7 min read

Well, Well, Well… How The Turntables

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Russia-Ukraine tensions have been darkening the mood of the stock market lately, although historically geopolitics don’t seem to put much of a dent into US returns.

We found a sunny-side-up business story buried in the food headlines about Super Bowl spreads, avocado shortages, and Valentine’s chocolates. It was a feature from AP about cage-free eggs becoming the norm in the US.

The percentage of hens in cage-free housing has reportedly gone from just 4% a little over a decade ago to 28% in 2020, and is expected to reach 70% in the next four years. We don’t know how much happier these chickens are, but it’s an important first-step. This about-face from the industry, which initially fought to increase the size of the cages, is attributed to many years of stockholder and stakeholder pressure (see last week’s edition for a refresher on the power you have as an investor). In short, companies got the message that it's what the customers want and they are willing to pay for it. Bringing the old way of doing things into today’s modern age of mass production required a lot of engineering, labor, and investment dollars, but change is here.

It's safe to say that what’s going to be different on our plates in the next decade is also being decided right now by customers, activist and investor pressure, and human ingenuity. We’re seeing tech and a sustainability focus from consumers drive changes in many areas with plant-based or lab-raised meat, low-waste packaging, electronic monitoring replacing stalls, and even farming.

There are a number of publicly traded agriculture companies that have strong ESG ratings from MSCI and agrotechnology (“agtech”) startups raised nearly $5 billion in funding in 2021, up from $3.3 billion in 2020 and $1.7 billion in 2019. According to Crunchbase, more than $1 billion of private investment has been sown into the sector in the first month-plus of this year. “One of those main reasons the sector finally seems to have taken root with investors is the changing buying habits of millennials in particular and people in general when it comes to their food’s taste, nutrition and sustainability,” says the story. Further proof that you as an investor and consumer can make an impact on the issues you care about.

News you can use

Graphic of newspaper with magnifying glass

It was all about the tech of the future at the Super Bowl this year, with numerous electric vehicle, cryptocurrency and metaverse (and anti-metaverse) ads. The EV push resulted in the most climate mentions at any Super Bowl ever.
Scientists at a laboratory in Oxford, UK extracted a record-amount of sustained nuclear fusion energy in a breakthrough for the low-carbon technology. Nuclear fusion (combining atoms) is said to be safer than the nuclear fission (splitting atoms) process currently used in plants. We hope they celebrated with a pint at the local pub. Read our breakdown on nuclear energy here.
Congress just delivered a major win to employees with sexual assault and sexual harassment claims. A landmark bill that bans forced arbitration and allows survivors to choose to go to court will be signed into law by the president soon. The Justice Department says the win rate for workers forced into arbitration was less than 2% in 2020.
Carbon allowance ETFs that track the price of carbon credits have emerged as a new way to invest in the energy transition. There are currently four traded in the US, including the Kraneshares Global Carbon Strategy ETF, which is up 36% in the last six months. In addition, Canada saw the launch of its first two carbon credit focused ETFs this week.

For more values-aligned investing resources, check out these FWIW guides:

A seat at the table… and more

As you continue on your sustainable investing journey, it’s likely you’ll come across companies and funds prioritizing diversity, equity, and inclusion (DEI). Today, we’re breaking down what this trend means for investors and how to begin to look at incorporating DEI factors into your investing strategy.

Diversity is about numbers and representation. Making sure people of color and women are well represented in the workforce, including in key decision-making positions, is vital. And many investors are drawn to looking at diversity and inclusion not only because it’s good for society, but because research also shows a positive correlation between diversity and good financial performance.

As an investor, a good start is identifying organizations with women and people of color in leadership positions, like directors and CEOs. For example, the SPDR SSGA Gender Diversity Index ETF only holds firms with a high ratio of senior female executives (VP and above). Another is to look for companies that disclose key data. As of last year, 11% (104) of companies in the Russell 1,000 Index made the racial, ethnic, and gender composition of their entire workforce public, like Netflix recently did. (You can see a complete list of the 104 firms here and search Bloomberg’s database of S&P 100 companies that have released complete EEO-1 data here.)

But for some investors, an exclusive focus on diversity data is not enough and they also look to inclusion and equity for signs of deeper change at a company.

Inclusion focuses on how a company brings together all of its employees to ensure that diversity translates to a more inclusive workforce that leads to higher-quality work, better decision-making, and greater team satisfaction. Equity symbolizes fair treatment, opportunities, and rewards across the company for all. As you can imagine, all of these are elements that can help a firm attract the best talent, have a positive social impact, and reap both the economic and social benefits of a diverse workforce.

Inclusion and equity may be hard to quantify in practice, but many of the characteristics can be seen in data on pay equity, child care, paid sick leave, or parental leave. Investors seeking a more systemic change in corporate America can look for companies making progress on all these fronts and the funds that track them. For instance, investors can check whether the company conducts pay equity analysis every year or is certified by a non-profit for achieving pay equity. Equileap’s gender equality scores use more than a dozen different metrics besides representation. Glassdoor has a list of examples of good performers. You can also look for workplaces that get the best reviews from Black and female employees.

As you can see, data is key to informing investors and stakeholders focused on diversity, equity, and inclusion, with most of this data falling under the “S” in ESG.

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Is your portfolio playing offense or defense?

Someone wise once said that life is a rollercoaster, and we haven't stopped comparing human existence to the steel amusement park attraction since then. The ups and downs of the economy tend to resemble one too, and investors like to ride with as few shocks and scares to their portfolios as possible. We’ve covered value and growth stocks previously, but there’s another way financial markets like to classify stocks based on cycles: cyclical and defensive.

What are cyclical stocks? Cyclical stocks are those that follow the ups and downs of business cycles. They rise when the economy is booming and fall when the economy contracts. These companies tend to sell the extra comforts and indulgences that people prefer to buy when the economy is stronger, like cars, travel, and restaurants.

What are defensive stocks? When the economy shrinks, sales of essentials like medicines, utilities, food, and toothpaste remain relatively unaffected. These well-established companies are known as defensive stocks because they provide reliable earnings and returns during volatile periods. They also typically offer consistent dividends.

How is this useful? There are four stages to every economic cycle: expansion, peak, contraction or recession, and trough. Depending on what point investors think we’re at, they prepare by buying cyclical or defensive stocks. They pile into cyclical stocks ahead of an expansion and run toward the protection of defensive stocks in anticipation of stormy weather. This move from one group to the other is known as rotation.

Where are we now? No one can say for sure, but economists expect interest rates to be hiked a few times this year, possibly starting as soon as next month. Investors expect this will slow economic growth, which is why defensive stocks have outperformed cyclical stocks since December (comparing S&P Consumer Staples and S&P 500 Consumer Discretionary sectors).

It’s important to note that timing the economy and choosing the best time to rotate is complicated and difficult, even for experienced investors. Experts recommend young investors maintain diversified, well-balanced portfolios and try to ignore all the noise. You can research adding some defensive assets for protection and diversification, or talk with a trusted financial advisor about it.