Market Update – October 2017
Global stocks continued their upward trend, rising 2.0% in October. Strength from emerging markets (up 3.5%) continued pushing the overall segment higher. Year-to-date, international stocks in aggregate led U.S. stocks. International bonds had a favorable return of 0.8%, while U.S. bonds remained flat. Global REITs pulled back during the month, while commodities, managed futures, and reinsurance each posted positive results.
- The initial estimate of third quarter real GDP growth came in at an annualized rate of 3.0%, a 0.1% decrease from the second quarter growth rate of 3.1%.
- Inflation (CPI) rose 0.3% to 2.2% on a year-over-year basis, mainly driven by the energy component.
- Consumer confidence hit a 17-year high in the latest report, mainly boosted by the job market.
- Nonfarm payrolls reflected 261,000 jobs added in October, while U.S. unemployment fell to 4.1%.
- The S&P 500 Index posted a 2.3% return in October, besting the other U.S. stock segments such as value and small cap stocks.
- International stocks also performed favorably, as large cap stocks rose 1.5%, mainly due to strength from Japan.
- Emerging markets stocks jumped 3.5% due to large gains from South Korea and India.
- The Federal Reserve kept rates steady for the month, but most Fed watchers are anticipating a small rate hike in December. The Quantitative Easing unwinding process has also begun.
- Bond returns in the U.S. were flat, while international bonds (currency hedged) rose 0.8%.
- Alternative asset classes were mostly positive, with the exception of global REITs (down 1.0%).
- Managed futures (up 1.2%), commodities (up 2.1%), and reinsurance (up 1.7%) each posted favorable returns in October.
Investing For Impact
Investing goals for individuals have long been focused on building an ideal retirement, saving for healthcare, funding children and grandchildren’s education, and/or leaving a legacy to family or charities. Sparked by investors wanting to express their values in a different way, combined with an explosion in technological and research capabilities, asset managers introduced sustainable investing. This allows investors to factor in one more goal: investing to impact the world for the better.
Sustainable investing, also known as Environmental, Social and Governance, or ESG, generally focuses on those three areas to make an impact. As of year-end 2016, approximately $23 trillion of global assets, or just over 25% of total managed assets, were being professionally managed with a sustainability-themed mandate. There are several methods of evaluation an investor can utilize to incorporate ESG factors into their portfolio. The most popular, with over $15 trillion in invested assets, is negative, or exclusionary, screening. As the name implies, organizations that do not meet certain environmental, social, or (corporate) governance standards are automatically excluded from the portfolio. The next most popular evaluation methods are ESG integration and corporate engagement. ESG integration is a systematic method to include firms with excellent ESG-related practices. Corporate engagement utilizes a screen to measure shareholder influence in addition to ESG guidelines.
In the past, many investors felt that in order to invest sustainably they would have to forfeit a portion of their returns. Although investors sought to make a positive impact, it was irrational to potentially sacrifice their own goals and needs. However, as sustainable investing has continued to grow, the investment universe expanded with it and fund expenses have declined. In 2013, Savant developed a set of model portfolios that allows clients to invest sustainably through the use of funds that take ESG considerations into account. Our sustainability portfolios include the same diversification strategies as our standard portfolios, such as a tilt toward the small and value premia, a defensive bond allocation, and an allocation to alternative investments. As a result, they are expected to exhibit similar long-term risk and return characteristics. If the idea of sustainable investing sounds intriguing, we encourage you to speak with your advisor to learn more.
Sources: Bureau of Economic Analysis (BEA), Federal Reserve, Morningstar Direct, Standard and Poor’s, Global Sustainable Investment Alliance.
Read our October 2017 Economic & Market Commentary for:
- Market Returns Year-To-Date as of 10/31/2017
- Market Returns Longer Term Annualized as of 10/31/2017
- Economic Indicators