Needless to say, 2018 was a crazy year. The chaos in the country’s politics, fanned virtually every day by our Chaos-in-Chief, finally caught up to the stock markets in the last quarter. The markets narrowly avoided their first bear market since 2008-09 and have begun 2019 with the longest shutdown of the U.S. government in history. The shutdown is causing more economic damage every day and unless some sanity kicks in somewhere to restart government services, this alone could tip the country into recession, accompanied by that long-awaited, and anticipated, bear market.
After reaching all-time highs on January 26, 2018, the Dow Jones Industrial Average and the S&P 500 went into a two-week slide that saw both stock indexes drop by more than 10%, a decline that is typically considered a market correction.1
Analysts have been saying for several years that the long, booming bull market was overvalued and due for a correction, so the drop was not a surprise in the big picture.2 And even after the 10% plunge, the Dow was up 19% over the previous 12 months, and the S&P 500 was up 12.5%.3
It's natural to be concerned about this kind of shift, but more important to maintain perspective and focus on your long-term goals. It may be helpful to consider some of the reasons behind the surge of market volatility.
OK, a couple of my clients have wondered why I haven’t bothered to comment on the recent gyrations in the market. I might well have commented around February 7 when it appeared the sky was falling, but as it happened I was on vacation in St. John, one of the Caribbean islands hit hardest by last fall’s hurricanes (and happy to be there spending money, thereby helping the recovery efforts). Internet service on the island is still very sporadic, and we didn’t have any service where we were staying that week. Standing outdoors in St. John, it was nice and warm, and the sky didn’t appear to be falling at all, just blue and beautiful.
Of course, by the time I returned home the market indexes had begun to recover, and the Dow Jones Industrials and the S&P 500 ended last week up 4.3% each, their biggest gains in five years. Stocks are still off their recent record highs, but certainly things appear to have stabilized.
I closed off 2017 with an SRI Investing tradition, making two donations to honor you, my clients, in appreciation of the trust and confidence you place in us. Even more importantly, you care enough to invest your assets to help create a better world. The first donation went to Heifer International (www.heifer.org), helping to create financial opportunities in underserved communities worldwide. The second donation is to purchase carbon offset credits from Native Energy in Vermont (www.nativeenergy.com), to make our professional practice carbon neutral. Native Energy was founded in 2000 (the same year I started my SRI practice) and is now a leading provider of carbon offsets, renewable energy credits, and greenhouse gas consulting.
SRI investors, like virtually all investors, know that over time markets go up and markets go down. When they go up for an extended period of time we call it a bull market – vice versa, it’s a bear market. Well, we’ve had a bull market now for a very extended period of time, more than 7 ½ years. Eventually, a bear market will follow. We know that. We just don’t know when and how severe it could be.
I happen to believe in some unsubstantiated investment “street” wisdom – that more money has been lost trying to avoid market “corrections” and bear markets than has been lost in the events themselves. If that wisdom is true, it is for a simple reason. Investors who bail out of their stock holdings while predicting (i.e. guessing, following a hunch or a chart) a market downturn are very often wrong about the timing. After they pull out, the market continues to go up for a substantial period of time – they miss out on the upside in their anticipation of the downside
It’s been about two weeks since the election. I’m very thankful I could spend much of the first week with friends and colleagues at the annual SRI Conference in Denver. As a group, we grounded each other – enabling us each to “get a grip” on the implications of having Mr. Trump as our next President. We came away from the conference collectively believing that SRI is now more important than ever. My own reflections have me wanting to be more specific and articulate about why and how I think that is true.
In the coming weeks, I will be writing more often, focusing on three themes I believe are important as we continue our work together as SRI investors. Before I say more about that, let me comment more immediately on the markets. In the aftermath of the election, the markets have been amazingly calm, and that is a very good thing. At a moment when many investors might have reacted emotionally with their assets, as they often do when unexpected events occur, cool heads have prevailed so far. In my mind, this is only one more example of an investor maxim – we simply can’t predict how the markets will react to future events. That is true about near-term future events and longer-term future events. To say a Trump presidency portends uncertainty is an understatement, and how the markets will react in the coming years is even more uncertain. We can only predict the markets will move more in concert with the economy than with U.S. governmental action, and in this case that might also be a good thing. Fundamentally, though, nothing has changed yet to warrant investors changing their long-term investment strategies.
Back to the three themes I will be writing more about. The first is climate change, no surprise. On this issue, I agree with Paul Krugman of the New York Times, who wrote last week it is the thing that concerns (scares) him the most about a Trump presidency. Already, the President-elect has named a climate change denier to head the EPA. Time is growing short for the world to make the transition to sustainability, and the U.S. should be leading the transition. Yet all political signals right now are to the contrary. SRI investors will play an ever more crucial role in encouraging the move away from fossil fuel energy production and a faster conversion to alternative energy. And while investing directly in alternative energy companies has so far been a dicey proposition, the development and production of alternative energy has been accelerating in recent years as the costs of that development have come down dramatically. That trend, along with the advent of new investment options, will only continue despite the obstructionist policies of a Republican-dominated federal government.
The second theme I want to focus on is community impact investing, and this for me stems directly from the election results. It is well-documented that Trump’s electoral college victory was made possible through his effective appeal to a wide swath of mostly white, blue-collar voters from the geographical heartland of the country. “Make America Great Again” implies a prior fall from greatness, and roughly 60 million U.S. voters ratified that belief with their votes. It’s also apparent these voters put aside concerns about Trump’s evident narcissism, racism, and history of abusive treatment of women because they believe he will help them improve their lives financially. As an advocate for SRI, I think it’s important we pay attention to that, for it is true that so many of the people who voted for Trump are the same people who live in communities that have not recovered economically or financially from the Great Recession of 2008-09. When we as SRI investors engage in community impact investing, we are directing capital in the U.S. specifically to these same communities, creating more opportunities for economic flourishing. This election tells me we haven’t done nearly enough on this front, and so I will be highlighting more community investment opportunities in future articles.
Finally, I believe in and am professionally committed to SRI because I believe SRI investors are helping to bring about a better world. At the unexpected dawn of a Trump presidency, many Trump opponents now feel a better world will be less attainable, if attainable at all. But do we have a clear picture of what that better world will look like? Yes, we say, it will be a more just, compassionate, and sustainable world, but can we see clearly what it will take to get us there? What are the concrete details, and the specific public and economic policies that will bring about and comprise a just and sustainable economy? I want to explore those questions more fully going forward because if SRI investors want to direct their capital to bring about a better world, it makes sense we will do so more effectively if we can more clearly envision that world.
The future beckons. SRI will continue to be an important part of it.
The first quarter of the new year has brought us small positive returns in many of the U.S. market indices, which means that investors survived—for now, at least—the worst start to a calendar year ever for the U.S. stock market.
The Wilshire 5000 Total Market Index--the broadest measure of U.S. stocks and bonds—was up 1.17% for the first three months of 2016, which is remarkable considering that the index was down more than 10% by the second week of February. The comparable Russell 3000 index has gained 0.97% so far this year.
Meanwhile, global markets are not off to a good start. The broad-based EAFE index of companies in developed foreign economies lost 3.74% in dollar terms in the first quarter of the year, in part because Far Eastern stocks were down 6.06%. In aggregate, European stocks lost 3.18%, and are now down more than 10% over the past 12 months. Emerging markets stocks of less developed countries, as represented by the EAFE EM index, fared better, gaining 5.37% for the quarter.
The easy call at the beginning of the year would have been to bail out when the markets were declining and sit out the widely-predicted start of a painful, protracted bear market. Some analysts were talking openly about another 2008-9 drop in share prices. But 10% market declines are simply a part of the market’s normal turbulence, and anyone who spooks as soon as they see a month of bearish sentiment is likely to miss out on the subsequent gains. Since hitting their 2016 lows on February 11, both the S&P 500 index and the Nasdaq Composite have gained roughly 13% in value.
That doesn’t guarantee that there will be continuing gains going forward, however. The Market Watch website reports that half of the S&P 500 sectors are reporting declines in earnings per share this quarter over the same period last year, and a poll by the FactSet analysts suggests that seven out of the ten sectors will end the earnings season reporting declining earnings.
Part of the wind at the backs of stocks this past six weeks has come, yet again, from the U.S. Federal Reserve Board, which had originally signaled that it planned to raise interest rates four times this year. After its most recent meeting, the Fed is projecting just two interest rate hikes this year, and Fed Chairwoman Janet Yellen has clearly indicated that the Fed will remain cautious about disrupting the markets or the economy as it unwinds its various QE initiatives.
Investors also seemed to take comfort that the Chinese stock market has stabilized—for now, at least. Recently, Chinese officials reported the first rise in an important manufacturing statistic—the purchasing managers index—in eight months.
But arguably the biggest stabilizer of U.S. and global stock markets was the rise in oil—or, more precisely, the end of a long unnerving drop in the price of crude that caused anxiety to ripple through the investor community (Figure 2). Analysts are not sure how the price of a barrel of crude oil is connected with the value of stocks; indeed, for most companies, lower energy costs are a net plus to the bottom line. But investors generally seemed to take comfort in the fact that oil prices had stabilized. It’s worth noting that the day the stock market hit its low for the year—February 11—was also the day when oil futures hit their low of $26.21 a barrel.
We can’t predict where the markets will head during the remainder of the year; indeed, even the present is hard to understand. Our mission as investors is to hang on and allow the millions of workers who get up every morning and go to work to do what they do best: incrementally, hour by hour, day by day, week by week, grow the value of the companies we own with their efforts. Investors will spook and sometimes flee stocks, driving their prices down, but for the long-term, the returns on your investments are invisibly, inexorably driven by the underlying value that is created in the offices, cubicles and factory floors all over the world, especially of the sustainable and responsible companies we strive to include in our client portfolios.
Article adapted from a Bob Veres script, with permission.
Wilshire index data: http://www.wilshire.com/Indexes/calculator/
Russell index data: http://www.russell.com/indexes/data/daily_total_returns_us.asp
S&P index data: http://www.standardandpoors.com/indices/sp-500/en/us/?indexId=spusa-500-usduf--p-us-l--
Nasdaq index data: http://quicktake.morningstar.com/Index/IndexCharts.aspx?Symbol=COMP
International indices: http://www.mscibarra.com/products/indices/international_equity_indices/performance.html
Indexes are unmanaged groups of securities and are not directly available for investment. This information is obtained from sources we believe to be reliable, but we cannot guarantee its accuracy. Past performance does not guarantee future results.