The stock market started off with a bang for 2017, with every broad-based global benchmark delivering strong returns for the first quarter. But digging into the details, it’s pretty clear the touted “Trump trade” was not the primary driver of investor enthusiasm. Consider:
It’s compelling to think investors might be making a political statement, but that’s almost certainly not the case; rather, the quarter’s rally was rooted in investors’ enthusiasm for where this economy is headed.
In the US, corporate profits are looking healthy; analysts expect companies to report Q1 earnings up 9% on average over from the same period last year. The prospect of lower corporate taxes and reduced regulations only adds to an already robust outlook for corporate profits (if not the planet.) Outside the US, emerging markets are benefiting from stabilizing commodity prices, while Europe is showing some modest signs of growth. In general, investors have been drawn to both emerging and international markets for their relatively attractive valuations. And, investors are signaling that the transition towards more sustainable energy continues, with potentially game-changing innovation ahead in generation, storage, transmission and application.
These and other signs of growth have led the Federal Reserve to multiple rate increases, with more expected. Federal Reserve Bank of San Francisco president John Williams sees the robust US economy leading to at least three more rate increases for 2017, stating, “With an economy at full employment, inflation nearing the Fed’s 2% goal and the expansion now in its eighth year, the data have spoken and the message is clear: We’ve largely attained the hard-sought recovery we’ve been after for the past nine years.” (Reuters, 3/29/17)
We, too, expect that economic growth and inflationary pressures will lead to multiple rate increases this year. If the Fed is able to engineer this in an orderly way, gradually rising rates could be positive for corporate profits — and for anyone living on a fixed income, retirees in particular. But of course, a rising rate environment could be the opposite of orderly, and markets face other significant vulnerabilities: the possibility of a peaking global economy, rising conflicts in the Middle East, North Korea and elsewhere, potentially destabilizing political leadership in the U.S. For now, on balance economic forces are positive but we remain watchful for signs of change. And so, we continue to take a careful and balanced approach in managing client assets:
As social investors, we see this as a time of real differentiation for corporate leaders, where simply paying lip service to social responsibility will not be perceived as adequate. (Exhibit A: Uber’s unconvincing statement under pressure that “we need to do better” on diversity.) Given the political climate, companies across sectors will face new pressure to take stands on issues ranging from gender equity, immigration and labor standards to energy policy and resource conservation, and we expect that stakeholders — consumers, employees, shareholders, us! — will hold them to commitments.
Already in 2017, we’ve seen varied corporate responses to the new US administration’s proposed environmental and human rights policy changes. Figure 8, along with other social investors, is working to promote opportunities for corporate leadership in this era of government backpedaling. In particular:
In announcing Starbucks’ plans to hire thousands of refugees and veterans, CEO Howard Schultz recently asserted, “Not every decision in business is an economic one… because leadership and moral courage is not a passive act.” We agree, but also believe those acts of corporate leadership and moral courage are very often exactly the things that lead to long-term economic health, for all stakeholders. We’ll be doing what we can as active investors to monitor, encourage and highlight such acts, and will continue to report here.