The stock markets again delivered positive returns for the 3rd quarter of 2017, continuing the trends we’ve throughout this year. Large company stocks generally outperformed small, the technology sector again delivered best-in-market returns, and market strength extended across the globe, especially in emerging markets. Although the S&P 500 is now trading at a relatively high 18x forward 12-month earnings, investors remain optimistic given continued low interest rates and a healthy outlook for corporate earnings growth. Stock price volatility has been
exceptionally low – which is particularly notable given the abundant negative news flow through the quarter. Over the past three months, we’ve seen destructive hurricanes and fires
across the US, growing geopolitical tensions with North Korea in particular, increasing racial strife at home, and White House dysfunction and congressional gridlock around core issues like healthcare, immigration, infrastructure spending and potentially tax reform. For now, investor optimism seems untouchable.
Bond prices held firm through the quarter, too, as interest rates remain low over both the short and longer term. The Federal Reserve has been challenged to set policy amidst conflicting signals of, on the one hand, low inflation still below the 2% target and on the other, strengthening economic growth around the world. The Federal Reserve refrained from raising rates at its September meeting, but did signal a reversal of its quantitative easing stance and a likely third rate increase for the year at its December meeting.
Healthy Corporate Earnings Growth Expected
We, too, are grappling with conflicting signals. We see the base case for healthy markets and continued growth, but also see considerable economic vulnerabilities and continue to take a careful and balanced approach in managing client assets. For existing accounts, we’re sticking to asset allocation targets, which for many accounts has meant diligently trimming stocks as prices rise. For new accounts and cash additions, we’ve been averaging into the market over time (roughly 3-6 months), to take advantage of market fluctuations.
The economic expansion of recent years continues to lift corporate profits (see above), as well as stock market returns and overall employment. But wages for the average worker have stayed sluggish while disparities in income and wealth have widened. Workers as a whole have seen little benefit from expanding corporate productivity and profitability. There are myriad reasons for this – the demise of unions, the rise in outsourcing, the advent of automation and perhaps most powerfully, new concentrations of wealth and power in the US economy. These forces have arguably had their biggest effect on historically disadvantaged groups. For example, a September 2017 study from the San Francisco Federal Reserve* found that earnings gaps between black and white workers have been persistent and growing for both men and women across all educational levels over recent decades—and that while in 1979 the average black man earned 80% as much per hour as the average white man, by 2016 that number had fallen to 70%.
Economists see the growing wealth gap and these types of disparities as increasing risks to economic stability. We agree and as investors deeply concerned with social justice, are eager for opportunities to highlight, encourage and participate in initiatives to drive change. On the corporate side, we are happy to see retailers like Target and Costco announcing wage increases for retail workers, tech leaders like Accenture launching its forceful Inclusion Starts with I campaign (https://www.accenture.com/us-en/company- diversity), and brand leaders like Nike voicing support for freedom of expression and for athletes protesting to call out racial injustice.
*Source: Federal Reserve Bank of San Francisco: http://www.frbsf.org/economic-research/publications/economic- letter/2017/september/disappointing-facts-about-black-white-wage-gap/
On the investor front, we’re pleased to participate in widening shareholder campaigns calling for gender pay equality at technology and financial firms in particular, and to see the $175 billion New York City Public Pension Funds now calling on 150+ companies for disclosure on racial and gender workforce composition and pay. California could lead the way on this type of corporate disclosure, as it may soon require employers of 500+ workers to publish statistics on differences in pay by gender.
There is clearly much work still to do. For our part, we’re committed to doing to what we can to work towards greater economic and social justice, from where we stand as active investors, and will continue to report here.