History Has Steered Folks to Environmental, Social and Governance Investing.
In this Milwaukee Journal Sentinel article from July 15th, Tom Saler explores socially responsible investing (SRI) and breaks down some recent high-profile examples.
Read July article.

 

New Firm Targets Socially Responsible Investors.
In this article from January 9th, Milwaukee Journal Sentinel reporter Kathleen Gallagher explores Greg Wait's launch of a new company that combines socially responsible investing and online investment advice.
Read January article.

 

Investment Trends, with insights by Greg Wait. In the Milwaukee Journal Sentinel's October 17th article, Kathleen Gallagher and Greg Wait discuss the recent rise of environmental, social and governance, or ESG investing. Greg provides insight into how reduced risk and improved returns are causing money managers to include ESG investing in their portfolios. Read October article.

 

Responsible Investing: Creating Financial and Non-Financial Value by Greg Wait. Do investors sacrifice returns in pursuit of their goal of advocating for a better world in which to live?
Learn more.

 

Ten-Year History of Investment Manager Performance by Greg Wait. As part of our process, we have conducted investment manager research and due diligence resulting in manager or fund recommendations to our clients. Here are our findings.

 

The month of September, 2013 marked the 10-year anniversary of Falcons Rock serving our clients and building relationships. We are grateful for all the years of friendship, loyalty, and support, and look forward to our next decade!

 

Investment Trends, with insights by Greg Wait. In the Milwaukee Journal Sentinel's July 20th article, Kathleen Gallagher and Greg Wait discuss the rising U.S. Treasury rates and using duration as a measure of risk. Greg's comments relate to whether we'll be "looking back on this short-term increase in yields as the warning shot for the much-anticipated longer-term rise in interest rates." Read July article.

 

Dec 9, 2012, Journal Sentinel's Kathleen Gallagher interviewed Greg Wait on current Investment Trends. Read the full article: "Low-quality stocks continue to provide strong returns."

 

We've Grown! Meet our new investment consultant: Tony Sebranek.

 

Investment Trends column of Milwaukee Journal-Sentinel shows Top-Down investment strategies are achieving positive results.
Read article on Top-Down Investing

 

Additional articles in the Milwaukee Journal Sentinel featuring Falcons Rock:
One is a fascinating story about a Mequon drug development company, which has a few of our clients as private investors.
Read article about our angel investors

 

Another features us in the Market Trends column: Strategy targets uncertain economy - and how Falcons Rock confronts specter of slow growth.
Read how we help clients get ready

 

There is a great deal of debate in the investment industry regarding active vs. passive (indexing) investment management.  We researched this topic and the results might be surprising to you.  Please see our research paper on this subject...more

 

We have experienced interesting situations with our clients. To update you on our firm’s activities, check out examples of recent work we have done for our clients...more

Get quarterly market reviews direct from Falcons Rock President, Greg Wait.

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US SIF Member 2017

Presidential Musings (v. 2)

 

2016 Q3 Client Letter

Brexit

Another Presidential election is upon us.  As I was preparing to write this quarterly letter, I looked back at my commentary from four years ago, and it seemed like a good place to start.  So, here we go (October, 2012 commentary italicized):

Fall is my favorite time of the year…except every four years when we are all subjected to the political campaigns and the media outlets incessantly barking at us about how completely incompetent and immoral each of the candidates is.  It is tiresome…

As you might imagine, our clients’ opinions run the length of the political spectrum.  I consider our clients to be intelligent, well-educated, hard-working people and I respect each of them enormously.   I also respect their political opinions and assume that they did not come to their viewpoints lightly.    I believe they gather information from sources they deem to be credible, although such credibility is sometimes difficult to discern.  Campaigns, commentators, pundits and analysts make as much noise as possible to get the attention of their audience…campaigns want to fire up their voters and the media want ad revenue.  The Pew Institute estimates that only 17 percent of political coverage actually addresses meaningful issues of policy. Economic data can be presented in ways that may help either party make their case on how they are going to “fix” things, which is one reason we now have a whole new industry devoted to “fact checking” the claims of politicians.

From an investment perspective, having a Democratic or Republican President has historically had almost no influence on the returns of the U.S. stock market.   There have been numerous studies conducted over the years that typically illustrate there has been no ascertainable difference in average stock market returns, based on the party sitting in the White House, since the early 1900s.  Of course, the results vary based on the specific time period measured, so I consider these studies to be inconclusive and frankly inconsequential.   Every President has an enormous incentive to oversee a growing economy and stock market, yet we still have frequent recessions and bear markets.  A President can exert influence, but the economy and markets are simply too complex for a U.S. President to drive their behavior.

All that said, it is still interesting and fun to look at stock market returns during political campaign seasons, so I did some analysis on the returns of the S&P 500 Index during the terms of our last four Presidents.  Our last four Presidents include two Democrats and two Republicans; with a total of six terms between them…two each for George W. Bush and Bill Clinton, and one each for George H.W. Bush and Barack Obama (almost…he’s one quarter away from finishing his current term).   Out of curiosity, I also plotted the returns of the MSCI All-Country World Index (ex-U.S.) to get a comparison of non-U.S. stock markets versus the U.S. stock market during these periods.  Our last four Presidents span the period from 1/1/1989 to 9/30/2012 and we’ve experienced both bull and bear markets during this time frame.

I’ve updated these charts to reflect the past four years through 9/30/2016.  I also borrowed an interesting chart from JPMorgan Asset Management regarding U.S. political perspectives in the post-World War II era.  Please see the following pages:

Presidents' Full-Term Stock Mkt Returns

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Investment Growth: US vs. Non-US Stocks

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U.S. political perspectives

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Here is a summary of the investment research:

  • The U.S. stock market, as measured by the total return of the S&P 500 Index, delivered very strong results during the terms of Presidents George H.W. Bush, Bill Clinton, and Barack Obama.
  • The U.S. stock market experienced losses during both terms of George W. Bush.
  • During the entire period measured, an investment of $1,000 in the U.S. stock market would currently be worth over $14,300.
  • During the entire period measured, an investment of $1,000 in the non-U.S. stock market would currently be worth about $4,000.
  • U.S. stocks delivered greater returns than non-U.S. stocks during the terms of Presidents George H.W. Bush, Clinton and Obama.
  • Non-U.S. stocks performed better than U.S. stocks during both terms of President George W. Bush.
  • Political polarization, as measured by the % of representatives voting with the majority of their party, is currently at an all-time high.
  • Congressional approval ratings are currently at an all-time low.
  • In the post-war era, the average annual GDP growth has been 3.9% during periods when a Democrat was President, and 2.6% during Republican Presidential terms.
  • In the post-war era, the average return of the S&P 500 Index has been 12.0% during periods when a Democrat was President, and 6.3% during Republican Presidential terms.  Volatility, as measured by standard deviation, has been greater during Republican Presidential terms.

So, what does all of this mean for the upcoming Presidential election?  Probably nothing.  Although politics do matter to an extent, they are not the be-all, end-all when it comes to long-term investing.  On average, stock market returns are positive regardless of whether a Republican or Democrat is in the White House, as well as whether they have full or split control of Congress.

Moody’s Analytics:  Macroeconomic Consequences of Proposed Policies of Mr. Trump and Secretary Clinton

In separate research papers, Moody’s Analytics recently analyzed the macroeconomic consequences of both Donald Trump’s and Hillary Clinton’s economic policies. These papers considered macroeconomic consequences under three scenarios: 1) taking each candidate’s proposals at face value, 2) assuming each candidate’s policies are fully or largely adopted, but on a smaller scale than proposed, and 3) assuming each candidate will need to negotiate with a somewhat skeptical Congress, resulting in scaled-back policies and adjusted to political realities.  The Moody’s Analytics model of the U.S. economy was used for the analysis, which is similar to that of the Federal Reserve Board and Congressional Budget Office for forecasting, budgeting and policy analysis.  The long-term economic impact is simulated in Moody’s model over the decade through 2026.  Here are the main takeaways from this analysis1, 2:

  • Broadly, Mr. Trump’s economic proposals would result in a more isolated U.S. economy.  Cross-border trade and immigration would be significantly diminished, resulting in reduced foreign direct investment.  Pulling back from globalization would thus diminish U.S. growth prospects.  The U.S. economy would suffer a recession that begins in early 2018 and extends into 2020, with a total real GDP decline of -2.4% during this period.  Average annual GDP growth for Mr. Trump’s first term would be +0.6%, and +1.4% over the next ten years.
  • Mr. Trump’s proposals would also result in larger federal government deficits (Deficit-to-GDP ratio of -10.2% by the end of 2020, -11.4% by the end of 2026) and a heavier debt load (Debt-to-GDP ratio of 95.3% by the end of 2020 and 135.2% by the end of 2026).
  • While everyone would receive a tax cut, the bulk of cuts would go to those at the very top of the income distribution.  Well-to-do consumers spend a significantly smaller proportion of tax reductions than do lower- and middle-income consumers.  The “marginal propensity to consume” out of after-tax income for those in the bottom quintile of the income distribution is 0.86, meaning that 86 cents out of every dollar in reduced taxes is spent.  In contrast, the marginal propensity to consume for those in the top quintile is 0.49.  The primary long-term economic benefit of Mr. Trump’s tax cuts would be the reduced marginal effective tax rate on investment (-10%)…if all else equal, this would incent more savings and investment.
  • By the end of Mr. Trump’s first four-year term in office, Moody’s estimates close to 3.5 million fewer jobs and an unemployment rate of 6.8% (the current unemployment rate is 4.9%).  The unemployment rate would peak at 7.4% in the summer of 2021, but by the end of 2026, the unemployment rate would be back down to 4.8%.  Cumulative employment growth would be -0.1% in his first term, and +0.2% by the end of 2020.  Moody’s also estimates that the average American household’s after-inflation income would stagnate, and stock prices and real house values would decline during Mr. Trump’s first term.
  •  
  • Broadly, Secretary Clinton’s economic proposals would result in a somewhat stronger U.S. economy, with average annual real GDP growth of +2.7% during her first term and +2.4% over the next ten years.  Near-term growth is supported by spending stimulus in combination with much stronger foreign immigration.  Longer-term growth is somewhat stronger because on net her policies expand the supply side of labor and capital needed to produce goods and services (significantly via immigration reform increasing the size of the workforce).  Increased spending on the nation’s infrastructure is considered a net positive.
  • Secretary Clinton’s proposals would have less impact on the nation’s fiscal situation.  Compared to forecasts under current law, they result in slightly larger first-term deficits (Deficit-to-GDP ratio of -4.5% by the end of 2020 and -4.4% by the end of 2026) and a mostly unchanged debt load (Debt-to-GDP ratio of 78.0% by the end of 2020, and 85.0% by the end of 2026).
  • There are some long-term economic costs from higher tax rates, as they reduce incentives to save, invest and work.  A higher minimum wage would also crimp employment.  Secretary Clinton’s economic proposals would most benefit middle- and lower-income households.
  • On balance, there would be 3.2 million more jobs by the end of Secretary Clinton’s first term and the average American household’s real after-tax income would increase by about $2,000.  The unemployment rate would be 4.4% by the end of her first term and 5.3% by the end of 2020.  Cumulative employment growth would be +1.8% in her first term, and +1.2% by the end of 2020.

According to JPMorgan, simply considering the long length of the current economic expansion, investors could expect some degree of recession during the next four years, regardless of who wins the Presidential election3.  Despite substantial economic progress and a soaring stock market since 2008, in many ways the mood of the public is sour and distrustful.  It is not hard to understand why, given the political climate and our Presidential candidates.

Third Quarter 2016 Review

The third quarter was less volatile than the first two quarters of this year, and all major asset classes remain in positive territory year-to-date.

All styles and cap ranges in the U.S. stock market finished the quarter in positive territory. Generally, small-mid cap stocks earned more than large cap stocks and the growth style outperformed the value style.  The best performing sectors in the S&P 500 Index in Q3 included Technology (+12.9%), Financials (+4.6%), and Industrials (+4.1%).  The worst performing sectors during the quarter were Utilities (-5.9%), Telecom (-5.6%), and Consumer Staples (-2.6%).

Non-U.S. stocks, as represented by the MSCI EAFE Index, rebounded in the quarter (+6.5% in U.S. Dollars, +6.1% in local currencies).  Global markets calmed down after realizing that the Brexit vote has more long-term than short-term implications.  This quarter’s best performing countries included China (+13.9%), Brazil (+11.4%), and Germany (+10.0%).  Selected countries whose stock markets delivered lower returns (USD) included the United Kingdom (+3.9%), India (+5.9%) and France (+6.4%).

The bond markets generated mixed returns as investors were willing to put money into riskier assets. Cash (money market funds) continue to earn next-to-nothing as the Fed Funds Rate remains accommodative.

Most balanced portfolios again experienced small gains during the quarter.  Real estate and commodity/oil prices both fell slightly after a strong first half of 2016.   Early indications are that alternative strategies had mixed, but mostly positive results:

Here are the returns for select market indices for Q3 2016 (as stated in U.S. dollars):


Responsible Investing Corner

In recent years, we have seen the introduction of a variety of innovative vehicles that focus on certain aspects of Sustainable, Responsible and Impact (SRI) investment.  Among these are investments in “alternative” asset classes, such as private equity and private real estate funds, venture capital funds, and hedge funds.  At the onset of 2014, alternative investment vehicles incorporating Environmental, Social and Governance (ESG) criteria totaled $224 billion compared to $132.3 billion in 20124.   Funds that have attracted considerable capital include those involved with alternative energy and clean technology.  Many real estate managers and developers adopt sustainability or community development strategies to differentiate themselves in the marketplace and some REITs are issuing green bonds to fund renovations5.  In 2015, the majority of green bond proceeds went to renewable energy (45.8%), energy efficiency (19.6%), low carbon transport (13.4%) and sustainable water (9.3%)6.

This and That

  • Moody’s Analytics has a Presidential Election Model7 that has successfully predicted 9 of the last 9 Presidential election outcomes, dating back to 1980.  The model’s variables include: the two parties’ share of the popular vote in previous elections, the tendency to turn out an incumbent party that has held the White House for two or more terms (“voter fatigue”), and changes in economic conditions (trends in gas prices, house prices, and personal real income).  These variables are then translated into Electoral College votes to determine the winner.  I’ll let you know how they did with this election in my next quarterly letter!
  • A Pew Research Center media survey reveals that 27% of TV viewers regularly watch the evening news on one of the three major networks, down from 60% as recently as 1993.  Dan Rather, Walter Cronkite, Tom Brokaw and others tended to be more consistent in reporting news events, without political bias.
  • A separate Pew Research Center survey testing political polarization theories illustrates striking differences between the media habits of conservatives and liberals.  Those identified as “consistent conservatives” are tightly clustered around a single news source, with 47% citing Fox News as their main source.  Those identified as “consistent liberals” are less unified in their media loyalty, with 12% citing MSNBC as their main source for news, and tend to seek a wider range of news sources.  These two groups combined represent 20% of the public overall.
  • On August 31, two major stock index providers (S&P, MSCI) broke out publicly traded equity real estate investment trusts (REITs) and real estate management/development companies from the financial sector and put them into a new REIT sector under their classification standard.  This could impact the dividend yield of the indices’ financial sector, as real estate stocks have been relatively high in recent years.
  • The Chicago Cubs are in the MLB playoffs and trying to win their first World Series since 1908…go Cubbies!
  • Democracy is the worst form of government, except for all the others.” – Winston Churchill
  • I never became wealthy by buying at the lows or selling at the highs.  I was there merely from the middle 60%.” – J. Pierpont Morgan

Those of you who have known me for a long time, know that I have no political party affiliation and am very independent in my thinking, which is a key reason I founded Falcons Rock thirteen years ago. We strive to provide our clients with unbiased and objective investment advice.  Our sources of investment and economic data are also considered unbiased, which allows us to offer competent analysis for our clients.  You won’t catch me watching either Fox News or MSNBC, or any of the investment squawk boxes on TV or online.  I do find independent analysis very interesting and enjoy passing on some statistics (from sources that you may not have access to) for your consideration.  If our politicians would only do the same…

Thank you for being a loyal client of Falcons Rock.

Greg Wait, President of Falcons Rock

Gregory D. Wait, President
Falcons Rock Investment Counsel, LLC

1 Moody’s Analytics: The Macroeconomic Consequences of Mr. Trump’s Economic Policies – June 2016
2 Moody’s Analytics: The Macroeconomic Consequences of Secretary Clinton’s Economic Policies – July 2016
3 JPMorgan Market Insights: An election of extremes – but a government of moderation – September 9, 2016
4 US SIF Foundation: Report on US SRI Investing Trends 2014
5 US SIF: The Impact of Sustainable and Responsible Investment – June 2016
6 Moody’s Analytics – The Macroeconomic Consequences of Mr. Trump’s Economic Policies – June 2016
7 Moody’s Analytics, www.economy.com – Election Model Update – September 26, 2016

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