The 3rd quarter started out with a short rally but dropped in the last part of July before finding support in early August and regaining momentum through the end of September. The US Small Cap market took the lead during the quarter, along with strong performance from the international markets and the US Mid-cap market. For the first time in several quarters, the US Large Cap market languished behind the other markets for the entire quarter. The S&P 500 Index finished the quarter behind the international, Mid-cap, and Small Cap Indexes. Investors’ optimism about the economic recovery waned a bit due to slower-than-expected interest rate decreases.

The S&P 600 Small Cap index and the S&P 400 Mid Cap Index ended the quarter with strong returns of 10.11% and 6.94% respectively, while the S&P 500 and the International Index indexes posted gains of 5.89% and 7.39% 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 and turning in a one-year number of 36.33%. 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 26.76%, outpacing the S&P 600 Small Cap index, which returned 25.76% during the same time frame. These indexes benefited from the broader market rally, driven by optimism about economic recovery and hopes that if a recession actually comes in 2024, it will be a relatively “soft landing.” As for the S&P International 700 index, it followed a similar pattern with variations influenced by regional economic factors and geopolitical events. It fell short of the US Large Cap market and performed in line with the US Mid Cap market with a respectable 12-month return of 26.77%. 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, we recommend investors 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 0.20% (Month over Month) in both July and August, meeting the expectations of a 0.20% increase for each month. The estimate for the month-over-month number in September was for an increase of 0.10% but came in at 0.20% when it was released on October 10^th, exceeding expectations by 10 bps. This unexpected increase is not a good sign, as the Federal Reserve may not feel the need to cut interest rates as quickly as analysts have been expecting. Hopefully, we will not see the month-over-month numbers continue to climb as we need to see month-over-month numbers stay in the 0.0% to 0.20% territory for the next several months so that the CPI year-over-year number can come back towards the 2 to 2.5% level over the next 12 months.

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

GDP growth came in stronger than the initial expectation of +2.0% for the 2^nd Quarter, with an actual +2.8% growth rate for the quarter in the Advance Release. The expectation was revised upward to 2.8% for the Second release and beat that expectation by coming in at 3.0%. The third revision raised the expectation slightly to 2.9%, and the actual print came in unchanged from the previous release at 3.0%. The debate among economists and market pundits during the past quarter has been focused on how fast the Fed will be to lower interest rates to avoid a recession or whether they will be forced to pause due to stronger than expected GDP numbers recently and weaker numbers expected in the current quarter.  

The yield curve finally reversed its inversion, marking the most consecutive days of inversion going back to the 1920s.  Recessions are usually declared after an inversion corrects.

(Source: Bloomberg)

The Unemployment rate jumped to 4.3% in July after rising to 4.1% in June. In August we saw the unemployment rate fall to 4.2%, and it fell again in September to 4.1%. Although we are still above the 4% level, it is possible we could see the Unemployment Rate continue its upward path for the rest of 2024 if the economy slows and if layoffs increase. 

Nonfarm Payrolls continue to have solid monthly numbers, with September coming in at 254k new jobs, which was stronger than the estimate of 146k. If job growth remains strong in the face of a potential recession, the Federal Reserve will not be inclined to cut interest rates as aggressively as some analysts are predicting, and there is a possibility that there will not be any additional interest rate cuts in 2024.

(Source: Bloomberg)

The Federal Open Market Committee finally cut the Federal Funds rate for the first time in several years during the final meeting held during the 3rd quarter as the debate continues whether we will have any more interest rate decreases in 2024. Based on Chair Powell’s recent comments, we should not be surprised if we don’t see any more rate cuts this year 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 continue before the end of 2024, a few economists are saying there will be no more interest rate cuts until 2025.  As the Federal Reserve was late to start raising interest rates, they will likely be slow to cut interest rates, causing unnecessary damage to the economy in their efforts to avoid sparking more inflation.  The current expectation is for the terminal rate to be above 3% due to inflationary concerns.

• BLES outperformed the S&P Global 1200 index during the 3^rd quarter with a return of 8.70% vs 6.35 % for the global index. 
• With the strong performance of the international markets in relation to the US Large Cap market during the 3^rd quarter, BLES diverged from the global index for the quarter in a positive way.
• It appears that the outperformance of BLES to the global index is due to underperformance in the North American region, which is directly attributable to the weak performance of the Mag 7 stocks in the S&P 500 and a broad rally across the other 493 stocks.  
• We believe that the tilt to the smaller end of the large cap spectrum of BLES is starting to show favor and should continue as the economic numbers 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 performed in line with the MSCI All Country World ETF with returns of 6.48% and 6.50%, respectively.  Although it was a volatile start to the quarter, FDLS rallied in line with the global market from early August to the end of the quarter.
• FDLS outperformed the S&P 500 by 60 bps (6.48% vs. 5.89%) as the global exposure to different stocks in relation to the market cap-weighted S&P 500 was the main contributor to this outperformance for the 3^rd 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 continues its upward 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 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 with a 3^rd quarter return of 4.44%.  GLRY underperformed the S&P 400 Midcap index in Q3, which ended the quarter up 6.94%.
• The 3^rd quarter was a rollercoaster ride for investors as the rally momentum stocks started to lose some steam vs the broader market with some understandable profit-taking. 
• Although the momentum factor is starting to fall out of favor, the methodology has not changed as 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 outperformed the S&P Midcap 400 Index for the 3^rd quarter with a total quarterly return of 9.66 vs. the small cap index at 10.11% and vs. the mid cap index, up only 6.94%.
• The mid-cap market and the US small cap market have finally regained some leadership momentum that we haven’t seen since the end of the 4^th quarter of 2023.
• The equal weighting of the 500 stocks in ISMD outperformed the blend of 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 second full quarter of our newest ETF, PTL outperformed the S&P 500 Index by 190 bps with returns of 7.79% and 5.89%, respectively.  
• The outperformance of PTL to the S&P 500 index is due to stronger performance in the broader large cap market vs. the Mega Cap Growth stocks commonly referred to as Mag 7.
• The exposure to smaller large cap companies in PTL as the mega cap growth stocks in the Communications Services and Technology sectors of the S&P 500 lost their momentum during the quarter.
• We believe as the new bull market continues its upward momentum, PTL is well positioned to outperform the S&P 500 due to the tilt to the smaller side of the large market cap spectrum as well as its strong core positioning benefiting from both value and growth exposure as the appetite for the mega cap growth stocks continues to wane.

(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 Inspire Tactical Balanced ESG ETF (NYSE: RISN) returned 5.48% in the 3rd quarter slightly underperforming its benchmark, the S&P Target Risk Moderate TR Index, which returned 5.70%.
• We attribute this recent underperformance to our focus on maintaining a biblically aligned portfolio. The benchmark S&P Target Risk Moderate TR (AOM) has around 25% invested in the S&P 500, which has seen substantial price increases largely due to P/E ratio growth. This surge is driven by expectations of future earnings from companies leveraging generative AI technologies. However, since this price rise is not yet supported by earnings per share (EPS) growth, a potential correction in the largest S&P 500 companies may occur.
• Our strategy maintains an estimated 80% allocation to U.S. stocks that score positively on the Inspire Impact scale. We prioritize mid to large cap, biblically aligned companies that have a history of solid revenue and profit growth, low debt levels, and are not trading at higher-than-average P/E ratios. Despite some short-term underperformance, this approach has been effective, and we intend to continue with it.
• The remaining 20% of the fund is held in short-term floating-rate government bonds as a defensive measure. While we may transition to standard short-term government bonds soon, the current allocation has worked well and will remain in place until interest rates begin to decline at the short end of the curve.

— Jacob Chandler, Manager

(source: Bloomberg)

Past performance is no guarantee of future results. The performance data quoted here represents past performance. Current performance may be lower or higher than the performance data quoted above. Investment return and principal value will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. For performance data current to the most recent month end, please call 877.658.9473.

• WWJD was up 10.04% in the 3rd quarter, outperforming the S&P International 700 TR Index return of 7.39%, an outperformance of 266 basis points. 
• 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 4.31% in the 3^rd quarter, slightly underperforming the fixed income benchmark of the Bloomberg Barclays US Intermediate Credit Index, which was up 4.58%.  
• The increase in the yield curve brought strong positive performance for intermediate bonds in Q3 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, the yield curve has started the parallel shift to the downside that we were expecting now that the FOMC has started the first of several rate reductions expected in the coming quarters. We expect this to bring strong returns to IBD 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 Fed has started its process of lowering interest rates.  However, core inflation remains high at 3.2% 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. Investors are still expecting over 70 basis points of rate cuts before the end of the year.

GDP, Yield Curve, Employment, & Consumer Confidence

The yield curve finally reversed its inversion, marking the most consecutive days of inversion going back to the 1920s.  Recessions are usually declared after an inversion corrects.   The labor market (usually a lagging economic indicator) is showing signs of slowing.  Total job openings continue to tick down.  Private (ADP) employment gains are showing signs of slowing, although the Labor Department showed a strong employment uptick in September.

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 and end 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.

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We still believe that we are in the first innings of the new bull market and are pleased to see the positive performance this quarter for all our ETFs and, in several cases, outperformance to their secular benchmark. We will not be surprised to see some profit-taking during the fourth quarter in the mega cap growth stocks that have caused our ETFs to underperform their secular benchmarks during this past year. This could bring a normal correction of -10% or more in the next few months but will also continue to shift attention to the broader large cap market as well as the small and mid-cap that have been ignored until this past quarter.  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 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.