January Commentary: Deteriorating Global Economic Conditions Continue to Impact Equity Markets
While uncertainty surrounds impact of U.S. government recovery package
By Natalie Trunow, Senior Vice President, Head of Equities
Calvert Asset Management Company, Inc.
New economic data released in January 2009--from gross domestic product (GDP) figures, housing and jobs, to consumer confidence, manufacturing and corporate earnings--confirmed that the economic recession was deepening. For its part, the Federal Reserve signaled its intention to provide additional capital injections and guarantees for banks to help normalize the credit market environment.
With both the consumer and corporate parts of the economy continuing to look grim, investors looked to the government to stimulate the economy. A stimulus bill providing tax relief, additional government spending and direct payments to individuals was passed. Still, if the stimulus efforts fail to create enough new jobs to counter-balance accelerating job losses (job cuts accelerated during January with Starbucks, Pep Boys and Eastman Kodak announcing layoffs), the unemployment rate could rise to 9.5% this year. Meanwhile, the Obama administration proposed creation of a “Bad Bank” that would absorb toxic assets in the U.S. financial system. However, with the cost potentially running as high as $3 to $4 trillion and a lack of clarity about the valuation methodology used to price toxic assets, the idea seemed to raise more questions than it answered.
New hedge fund regulation was also introduced, which proposed bringing hedge funds under the supervision of the SEC and imposing registration and transparency requirements on the largely unregulated industry. A likely result will be a permanent reduction in the levels of leverage and risk-taking within this asset class.
While U.S. investors looked for signs of potential relief from overseas, little was forthcoming. The Chinese economy continued to slow at a higher- than- expected rate, threatening an even deeper impact on its trading partners, including other emerging market countries.
The S&P 500 Index posted the worst January return in its history, with a decline of 11.25%. Global equity markets followed suit, posting an 11.5% decline for the month. Growth stocks outperformed their value counterparts (as reflected in Russell 1000 Growth and Russell 1000 Value Index performance) by an impressive 6.4%, primarily due to the considerably smaller exposure to Financials, particularly banks, in growth stocks.
During the month, Calvert’s socially screened portfolios underperformed marginally
(-0.88% relative to the Russell 1000 Index, which was down 8.16%), mainly due to a large underweight position in energy, which posted a good relative performance, declining by just 2.87%, and a sizable overweight in the worst-performing sector--Financials, which fell 24.7%, with bank stocks down 37%. The carnage in banking shares continued as the Bank of America (B of A) acquisition of Merrill Lynch revealed a higher level of toxic assets then anyone, including B of A, expected, raising concerns that the deal might be abandoned, creating further uncertainty in the markets.
Many active investment managers fared well during the month, as they avoided banking shares and exposure to heavily cyclical sectors such as materials and industrial stocks.
Investment in mutual funds involves risk, including possible loss of principal invested. You could lose money on your investment in a Calvert Fund or the Fund could underperform because of the following risks: the market prices of stocks may decline; the individual stocks in the Fund may not perform as well as expected; and/or the Fund’s portfolio management practices may not work to achieve their desired result.
As of January 31, 2009, Calvert’s sustainable and responsible funds owned the following companies: Starbucks accounted for 0.15% of Calvert Social Index Fund and Eastman Kodak accounted for 0.03% of Calvert Social Index Fund; no Calvert sustainable and responsible fund owned shares of Pep Boys or Bank of America.