The 2^nd quarter took a break from the rally that the markets started last October. The US Large Cap market regained some of the upward momentum in mid-May but the small and mid-cap markets languished with poor performance for the entire quarter. The S&P 500 Index was able to finish the quarter ahead of the international index with the Mid Cap and Small Cap Indexes finishing the quarter far behind.  Investors’ optimism about the economic recovery waned a bit as fear of higher interest rates for longer stayed on the table. The S&P 600 Small Cap index and the S&P 400 Mid Cap Index ended the quarter with a dismal return of -3.11% and -3.45% respectively, while the S&P 500 and the International Index indexes posted gains of 4.28% and 0.91% respectively. 

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 24.54%. 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 13.55% outpacing the S&P 600 small-cap index which returned only 8.58% during the same time frame. These indexes benefited from the broader market rally, driven by optimism about economic recovery and hope that if a recession 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 and fell short of the US large-cap market and slightly underperformed the U.S. mid-cap market with a respectable 12-month return of 12.85%. 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 April, beating the expectation of a 0.40% increase, and came in flat at 0.00% (Month over Month) in May, beating the expectations of a 0.10% increase. The estimate for the month-over-month number in June was for an increase of 0.10% but came in at -0.10% when it was released on July 11^th, exceeding expectations by -20 bps. This unexpected decrease is a good sign, 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 weaker than the initial expectation of +2.5% for the 1^st Quarter, with an actual +1.6% growth rate for the quarter in the Advance Release. The expectation was revised downward to 1.3% for the Second release and came in on point at 1.3%. The Third revision raised the expectation slightly to 1.4% and the actual print came in as expected. The debate among economists and market pundits changed during the past quarter to “When will the Fed be forced to lower interest rates due to the slowdown in the economy” with the weak GDP numbers recently and weaker numbers expected in the current quarter.  

The probability of a recession has dropped from 65% in July to only 30% presently according to the Bloomberg survey.   The yield curve (10s - 2s) remains inverted and has been inverted for over 500 consecutive days which is a multi-decade high.

(Source: Bloomberg)

The Unemployment rate rose to 3.9% in April after falling back to 3.8% in March. In May we saw the unemployment rate jump to 4.0%, and it rose again in June to 4.1%, both months beating expectations. Now that we have broken through the 4% level it is possible we could see the Unemployment Rate continue to rise for the rest of 2024 as the economy slows and if layoffs increase. 

Nonfarm Payrolls continue to have solid monthly numbers with June coming in at 206k new jobs, which was stronger than the estimate of 191k.  If job growth remains 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 any interest rate cuts in 2024.

(Source: Bloomberg)

The Federal Open Market Committee left the Federal Funds rate unchanged during the two meetings held during the 2^nd quarter as no one believes there will be any more interest rate increases in this cycle. Based on Chair Powell’s recent comments, we should not be surprised if we don’t see any rate cuts until later this year if at all as he has reiterated that they will remain data-driven and the data is showing a slowing but resilient economy. Although many analysts fully expect the rate cut cycle to begin before the end of 2024 a few economists are saying there will be no interest rate cuts until 2025.  As the Federal Reserve was late to start raising interest rates, they will likely 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 2^nd quarter with a return of -2.06% vs 3.20 % for the global index. 
• With the disappointing performance of the international markets in relation to the U.S. large-cap market during the 2^nd 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 due to strong underperformance in the North American region, which is directly attributable to the strong performance of the mega-cap growth stocks in the S&P 500 which are not held in BLES.  
• We believe that 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 -598 bps.  After a weak start to the quarter, FDLS rallied in line with the global market until mid-May then sharply diverged for the last half of the quarter to finish with a quarterly return of -3.06%.
• The global exposure to different stocks in relation to the market cap weighted MSCI ACWI Index, which is dominated by the mega-cap growth stocks in the S&P 500, was the main contributor to the underperformance for the 2^nd quarter.
• We continue to believe that the globally 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 new bull market gains momentum but will not always be in favor relative to the broad markets.

(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 continued the upward ‘momentum’ from the rally that started in the 4^th quarter of 2023, which saw broad markets break out from the correction. GLRY outperformed the S&P 400 Midcap index in Q2, ending the quarter up +0.47% versus -3.45% for the index.
• The 2^nd quarter was a rollercoaster ride for investors as the rally in the first quarter turned negative during April with some understandable profit-taking. GLRY rallied in line with the mid-cap index in May but maintained strength when the mid-cap index diverged to the downside after mid-May.
• 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 lets them make strategic decisions in a similar or a lower rate environment.  We will 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 performed in line with both the S&P Small Cap 600 index and the S&P Midcap 400 Index for the 2^nd quarter with a total quarterly return of -3.44%, vs the mid-cap index down -3.45% and the small-cap index down -3.11%.
• The mid-cap market and the US small-cap market have yet to regain the momentum that led all markets to end the 4^th quarter of 2023 as the US large-cap market continues to power higher.
• 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 between 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.

• In the first full quarter of our newest ETF, PTL underperformed the S&P 500 Index by 587 bps for the quarter with returns of -1.59% and 4.28% respectively.  
• The underperformance of PTL to the S&P 500 index is due to weaker performance in the Consumer Staples and Technology sectors vs. the sector returns in the benchmark.
• The exposure to smaller companies in PTL in these two sectors hurt PTL as the mega-cap growth stocks in the Communications Services and Technology sectors drove the strong performance of the S&P 500 during the quarter.
• We believe as the new bull market gains momentum, PTL is well positioned to outperform the S&P 500 due to the tilt to the smaller side of the market cap spectrum as well as its strong core positioning benefiting from both value and growth exposure when the appetite for the mega-cap growth stocks starts to wane.

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 Inspire Tactical Balanced ESG ETF (NYSE: RISN) returned -3.70% in the 2nd quarter and +5.50% (annualized) since its inception on July 15, 2020. This quarter, the fund underperformed its benchmark, the S&P Target Risk Moderate TR Index, which returned +1.11%.

We attribute this underperformance to our commitment to biblically aligned stock holdings. The benchmark S&P Target Risk Moderate TR (AOM) allocates about 25% to the S&P 500, which has experienced significant price increases due to P/E ratio expansion. This rise is driven by anticipated future earnings growth from companies benefiting from generative AI technology. However, the price increase is not currently supported by EPS growth, suggesting a potential correction in the largest companies within the S&P 500.

Our stock allocation favors smaller companies that are still in the “Large Cap” market segment, which we believe will be advantageous if a correction occurs soon.

We maintain an estimated 80% allocation to US stocks with a positive Inspire Impact Score. Our focus remains on large-cap, biblically aligned stocks with strong historical revenue/profit growth, low debt, and high returns on invested capital that are selling at lower P/E ratios compared to their historical averages. Despite some underperformance this quarter, this approach has proven beneficial, and we will continue to use this strategy moving forward.

For the 20% of the fund not allocated to equities, we continue to hold short-term floating rate government bonds as a defensive position. Although we may shift to standard short-term government bonds (non-floating rate) soon, the current asset class has served us well, and we will maintain it until rates begin to decline. 

— 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.

• WWJD was down -0.71% in the 2^nd quarter, underperforming the S&P International 700 TR Index return of 0.91%, an underperformance of -162 basis points. 
• It appears that the underperformance of WWJD to the International index is attributable to underperformance in the Asia Pacific region.
• 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 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.

• IBD was up 0.30% in the 2^nd quarter, slightly underperforming the fixed income benchmark of the Bloomberg Barclays US Intermediate Credit Index, which was up only 0.73%.  
• The increase in the yield curve brought slightly positive to flat performance for intermediate bonds in Q2 as well as the longer end of the yield curve. 
• With 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 coming quarters allowing strong returns during the next 12 to 18 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 May CPI month-over-month reading was flat at 0.0%, which was below the expected 0.1%. Year-over-year inflation is down to 3.3%. Based on Chair Powell’s recent comments, we have reached a terminal level of interest rates of around 5.5%, and rates are expected to fall starting in late-2024. Many investors are of the belief that the inflation scare is well behind us. However, core inflation remains high at 3.4% 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 first quarter GDP figure came in at 1.4%, below the consensus of 2.5%. This was a weaker quarter as consumer spending is starting to slow and we believe we are in a trend of slowing growth which could get worse especially if personal consumption, business investment, and home building continue to slow for the remainder of 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 is still 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 for the remainder of 2024 and into 2025, 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. 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.

Although we still believe that we are in the first leg of the new bull market we are disappointed to see the negative performance this quarter for most of our ETFs. We must keep in mind 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 third quarter in the mega-cap growth stocks that have caused our ETFs to underperform their secular benchmarks during this past quarter. This could bring a normal correction of -10% or more in the next few months but it could also be the catalyst to shift attention to the broader large-cap market as well as the small and mid-cap that have been ignored of late.  If this does happen we would look for our ETFs to come into favor and possibly outperform the secular counterparts. 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 are thankful to 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.

Blessings,