Covenant Weekly Market Synopsis for September 17, 2018

September 17, 2018

Last Week Today: The US administration reached out to China seeking to resume trade talks and then, later in the week, Bloomberg reported that Trump still wants to impose tariffs on an additional $200 billion worth of imports from China. These seemingly contradictory actions can be reconciled through the lens of President Trump’s aggressive negotiating style. In other words, tariffs are a means to an end. It is likely the Trump administration would like to avoid a lengthy trade dispute that would be costly to both sides and is using tariffs to bring China to the negotiating table. Speaking of which, weakness in the Chinese equity markets (the yellow line in the chart below) will likely make Chinese officials more amenable to some of the U.S.’s requests. | Economic data released last week was a bit of a Goldilocks report, pointing to high consumer and business confidence, a robust labor market, and lower than anticipated inflationary pressure – more detail is included below in “Economic Quick Hits.”


Reflecting positive domestic economic data and somewhat calmer conditions in troubled emerging market countries such as Turkey, global equity market indices closed the week in the black. The S&P 500 gained +1.2%, but for a change was outdone by international stocks with the EAFE Index rising +1.8%, and the beleaguered emerging markets MXEF Index rising +1.8% (“improving” to -9.3% year-to-date). Reflecting risk-on sentiment, US Treasury yields increased while the spread of high yield bonds to the 10-year UST declined to 3.27%. The U.S. Dollar retreated by -0.5%, copper gained +0.9% (-20.4% YTD), and WTI Crude gained +1.8% to close at $68.99 per barrel.  For more detail on weekly, month-to-date and year-to-date asset class performance, please click here.

Investing With Impact. It goes by many names, Impact Investing, SRI (Socially Responsible Investments), and ESG Investments (Environmental, Social and Governance). While their specific objectives are not identical, the common thread weaving through these investment styles is to evaluate corporate behavior in the context of future financial performance. Once a fledging movement considered in the same sphere as charitable giving, Impact investing is gaining momentum as investments earmarked explicitly for Impact investing increased by 33% from 2014 – 2016 in the U.S. Moreover, Impact investing is a global phenomenon, with an estimated $23 trillion in assets professionally managed under sustainable and responsible investment strategies as of the end of 2016 according to the Global Sustainable Investment Alliance.


Countering the “charitable” label, Impact investment returns are competitive, and in some cases better than, traditional investing where one solely focuses on the bottom line. Bearing some markers of George Soros’s capital markets Theory of Reflexivity, changing investor perceptions about Impact investing are influencing not only the share price of companies with a social conscious, but management teams as well, creating a positive feedback loop in which investment capital is flowing to companies in which capitalism harmoniously coexists with goals to improve society. Indeed, the number of publicly traded companies providing sustainability reports has accelerated from 20% in 2011 to more than 80% at the end of 2016!


Choosing investments through an ethical lens is set to accelerate further. While institutions currently dominate Impact investing, comprising approximately 74% of Impact investing assets under management (AUM), mass affluent investors increased from 13% of AUM to 26% of Impact-focused AUM in the three years ending 2016. Moreover, Millennials are one of the world’s largest demographic cohorts and Deloitte forecasts that their collective net worth will reach $19 trillion to $24 trillion by 2020. A large portion of that net worth appears destined to follow some approach to Impact investing as 90% of Millennial investors express interest in pursuing sustainable investments as part of their 401 (k) portfolios according to Morgan Stanley.

It’s not just investment capital that is being redirected; consumer preferences are changing as well. According to a report from consultant Roland Berger, 75% of consumers take corporate sustainability responsibility into account when making purchases. Companies that pursue responsible environmental and social practices along with sound governance should garner additional demand for their products and services, which in return can improve profitability that feeds into stock prices.

Wayne Gretzky famously said that the key to his success as a hockey player was that he skated to where the puck was going, not to where it had been. As investors and consumers increasingly seek to support companies doing well financially by doing good (with regards to governance, social, and/or environmental impact), adding Impact investment exposure to one’s portfolio may be the equivalent of skating to where the puck will be.

Economic Data Quick Hits. In sum, it’s all good on the Western Front:

  • August economic data released this week was mostly positive: U.S. industrial production rose 0.4% (vs. 0.3% consensus estimate); consumer prices rose 0.2% (below expectations of 0.3%), and the producer-price index came in lower than anticipated.
  • Confidence is sky high: The September University of Michigan sentiment index rose to 100.8 (from 96.2 in August), the second highest level since 2004; the Index of Small Business Optimism was 108.8 in August, the highest reading ever. August retail sales were below consensus, but July’s numbers were revised higher. Clearly, emerging market problems encountering are not impacting sentiment – it’s game on for consumers and small businesses.
  • For the first time in 10 years, buybacks are accounting for the largest share of cash spending by S&P 500 firms. Buybacks surged by 48% to $384 billion during 1H. Repurchases have been concentrated with ten stocks generating 78% of aggregate buyback growth, of which Apple, Inc. accounts for 24%. Capital spending is also on the rise. S&P 500 capex during 1H rose by 19% to $341 billion. GOOGL more than doubled capex to $13 billion and accounted for 13% of the rise in S&P 500 capex during 1H. (Source: Goldman Sachs)
  • The European Central Bank (ECB) made no change to its monetary policy guidance, as expected, but Mario Draghi did slightly reduce economic growth projections for the euro area (from 1.9% to 1.8% for 2018, from 2.1% to 2.0% for 2019). Though Draghi reiterated that risks are broadly balanced, he noted that uncertainty surrounding protectionism and emerging markets (EM) volatility had gained prominence. The central bank plans to begin reducing bond purchases next month and end all bond purchases by the end of the year, depending on incoming economic data. (Source: LPL Financial Research)
  • The number of U.S. job openings increased to 6.94 million in July, a record high and above consensus estimates of 6.68 million, according to the JOLTS report released Tuesday. Higher job openings signal a healthy labor market with motivated employers. Additionally, the quit rate, or voluntary quits as a percent of separations, climbed to a 17-year high. An increasing number of workers quitting their jobs can put upward pressure on wages, boosting inflationary pressures in the economy. (Source: Marketfield Asset Management)

Be well,