by Franklin J. Parker, CFA
- It is jobs week! We got factory orders today, which surprised to the upside (1.6% growth vs 0.5% expected). JOLTS job openings report tomorrow, we get the unemployment rate and average earnings on Friday. Employment is the key figure in ongoing economic growth, so it could move markets.
- Last week’s data was a mixed bag: consumers spent more than they earned for the first time since December. In addition, personal consumption expenditures increased at an uncomfortably higher level, though if we factor out food and energy costs, it does appear that PCEs are slowing, although it may also be that consumers are having to stop buying other things to keep up with rising food and energy costs. PCEs are the Fed’s preferred measure of inflation, so higher figures here drew pessimism from market participants about the outlook for Fed policy.
- Next week kicks off earnings season. Maybe more than anytime before, this earnings season will be critical. Because this economic environment is so ambiguous (if we are in a recession, for example, it is the strangest recession on record), investors will be watching corporate results and their outlook for direction. At the end of the day, earnings growth is what drives market prices. If earnings growth is expected to wane, prices are likely to fall further. Despite the doom and gloom, this quarter is expected to see positive earnings growth for the market as a whole.
There is a controversy silently brewing between the investment management industry and regulators. “Greenwashing” has become a real, and not often talked about, problem.
With ESG investing (Environmental, social, and governance investing) becoming more popular, regulators have begun to take notice of funds and investment managers that make claims to the investing style, but do not back up their actions with the claims. “Greenwashing” is the term that describes an investment strategy that claims to have an ESG mandate, but whose holdings are indistinguishable from a non-ESG mandate. It can also refer to an investment process that has a marketing banner of ESG, but does not, in fact, consider any ESG factors in the security selection process.
The challenge, of course, is that there is no standard definition for ESG investing. Because ESG investing is very personal, I doubt a standard definition ever could exist. For example, one investor might include Tesla in an ESG strategy because of its positive environmental impact, while another might exclude Tesla because of its poor social or governance components. The point is: every investor values each ESG component separately, belying any attempt to codify the practice across the industry.
Recently, regulators in Germany outright raided Deutsche Bank’s asset management unit on allegations of greenwashing. The SEC recently proposed two new rules to combat it.
More than anything, securities regulators do not like lying. If a firm says they are running an ESG strategy, they had better be able to prove in court that they are running an ESG strategy. Regulators are even more apt to ensure investors are getting what they pay for since the average ESG fund is almost 50% more expensive than the average investment fund.
I believe that investors should consider their ethical investment goals just as carefully as their financial goals. Just as with all goals, these are very personal undertakings, and when tradeoffs exist, those tradeoffs should be carefully considered. In the end, it is incumbent on us, investors and advisors, to navigate these waters and to do our due diligence!
Chart of the Week
Capacity utilization is, in theory, a measure of how much of its potential economic capacity the US is using. A little-talked about figure, it can give some insight into the underlying fundamentals of the economy. Other than 2008 (which was a financial-driven recession), this figure tends to decline leading into recessions. At the moment, it is at its highest levels in over 15 years.
This is an odd economic environment, to be sure. I am cautious to rely too heavily on indicators that worked pre-2020 as I believe post-2020 is a different paradigm. Even so, the underlying economy appears to be fairly robust, despite the headlines.
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