Both stock and bond markets rebounded strongly during the first quarter of 2019. In the U.S., large company stocks rose 13.6%, small companies were up 14.6%, and bonds were up 2.9%. Foreign stocks rose 10%. The markets were lifted by news that the Fed had reduced the number of planned interest rate increases for 2019, from a prior estimate of three hikes down to zero. Reports of slowing global economic growth and low inflation contributed to the revised interest rate position.
Gross Domestic Product (GDP): who isn’t used to hearing about the ups and downs of this metric, commonly understood as the most important indicator of economic health? This statistic—the monetary value of finished goods and services produced within a country’s borders over a specific period—and the pursuit of its growth is embedded at the center of mainstream economic theory. But the question of whether GDP is still a meaningful metric in a world of persistent income inequality, intractable environmental challenges, and human exploitation is at the heart of Kate Raworth’s Doughnut Economics: Seven Ways to Think Like a 21st-Century Economist. Despite the title, this book offers a thoughtful, practical advice that any concerned citizen can use.
The final quarter of 2018 hit with a dramatic downturn for the stock market, while bond investments generally performed well. Large U.S. company stocks were down 13.5% over the quarter and down 4.4% for 2018. Small company stocks were down 20.2% this quarter and 11% on the year. Bonds were 1.6% higher for the quarter, though they were flat for the year.
The fourth quarter setback for stocks was abrupt and vexing. Large company stocks had recently risen 10.5% by the end of the third quarter. But by the year’s end, they were down 4.4% in a sharp reversal. Analysts have been reminding investors for years that a notable sell-off could arrive unexpectedly as the rising market endured longer and longer.
Stock markets were generally higher over the waning months of summer, with stocks of large US companies for the quarter up by 7.7%, small U.S. companies up 3.6%, and foreign stocks up 1.4%. Bonds, broadly measured, were flat for the quarter, though down 1.6% so far this year.
Trade tensions have remained front and center in economic news as the administration has continued to press for additional tariffs, as announced during the quarter. However, vigorous growth of the U.S. economy,
The stock market headed into summer on an up note, with large company stocks rising 3.4% for the quarter and small company stocks up 7.8%, though foreign stocks were down 1.2%. More interest rate hikes continued to weigh on bonds, which were off 0.2% over the three months.
The bond market is historically far less risky (volatile) than the stock market, though the market still does fluctuate. One of the key drivers of bond market fluctuations is movement in interest rates. The Fed, which sets short-term rates, has increased the rate twice so far in 2018 and has stated its intention to raise it twice more.
The rule of law is the principle that all people and entities are subject to laws that are fairly applied and enforced. No one, according to this principle, is above or outside the reach of the law—neither presidents nor corporations.
Unfortunately, the rule of law in the United States is being undermined. The current president is well known for attacking the federal judiciary in spoken and written word, though federal judges have life tenure, which affords them some degree of immunity from his political ravings. The more alarming shift—with profound, long-term implications for the rule of law—is the current administration’s nomination of partisan extremists to the federal bench and the record pace at which the Senate is confirming many of them. (It should be noted that some of these nominees are so poorly qualified that even Republicans turned their noses).
The extreme politicization of the judicial nomination process has already begun to erode the rule of law in the US. Perhaps the most egregious example of this is the Supreme Court’s 5-4 vote in the infamous Citizens United ruling, which invalidated parts of a federal law that had imposed limits on corporate money in politics.
Many people are motivated by the desire to be as prepared as possible for an uncertain future, but they recognize that this is no easy task. We encourage you to take a big picture view of the world and consider the many ways that the future could unfold. You’ll want to envision where you would like to be going in both the near-term and in years to come, and to keep abreast of the wide and growing range of investment choices available to you. By thinking in this broad, creative way, resilient investing gives you the tools to design a personalized plan. This will show you where you’re currently investing your time and money, highlight areas that you might be over or under emphasizing, and provide the guidance you’ll need to move forward in your chosen directions.
As you put your plan into action, you’ll notice a newfound sense of calm, one that rests on the knowledge that you’ve taken measured steps to future-proof your life and are ready to ride out the inevitable storms and surprises that come your way. You can’t eliminate risk, but you can dial down your stress levels and have more peace of mind by knowing that you’re prepared. Having a comprehensive and diverse set of investments will provide genuine benefits when one or another market you’ve invested in has a downturn (whether it be a sudden drop in the Dow, a dry spell that decreases yields in your garden or regional food network, or an unexpected health challenge). While it is always painful to suffer a hit in one area, investments in other Zones will likely be doing better and help carry you through.
In an exceptionally volatile quarter for investors, markets ended lower, with US large company stocks down 0.8%, US small company stocks lower by 0.1%, foreign stocks down 1.7%, and domestic bonds lower by 1.5%.
The stock market swooned in February as traders showed alarm about rising US interest rates. The market sell-off was related to the long-anticipated rise—and possible accelerating future rises—in US interest rates (considered a negative for stocks and bonds) as well as concerns that inflation may be brewing. It may not be just coincidence that this reaction happened in the wake of the recent federal tax cuts, which analysts say will stimulate—unnecessarily say some—the US economy, leading to things such as higher interest rates and inflation.
Tax cuts, along with stepped-up government spending (in March Congress passed a $1.3 trillion budget), may serve to overheat the US economy in coming months, though it is an open question as to whether the tax cuts will actually spur economic growth. Following the passage of the tax bill, there was a series of well-publicized employee bonus and capital investment announcements. (Keep in mind bonuses are one-time and not the same as wage increases.) These were meant to show that big businesses were sharing the bounty of the tax cuts with workers. Since then, however, studies and polls have shown that business investment has not increased as a result of the tax cut—and neither have wages.
How Socially Responsible Investors Supported the Dakota Access Pipeline Protests
The Dakota Access pipeline (DAPL) starts in the Bakken oil fields of North Dakota and runs nearly 1,200 miles to its terminus in Illinois, where it connects to additional pipeline infrastructure that carries the oil to refineries as far south as Texas. Along the way it crosses hundreds of streams, rivers, and other waterways, including the Missouri River less than a half-mile upstream from the Standing Rock Sioux Tribe reservation.
The project was completed and oil started flowing in June of 2017, after a prolonged protest by the Standing Rock Sioux Tribe, who were joined by water protectors from more than 100 indigenous tribal nations from across the Americas, as well as non-native allies from around the world. As the water protectors decried the violation of tribal sovereignty, the desecration of sacred sites, and the imminent threat to their only source of clean drinking water, they faced attack dogs, tear gas, rubber bullets, and water cannons in sub-freezing temperatures. These protests and concurrent lawsuits were documented by citizen journalists and eventually picked up by major news outlets.
One aspect of the stand-off that did not receive much media coverage was the role that socially responsible investors played in supporting the Standing Rock Sioux in their fight against the pipeline. At the November 2017 SRI conference, remarks by Rebecca Adamson, founder of First Peoples Worldwide (an indigenous-led grant-making organization that focuses on funding local development projects in indigenous communities while creating bridges between their communities and corporations, governments, academics, NGOs and investors in their regions) were presented by Susan White, co-chair of the Investors and Indigenous Peoples Working Group (a coalition of socially-responsible investors and others dedicated to supporting indigenous peoples rights) and Sydney Morris, chair of the Calvert Advisory Council. They provided a compelling account of the behind-the-scenes support socially responsible investors lent to the cause and the results of subsequent advocacy efforts undertaken by SRI groups:
In August 2016, the tribe asked First Peoples Worldwide and the Investors and Indigenous Peoples Working Group to lead an investor strategy aimed at diverting financing from DAPL. Investors worth more than $1.7 trillion signed a statement supporting the tribe’s request for a reroute.
Shareholder resolutions requesting better disclosure of environmental and social risks (from companies invested in the pipeline project) received record-breaking vote counts: Marathon Petroleum (38%), Enbridge (30%), and Wells Fargo (19%).
Energy Transfer Partners (the lead developer of the Dakota Access Pipeline project) stock is down more than 60% since its 2014 highs.
More than 500 NGOs and over 700,000 signatures catalyzed consumer bank account closures worth over $4 billion. Three banks divested from DAPL (BNP Paribas, DNB and ING), twelve of seventeen banks met with the tribe, and ten banks signed a statement requesting changes to the Equator Principle, (an ESG risk management framework used by ninety banks worldwide) in response to investor and civil society pressure. The fight against the DAPL has placed the costs of social risk front and center on the financial industry’s radar.
In response, First Peoples Worldwide created a seminal research effort now underway with the University of Colorado’s Leeds Business School and the American Indian Law Clinic. The first case study will be titled DAPL: Social Costs and Material Loss. Leeds Business School and the American Indian Law Clinic have formed a collaborative: First Peoples Investor Engagement Program. FPIEP has dedicated faculty and graduate students who will continue the work on quantifying social risk, designing market-based strategies for upholding Indigenous rights, harnessing the activist infrastructure that emerged from DAPL for future campaigns, and offering the Shareholder Advocacy Leadership Training to tribal leaders.
Although the Standing Rock protest did not stop the construction of the pipeline, it did catalyze these and other significant advances—not least a greatly increased awareness about the continuing impacts of colonialism on First Nations people. In 2018, the Investors and Indigenous Peoples’ Working Group (of which Natural Investments is a participant) will continue to advocate for the rights of indigenous peoples. The working group will push for companies to adopt Indigenous Peoples’ Free, Prior and Informed Consent (FPIC) policies and to cease activities that harm Indigenous lands, communities, and cultures. It will also focus on building investor, corporate, and U.S. government support for the United Nations Declaration on the Rights of Indigenous Peoples. And the group is committed to identifying opportunities, including strategic partnerships and investor support, to advance Indigenous community economic development initiatives.
“The SRI community made our voices heard, and we thank you,” said White and Morris, as they concluded their talk at the SRI Conference. Their eloquent presentation affirmed and deepened the commitment of Natural Investments to advance the rights of Indigenous peoples around the world through the powerful lever of impact investing.
The stock market continued its upward march during the third quarter. Large company stocks ended up 4.5%, while small companies rose 5.7%, and foreign stocks were up 5.4%. Bond returns for the quarter broadly measured— were also positive, up 0.8%.
These results arrived amid a backdrop of generally positive global economic news. IMF economists believe the pickup in global economic growth will remain on track and have expressed particular optimism for developed European economies. Though difficult to predict reliably, there is some analyst consensus that foreign stock markets may present better opportunities in 2018 than U.S. markets.
This is in part because the U.S. is now in an (unhurried) interest rate increase cycle. Rising interest rates are known to have a cooling effect on an economy. You might think of low rates as oiling-up the economic machine, while higher rates can slow the machine, to a degree. A recent Wall Street Journal poll of economists showed that the majority expects the Fed to raise rates once more this year, in December.