Quarterly Commentary 4Q’21
Looking Back at 2021
When history looks back at 2021, we expect the year will be defined by the ongoing battle against Covid 19, the climate change-fueled disasters around the globe, and the growing threats to democracy in many countries, including the U.S. It was certainly a difficult year for humanity. But the stock markets, ever forward-looking, were largely about growth and recovery. For the third consecutive year, major US and global benchmarks delivered healthy double-digit returns to investors.
That said, returns varied across regions of the world, with the US again outperforming most other countries. US stocks of all sizes did well: indexes for small, mid, and large company stocks each delivered 20%+ returns for the year. Meanwhile the MSCI EAFE Index, which measures stock returns across 21 developed country markets in Europe, Asia, and the Far East, delivered a less robust 11.8%. The MSCI Emerging Markets Index actually lost ground, delivering -2.5% for the year, on concerns about an unpredictable China, high debt levels, and continuing impacts from Covid. Putting it all together, the MSCI All Country World Index – a global benchmark which Figure 8 has used as a primary stock benchmark – returned 19.0% for the year. Figure 8 stock portfolios performed largely in line with the global benchmark.
There were also some big disparities across sectors and industries. Real estate stocks were a standout as property prices soared, while technology and consumer discretionary stocks continued their strong run. Last quarter we wrote about oil and gas stocks rising after more than decade of significantly lagging. With current demand for energy still high, oil and gas stocks and the big banks that finance them again outperformed - a headwind these past quarters for climate-concerned investors. Conversely, renewable energy stocks pulled back as US Congress did not (yet?) deliver on the second and larger part of the infrastructure spending bill. We have high conviction that this quarter’s dynamics will reverse as the transition away from fossil fuels proceeds. With rising concerns around inflation (see below), bond markets languished. Our primary benchmark, the Bloomberg Barclays Intermediate Aggregate Index was -1.4% for the year.
Looking Out – and Up? – at 2022
The recovery story foretold by 2021’s strong stock market has hit some bumps, as Covid continues to confound. Right now, all eyes are on inflation. The headlines have been dramatic: the US Consumer Price Index was up to a 40-year high of 7.0% year-over-year for December and the Produce Price Index was higher at 9.7%. Economists largely agree that inflation will not persist at this elevated level, as the current pace of recovery cools and pandemic-driven supply chain issues resolve. Bond markets support this view, with interest rates across all maturities staying historically low, indicating bond investors see sluggish growth and not sustained high inflation ahead. Regardless, there is certainly elevated concern about inflation – and we know the expectation itself can lead to more inflation.
The Federal Reserve has backed off from its characterization of rising prices as “transitory” and recently announced a series of measures to tighten the money supply. Economists now generally predict three federal funds rate increases through 2022, with the first happening early in the year. In many ways, it’s a sign of economic health to be steering rates upwards, pumping the brakes on economic growth. The Fed has a lot of room to maneuver as its starting point is a fed funds rate that’s essentially zero. Rising interest rates typically present a less-friendly environment for investors, and many market watchers anticipate 2022 will bring more tepid growth than the than strong double digit returns we’ve enjoyed over the past three years. As we enter an era when stock valuations may contract from their current above-average levels, our Figure 8 team is staying focused on our asset allocation, risk management, and valuation disciplines, while carefully adding to bonds where appropriate in this still-low-but-rising interest rate environment.
Compounding supply chain challenges is the growing labor shortage. In the US and beyond, many workers have left the labor force due to illness or family demands, while immigration policy and aging demographics exacerbate the impact. Lower wage workers suddenly have bargaining power to ask for better pay, benefits, and working conditions. We see this as a positive, if early, step towards addressing the runaway inequality that’s plagued the US economy. Twenty-nine states now mandate a minimum wage higher than the federal level, striking workers at Deere successfully negotiated better wages and benefits, and Starbucks employees successfully unionized for the first time in Buffalo with more locations expected to follow. Figure 8 joined with other social investors in a letter to Starbucks executives asking for their support for worker rights and will stay engaged as things evolve. In our view, wage growth may raise corporate costs in the short term but are essential to a functioning economy and democracy in the long term.
Shifting wage inequality was never going to be easy – and the rise of worker power is but one step in a long battle - but perhaps enduring two years of a global pandemic have strengthened the world’s resolve to collectively tackle difficult things. As we look to 2022, we see new possibilities for progress, especially around accelerating global solutions to climate change. This includes potential breakthroughs in battery technology and storage capacity, increasing electrification, further development of carbon markets, and maybe even additional climate legislation from US Congress. We’re also hopeful workers will continue to gain strength, using this moment in history to narrow what has been an increasing and unjust gap in wealth and wages.
“Right and wrong matter. It cannot happen that evil, injustice, and oppression can have the last word. No, ultimately goodness, justice, freedom – these will prevail.”
Our positivity is in part inspired by the legacy of the great Bishop Desmond Tutu, who the world lost in the final days of 2021. Bishop Tutu served as a symbol for decency, humanity, and even joy in the face of overwhelming injustice throughout the apartheid era in South Africa. Bishop Tutu was a hero and inspiration to many, including those of us building the field of social investing in its early days, as he guided us to use the power of divestment to help end the apartheid system. In the aftermath, Bishop Tutu led the work of the Truth and Reconciliation Commission, demonstrating to the world how even in the most direct cases, people can simultaneously acknowledge the incredible pain of the past while looking to the future with hope, optimism, and resilience. Now, at another challenging time in the world, we pledge to keep following his lead.
