Climate Change – It’s Not What You Think.
By Michael B. Hardy, CFA, SVP, Senior Investment Strategist/SPM, Bell State Bank & Trust
The topic of global climate change seems to find its way into more and more conversations, but not in the images – melting glaciers, heat waves, late-season snows and unpredictable jet streams – that may usually come to mind. The other climate change permeating so many conversations is tangible, visible worldwide and extremely important to everyone reading this article; it is the change taking place on a global scale with regard to power, influence and implications for financial markets and investors.
Since the global adoption of the Internet, people can instantly connect to all corners of the planet 24/7. Information, truths, half-truths and flat-out false information all travel today at the speed of light, with immediate responses in the financial markets. The canary is out of the cage, and there is no putting it back in; the global climate for the dissemination of information and the resulting influence on financial markets have changed.
The single most influential factor in market valuations over the past four years has been the actions taken by central banks around the globe to support weak economies and attempt to spur growth. The global climate recently has changed with regard to our own Federal Reserve, which for the past four years has embarked on a massive stimulus program that exceeds $2.5 trillion. The markets grew to expect the Fed to support the economy through continued buying of debt securities in an effort to suppress interest rates and stimulate borrowing. On May 22, 2013, the world changed when the Fed declared its intent to “taper” purchases of bonds.
Reading this as a methodical exit of Fed buying, the markets reacted with a rapid surge in interest rates; the yield on the 10-year U.S. Treasury spiked 35% from May 21 to June 25. This sent shockwaves of confusion through the financial markets, with developed and emerging markets falling in value. Bonds, the safe haven for many investors, came under significant pressure as the single largest buyer in the market, the Federal Reserve, began to signal a change in its actions, possibly reducing or exiting the bond-buying program. Nothing was immune from price weakness as gold, silver, commodities and real estate all sold off. The climate had changed. Markets are currently repricing based on this change, and the result is increased volatility and less clarity.
What Needs To Happen Now
The markets now need to be convinced that our economy is strong enough to stand on its own without the support of Federal Reserve stimulus. The economy continues to grow, household net worth is at an all-time high and confidence has improved materially. Will the change in climate – with the Federal Reserve wanting to get out of the stimulus business – be enough to derail fragile economic growth and a four-year stock market rally? It is possible, but our outlook remains that of modest growth in the economy and appreciation in the stock market over the next 18 to 24 months.
What about the global climate change in world power and influence? An illustration of how significant a shift we have seen is playing out before our very eyes with regard to American Ed Snowden, the man who has admitted to conducting one of the most significant breaches of national security in history by leaking top-secret information on American government surveillance programs. Snowden ran to Hong Kong to disclose the top-secret program. The U.S. requested his extradition, yet Hong Kong and Chinese officials disregarded the request and allowed him to leave for Russia. The U.S. again asked for Snowden’s extradition, at which time Russia showed little interest in cooperating. At the time of this writing, Snowden remains in Russia and is seeking asylum in Ecuador. Major trading partners appear no longer to respect the U.S.; they are flexing their own influence in directing global concerns. Ten years ago, Snowden most likely would have been immediately turned over to the U.S. Not today; the global climate has changed.
In the Middle East, the Arab Spring of two years ago has resulted in many leaders being forced from power, including those in Tunisia, Egypt, Libya and Yemen. Uprisings have broken out in Bahrain, Syria, Algeria, Iraq, Jordan, Kuwait, Morocco and Sudan. Civil unrest continues to this day in many of these regions, while those countries with global influence, including the United States, China and Russia, find themselves at odds over how to best address the events and implications for future political power, energy and essential commodity procurement.
This is climate change on a global scale that is now priced into assets in real time. Gone are the days of information delays which provided the luxury of time to contemplate the impact of events and to base resulting decisions on well-thought-out potential outcomes. These are the days of rapid response, continued re-evaluation and constant motion in investment opportunities and risk. We share these thoughts not to alarm or discourage but rather to inform as we assist in developing and managing investment strategies that allow you to reach your financial goals.
The global climate will continue to change, but our commitment to our clients remains steadfast.
If you’d like to talk more about investment scenario planning, call Michael B. Hardy to start the conversation.
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