The “dog days” are here and it’s created a bit of a lull in the market. It’s expected for this time of year, but investors can take solace in the fact that history suggests things will pick up near the end of the month and beyond.
Still, investors may look at the current market and see sluggishness for the most part. The lull in the market is reflected in our friends at MAPSignals’ trusty Big Money Index (BMI), a gauge of institutional investor activity, which has been hovering around the 56-57% range for a while now:
Recently, the selling of Chinese stocks helped pull stock indexes down a little bit. It was a tech-led plunge that spread to other industries as well. However, that selling has slowed dramatically.
Additionally, we still see constructive signs under the market. Earnings season data are great so far on a large scale and future guidance looks bright. Still, much of the data remain stagnant. But we know how August is historically low on volume and high on volatility, so it’s not unexpected.
From a sector standpoint, we're still seeing real estate, financials, technology, industrials, and materials as the top five. But looking at the chart below, we also see there are no sectors with outsized trading activity (the usual yellow highlights), which indicates a consistent cycling of sectors under the surface:
It’s important to note how these short-term lulls don't matter much for us at Cornerstone, as we adopt a long-term investment perspective. That allows us to take this short-term data with a grain of salt, as our longer-term patience leads us into future bullish markets.
Over the last month or so, we've talked about a lot of data points that support the long-term health of the market. And today we want to bring up one more that helps to reinforce the health of the U.S. corporate environment – corporate cash on hand.
In the chart below, you can see the S&P 500 Industrials cash and cash equivalents stand at about $1.81 trillion, which is barely below the all-time high, set in the second quarter of 2020, at $1.89 trillion:
What's most interesting is that companies have spent a combined $5.65 trillion on stock dividend distributions and buybacks during that period. That doesn't even consider how they used capital for other productive uses, like mergers and acquisitions, research and development, plant investments, and additional CapEx spending.
This tells us cash holdings continue to rise over time, despite trillions in expenses and the strain imposed by COVID-19. That suggests corporate America overall is on solid footing and supports continued market growth.
In our opinion, investors should feel good about this cash on hand. It could be used to raise dividends and/or perform stock buybacks. It could also be used to improve companies through internal and external investments. Or we could see a combination of both.
But no matter how you slice it, any of those uses of capital will likely improve either the stock price/dividend payout, the firms’ business prospects, or all the above. Thus, this situation should play out well for investors.
Sustainable Investing
At Cornerstone we've increasingly received more and more inquiries on sustainable investing and how to incorporate it into a portfolio.
And it’s no surprise because sustainable investing has become increasingly popular among both retail and institutional investors around the world. Just in 2020 alone, sustainable investing accounted for $17.1 trillion of professionally managed assets. In the first quarter of 2021 alone, the global capital inflow to sustainable funds was $185.3 billion.
But what we want to address in this post are three key questions:
- What is meant by sustainable investing?
- Why is it increasingly popular?
- Does sustainable investing really do good?
To answer the first question, we run into what we believe to be the only current investing issue with a sustainable investing movement – there is no standard definition of sustainable investing. Often, sustainable investing is described as either socially responsible investing (SRI) or environmental, social, and governance investing (ESG).
The issue in the U.S. lies in the fact there are currently no uniform rules or definitions around what sustainable investing really means. A comparison of different investment companies’ publications reveals a variety of meanings and connotations when referring to SRI/ESG. For instance, some investment firms consider sustainable investing to be a strategy for maximizing portfolio returns. Others consider sustainable investing to be a strategy that minimizes financial risk or “societal risk”.
Additionally, SRI/ESG investing strategies can be implemented by using one of two types of screens or filters, one being a negative screen which removes certain companies and the other being a positive screen identifying certain companies with good behaviors that should be included. However, using either filter can come up with wildly different lists of “strong, sustainable companies.”
In essence, SRI/ESG investors are subject to the discretion of any particular investment manager, leaving the entire landscape bifurcated. With no regulation on SRI/ESG and investment managers defining the parameters, it allows for almost any interpretation of what is a “sustainable” investment.
The result is often confusion and contradiction for investors. In some cases, ratings agencies will assign sustainability scores to companies, and the same company can have vastly different scores, depending on the rating agency. We believe there needs to be a uniform global definition to help investors make informed decisions and to continue to drive the growth and performance of responsible, sustainable companies.
So, why sustainable investing is so popular?
The common assumption is that investing in SRI/ESG funds translates to outperformance relative to the market. But research paper after research paper show that, on average and on a risk-adjusted basis, SRI/ESG funds perform about as well as their benchmarks, neither better nor worse.
From an investment perspective, this tells us the performance of sustainable investing is on par with non-sustainable investing. So, if an investor is using a sustainable investment thesis to try to outperform the market, that won't be the case. Rather, the primary motivation for using this strategy should be about doing good and the positive feeling that that you receive from that, not about generating superior returns.
This leads to our third question – does sustainable investing actually “do good”?
Unfortunately, confusion over what defines sustainable investing makes it difficult to answer this question because no reliable, uniform measurements exist. As we discussed in the first question, absent a standardized definition for SRI/ESG, it’s tough to determine whether an investment actually has a sustainable impact.
Making matters worse, some firms get crafty when it comes to SRI/ESG, with one of the biggest examples of this being “greenwashing.” This is when a company overstates or exaggerates their positive impact on sustainability, including sometimes even intentionally fabricating false information.
Even worse, it’s become increasingly difficult for investors to see through this tactic. In a recent survey, six out of 10 investors found greenwashing to be the biggest challenge to sustainable investing, especially as it increasingly becomes mainstream for investors and fund managers.
This greenwashing is an effect of not having a standard definition on what exactly constitutes sustainable investing and a lack of regulation. In our opinion, the industry needs a comprehensive framework to provide a true apples-to-apples comparison that will allow investors to weigh one investment against another. Otherwise, they will be left wondering and forced to guess exactly how sustainable an investment really is.
So, the answer to the third question is that it’s tough to tell how sustainable an investment is without consistent judgement criteria. And as a result, ESG investors can benefit greatly from professional investment assistance to guide them through this uncharted territory.
Securities sold through CoreCap Investments, LLC. Advisory services offered by CoreCap Advisors, LLC. Cornerstone Financial Services, CoreCap Investments, and CoreCap Advisors are separate and unaffiliated entities.