Market Report – Winter 2021

The three major events of the year—the coronavirus pandemic, racial unrest, and a contentious presidential election— combined to present an environment that we could scarcely have imagined twelve months ago. There has been plenty of fallout from these events, including the heartbreak over lives lost, economic hardship, a painful confrontation with systemic racism, and the thorough disruption of communities and local economies.

As of this writing, more than 78 million cases of COVID-19 have been confirmed worldwide, and more than 1.7 million deaths have been attributed to the pandemic—numbers that continue to rage out of control. These are losses that overwhelm the mind. The enduring legacy of the pandemic will be the massive void left by those who have died.

The economic growth in the US from mid-2009 through early 2020 was also cut short by the onset of the deadly virus, which ended the longest period of economic expansion in the history of the nation. The sharp pullback of first half-year improved in the third quarter with a partial rebound in economic activity. However, winter is now upon us, and a new surge of COVID-19 infections has put displaced workers—who are disproportionally Black, Latinx, and women—at greater risk of financial crisis.

In spite of all this, the stock and bond markets ended the year with gains, buoyed by federal, state and local government support programs and optimism that the pandemic will eventually subside. For the year, US large company stocks rose 18.3%, US small company stocks were up 19.9%, and foreign stocks rose by 7.8%. US bonds, broadly measured, rose 7.5%. There are reasons to believe that 2021 may be better than we imagine. If vaccines prove safe and effective, most Americans should be vaccinated by midyear, allowing for social distancing restrictions to wind down. In such a scenario, it is reasonable to presume a rebound in consumer spending for goods, services, and travel that would pave the way for economic recovery.

Another reason for optimism is the Biden administration, which includes a truly expert economic team. If the Senate confirmations go through, Janet Yellen will be the first woman US Treasury secretary, Adewale “Wally” Adeyemo will be the first Black deputy Treasury secretary, and Cecilia Rouse will be the first woman of color to chair the Council of Economic Advisers.

While the benefits of executive-level diversity are well established, the further promise of these candidates is in their depth of experience in economic policy and success in financial management. Wall Street is welcoming a return to executive-branch rationality, consistency, and communication in the management of vital economic issues.

Despite the turmoil—or perhaps because of it—2020 was a good year for socially responsible investments overall. For the year, the S&P 500 Index, a standard benchmark for regular large company stocks in the US, was handily outperformed by the KLD 400 Social Index, a comparable index of companies with superior environmental, social, and governance (ESG) ratings. In addition, a recently concluded seven-year study conducted by MSCI (a major index provider) found that companies with top-third ESG ratings outperformed bottom-third rated companies by more than 2.5% annually over the
period. This goes further in confirming the wisdom of socially responsible investing—something the founders of Natural Investments had recognized decades before the industry recently “discovered” the merits of the idea.

Looking forward, while current market valuation is a concern, we are optimistic for the intermediate and long-term prospects for the US economy and markets. We expect wide-reaching economic benefits from a meaningful shift toward broader inclusion and a low-carbon economy.

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