What’s Up on Wall Street: Spring 2019

Both stock and bond markets rebounded strongly during the first quarter of 2019. In the U.S., large company stocks rose 13.6%, small companies were up 14.6%, and bonds were up 2.9%. Foreign stocks rose 10%. The markets were lifted by news that the Fed had reduced the number of planned interest rate increases for 2019, from a prior estimate of three hikes down to zero. Reports of slowing global economic growth and low inflation contributed to the revised interest rate position.

The change in expected Fed action on rates this year is significant. Interest rate adjustments are a tool used by the Fed to boost or rein in the economy. The Fed spurs the economy by lowering rates and applies brakes by raising rates. The Fed raised rates four times in 2018—a rapid response to an accelerating U.S. economy. Toward the end of last year, the Fed expected to raise rates a few times in 2019. Cutting those planned raises is a notable statement that the Fed sees slowing growth.

Since economic growth conditions are generally supportive of a rising stock market, it would be reasonable to interpret the Fed’s actions as bad news for the stock market. This could be true; however, remember that rate hikes tend to slow economic activity, so the originally planned three rate hikes in 2019 were expected to weigh on the economy and have a dampening effect on businesses and profitability. Going from a forecast of three rate hikes to zero might actually improve the environment for the stock market for the rest of 2019, in spite of the broader trend of an economic slowdown.

The change in rate outlook was also a plus for bonds. Bond values and interest rates move in opposite directions. Bond values decrease as rates rise, and vice versa. Thus, periods of rising rates are generally periods of below-average returns for bond investors—and this was indeed the case in 2018, when bond investments realized low or even negative returns. By December, bond values had already “priced in” the expectation for multiple rate hikes in 2019. When that outlook changed in the first quarter, bond values rose.

In February, U.S. Representatives Alexandria Ocasio-Cortez of New York and Ed Markey of Massachusetts introduced the Green New Deal, a non-binding resolution that was generally greeted with skepticism on both sides of the aisle by legislators who believe it is unrealistic and costly. However, as SRI investors know, public funding is not the only option. According to Bloomberg Businessweek, investors are willing to put up the capital to fund many of the GND goals—including switching to 100% renewable or clean power in ten years, building a nationwide energy grid, and renovating existing buildings for energy efficiency—provided they get clarity from Congress.

The original New Deal isn’t the only precedent for private-public cooperation on a major initiative. Another is the national production board, created by President Franklin Delano Roosevelt during World War II to guide factories into war-goods mode. There was also the Reconstruction Finance Corp., a government entity created during the Great Depression that issued loans to companies and states for investment in projects to foster economic stability.

The Green New Deal proposes the creation of public banks in a similar vein to enable private sector investors to participate in the ownership of infrastructure projects and earn returns. For all of its foibles, Wall Street has proven masterful at making deals to shift capital to opportunities. Aligning our national economy with the purpose of combating climate change is not only feasible—it offers potentially lucrative investment opportunities in support of broader economic growth.

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