A Cold War and Hot Oil

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Wow! The FWIW subscribers keep rolling in and we would like to thank everyone who is sharing and referring people to FWIW. To everyone who has joined us in the past few weeks, welcome! Here are a few links to resources and past stories that you might find interesting:

• Unpacking the ESG Alphabet Soup (including a link to our ever-growing glossary of common terms)
• How to Research ESG Stocks and Funds
• Investing in Women, a Gender Lens Guide
• How to Practice Faith-Based Investing
• Correction Triggers and Bears, Oh My!

Greetings,

All eyes are turned east this week as a former superpower looks to reclaim some of the dominance it lost three decades ago. The Cold War, a distant memory for a long time heard of mainly in history lessons and spy thrillers, has entered a new chapter and is back to defining global politics and trade. If you feel like you are going “back to the future,” you are not alone. Our thoughts are with the people of Ukraine as they face this violent invasion.

The grim news coming out of Kyiv has hit stock prices around the world. It is a rapidly changing situation and, as we write this, the S&P 500 index is now in correction territory (10% drop from all-time high) and the Nasdaq index is approaching its first bear market (down 20% from all-time high) in nearly two years. (FWIW rundown on some of these terms here). Some investors have loaded up on “safe haven” assets like government bonds and gold, which are seen as safer in times of crisis, while - as this Barron’s article notes - other long-term investors may be looking to buy as stock prices drop.

As you move forward on your investing journey or work out how to align your values with your investing, what can we expect for stocks? Historically, the US stock market has taken many (but not all) geopolitical events in its stride, as this chart from LPL Research shows. Only 1% of the revenue for S&P 500 companies is generated in Russia and Ukraine, according to FactSet, which has a list of the most exposed firms. But there’s no saying how it will play out this time, especially if the conflict escalates, drags on, and drastically reorders the global economy with broad consequences. The data suggests the recovery could take much longer if US forces get involved.

Some may say Russia is not a superpower anymore, but it’s still a major energy provider, the world’s biggest wheat exporter, and a huge source of raw materials like nickel, copper, and platinum. We could see shortages in these commodities and the products made with them as war and sanctions disrupt several supply chains, including the already troubled chips sector. (No, not red caviar Lay’s, which the world also needs more of, but semiconductors used in gadgets.) However, the central concern for trade and the planet with what’s going on right now is energy. Read on for more on this.

News you can use

• The storms in Europe making it hard for planes to land, as seen in viral live streams, are contributing to a surge in wind power. The EU generated a record 14.9 terawatt-hours last week, according to Bloomberg. Germany has produced more power from wind this year than fossil fuels thanks, in part, to the winds accompanying the storms.
• If all the methane leaks in fossil fuel operations were plugged in 2021, we could have captured enough gas to supply Europe’s power sector, said the International Energy Agency. Read our deep dive on methane here.
• Activist investor Carl Icahn doesn’t like how the sausage gets made at McDonald’s. As a shareholder, he’s putting pressure on the burger chain to stop sourcing pork from suppliers that use gestation crates and has nominated two members to its board to get rid of the practice.
• Workers at several Apple stores are trying to form a union and they aren’t afraid of green bubble shaming. The employees, who complain their wages aren’t keeping up with inflation even as Apple’s revenue explodes, are using Android phones to avoid spying, says the Washington Post.
• The largest donor-advised fund (DAF) program in the country made a record $10 billion in grants last year, a 41% increase over pre-pandemic levels. Fidelity Charitable says crypto donations topped $330 million, a nearly twelvefold increase over 2020. Learn more about giving with DAFs here.
• Looking for more places to learn about these subjects? Nerd out with us – here’s what we’re reading & watching

What’s energy got to do with it?

Global energy prices have been spiking and the effects are being felt by everyone. You’ve probably winced a few times this year at the gas pump. American drivers are on average paying a dollar more per gallon from a year ago. Soaring demand after the reopening has been met with problems on the supply side, like low inventories, low spare production capacity, and low investment.

Now add the Ukraine crisis to this hot oil prices situation, and you have the ingredients for a severe energy crisis. The price of oil rose over $100/barrel yesterday for the first time since 2014. Most of Russia’s coercive power and influence in global politics today comes from its vast fossil fuel resources, mainly oil and gas. The country supplies around 40% of Europe’s natural gas imports and 26% of its crude oil imports, and could trigger chaos by turning those taps off. Although a complete shutdown of flows is not expected, because it would be brutal for both sides, even small disruptions – during a time of fundraisers to keep retirees’ power on – is a frightening prospect. In such a scenario, the US and other countries would have to ramp up their production.

The question now is should fossil fuel companies be increasing capacity when all the climate change reports say we really should be cutting emissions? We know there’s shareholder pressure against more pumping and drilling, and climate experts have warned that staying on the net zero by 2050 pathway cannot accommodate more dirty energy and needs much more clean investment. However, many industry leaders, like BlackRock CEO Larry Fink, have made the case that because high prices are especially hard on the poor, drilling for more fossil fuels –  even while we develop a greener world – is necessary.

Regardless of which side you agree with, the green transition will likely be long, complicated, and with some degree of reliance on fossil fuels. Sustainable investors have some important decisions to make about how much carbon they are comfortable with in their portfolios, and what their investing strategy will be. We all love being values-aligned investors, but sometimes this can create tensions.

There’s no sugar-coating it: oil and gas is currently a hot sector, and you may miss out on some stellar returns and blockbuster stock buyback in the short-term if you choose not to include gas and oil companies in your portfolio. Two of the best performing ETFs this year are the VanEck Oil Services ETF (+28.07%) and the United States Natural Gas Fund LP (+25.46%). For comparison, the S&P 500 is down 12%. You could, as one asset manager put it, get some of those gains and push for progress on the issues you care about by “buying brown and helping it to become green” through shareholder activism or targeting companies with strong decarbonizing efforts. There are also low-carbon funds to consider.

If you do decide to divest from oil and gas stocks, you’ll be avoiding stranded asset risks and may be better positioned for the long-term green trend. As more countries and industries actively pursue a net-zero carbon future and more energy independence, the momentum is likely to drive money to renewables, which will create more investing opportunities.

What is “the market” and how do you know what it’s doing?

During periods of uncertainty and instability, you’ll often hear people on the news talk about “the market” and how it’s behaving. There isn’t a mood ring to wrap around Wall Street or a real-time poll to check how everyone with a trading account on their phones is feeling.

But there are stock indexes, and we mentioned two of them - the S&P 500 and the Nasdaq index - earlier in this email. They are aggregates of a specific set of stocks and are used to measure how the market, or a section of it, is performing. Investors use benchmarks, which can include these stock indexes, to gauge the performance of their stocks, funds, and overall portfolios in comparison with others. In fact, many passive funds and ETFs, like the SPDR S&P 500 ETF Trust and Invesco QQQ Trust, are an easy, low-cost way to invest that even Warren Buffett recommends as they track or seek to exactly follow the major stock indexes.

Dow Jones Industrial Average: The oldest and most famous stock index, the Dow Jones does not track the market. In fact, it’s made up of 30 large, established companies that generate most of their revenue in the US and are meant to represent the state of the economy, like Cisco, Coca-Cola, Disney, and Apple. It’s price-weighted, meaning a company’s share price determines how much influence it has on the index’s movement. So, unless you own the 30 stocks that are included, it may not be as relevant as the news media makes it out to be.

S&P 500: It includes the leading 500 profitable US companies, worth at least $12 billion each, across 11 sectors. When people talk about the market being up or down, they’re usually referring to the S&P 500 as it is broad based and has long been a benchmark for all types of investments. It’s market-cap-weighted, so the biggest companies, like Apple and Google, account for a worrying amount in its swings.

Nasdaq composite: It includes all the 3,000 or so US and international companies listed on the Nasdaq stock exchange. It’s another index that is weighted by market capitalization and the technology sector represents over 50% of the weighting, so its focus is high earnings growth.

How much you worry about matching index performance can vary based on your values, strategy, and risk tolerance. So, identifying the right benchmark for you - particularly the values-aligned investor - is key when judging performance. For example, ESG funds are lagging the market in the short-term, but many are beating the market when you compare them to relevant benchmarks over a longer time period.

Before you go -

Possibly frustrated by the lack of opportunities for romantic meet-cutes, or just seeking someplace cozy and calming, Americans are returning to bookstores in a big way. We’ve seen Notting Hill, we get it.