The U.S. economy continues to defy naysayers with its steady climb higher. For the third quarter of 2023, estimates are that U.S. Real (i.e., inflation-adjusted) Gross Domestic Product (GDP) grew 3.0% (annualized). If it comes in as projected, this will be the economy’s fifth quarter in a row with positive growth at a very respectable increase of 2.4% from the same period the prior year.

For the calendar year 2023, a year in which many had predicted a recession would occur, current expectations are that it will show a 2.1% growth rate once the final numbers are in the books. Therefore, while a recession appears to have been avoided in 2023, the significant and lengthy inversion of the Treasury yield curve, a highly accurate predictor of impending economic weakness, signals to many that we are not out of the woods yet as we look to 2024.

The engine behind the U.S. economy’s remarkable resiliency is the on-going strength of the labor market. The unemployment rate for September came in at 3.8%, with the number of jobs growing an average of 267,000 per month over the past year. Very impressive. Furthermore, average hourly earnings grew a solid 4.2% over the prior 12 months. As seen in the recent increase in strike-related activity, the pendulum of negotiating power between labor and management has shifted significantly in labor’s direction for the first time in decades. Welcome news for employees, but a headwind against the efforts to subdue inflation.

Given the strength of the economy as well as the labor market, expectations are that inflation pressures will continue to persist, and it will be very difficult to reach the Federal Reserve’s 2% target rate. Nevertheless, inflation has subsided from its pandemic high. The most recent Consumer Price Index (August 2023) showed an annual increase of just 3.7%.

Most worrisome for investors these days is the prospect for interest rates going forward. In the third quarter, interest rates across maturities and sectors rose to levels last seen almost 20 years ago. While most expect that the Federal Funds rate (currently capped at 5½%) is at or near its “terminal rate,” the realization that rates could remain “higher for longer” has been dampening the enthusiasm for investing in bonds as well as stocks.

Along with this uncertain economic environment, going forward there remain other reasons for concern: the tragic outbreak of conflict in the Israel/Gaza region, the continued war in Ukraine, an increasingly hostile China, the uncertainties of the commercial office space market, U.S. bank challenges, and the ballooning U.S. debt burden.

Globally, the challenges are similar to that of the U.S.: anemic economic growth, labor shortages, higher than desired inflation levels, and tightening monetary conditions. So far this year, interest rate differentials have driven strength in the U.S. dollar versus the other major currencies. This has been detrimental to U.S. investors’ international investments but could signal a good entry point going forward.

For the remainder of the year, investors need to be alert to global conflict concerns as well as the prospects for interest rate policies. Labor strike activity could signal what to expect for inflation in the coming months. While a recession has been avoided thus far, the risk still remains even though it might be short and shallow. Therefore, remain focused on long-term goals while looking to make tactical adjustments as needed.

Sources: Bureau of Economic Analysis, Bureau of Labor Statistics, International Monetary Fund, The Conference Board

The 3rd quarter brought a negative tone back to the stock markets as we experienced a reversal from the positive performance in the previous quarter and what may be the start of the correction predicted by some analysts for the past year. The S&P 500 trailed the small and mid-cap indexes for the month of July, but all markets turned sour in August and even with a slight bounce early in the month continued their slide through September. The S&P 500 Index was able to finish the quarter as the leader by falling less than the other markets by being down -3.27%.  Investors turned pessimistic about the economic recovery and fear of higher interest rates and a resurgence of inflation. The S&P 400 Mid-Cap and the S&P 600 Small Cap indexes faced more headwinds as well and with some ups and downs both indexes ended the quarter with losses of -4.20% and -4.94% respectively, giving all of the gains from last quarter plus some. The S&P International 700 Index exhibited a similar roller coaster ride by starting the quarter in line with the US markets and finishing with a negative performance of -4.41%, which was in line with the US small and mid-cap markets.

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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 21.59%. 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 15.46% and strongly outpaced the S&P 600 Small Cap index that only returned 9.98% 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 actual comes this year, it will be a relatively “soft landing”.  As for the S&P International 700 index, it followed a similar pattern, but with variations influenced by regional economic factors and geopolitical events was able to outpace the US markets with a strong 12 month return of 24.45%. Overall, the past 12 months exhibited positive market sentiment even with facing continued headwinds of rising interest rates and inflation numbers not falling as fast as the markets previously had hoped. There seems to be a debate between those that think we are in a “bear market bounce” and those that think we have just kicked off the next “bull market”.  We do not see that debate ending soon.  We believe even though the markets could be higher 6 to 12 months from now there is always a chance of a 10%+ correction as part of a market in an upward trend.

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Economic Indicators and Calendar

(Source: Bloomberg)

Inflation rose to 0.2% (Month over Month) in July, in line with expectations, and spiked to 0.60% (Month over Month) in August. The expectation for the month over month number in September was only an increase of 0.30% and was released on October 12th coming in slightly above estimate at 0.40%.  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 to 2.5% level over the next 12 months.

(Source: Bloomberg)

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

GDP growth came in stronger than the initial expectation of +1.8% for the 2nd Quarter, with an actual +2.4% for the quarter in the Advance Release but came in slightly lower with the Third revision at only 2.1%.  The debate among economists and market pundits continued during the 3rd quarter as to “when will the recession end” even though there has been no definite proclamation of a recession yet.  We still believe it is likely we will hear that announcement sometime by the end of 2023 or early 2024, but since 2024 is an election year there may be pressure to forgo declaring a recession until after November 2024.

The probability of a recession dropped from 65% to 55% according to a Bloomberg survey; even as the yield curve (10yrs – 2yrs) remains deeply inverted.

(Source: Bloomberg)

The Unemployment rate dropped to 3.5% in July but spiked to 3.8% in August and remained unchanged in September. In the previous quarter we saw an increase in May to 3.7% and a subsequent drop back to 3.6% in June. It is possible we could see unemployment rise above 4% in the 4th quarter of 2023 as the economy slows and 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 and may remain strong in the face of a potential recession as those that are 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 their enthusiasm for higher interest rates as they seem to want to see unemployment rise to 5 or 6%.

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(Source: Bloomberg)

The Federal Open Market Committee raised the Federal Funds rate by 0.25% in July as expected but chose to leave rates unchanged at their September FOMC meeting. Their second ‘pause’ or ‘skip” was mainly due to the slowing economy and the “wait and see attitude” that the committee is communicating.  Based on Chair Powell’s recent comments, we should not be surprised if we see a rate hike of 0.25% at the November or December meeting with a potential terminal rate of 5.75%.  As the Federal Reserve was late to start raising interest rates, it is highly likely that they will raise interest rates too high causing unnecessary damage to the economy in their efforts to bring inflation down.

The  S&P Global 1200 index outperformed BLES during the 3rd quarter with a return of -3.66% vs -4.30%.

With the weak performance of the US large cap market in relation to the International markets during the 3rd quarter, BLES diverged from the global index for the last two months.

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.

(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, 2022 as a global, all-cap, multi-factor ETF and has now passed the first year anniversary milestone.  

The exposure to different stocks in relation to the S&P 500 during the third quarter allowed FDLS to outperform the S&P 500 Index by 101 bps during this period. After a strong start to the third quarter, FDLS fell after its peak in late July to peak again in early September to fall again to end the quarter with a return of -2.26%.

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 as the next bull market gains momentum.

(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.

GLRY fared well in a volatile Q3 2023, which saw broad markets swing +/- 3% multiple times. Midcaps fell late in the quarter, ending the quarter down -4.20%, versus -0.73% for GLRY.

In volatile markets, preservation of capital is paramount.  While some positions did underperform, the FEVRR methodology seeks to avoid major pitfalls by isolating strong balance sheets and finding nimbleness, through earnings potential and relative valuations.

Looking ahead, higher interest rates historically impact small and mid-cap companies more than large-cap.  However, heavily leveraged large cap companies, which took advantage of low interest rates, may see further headwinds compared to smaller, nimbler firms.  Furthermore, recent labor disputes could impact larger, more established companies more than small employers.

—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.

ISMD underperformed the S&P Midcap 400 index and the S&P Small cap 600 Index by -85 bps and -12 bps respectively for the 3rd quarter.

The small and mid-cap markets climbed strongly to start the quarter but reversed in August to finish the quarter with momentum to the downside to start the last quarter of the year.

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 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 was down -3.55% in the 3rd Quarter and underperformed the S&P Target Risk Moderate TR Index benchmark for the quarter, which was down only -3.12%.

We attribute this performance for the quarter to our increase in equity exposure of the fund which began in July and was held through the third quarter. We increased the equity allocation up to 80% and have remained at that level. The overall US stock market began a retracement in July and contributed to the underperformance during the period.

Additionally, we improved the screening criteria that we use to select the stocks within the equity allocation of the fund to focus 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 PE ratio compared to their historical average.

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 has completed their interest rates increases.

— 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 4.34% in the 3rd quarter, outperforming the S&P International 700 TR Index return of -4.41%; an outperformance of just 7 basis points.

Being highly correlated with the index during 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 the 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.

Yields Continue to Rise  -  The yield curve continued to rise across the spectrum after rising during the second quarter, continuing a pull back to the fixed income markets that started last quarter. Interest rates for the 1-month to 30-year maturities all went up in the 3rd quarter, as the Federal Reserve hinted at continued rate increases after the second “pause” at their most recent FOMC Meeting in September and the looming expected recession.

As of the end of the 3rd quarter, the 3-month T-Bill yield increased from 5.298% to 5.451% (a 15 bps increase) vs the 10-year U.S. Treasury which rose by 73 bps from 3.84% to 4.572%.

The 2-year U.S. Treasury yield increased from 4.9% to 5.046%, the 5-year yield went up from 4.156% to 4.611% (an increase of 45 bps) and the 30-year treasury increased from 3.862% to finish the quarter at 4.701% (an increase a whopping 84 bps).

The probability of a recession is still high as the economy is slowing but with strong employment numbers and consumer spending, a recession is still avoidable if the Federal Reserve will not push their rate increase process too far.

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IBD was down -0.79% in the 3rd quarter, slightly outperforming the fixed income benchmark of the Bloomberg Barclays US Intermediate Credit Index which was down -0.92%.  

The continued rise in the yield curve caused negative performance for intermediate bonds in Q3 as well as the shortest end of the yield curve.

With the increased probability of the Federal Reserve having at least one more 25 bps rate increase in their pocket, it is highly likely that the yield curve could shift in a parallel fashion to the upside in the 4th quarter which would give us negative performance 3 quarters in a row. However, when there is confidence that the terminal level of interest rate increases is reached, we should see the yield curve start to shift downward, but probably not until early 2024.

(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 August CPI month-over-month reading was 0.6% which was in line with expectations. Year-over-year inflation has ticked up recently to 3.7% and will likely continue to rise given the recent increase in energy prices. Based on this and Chair Powell’s recent comments, we may see one more rate increase this year, with a terminal rate now predicted to be between 5.5% and 5.75%.  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 second quarter GDP figure came in at 2.1%.  This was stronger than expected and third quarter GDP is likely to be even stronger. 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 heavily 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.  With inflation still running high and the labor market remaining strong, the Fed will likely keep rates high to try to bring down inflation.  Therefore, the risk of a recession occurring in the next few quarters is still on the table.  We will continue to keep a close eye on growth figures going forward.

Corporate Profits

As we finish out 2023, corporate profits have so far remained fairly  strong and were even revised higher (up 0.2% from the first quarter, but still down 2.7% from a year ago).  We expect profits to continue to fall (or at least have only modest gains), particularly given the impact of higher interest rates and potentially slowing consumer demand. We will continue to keep a close eye on corporate earnings as this will impact equity performance going into 2024.

Geopolitical Risks

The global capital markets face several geopolitical risks in the coming 3 to 6 months, which could significantly impact investor sentiment and market stability. One key concern is the ongoing labor tensions with major strikes against the 3 major auto makers and the UAW.  It is interesting that the Screen Actors Guild has been on strike for several months and no one has noticed. The newest geo-political risk reared its ugly head as we were writing this commentary when Hamas launched a large and unprovoked attack against Israel on October 7th.  Israel will most likely strike back harder and faster but the hostilities on both sides may escalate before a ceasefire is announced. Additionally, political unrest, civil conflicts, and potential changes in leadership in various regions can also introduce instability and raise concerns about the business environment in the next several months which may result in increased market uncertainty, fluctuations in stock prices, and the need for investors to closely monitor global developments and assess their potential impacts.

The markets were showing signs that the Bear Market may have entered hibernation as we started the year with two positive quarters in a row, but now with our first negative quarter in 2023 that conclusion appears a bit premature. Although we don’t like to see a negative quarter, that does happen periodically even during the first stages of a new bull market. It’s like we have to take two steps forward and then one step back.  Hopefully we can get a couple of more “steps forward” before we get another “step back” before everyone is convinced that the new bull market has begun. As we are still facing the same headwinds from the last couple of years  – inflation, rising interest rates, War in Ukraine and slower economic growth  plus a couple of new ones – 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 remainder of 2023 and beyond.

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.

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