More and more companies, including airlines and oil companies, are announcing an intention to achieve carbon-neutral operations over the next couple decades. But, it is important to look behind the headlines and understand what that sort of pledge actually means. What business is the company actually in and does the pledge include their supply chain or product output? From the Climate Accountability Institute (Oct. 9, 2019, data through 2017), global fossil fuel and cement emissions from 1965 to 2018 totaled 1,354 billion tonnes of carbon dioxide and energy-related methane (GtCO2e); The twenty largest investor-owned and state-owned fossil fuel companies produced carbon fuels that emitted 35% of the global total (480 GtCO2e); Looking over the entire historical data set they find their current database of 103 fossil fuel and cement entities emitted 1,221 GtCO2e, or 69.8% of global since 1751 (1.75 TtCO2e); of which the Top Twenty companies are responsible for 526 GtCO2e, or 30% of all fossil fuel and cement emission since 1751. [Charts and data, Climate Accountability Institute, October 2019]
When you measure is everything. The major stock indices in the United States posted the strongest returns in recent years with the Nasdaq up 36.7%, Dow Jones Industrials up 25.3% and the S&P 500 (pictured below) 31.5% on a total return basis in the calendar year 2019. These results are undoubtedly impressive but are highly endpoint dependent. At the beginning of 2019 the equity market was reeling mainly due to the perception that the US Federal Reserve intended to pursue overly restrictive monetary policy only to announce quite the opposite at this time last year. The beginning of 2019 was a low point for US equity indices and the year ended with all-time record highs, producing very impressive calendar year returns. What we highlight on this week’s chart is the 14.26% total return (11.16% annualized) of the S&P 500 when measured from the September 2019 high prior to the fourth quarter US Fed-induced market rout. That return is historically strong but not as dramatic as measuring January to January would suggest.
This morning the Labor Department announced that payrolls expanded by 266,000 in November, well ahead of estimates. Just as important, the previous month’s jobs were revised upwards to 156,000 and the unemployment rate matched the 50-year record low of 3.5%. Average hourly wages also expanded 3.1% signaling that consumers’ wallets are gaining on the overall economy. Hiring momentum is no doubt strong and is outpacing growth in the labor force. While this is good for employees currently, continued wage inflation may cut into future corporate profits. The low inflation environment may make it difficult for companies to raise prices as wage pressures may crowd out margins. [chart courtesy Bloomberg LP (c) 2019]
Large Cap stocks in the United States have outperformed the rest of the world for the better part of the past ten years largely because of superior demographic, economic and corporate conditions in America. However, there have been several periods this decade when international bourses have gained ground on America and that has been the case since mid-August this year. While US companies have tended to exhibit robust fundamentals compared to their international rivals, stock market valuations favor international equities. Can the rest of the world continue to outpace the US? We continue to favor American stocks and bonds because economic conditions abroad continue to be challenging. Eurozone economic activity is barely expanding, although the German economy did surprise on the positive side (thus narrowly avoiding a recession) and Chinese GDP growth may be slowing more than expected. The headwinds international markets face may prove to be too much to overcome from a relative performance standpoint. [chart courtesy Bloomberg LP (c) 2019]