The Haystack: Fed Meeting, ESG Investing and Energy

As I wrote this on the afternoon of Friday the 13th, the S&P 500 sat near the cusp of yet another all-time high, driven by…what else…rumors that the December 15th tariff deadline could pass without any tariffs being assessed. U.K. election results are also driving headlines, but I’m not going to pretend to be an expert in geopolitical events.

Here are the topics I’d like to cover this week:

1. The latest Fed meeting
2. ESG (Environmental-Social-Governance) Investing
3. More thoughts on Energy

Last Fed Meeting of 2019. Yawn.

Not much to say here. The market was expecting the Federal Reserve to stay put last Wednesday, after three rate cuts earlier this year. Per Charlie Bilello, there have been 85 meetings since the current expansion began. There has not been a single rate “surprise.” The current baseline is that the Federal Reserve keeps rates unchanged through 2020. I am skeptical and tend to think that any “growth scare” and accompanying market sell-off will force Jerome Powell and the committee off the sidelines to appease the market. Especially in an election year. Dave and I don’t have a call one way or the other–we aren’t going to wade into the pool of “Fed Guessers” but we both think that there is probably more politics at play at this point in the election cycle than not.

ESG Investing

ESG investing means buying companies with sound practices regarding the environment, social responsibility and corporate governance, and usually avoids energy, tobacco, firearms…the usual suspects. From Eric Balchunas over at Bloomberg, a performance back test shows that a basket of “ESG rejects” handily beat the broader market since the beginning of 2013. Keep in mind that this is a “relative” exercise, and simply takes the 20 lowest scoring stocks in the S&P 100 by Sustainalystics’ ranking methodology. Another way of putting this: are the lowest scoring stocks truly “bad” companies, or do they simply score poorly relative to peers? There’s a ton of ways to slice and dice the ESG angle, but this was a fun find.

As an individual investor, there are ways to go about socially-conscious investing, but be wary of strategies that abandon entire industries wholesale; you could be leaving some performance on the table. We have been giving some straight forward advice to people who’ve asked about this – so here it is for you to consider. If you’ve got a gain in a position that you feel doesn’t measure up to a personal “ESG” desire, donate the gains to charity. It’s simple and we think it’s a great way to direct funds to charity rather than forgo gains altogether. Call us if you have any thoughts along those lines and we can take a look at options tailored to your specific situation.

(H/T @EricBalchunas)

Let’s Revisit Energy

The second half of last week’s post was dedicated to the energy sector, and for good reason. It is, by far, the worst performing sector in the S&P 500 year to date and has been a huge laggard over the last 10 years. The break got started in the fourth quarter of 2014. A natural and fair question then, is…why own ANY energy stocks, given the world seems to be moving away from conventional oil and gas?

Lawrence Hamtil offers some really good color on the subject, illustrating that energy is largely uncorrelated with other sectors in the S&P, due in large part to its relationship with the U.S. dollar. And of course, should inflationary expectations build, oil and gas stocks are set to benefit as hedges. A qualitative assessment I would add: as the world continues to slowly drift towards renewables and alternative fuel sources, who’s to say that large integrated energy names won’t participate in research, development, and infrastructure buildout? Exxon Mobil will likely look VERY different 50 years down the road, but in the meantime, expect there to be steady demand for conventional crude oil products. For a really authoritative look at the future of energy, it is hard to beat Michael Cembalest’s annual joint paper with University of Manitoba professor Vaclav Smil. Check out the International Energy Agency (IEA) projections graphic on page 4, which illustrates the slow anticipated rise in nuclear, renewables and bioenergy.

What’s next?

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