The US economy remains resilient, supported by strong retail spending and labor markets and signs of improving consumer confidence¹ and strengthening in housing markets. 

In the third quarter of 2023, GDP grew at its fastest rate in nearly two years – driven by consumer and government spending and private inventory investment.² However, we believe recent indications signal that economic growth is slowing down. The US Manufacturing Purchasing Managers’ Index (PMI) was in negative territory as of Q4 2023.³ ⁴  Consumer debt is also increasing,⁵ indicating that retail spending may be driven by borrowing as pandemic era savings dwindle. The 4th quarter GDP estimate, currently at 2.4%,⁶ suggests the economy has remained strong.

Read More

By Jane Swan, CFA and Roraj Pradhananga, CPA

The first quarter of 2023 was characterized by major events such as the failure of Silicon Valley Bank, escalating concern of a pending recession. Sentiment made an about face in the second quarter, buoyed by limitless enthusiasm for artificial intelligence. At the end of the third quarter, we seemed to have settled into an uncomfortable normalcy: uncertainty.

The labor market remains tight despite slowing job growth in 2023. The unemployment rate remains low at 3.8% despite increasing 0.2% in Q3.¹ Employees are losing confidence in their job prospects, as shown by recent declines in the Conference Board survey and stalling of the quits rate. 

Read More

By Jane Swan, CFA® and Roraj Pradhananga, CPA

Early 2023 offered the economy and markets several hurdles. High inflation, instability in some regional banks, and a looming battle over the debt ceiling each invited speculation of a possible recession. The US economy remains resilient, supported by consumer spending with strong labor and housing markets. Manufacturing data and other leading economic numbers suggest a possible slowdown could still be ahead, and continued interest rate hikes could tip the economy towards a recession. 

Read More

By Jane Swan, CFA, Senior Wealth Manager

Equity market returns in the first quarter were very strong. Investors were seemingly unfazed as political commentators vacillated between exuberance and doubt over the potential for the Trump presidency to advance tax cuts and other pro-business policies. The S&P 500 (U.S. large cap) was up 6.1 percent. The Russell 2000 (small cap) was positive at 2.5 percent. The MSCI EAFE (developed international equities) rebounded and were up 7.4 percent. Strongest of the major equity benchmarks was the MSCI Emerging Markets index, up 11.5 percent in the quarter.

2017 Q1 Asset Class Returns

Within equity markets, the strongest performance came from the technology sector, up 12.6 percent. After technology, the best-performing sectors were consumer discretionary, health care, and consumer staples up 8.45 percent, 8.37 percent, and 6.36 percent respectively. Only two of the ten sectors were negative. Telecom was down 4 percent and energy was down 6.7 percent. Positive earnings forecasts for the year are largely dependent on growth in earnings from the energy sector. The declining price of oil and weakness in the energy sector ordinarily casts a more negative pallor over the market.

2017 Q1 Sector Returns

Fixed-income markets were positive despite the interest rate hike at the March meeting. Tepid but consistent economic growth, low unemployment and a slight increase in inflation compelled the Federal Reserve to raise the Fed Funds rate by a quarter of a percent to the range of ¾ to 1 percent. The statement also foreshadows future rate hikes by year-end. The small rate hike did not impact longer maturities, as the yield curve flattened. This flattening reflects a disagreement between the bond market and stock market about the likelihood of a significant economic expansion. Fixed-income markets ended the quarter just barely positive after negative returns in the end of 2016. Treasuries were up 0.8 percent. The yield on the 10-year Treasury was almost unchanged at 2.39 percent from 2.45 percent at the end of 2016. Corporate bonds were up 0.8 percent. Intermediate munis were up 1.9 percent. High-yield bonds were up 2.7 percent in the quarter.

As we look at market behavior and reaction to political environment, there are a number of factors we carefully consider. Thus far, the majority of investors appear to react favorably to political statements and promises by the Trump administration that are business-friendly. At the same time, investor reaction has been muted to setbacks in the administration’s agenda. The market rallied in early March as debate began over a bill repealing and replacing the Affordable Care Act (ACA), but was flat the week the bill died without reaching a vote. Many business-friendly tax reforms are dependent on cost savings from the rollback of the ACA. However, the lack of reaction suggests that the market still believes significant tax reform can be achieved. Likewise, with a significant portion of earnings growth expected from the energy sector, declines in the price of oil and related earnings expectations for energy companies have not yet caused a drag on the market. Many of our clients have limited direct exposure to the energy markets, but a significant shock in this sector would have repercussions across the market.

With the initiation of many expected rate hikes, fixed-income investors are anxious about their portfolios. Interest rates have an inverse relationship with bond prices. This means that when interest rates go up, the prices of previously issued bonds declines. The decline in prices occurs because the increase in rates enables new bonds to pay higher rates than the previously issued bonds.  The sooner a bond matures (the shorter the bond’s duration) the less likely the bond will experience a price decline when interest rates rise. Conversely, the further away the maturity, (the longer the bond’s duration), the greater decline in the bond prices when interest rates rise. Bonds with a longer duration pay a higher current yield than bonds with low duration, but they also carry more risk and suffer more when interest rates rise.

Many investors look to the bond portion of their portfolios primarily for stability and preservation of capital. Declines in this asset class can be uniquely disconcerting. In the persistently low interest rate environment of the past decade, many investors have grown frustrated by low yields and have turned to longer durations or lower credit quality (high yield, also known as “junk” bonds) to increase income from bonds. Because these bonds have greater potential to fall in value as interest rates rise or credit quality declines, understanding this risk is important.

For investors using bond funds, there is a possibility that a decline in prices of existing bonds from interest rate hikes will cause panic selling among investors. Investors using laddered bond portfolios (a series of bonds over a spread of years that are held until the bonds mature) may have more control than bond fund owners. Fluctuations may not have a real impact on the investor. As we consider the options for bond investments for our clients, we look to find the best fit for their financial and impact objectives. Where individual bonds have the benefit of allowing the investor to limit realized losses by holding bonds to maturity, individual bond portfolios are almost always less diversified than bond funds. While bonds can theoretically be traded at any time, bond trading is significantly less efficient than stock trading. Transaction expenses for small bond denominations are expensive. Remembering that the primary purpose of a bond allocation is preservation of capital, the diversification through a bond fund should be balanced with the ability to control against losses from rising interest rates. For investors who do not have a large enough bond allocation to appropriately diversify their bond holdings, bond funds are often a better choice than owning an insufficiently diversified bond portfolio.

Your Veris team knows that uncertain times are unsettling to investors. While we continue to keep abreast of possible and unpredictable impacts from policy changes, we focus on our clients’ long-term goals. Our sustainability core-values help filter short-term noise in the financial markets without losing sight of the long-term risks and opportunities.

By Jane Swan, CFA, Senior Wealth Manager

As the market adjusts and tries to make sense of the results of the U.S. election, financial markets have been mixed. After an initial decline in futures markets on election night, the S&P 500 (U.S. large cap) rose 3.8 percent in the quarter, bringing total return for the year to 12.0 percent. The Russell 2000 index (U.S. small cap) had another strong quarter and was up 8.8 percent for the quarter, or 21.3 percent for the year. International markets were less enthusiastic. The MSCI EAFE (developed international markets) slid 0.7 percent for the quarter, bringing year-to-date to a positive 1.5 percent. Emerging markets, the best performing asset class of the prior quarter, were down 4.1 percent in the final quarter, but were up 11.6 percent for the year.

2016 Q4 Asset Class Returns

Investment grade domestic fixed-income markets, which had rallied in the prior quarter, gave back much of their gains. U.S. Treasuries returned a negative 3.0 percent in the quarter, driving down year-to-date returns to a positive 2.7 percent. Corporate bonds fell 2.1 percent for the quarter, but up 2.1 percent year-to-date. Municipal bonds were down 3.7 percent for the quarter and 0.5 percent for the year-to-date. Excluding investment grade issues, high-yield bonds finished the year up 1.8 percent for the quarter and 17.1 percent for the year.

Within the large cap market, the sectors potentially benefitting from deregulation saw the largest gains.  The biggest winners:  Financials (up 21.1 percent for the quarter, 22.8 percent for the year), Energy (up 7.3 percent for the quarter, 27.4 percent for the year) and Industrials (7.2 percent for the quarter, 18.9 percent for the year). Not far behind were Telecom (4.8 percent for the quarter and 23.5 percent for the year) and Materials (4.7 percent for the quarter and 16.7 percent for the year). Each of these sectors have seen progress on environmental or consumer protection regulations in the last eight years. The market suggests that profits have the potential to be higher (at least in the short term) with less government regulation.

Weaker returns came from sectors mostly thought to have less potential benefit from deregulation. These include Consumer Discretionary (up 2.3 percent for the quarter, 6 percent for the year), Technology (up 1.2 percent for the quarter, 13.9 percent for the year) and Consumer Staples (down 2 percent for the quarter but up 5.4 percent for the year. Utilities had almost no change in the fourth quarter after three strong quarters in 2016. They were up just 0.1 percent in the quarter but 16.3 percent for the year. The worst performance came from Health Care sector, which was down 4 percent in the quarter and 2.7 percent for the year. The uncertainty over the fate of the Affordable Care Act triggered uncertainty about profits for the sector.

2016 Q4 Sector Returns

Looking Ahead

With a new administration now in place, we look at each sector to understand how markets may be affected by both political and economic forces. The energy sector, heavily impacted by oil-related businesses, is an instructive place to start.

The significant rebound in energy stocks last year happened despite dramatic a year-over-year decline in the sector’s earnings (currently estimated at -66%). Because stock prices tend to express expectations of future earnings, the rise in stock prices is a reflection of the expected significant increase in earnings for companies in the energy sector. The chart below shows current earnings growth forecasts for each sector over the next two calendar years. The estimates for extraordinary forecasted growth in earnings within the energy sector stand out. They are expected to exceed 350 percent. In fact, the forecasted earnings growth has little to do with potential policy or regulation changes under the Trump presidency. The 2017 forecast has changed very little from its pre-election forecast from September 30, 2016.

The anticipated increase in oil stock earnings is instead tied to the expectation that oil will to rise to about $56 by the third quarter of 2017 from a low of $33.69 in the first quarter of 2016. This forecasted increase is expected to boost energy sector earnings from $4.3 billion in the third quarter of 2016 to $14.0 billion in the third quarter of 2017. The price of energy stocks today factor in these expectations. Changes to these expectations, either positive or negative surprises, could further impact the returns of energy stocks. It is important to note that while the current value of energy stocks appears very positive that: 1) globally the majority of new electric generating capacity is solar and 2) grid parity prices for solar and wind are now below fossil fuels throughout Developing world and will at parity in the U.S. over the next 5 years.  Finally Bloomberg’s analysis tags 2020 as the year oil consumption peaks globally.  These are amazing transformations that are not turning back.

Earnings Growth Forecasts by Sector

The price of oil is a function of many factors. One key variable is the value of the dollar. (Oil is priced in US dollars.) When the dollar is strong, it weakens the price of oil. An unanticipated change in the strength of the dollar could have a meaningful impact on the current earnings forecasts. Changes to fiscal and monetary policy, as have been hinted at by the incoming administration, could also impact the strength of the dollar.

Oil Prices vs. Strength of Dollar

Another key factor affecting oil prices is supply and demand. Some of price declines in recent years can be attributed to the high supply coinciding with decreases in demand for oil. Supply has been high because OPEC has maintained elevated production levels. Natural gas and energy from renewable resources have taken share of total demand away from both oil (petroleum) and coal. Expectations for oil prices to increase this year rest heavily on assumptions of a weakening dollar and a decrease in OPEC production.

Primary U.S. Energy Consumption by Source

The impact of tax incentives proposed by the new administration and Congress are uncertain at best. This may not change the business case for renewable. As oil gets more expensive, the interest in sourcing energy from natural gas and renewable energy would be expected to rise. When oil is relatively cheap, as it has been, tax incentives have helped make the financial case for investment in renewable. Moreover, 365 U.S. companies made urged the president-elect to continue participation in the Paris climate deal, citing the business and job creation aspects of climate protection economies. While short-term returns may be volatile and unpredictable for the next few years, there remains a long-term business case for ongoing investments in renewables.

As we look to the broader economy, Veris’ areas of thematic impact focus, and at vulnerable communities, we see important roles for city and state governments, impact investing and philanthropy. Cities and states continue to lead in raising the bar in areas ranging from increasing the minimum wage to addressing climate change. Shareholder advocacy and active investing can replace some of what may be lost by decreased government regulation. Investment in sustainable businesses can address climate change and building healthy communities. With many non-profits relying on government grants for significant portions of their annual budgets, increased reliance on philanthropy is expected. Clearly in this transition in Washington we see the importance of redoubling the effectiveness of impact investing strategies. And we need to remember that for the last 20 years we have collectively been changing the face of business and finance for the better. Impact investing plays an ever bigger role.  We appreciate our opportunity to engage in this work with each of you.