has slowed.  We will continue to keep a close eye on consumer confidence, spending, and growth figures going forward.

Corporate Profits

Much of the strong equity results in 2021 were driven by remarkable corporate profitability (the S&P 500 profits rose 45%, an all-time high). We mentioned that we didn’t expect to see such a rise in profits in 2022. However, corporate earnings are still rising in 2022, growing 6.1% in the second quarter. We will continue to keep a close eye on profitability as 3^rd quarter earnings are announced over the next several weeks given the impact of higher interest rates and potentially slowing consumer demand.

The markets are still languishing in the mire of this Bear Market and finished another quarter with negative performance. It is still true that markets can’t go down forever and 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 3 quarters  – inflation, rising interest rates, War in Ukraine and slower economic growth  we need to remain patient. 

The more negative sentiment we see in the media and the majority of the so called market experts the higher the probability is that they are wrong and this bear market may be over sooner than most pundits expect. One of my favorite market legends, Sir John Templeton, was known to say, “If you want to have better performance than ‘the crowd’ you must do things differently from ‘the crowd’”. 

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 4^th quarter and 2023.

We are thankful for 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.