Quarterly Commentary 1Q’24
Surprising Resilience
The economic uptrend we saw in late 2023 is continuing right into 2024, with many positive indicators in the U.S. and across developed economies. The labor market remains especially strong; that strength, plus real wage growth for workers, is contributing to ongoing robust consumer spending. Government spending is strong as well, with programs like the Infrastructure Investment & Jobs Act, CHIPS Act, and Inflation Reduction Act boosting both public and private investment. At the same time, inflation has moderated to the 3.0-3.5% range – much improved although not yet at the Fed’s 2% target – which could still be quite a way away. There are certainly pockets of economic concern (e.g. rising consumer debt levels, waning commercial real estate, the still-present possibility of stubborn inflation) but overall, it’s hard to find significant evidence of the softening forecasted in response to the steep increases in interest rates of last year. In February, the Conference Board officially abandoned its expectations for a U.S. recession in 2024, and in its quarterly “World Economic Outlook” the International Monetary Fund called out the “surprising resilience” of the global economy as it modestly increased its global growth forecasts to 3.2% for each of the next three years.
This healthy economic scenario of course makes it hard for the Federal Reserve to justify a cut in interest rates. While many market observers had come to expect multiple rate cuts in 2024, for now the Fed has said it will wait and watch the data. We’re waiting, too. The consensus outlook among economists is still for a soft landing that leads to modest rate cuts during 2024. We can envision that rosy scenario as well – but we can also see that today’s steady economic backdrop could be jolted by any of a number of events, including a delayed slowdown precipitated by overextended consumers, inflation that proves more persistent than currently expected, or more event-driven disruptions across global supply chains leading to additional inflationary spikes. We’re also concerned about potential political chaos in the US and abroad, as well as the ongoing devastating wars in Ukraine and Gaza, heightened by worrying new tensions with Iran. There’s nowhere else we’d more like to see a “soft Source: IMF.org landing”, in the form of a peaceful and sustainable solution.
As you review your portfolio reports for this quarter, you’ll see that stock performance was once again positive, with all major segments seeing positive results. Small cap US stocks (as measured by the S&P 600 index) rose 2.5%, large cap US stocks (the S&P 500 index) were up 10.6%, developed international markets (the MSCI EAFE index) were up 5.9%, and emerging markets (the MSCI Emerging Markets index) were up 1.9%. Overall, the global MSCI ACWI returned 8.3%. [Source for Stock & Bond Index Returns: Refinitiv Datastream] During the quarter we added to positions in First Solar and the newly independent water pureplay Veralto, both intended as long-term sustainability-focused holdings. Bond returns were slightly negative for the quarter, with the Bloomberg Barclays Aggregate Bond Index returning -0.8% as bond investors continued to anticipate the Fed’s future rate cuts (or not, depending on the day!).
$20 Billion for the Climate
The Greenhouse Gas Reduction Fund (GGRF) has gone live!!! The GGRF is the only major outright cash distribution from the Inflation Reduction Act (everything else is tax credits) and has enormous transformative potential for the environment and communities. On April 4, the EPA announced the much-anticipated first round of grant awards for the GGRF. With the $20 billion in these grants, money will go directly to community lenders to finance local community-determined projects around the energy transition and climate justice, with a projected 70% of funding expected to go to the most economically vulnerable areas.
The total $20 billion in grant awards from this round went to three major coalitions. The largest recipient is Climate United, a coalition led by Calvert Impact Capital and including organizations we know well: Self-Help, Sunwealth, and many Community Development Financial Institutions (CDFIs). The GGRF is intended to be catalytic in bringing private capital to the space: every $1 from the Federal government is projected to lead to an additional $7 in private capital – and that includes us! In fact, sustainable and impact investors – including our clients at Figure 8 – have already been involved in providing early capital and proof of concepts that with these new funds, are expected to see major expansion. If your portfolio holds, for example, a Calvert Cut Carbon Note, a Connecticut Green Bank bond, a green municipal bond, or a Self-Help Credit Union CD, you have already played a role in this transition – and there will be more to come. (To note: this first GGRF round included two tranches: the National Clean Investment Fund and the Clean Communities Investment Accelerator; the Solar For All awards are expected by fall.) You can read more about the Greenhouse Gas Reduction Fund awards here and the Climate United coalition here.
Last quarter we opined that renewable energy and other clean technology companies will be propelled by fresh capital, new global commitments, and very possibly a much friendlier rate environment in 2024 and beyond. We don’t yet have that friendlier rate environment, but the other ingredients are rapidly falling into place.
You should always consult a financial, tax, or legal professional familiar with your unique circumstances before making any financial decisions. This material is intended for educational purposes only. Nothing in this material constitutes a solicitation for the sale or purchase of any securities. Any mentioned rates of return are historical or hypothetical in nature and are not a guarantee of future returns. Past performance does not guarantee future performance. Future returns may be lower or higher. Investments involve risk. Investment values will fluctuate with market conditions, and security positions, when sold, may be worth less or more than their original cost.