What’s Up on Wall Street
Winter 2011
By Scott Secrest, AAMS® (
This e-mail address is being protected from spambots. You need JavaScript enabled to view it
)
Director of Investment Research
Awareness and Opportunity
A U.S. economy which is slowly putting itself back together set the tone for the markets during the fourth quarter. While the short-term economic indicators continue to be mixed, we are in agreement with the camp of economists focusing on longer term economic fundamentals. There is a growing awareness in the financial world of the implications of an emerging sustainable economy, which supports this longer-term, more holistic thinking.
In the markets, large company stocks in the U.S. rose during the year by better than 15%. Smaller sized company stocks did even better, up in the neighborhood of 26%. In a notable late-year resurgence, foreign stocks helped to push values higher in those indexes by almost 8%. Broad bond indexes were higher during the year by 6.5%.
As optimism slowly grows about the health of the U.S. economy, we are carefully monitoring, and adjusting to a bond market that is likely to come under pressure with the possibility of rising interest rates. As the economy improves, we will expect to see interest rates begin a slow upward climb. Bond values have an inverse relationship to interest rates and those values will generally move lower in this environment. We are favoring shorter maturities in bonds as this situation develops.
In this environment we additionally seek to insulate our portfolios to a degree with the inclusion of different bond categories including foreign bonds and “high yield” bonds, which are a form of corporate bonds. Each bond category has its own set of risk and return characteristics and expected behavior in various economic environments.
Heightened awareness is critical during periods of economic uncertainty. Economic risks today exist in at least two key areas: a vanishing middle class, and failing to embrace the new economic direction of sustainability.
It has been noted of late that income inequality in the U.S. has reached astounding levels. Not since the roaring 20’s has income disparity between the top and bottom income tiers in the U.S. been so great. While there is significant ethical hazard to this, it is really evidence of a middle-class that has largely vanished in the U.S. This troublesome situation has been developing for some time as production, and now many service industry jobs have been relocated to foreign countries.
Perhaps our greatest, long-term risk is that of failing to embrace our inevitable shift to an economy geared for low-carbon emissions, more equitably distributed income, clean production-based industries, a viable middle class, and sustainability principles. I say ‘inevitable’ here because this shift will occur one way or the other.
We can seize the opportunity to move energetically in this direction now, and create great economic opportunity for ourselves along the way. Or, we can stubbornly hang on to the old, consumption-intensive, waste-producing, dying-industry, and debt-dependent ways of the past. By so doing, we will delay the sustainable economy. But, it will still come in time, with the slow-motion collapse of systems that we know to be broken. Please review your notes of the financial collapse of 2008-2009 if you have any doubt of this.
Most of those who would deny this necessary economic transformation are sprinkled among the entrenched, old-line businesses of the U.S. who can see the writing on the wall, but who are committed to fighting it every step of the way. As a society, capitulating to these arguments and clinging to the old ways is indeed our greatest risk, both economically and for the well-being of society and our natural environment.
“Long-range planning does not deal with future decisions, but with the future of our present decisions,” Peter Drucker famously observed. Through our collective awareness of our historic opportunity to create a sustainable world, socially responsible investors and others today are directing investment dollars toward solution-oriented companies, and it’s never been more important. Research & development departments are today planning for the clean and efficient products that will dominate the markets in decades to come.
The necessity for our economic transformation may be explained by the notion that it is ethically, socially and environmentally the right course to take, or it could be based simply on a reasoned forecast of where our economic opportunity lies today, take your pick. Either way, investors with awareness of the coming sustainable economy will be both those who insure its success, and who will benefit from investment in it.
Natural Investments, LLC. is a registered investment adviser with the SEC.
