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ESG

The Greening of Wall Street

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The green revolution is upon us. Like it or not, the world is shifting away from fossil fuels toward renewables. Solar and wind farms are sprouting up across the globe. The major car companies are phasing out gas-powered vehicles and transitioning to hybrids or plug-ins. And the Biden administration has announced major green initiatives to support renewable energy and reduce carbon emissions.

This quantum shift has not gone unnoticed by Wall Street. In fact, investing in green businesses has taken off. A few electric car and solar companies have seen their stock prices soar as more and more investors view them as the wave of the future. Funds specializing in green and other socially responsible investments — called impact, sustainable, or ESG funds — have proliferated, allowing investors to pursue a broad-based green investing strategy. According to the Forum for Sustainable and Responsible Investment, there are now over 800 registered investment companies offering funds with ESG assets, including 718 mutual funds and 94 ETFs.1 U.S.-domiciled assets under management using ESG strategies grew from $12.0 trillion at the start of 2018 to $17.1 trillion at the start of 2020, up 42%.2

What’s Driving Growth?

Several factors are behind this dramatic growth — first and foremost, demographics. Millennials, at over 70 million strong, are coming of age and now outnumber baby boomers. This new generation is the heir to a huge asset transfer now in progress, and millennials seek to make a difference in society through the investments they make. But investor interest is also growing broadly. A recent Morningstar report found that 72% of the U.S. population expressed at least a moderate interest in sustainable investing, while a Morgan Stanley survey determined that 85% of all individual investors were interested in sustainable investing, up 10 percentage points from 2017.3

Green technologies have also become cheaper. The prices of some products have fallen dramatically, making them competitive with traditional technologies. The cost of solar power, for instance, has decreased by 80% in the past decade. That of lithium batteries is falling by 20% a year.4

What’s more, many countries are going greener. The U.S., EU, and China are setting “net-zero” emissions targets, and early this year, the Biden administration rejoined the Paris Accord, which aims to reduce greenhouse gas emissions and limit global warming.

What About Returns?

Proponents of green investing have always had to combat the notion that socially conscious investments underperform the broader universe of investments. Yet there is a growing body of evidence that suggests otherwise. In fact, a number of different studies show that sustainable funds have had comparable, or even higher returns than traditional funds. For 2020, analyses by Morningstar and Morgan Stanley indicate that ESG funds comfortably outperformed their peers. A longer-term study of ESG fund performance from 2004 to 2018 by Morgan Stanley indicated there is “no financial trade-off in the returns of sustainable funds compared to traditional funds, and they demonstrate lower downside risk.”5

Tips for Green Investing

Investing with a conscience is not that different from investing just for profit. It involves another layer of thinking and analysis, but otherwise calls for the same scrutiny that should be applied to traditional investing.

  1. Define your objectives. Being ‘socially responsible’ is a broad mandate. Different funds, companies, and strategies may stress different objectives. Some may focus on environmental factors, some on social or corporate governance. And some may be very specific. So before you choose which best suits your goals, make sure you identify what those goals are.
  2. Strike a balance. Although, in the aggregate, ESG funds have kept pace with the broader market, many individual funds or stocks have not. When researching candidates, you will want to strike a balance between performance and social objectives, and set limits as to how far you are willing to compromise on one objective to meet the other.
  3. Diversify. Just like with a traditional portfolio, green investors should also diversify their portfolios by risk and asset class, targeting an asset allocation that is in keeping with their investing time horizon and appetite for risk. ESG funds can now be found in all major asset classes, permitting investors to diversify while pursuing social causes.
  4. Work with a professional. There are thousands of companies and funds that support green causes. Choosing among them while also adhering to an investment strategy that suits your non-social goals can be complex, so you may want to work with your financial professional to assure that your choices address your unique circumstances and needs.

Notes

1Source: US/SIF, Sustainable Investing Basics, retrieved June 3, 2021.

2Source: US/SIF, 2020 Report on US Sustainable and Impact Investing Trends, November 2020.

3Source: CNBC, ‘Sustainable investing’ is surging, accounting for 33% of total U.S. assets under management, December 21, 2020.

4Source: The Economist, The Green Meme, May 20, 2021.

5Source: US/SIF, Financial Performance With Sustainable Investing, retrieved June 7, 2021.

 

Socially Responsible Investing (SRI)/Environmental Social Governance (ESG) investing has certain risks based on the fact that the criteria exclude securities of certain issuers for non-financial reasons and , therefore, investors may forgo some market opportunities and the universe of investments available will be smaller.

 

An investment in Exchange Traded Funds (ETF), structured as a mutual fund or unit investment trust, involves the risk of losing money and should be considered as part of an overall program, not a complete investment program. Amounts invested in mutual funds and ETFs are subject to fluctuations in value and market risk. Shares, when redeemed, may be worth more or less than their original cost.                       

                                                                                                                                                    

This material was prepared by LPL Financial. This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that they views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change. All performance referenced is historical and is no guarantee of future results. All indexes are unmanaged and cannot be invested into directly.

 

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

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Irrational Exuberance

Irrational Exuberance: Stocks and the Economy

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Stocks and the Economy: Irrational Exuberance

When Federal Reserve chairman Alan Greenspan made his famous pronouncement on the stock market back in 1996, the economy was strong and the Internet bubble was just starting to inflate. In fact, “irrational exuberance” would seem to be a more fitting label for today’s market.

Between March 23 and June 8, the S&P 500 rose over 44%, putting it less than 5% shy of its all-time high set in February. Meanwhile, the Dow Jones Industrial Average topped 27,500, just 7% short of its record and the NASDAQ Composite hit new highs. Although markets have taken some jolts since then, stocks are still doing surprisingly well.1

The economy, however, presents a very different picture. Unemployment in the U.S. skyrocketed to 14.7% in April and then fell slightly to 13.3% in May, still the highest levels since the Great Depression. Institutional loan default rates are up sharply, and bankruptcy filings are expected to follow suit, especially among retailers. The Congressional Budget Office expects second quarter Gross Domestic Product (GDP) to tumble by 12%, its largest drop since the early 1930s, and the Federal Reserve has cautioned that it could take time for the economy to bounce back, especially if second-wave virus outbreaks emerge. In fact, many economists are calling for a drawn out recovery, with fits and starts, as secondary waves of infections keep some businesses shuttered and scare consumers away from stores and travel.

To put the disparity in perspective, consider some recent bear markets and their economic fallout. In the 2007-2009 financial crisis, the S&P 500 lost 56% of its value. Yet unemployment never topped 10%, and GDP fell only 2.5% in 2009. Or, consider the dotcom bust, when the S&P 500 fell 49% (and the NASDAQ Composite lost three quarters of its value). The ensuing economy saw unemployment top out at 6.3%, while annual GDP growth remained positive.

Clearly, the current market would seem to be at odds with economic reality. But there are several different factors at work here.

Stocks Are Not the Economy

As Nobel Prize winning economist, Paul Samuelson, famously quipped back in the 1960s: the stock market has predicted nine of the past five recessions. Paul Krugman, another Nobel laureate, suggests three rules when considering the economic implications of stock prices: “First, the stock market is not the economy. Second, the stock market is not the economy. Third, the stock market is not the economy.”2

As both men emphatically point out, the dynamics driving stocks differ from those driving the economy. The major market indexes such as the Dow Jones Industrial Average (DJIA) or the S&P 500 reflect a limited segment of the economy, and the majority of stocks are owned by a small percent of the population. The widely followed DJIA, for instance, is composed of just 30 blue-chip stocks. Even the broader S&P 500 index contains only the largest of U.S. companies. Small businesses, which represent the lion’s share of U.S. businesses and employ almost half of Americans working in the private sector, have little representation in stock indexes. Yet it is those smaller businesses, many with limited cash reserves, which are taking the biggest economic hit from the pandemic.

Stock index prices are also driven largely by constituent companies’ earnings and profits, which may have little to do with economic metrics such as unemployment. Furthermore, stocks are highly sensitive to interest rates and monetary policy changes, which typically take much longer to be felt in the economy.

Government Moves to Shore Up the Economy Have Been Unprecedented

The optimism of investors in the face of economic freefall may be justified in part by the bold steps taken by the Federal Reserve and Congress to stem the fallout from lockdowns and closings. The Federal Reserve has slashed interest rates, increased the money supply, and taken different measures to support capital markets. For its part, Congress has passed unprecedented stimulus legislation, boosting weekly unemployment checks by $600, and passing such bills as the CARES Act. Meanwhile, the Small Business Administration is also supporting businesses through its Paycheck Protection Program. Collectively, such moves — and many others by state and local governments — not only provide immediate relief to millions of companies and workers, they also send the message to investors that the government is willing to take whatever steps are necessary to get the economy back on track.

Stocks Are Still the Investment of Choice

Long before the coronavirus struck, anyone seeking return was turning to stocks. Yields on bonds and cash had been historically low for years. Now, with recent interest rate cuts, that trend is more pronounced than ever. As of June 1, the interest rate on 10-year U.S. government bonds was only 0.66%, down from more than 3% in late 2018.3 After inflation is factored in, that works out to a negative return. Meanwhile, higher-yield bonds are riskier than ever as cash-strapped issuers may struggle to make interest payments. So it’s no wonder that capital continues to gravitate toward stocks — even in the face of economic turmoil — since they appear to be the only game in town with potential for return-hungry investors.

The Road Ahead

Whether stocks will continue on a divergent path from the economy is anyone’s guess. Ultimately, the longer-term health of both the stock market and the economy will largely hinge on the success in slowing and stopping the pandemic. But any resolution will take time, and there will likely be bumps in the road.

Also keep in mind that trying to time the market’s ups and downs is a losing game. Anyone heeding Greenspan’s warning back in 1996 would have missed out on three of the best-performing years in recent stock market history. So stick to your plan, expect volatility, and consult with a professional before making any major financial decisions.

 

 

Notes

1Google Finance.

2New York Times, Crashing Economy, Rising Stocks: What’s Going On?, April 30, 2020.

3U.S. Department of the Treasury, Daily Treasury Yield Curve Rates, June 1, 2020.

                                                                                                                                                                            

This material was prepared by LPL Financial. This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that they views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.

References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses or sales charges. All performance referenced is historical and is no guarantee of future results.

 

The Standard and Poor’s 500 Index (S&P500) is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

 

Dow Jones Industrial Average is the most widely used indicator of the overall condition of the stock market, a price-weighted average of 30 actively traded blue chip stocks, primarily industrials. The 30 stocks are chosen by the editors of the Wall Street Journal. The Dow is computed using a price-weighted indexing system, rather than the more common market cap-weighted indexing system.

 

The NASDAQ-100 is composed of the 100 largest domestic and international non-financial securities listed on the NASDAQ Stock Market. The index reflects companies across major industry groups including computer hardware and software, telecommunications, retail/wholesale trade and biotechnology, but does not contain securities of financial companies.

 

Gross Domestic Product (GDP) is the monetary value of all the finished goods and services produced within a country’s borders in a specific time period, through GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments and exports less imports that occur within a defined territory.

 

 

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timing the market

Thinking of Timing the Market?

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Thinking of Timing the Market?

Volatility is back and so is the idea of timing the market. The sustained rally that produced 30%+ gains in the S&P 500 in 2019 and continued into 2020 came to an abrupt halt in late February, when fears of the new coronavirus epidemic and its effects on the economy swept Wall Street and beyond. Markets across the globe plummeted, and the Dow Jones Industrial Average dropped over 1,000 points in one day. More drops followed, and volatility has ensued as investors try to grapple with the spreading epidemic and its potential impact on trade, travel, and the global economy.

The Futility of Market Timing

The situation presents a tempting scenario for timing the market — those who try to predict when stock prices will rise and fall. Should you sell before it gets worse? Should you buy while prices are down? What about parking your money in bonds until the epidemic runs its course?

While timing your purchases and sales to capitalize on the market’s ups and downs may seem to make sense in theory, it’s extremely difficult to pull off successfully. Typically, you can’t accurately pinpoint a market high or low point until after it has occurred. If you move your money out of stocks during a low period, you might not move your money back in time. By the time you realize stocks are on an upswing, it may be too late to take advantage of gains.

In fact, history has shown that trying to time the market’s ups and down is a loser’s game. Even the experts, with their analytical prowess and sophisticated computer models, cannot manage to consistently beat the market. A landmark study by CXO Advisory Group tracked more than 4,500 forecasts by 28 self-described market timers between 2000 and 2012. Only 10 were able to accurately forecast equity returns (as measured by the S&P 500) over 50% of the time, and none were able to predict accurately enough to outperform the market.1 Nobel Laureate William Sharpe calculated a market timer would have to be correct 74% of the time — on both the market decline and recovery — to outperform another investor who just lets their money sit in a passive portfolio of comparable risk.1

Dealing with crises such as the coronavirus epidemic requires patience and a level head. Here are some suggestions to help you weather the storm:

Don’t panic. Selling into a plunging market is often a sure way to lock in a loss. Talk with a financial advisor before you act. He or she can help you separate emotionally driven decisions from those based on your goals, time horizon, and risk tolerance. Researchers in the field of behavioral finance have found that emotions often lead investors to read too much into recent events even though those events may not reflect long-term realities. With the aid of a financial professional, you can sort through these distinctions, and you’ll likely find that if your investment strategy made sense before the crisis, it will still make sense afterward.

Consider Time in Market Instead. Clearly, time can be a better ally than timing. Instead of trying to time the market, you may be better off with a well-coordinated investment strategy based on your personal risk tolerance and time frame. While past performance is no guarantee of future results, the stock market has always recovered from every downturn.

So think twice before trying to time the market’s dips and corrections, and work with your financial advisor to ensure that the investments you select are in keeping with your goals.

Source/Disclaimer:

1Source: Index Fund Advisors, Inc. (IFA.com), 2014. Based on a study by CXO Advisory, © CXO Advisory Group LLC.

 

 

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How can I get started planning my finances

Building a Solid Financial Foundation

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Building a Solid Financial Foundation

When the markets and the economy are behaving badly, as they tend to do from time to time, it’s easy to feel helpless. But creating a solid financial foundation can help you gain control of your investments and possibly avoid mistakes that can sabotage your portfolio.

Your Net Worth — A Place to Start

Having a current picture of your finances is an important first step in building a solid foundation. By determining your net worth at the same time every year, you’ll know what sort of financial shape you’re in and whether you’re making progress toward your goals. To find your net worth, list all of your assets, including bank and investment accounts, real estate, retirement plans, life insurance, business interests, etc. Then subtract your liabilities, such as your mortgage, credit card debt, loans, etc. The amount that’s left is your net worth. If you don’t like the number, look for ways to either decrease your debts or increase your assets.

Lost Without Them

Setting specific goals can help you focus your investing efforts. Prioritize the goals you’ve set according to their importance and your time frame for needing the money. Keep in mind that the goals you have now will probably change over time, so be flexible. Revisit your goals periodically and revise them when necessary.

Make It Personal

You can’t control what happens in the economy, but you can control your own behavior. Instead of worrying about whether the market is up or down or which investments will be hit hardest by a decline, think about the things you can do that could make a difference. Investing money on a regular basis or adjusting your portfolio’s asset allocation are steps that can help put you in control.1

Good Behavior

Think about creating a written investment statement that describes your risk tolerance, rebalancing schedule, and reasons for selling an investment.2 Having guidelines to follow can keep you from making mistakes that might thwart your plans. You might also want to review your own financial track record. Tax returns and brokerage statements can tell you a lot about your past successes and failures. Keep in mind that past performance is no guarantee of future results.

 

1Asset allocation and dollar-cost averaging do not assure a profit or protect against a loss. Dollar-cost averaging involves regular, periodic investments in securities regardless of price levels. You should consider your financial ability to continue purchasing shares though periods of high and low prices.

2Consider the tax consequences when selling investment shares. Rebalancing strategies may involve tax consequences, especially for non-tax-deferred accounts.

 

Because of the possibility of human or mechanical error by DST Systems, Inc. or its sources, neither DST Systems, Inc. nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall DST Systems, Inc. be liable for any indirect, special or consequential damages in connection with subscriber’s or others’ use of the content.

© 2017 DST Systems, Inc. Reproduction in whole or in part prohibited, except by permission. All rights reserved. Not responsible for any errors or omissions.

 

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