WCM Chart of the Week for March 1, 2021

Equity markets around the globe were on edge as February came to a close. The technology-laden NASDAQ fell nearly 7% from an all-time high on February 12th. The weakness in equity prices came despite very accommodative comments from US Federal Reserve Chairman Jerome Powell during his scheduled two-day Congressional testimony last week. Equity markets became unnerved as government bond yields began to rise at an accelerated pace in the US, Eurozone and particularly the UK. Benchmark interest rates have been rising since the beginning of this year and US interest rates have been climbing since last Summer signaling expectations of improving economic conditions in the months ahead. As long as the rate environment increases gradually, gains can continue in equity markets. But, as we witnessed over the past few weeks, a steep ascent in market interest rates will have an expected adverse impact on risk assets. [chart courtesy Bloomberg LP (c) 2021]

WCM Chart of the Week for February 22, 2021

As we pass through the 12-month mark of the pandemic-caused rout in equities and risk assets across the world, investors are concerned about stretched stock market valuations, tight investment grade and high yield credit spreads, rising interest rates and poor labor market conditions. As of February 22nd, the one-year total return on the S&P 500 is just over 18% which is significant by any historical measure. As the next month or so passes, and as long as equity prices stay near where they are now, trailing returns are likely to grow even stronger as the anniversary of the March 23rd market bottom approaches. This may provide an additional psychological boost for investors as more stimulus is poured into the economy. Our concern is that the tremendous forthcoming stimulus now being debated in Congress might not be fully needed, or at least might not be properly apportioned. The stimulus may propel stocks higher here and abroad but may force the US Fed, which remains the dominant force in global capital markets, to reign in liquidity sooner than the market anticipates. [chart courtesy Standard & Poors and Bloomberg LP ©2021]

WCM Chart of the Week for February 15, 2021

Investors are concerned that US equity market levels are reaching new all-time highs and valuation readings continue to be stretched. Several months ago narrow leadership within US stocks was the reason to justify underexposure to the asset class. Market participation has broadened considerably since the pandemic-caused nadir of 2020 as equity prices have climbed. One measure of greater market participation is the percentage of stocks trading above their long-term trends, depicted as the dotted line in the chart, revealing 89% of the S&P 500 universe trading above their 200-day moving average. While the current level of participation is high, it can persist for prolonged periods as it had over the past decade. The 2010s were a period of slow economic and job growth post-financial crisis, and yet equity prices delivered robust gains during times of high participation, only temporarily interrupted by bouts of Euro-related uncertainty, the US Treasury debt downgrade, and the “Taper Tantrum”. Given the amount of monetary and fiscal support pledged by the Fed and Congress, our sense is that US stock prices could maintain their general upward trend even in the face of more near-term challenges. [chart courtesy Bloomberg LP, © 2021]

WCM Chart of the Week for February 8, 2021

What does a pledge from China of carbon neutrality by the year 2060 actually mean, and how do we measure progress? There are various global targets for climate change mitigation that attempt to quantify what needs to be done so that the global system does not exceed the point of no return, generally seen as a rise of 1.5 – 2.0 degrees Celsius. Under the Paris climate accord, a number of nations committed to carbon neutrality in the next 30 years. China said 40, but as the largest economy on Earth how do we measure their progress? This week’s chart from the US Energy Information Administration country analysis of China (Sept. 2020) is just one hint at the structural challenges China faces in achieving the target. On a per-capita basis China’s carbon footprint is still smaller than the developed West, but their total footprint is more than a quarter of the world’s total output, and their energy mix is just 15% non-carbon and more than half coal. After the pandemic interruption that marked the period around the Lunar New Year, China’s carbon output returned to or even exceeded pre-pandemic levels. We are looking for the steps China will take now to level out carbon growth so that it can begin reversing the trend after 2030, and wonder, even worry whether another 10 years of increasing output takes us past the global point of no return.

Pine beetles and self-reinforcing climate consequences

Beetle Kill in Colorado (c) 2020 J. Sorgi

By September of this past year, both California and Colorado had experienced record-breaking wildfires, exceeding previous history for the largest wildfires in their respective states. According to the National Interagency Fire Center, more than 7.5 million acres had burned across the United States by Fall 2020, surpassing the approximate 6.1 million acre 10-year annual average (NIFC, 2020). Why have we seen increasingly disastrous wildfires in recent years?

Enter stage right the mountain pine beetle. Approximately 5 mm in length with an average life span of one year, the mountain pine beetle may not seem like a formidable opponent, but like all ecosystems, each member is densely interconnected (USDA FS, 2011). An imbalance of one species always equates to consequences for another.

One of 17 species of bark beetles native to North America, the mountain pine is a wood-boring insect that has shaped the forest landscapes from Canada to Mexico for thousands of years (NPS, 2018). From July to August, adult pine beetles colonize forests in search of larger trees (typically no less than 3 inches in diameter). Affected pine species include Lodgepole, Ponderosa, Western White, Whitebark, Jack, and Limber pine. Once a suitable host has been identified, female beetles excrete a pheromone signaling other beetles to follow (Katz, 2017). Females then begin eating tunnels called galleries into the inner bark of the tree, extending up to 30 inches or more from the attack site. The eggs hatch and beetle larvae continue burrowing and feeding until winter freezing temperatures trigger dormancy. By June or early July, larvae pupate and emerge from the tree in search of new hosts to repeat the cycle. Within one year of invasion, infested trees can fade from green to red-brown and die (USDA FS, 2011).

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WCM Chart of the Week for February 2, 2021

It is not surprising that China’s carbon emissions are growing given relatively strong economic activity compared to the developed world. Or perhaps it is given China’s pledge of carbon neutrality by the year 2060. China’s contribution to carbon in our atmosphere is approaching 10 billion tons annually, an amount that is greater than the US and Europe combined. To place that in context, according to the World Bank, as of 2019 the Chinese economy is only 38.6% of US and EU economic output. It is important to note that carbon output in the US and Europe has been steady and even declining as their economies are expanding. Another startling fact is the Chinese economy represents 16.3% of Global GDP (also World Bank data) and yet contributes nearly 29% of the 34.2 billion tons of carbon emissions, according to the British Petroleum Statistical Review. In our view, China has a great deal to do to meet its 2060 carbon neutrality pledge on its way to becoming the world’s largest economy, starting with action on its COP21 Paris commitments including reducing its dependence on coal.  [chart courtesy British Petroleum Statistical Review, © 2021]

Capital as a Force for Good

Wilde Capital Management is proud to have been part of the Force for Good steering group and the team that prepared the new report, “Capital as a Force for Good: Global Finance Industry Leaders Transforming Capitalism for a Sustainable Future”, which was launched at the ‘Global Leadership in the 21st Century’ conference organized by the United Nations, Geneva and the World Academy of Art and Science, in support of the United Nations’ 2030 Agenda for Sustainable Development.

63 leading institutions in the global finance industry, representing over US$100 trillion, and nearly 30% of the world’s financial assets, are pointing the way for the industry as a whole to respond to major global challenges including climate change, financial inclusion and inequality.

The new report documents and analyzes their activity in terms of environmental, social and governance (ESG) polices, sustainability programs, and stakeholder engagement, whose cumululatve impact determines how they can be a “force for good” in the world. Taken together, these can have significant impact on driving sustainability in the world, both directly and and indirectly through changes in the way capital is deployed, driving up the cost for those that damage it.

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WCM Chart of the Week for January 25, 2021

While conditions in the US labor market remain dire with initial and continuing jobless claim registering persistently high levels, other surveys are showing early reasons for optimism. The US ISM (Institute of Supply Management) produces several influential surveys of their members, and they have released key reports on the impact of COVID-19 on US business trends. The December surveys on US Manufacturing New Orders and Business Production suggest that purchasing managers are optimistic. In fact, the New Orders reading stands at a level not seen since 2004. This is a critical development because, if business optimism remains elevated, eventually staffing will have to expand bringing job seekers back to work. A lot needs to occur for the economy to fully recover — vaccines need to be distributed in mass and be effective, people need to feel comfortable re-engaging in economic activity, and states need to allow businesses and schools to reopen. We believe supply managers are seeing beyond these significant near-term challenges to an economic recovery in the quarters ahead. [chart courtesy US ISM, Bloomberg LP © 2021]

WCM Chart of the Week for January 18, 2021

This week’s chart comes courtesy of J.P. Morgan Asset Management’s “Guide to the Markets” quarterly publication, expressing the near uniform adverse bond market impact of a nominal 1% rise across the yield curve. A key assumption cited in the chart subtitle is that the shift in the curve is parallel, which rarely happens. Yet, the illustration highlights a major challenge for US bond investors in the months ahead.  There may simply be few segments within fixed income where investors can expect positive total return. It is reasonable to assume that the rise in intermediate-to-long term US Treasury rates will continue, eventually approaching pre-pandemic levels. The yield on the 10-year US Treasury has risen from 0.5% on August 4, 2020 to 1.08% on January 18, 2021, while it stood at 1.77% 12 months ago. According to JPM’s analysis, only US Convertibles, High Yield and Floating Rate securities can be expected to deliver modestly positive total return in the year ahead. There are other key assumptions that would change the results of their modelling, such as benign equity market conditions and a steepening yield curve, but the chart illuminates the harsh reality facing bond investors in 2021. [chart courtesy JP Morgan Asset Management © 2021]

WCM Chart of the Week for January 4, 2021

What happens when one ESG priority comes into conflict with another? This week we examine a chart from the World Resources Institute (www.wri.org) of data from the Servicio de Información Agroalimentaria y Pesquera chronicling a decade of growth in avocado production in Mexico. Avocados play on ESG themes of healthy eating, job creation and economic opportunity. Unfortunately, the explosion of consumption, primarily in the US as a result of NAFTA, of Mexican avocados has fueled deforestation, draining of aquifers, soil degradation, increased CO2 emissions, threatens indigenous species and even triggers small earthquakes. According to various studies assembled by the World Economic Forum, avocado groves consume multiples of the water of indigenous forest, and the fruit has an end-point carbon emissions footprint many times that of bananas. As with other monocultures like palm in Indonesia, avocado has brought economic opportunity to areas that badly need it like Michoacán province, but at a profound and unsustainable cost. Conscientious consumption and deploying capital to find more sustainable methods of cultivation without depriving Michoacán of needed money and opportunity are examples of where ESG is headed to address whole-systems challenges rather than focusing narrowly on single issues or ideas.

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