by Franklin J. Parker, CFA
The Summary
- Last week’s economic data generally showed a strong underlying economy. The unemployment rate ticked up, but that was largely due to workers coming back into the labor force and looking for work. There are still 1.8 open jobs for every one unemployed person, and there were 315,000 jobs added in August. On the downside, factory orders ticked down for the month, but that data was offset by today’s service sector PMI showing that the services industry got a bit of a boost in August.
- This week we get a peek into consumer credit data. Spending has largely remained strong despite lower real wages because consumers have been willing to dip into their savings. The next and last step is dipping into credit. An expansion of payment burdens and/or credit outstanding could be a signal that consumers are beginning to feel the pinch and a slowdown in spending would not be too far behind. We also get wholesale inventories, a figure that has been swinging wildly post-Covid.
- I expect markets to be rocky for the next several months. Investors are pricing and repricing the Federal Reserve’s actions all the while trying to better understand the growth story for both the economy and corporate earnings. That said, it is my view that the general trend will be up, at least until consumers slow their purchasing and corporate profits start to weaken. Of course, the risks you should take are always informed by your goals. We cannot manage money in the abstract!
The Details
Investing with a mind toward ESG (environmental, social, and governance factors) has grown in both popularity and assets over the past decade. The Economist recently ran an entire special report on the topic, and there is more to unpack than we have space for. Even so, let’s look at it very briefly.
First, what is it? ESG investing involves looking at companies not just through the lens of risk and return, but also with a mind to their impact on the environment, their impact on the communities in which they operate (social concerns), as well as their overall governance, or any other non-financial factors an investor may be concerned with.
Unfortunately, the financial industry has taken the same tack they always have when it comes to this important topic: they have built products and have expected investors to buy them.
But ESG investing, along with its cousins impact investing and ethical investing, are all very personal endeavors. In my experience, every investor has a different take on exactly what this kind of investing means to them. Also overlooked by the industry as a whole: investors are often required to make tradeoffs when the E, S, and G might be in conflict. Tesla, for example, might be a net positive for the environment (the E in ESG), but its treatment of employees and its dictatorial governance structure generally give it low scores in the social and governance components (the S and G in ESG). An investor, then, must weigh the personal importance of each of those scores and decide whether such a company fits in their personal ESG mandate. Some may decide it fits, while others may decide it does not.
And that is the critical point: an ESG investing mandate is both important and very personal. There is no one-size-fits-all, so investors need an advisor who can talk through these important issues and implement individualized solutions.
This is an area we would be eager to help you navigate.
Chart of the Week
The Wall Street Journal reported a slight uptick in the defaults on low-credit-quality bonds this month. While it is a small corner of the market, there is worry that it may begin to spread as interest rates rise and profits come under pressure.
Delinquency rates on commercial loans is a metric that I follow closely. Typically, leading into a recession, delinquency rates start to rise. We haven’t seen a significant uptick on delinquency rates just yet, though this figure only posts quarterly (and the last data we have is from the first quarter of this year). If delinquency rates do begin to rise meaningfully, investors should grow more cautious.
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