Market Trends, the Debt Ceiling, and ESG Research

 Market Trends, the Debt Ceiling, and ESG Research

In unrelatedness to the turbulence experienced in the first quarter, the second quarter seemed much smoother and less challenging. The initial shock caused by lightweight banks in Q1 subsided, and in Q2, there was only one Federal interest rate hike of 0.25%, which had a relatively minor impact.

During this quarter, the debt ceiling issue took the spotlight, leading to some drama and anxiety. However, despite the concerns, the situation was resolved without any catastrophic consequences. There was moreover an interesting new paper on whether or not “green” companies are inadvertently causing increasingly pollution, and how variegated kinds of shareholder engagement can stupefy this.

We’ll delve deeper into the details below. Here are the performance charts for your review.

Bar chart

Exhibit 1: Second quarter, monthly returns in USD for US stocks, non-US stocks, US bonds, and Non-US bonds, April 2023-June 2023. eVestment, (2023). Own work.

Exhibit 2: Second quarter, quarterly returns in USD for US stocks, non-US stocks, US bonds, and Non-US bonds, April 2023-June 2023. eVestment, (2023). Own work.

Exhibit 3: 1 year returns as of 6/30/2023 in USD for US stocks, non-US stocks, US bonds, and Non-US bonds, July 2022-June 2023. eVestment, (2023). Own work.

In the second quarter, stocks showed strong performance, while immuration experienced poorer results. However, the monthly performance of both windfall classes varied significantly. Looking at the past year’s overall performance, US stocks performed remarkably well, growing by 18.95%, and Non-US stocks moreover showed very positive growth, rising by 12.47%.

As for bonds, their rolling one-year performance has been gradually improving, but it remains in negative territory. Despite the negative trend, there are signs of progress, suggesting potential for recovery in the yoke market.

The Debt Ceiling Drama

As we moved into the second quarter of 2023, investors became increasingly concerned well-nigh the debt ceiling and the potential for default. On January 19, 2023, Janet Yellen, the Secretary of the Treasury of the United States, supposed that the country had reached its debt ceiling. She warned that if a new limit wasn’t well-set upon and implemented by June 5, 2023, the U.S. would squatter the risk of defaulting on its obligations.

The debt ceiling refers to the maximum value of money that the United States can borrow, which is a limit set by Congress. Given that the U.S. government operates on a deficit, it needs to infringe funds to imbricate its expenses. 

Historically, the United States has never experienced a default on its debts, but such an event would undoubtedly lead to far-reaching consequences, with potential financial market turmoil stuff a major concern. Up until this year, the debt ceiling has been raised, extended, or revised a staggering 78 times since 1960. Yes, that’s correct – increasingly than once per year on stereotype since 1960! Unfortunately, the growing lattermost partisanship within Congress has transformed what used to be routine merchantry into a contentious and divisive issue that can quickly escalate into a flashpoint of contention.

Fortunately, a deal was reached on Saturday, May 27th, to lift the debt ceiling through January 2025. The snout was then passed in the House of Representatives on May 31st, and the Senate tried it on June 1st.

After all the discussions well-nigh the pending crisis, the question arises: How did the market react to the debt ceiling drama? Did a significant rally follow suit? Let’s take a look. Exhibit 4 unelevated is a orchestration showing an exchange-traded fund (ETF) that tracks the Russell 3000 Index, a wholesale proxy for the U.S. stock market.

chart showing trends over time.

Exhibit 4: iShares Russell 3000 Index performance in USD, FactSet, (2023). Own work.

In this case, the debt ceiling try-on was officially reached while the market was closed. As measured by the ETF, the market sealed on Friday, May 26th at $240.27 and opened Tuesday, May 30th (Monday, May 29th the markets were sealed for Memorial Day) at $241.59 – an increase of 0.55%. The market was substantially unappetizing through June 1st and opened 1.03% higher on June 2nd without the Senate passed the bill. Overall, from the market’s tropical on Friday the 27th to its opening on June 2nd, the market went up 1.43%. 

While analyzing the market’s response, it’s important to tideway it with a stratum of caution. There were likely several other events that occurred during that week that impacted the market. Considering the significance of the debt ceiling issue, it likely had some form of positive effect. However, it’s not unreasonable to think that the market’s reaction appeared relatively subdued compared to the headlines. A 1.43% increase is undoubtedly a good performance for the markets in a single week, but given the months of vaticination surrounding the pending crisis, some might have expected a increasingly pronounced response.

The key takeaway here is that a potential crisis, plane if deemed unlikely, is unconfined for merchantry if you are part of the press. If investors as a whole believed a deal was unlikely to be reached, we would have seen the market trade lanugo as the deadline approached. That simply didn’t happen. Despite all the headlines, the market believed a deal would be reached and a slipperiness would be avoided. The markets got this one right. 

Now, you might be thinking, “Perhaps I shouldn’t have been so concerned,” but it’s completely understandable that you may have felt nervous. Without all, when you see the stock market only went up by 1.43%, you may wonder if staying invested during all the perceived turmoil was truly worth it. At Abacus, our philosophy is firmly rooted in decades of research, and it emphasizes that attempting to time the market is an endeavor that tends to forfeit clients in the long run. 

Could “Green” Investing Push Polluters to Emit Increasingly Greenhouse Gases?

nuclear power plant

Kelly Shue, a finance professor at the Yale School of Management, and Samuel Hartzmark, an expert in windfall pricing and behavioral finance at Boston College, have authored an intriguing paper titled Counterproductive Sustainable Investing: The Impact Elasticity of Brown and Untried Firms. This research is interesting and has unprotected our sustentation as it aligns closely with our investment principles at Abacus. We are keen to explore the main themes of their paper and yank comparisons to our own investment approach.

The paper delves into the stardom between “brown” companies (less environmentally focused) and “green” companies (those that prioritize environmentally conscious merchantry practices). A key finding of this research is that divesting from brown companies may inadvertently increase their forfeit of capital, making it increasingly expensive for them to infringe money and potentially hindering their transformation into untried companies. Conversely, investing in untried companies lowers their forfeit of capital, but since they are once environmentally conscious, there may be limited room for remoter improvement.

This dynamic raises concerns well-nigh its long-term impact on environmental progress. The “cost of capital” refers to the expense a visitor incurs while raising funds. By divesting or selling a company’s stock, its stock price can decrease, prompting potential reconsideration of their merchantry practices and potentially bringing change.

In essence, the paper highlights the complexities and implications of divestment strategies in relation to environmental goals and the importance of understanding the forfeit of wanted in fostering sustainable change.

According to their findings, socially conscious wealth currently represents less than 2% of the overall stock market wealth in the U.S. To make a substantial impact on the forfeit of capital, these socially conscious investors would need to worth for over 80% of the investable wealth. In other words, there is currently an insufficient value of socially conscious wanted in the market to significantly sway the forfeit of equity.

In Closing

Whether it’s inflation, the debt ceiling, wall failures, or trying to understand the true impact of untried versus brown companies, decades of history and research shows us the path forward: to mindfully think well-nigh the long run. We encourage our clients to remember that history and topnotch research are far increasingly reliable barometers of future success than what’s happening in the heat of the moment.

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