Quarterly Commentary 4Q’16
The Current Context: Unpresidented
The 4th Quarter of 2016 brought one surprise after another and indeed, it seems our world has tipped. Donald Trump was elected US president and has proceeded towards inauguration day under (to say the least) highly unusual circumstances. Along with the president-elect come concerns about his wide-ranging business conflicts, controversial appointments, nepotism, inflammatory communications style, alarming views on Russia and its involvement in election hacking, confounding relationship with Vladimir Putin and bizarre infatuation with tweeting. Trump’s ascendancy to political power and the magnitude of his proposed policy changes are truly unprecedented.
With all the uncertainties surrounding a Trump presidency, one might expect investors to be wary. But with Republicans winning both houses of Congress, investors have cheered. Stock prices and bond yields have both moved higher since the election, in anticipation of lower corporate taxes, stimulative government spending and a loosened regulatory environment. For both the quarter and the year, the US led other markets around the world, with banks and industrial companies among the strongest performers as they are expected to benefit from normalizing interest rates and/or infrastructure spending. For the 4th quarter, the US-based S&P 500 rose 3.8% while the broader MSCI All Cap World Index was up 1.3%. For the full year, the S&P 500 logged 12.0% and the MSCI All Cap World 7.9%. Bond prices weakened during the quarter and the Federal Reserve’s interest rate hike on December 14 seemed almost an afterthought, as bond yields rose swiftly following the November 8 election.
Our View: Non-Linear Progress is Still Progress
We maintain our near-term caution in the midst of this enthusiasm, anticipating big speed-bumps ahead for the Trump administration and for the broader Republican agenda around trade, tax, energy, immigration and healthcare reform policies. Legislative change is typically not smooth or easy – it was designed that way. We may see an upward nudge in economic growth; however, Trump’s GDP growth target of 4% is unlikely attainable, most likely inflationary and certainly not sustainable. We expect investor disappointment and increased market volatility as it becomes clear the promises of unfettered growth won’t be kept.
On the surface, it also seems the current political environment would present headwinds for sustainable investors. Wall Street is now most bullish on big banks, big oil, big pharma, military contractors, private prisons and natural resource extraction – segments typically underrepresented in the portfolios of socially responsible and sustainable investors. These market segments are largely up since the election, but again, we are skeptical that real gains in earnings will be as big or protracted as many are anticipating. While this administration and its followers may choose to ignore crucial challenges such as climate change, natural resource depletion, and economic inequality, we will continue to choose to participate in the evolution of solutions to these pressing issues. We are believers that long-term, sustainable economic growth is driven by the key elements of innovation, opening access to new markets and improving efficiencies. We remain bullish on finding opportunities for types of investments over coming decades, both within and outside the US.
In the longer term, we see tremendous opportunity for sustainable investment. As we’ve written before, we believe we are entering a time of large-scale economic transformation as the world grapples with shifting demographics, growing resource scarcity and an increasingly vulnerable planet. Admittedly, the election of Donald Trump, the UK’s Brexit vote and increasing isolationist sentiment across Europe and elsewhere were not quite the changes we anticipated along this path. But as Ford Foundation President Darren Walker writes “America’s rich and inspiring history has taught us that progress is not linear.” (For more, see Walker’s important and hopeful essay Let America Be America Again.) And indeed, it makes sense that the global shifts we envision would have side effects: that as we begin the shift away from the fossil fuels on which our economy has relied for 200 years, some would fight to bleed remaining profits… that as borders have become more fluid and the US & Europe become more diverse, there might be an isolationist backlash… that as developing economies begin to build wealth, that some in power might think it rightfully belongs to them.
Portfolio Positioning: What We’re Doing
In this time of change, we’ve maintained a disciplined focus on rebalancing portfolios to be sure they’re in line with asset allocation targets and client-specific risk tolerance, as we expect stock market bumpiness going forward. In particular, we’ve been reducing stock holdings where recent market strength has led to overweights in equities. In many portfolios, we’ve added to high-quality bond positions, particularly in corporate and municipal green bond issues financing the build out of solar and wind energy. In general, we continue to see large cap US stocks trading at pricey valuations, with better buying opportunities, albeit with more uncertainty, outside the US and in smaller capitalization stocks.
In our impact work, we continue our collaborations and shareholder engagements to influence corporate practices in areas such as industrial water use, labor standards across the agricultural supply chain and efforts to eliminate the sourcing of “conflict minerals” used in electronic devices. In November, we were proud to submit Figure 8’s first co-file of a shareholder resolution with BlackRock, Inc. The asset manager, which promotes itself as a leader in environmental, social and governance investment strategies and is a member to the Principles for Responsible Investment, rarely votes in favor of climate resolutions. Given this contradictory approach, we have requested that Blackrock review its proxy voting on climate issues. As we move forward in a period of time when US regulation and government oversight is expected to decrease, our diligence as shareholders is more important than ever.
At Figure 8, we are steadfast in our mission to find and deliver solutions for investors and the world in this changing landscape. As always, we are happy and honored you’re joining us on this this journey.
Lisa Cooper, CFA, CFP®
President, Figure 8 Investment Strategies