Recently released documents revealed the FBI has for years secretly demanded vast amounts of Americans’ consumer and financial information from the largest U.S. credit agencies.
The FBI regularly uses these legal powers — known as national security letters — to compel credit giants to turn over non-content information, such as records of purchases and locations, that the agency deems necessary in national security investigations. But these letters have no judicial oversight and are typically filed with a gag order, preventing the recipient from disclosing the demand to anyone else — including the target of the letter.
Only a few tech companies, including Facebook, Google, and Microsoft, have disclosed that they have ever received one or more national security letters. Since the law changed in 2015 in the wake of the Edward Snowden disclosures that revealed the scope of the U.S. government’s surveillance operations, recipients have been allowed to petition the FBI to be cut loose from the gag provisions and publish the letters with redactions.
Tech companies have used “transparency reports” to inform their users of government demands for their data. But other major data collectors, like credit agencies, have failed to publish their figures altogether.
Three lawmakers — Democratic senators Ron Wyden and Elizabeth Warren, and Republican senator Rand Paul — have sent letters to Equifax, Experian, and TransUnion, expressing their “alarm” as to why the credit giants have failed to disclose the number of government demands for consumer data they receive.
“Because your company holds so much potentially sensitive data on so many Americans and collects this information without obtaining consent from these individuals, you have a responsibility to be transparent about how you handle that data,” the letters said. “Unfortunately, your company has not provided information to policymakers or the public about the type or the number of disclosures that you have made to the FBI.”
Spokespeople for Equifax, Experian, and TransUnion did not respond to a request for comment outside business hours.
It’s not known how many national security letters were issued to the credit agencies since the legal powers were signed into law in 2001. The New York Times said the national security letters to credit agencies were a “small but telling fraction” of the overall half-million FBI-issued demands made to date.
Other banks and financial institutions, as well as universities, cell service and internet providers, were targets of national security letters, the documents revealed.
The senators have given the agencies until December 27 to disclose the number of demands each has received.
Apple may dominate the wearable conversation here in the States, but things look a fair bit different on the other side of the world. In Asia, Xiaomi is the giant in the room. According to new numbers form Canalys, the Chinese manufacturer was the key driver in global growth.
Wearable band shipments grew 65%, year over year for Q3. Xiaomi continues to top the list, with an even more impressive 74% versus this time last year. That puts gives the company 27% of the total global wearable band market — its highest number since 2015.
Low prices have been the key to the company’s success, which have helped grow shipments in China by 60% overall. The company’s strategy has also rubbed off on competitors like Samsung and Fitbit (soon to be counted among Google’s numbers), which have sought to offer low cost devices in order to appeal to those users, particularly in Asia.
Huawei saw substantial growth for the quarter, as well, at 243% year over year, courtesy of strong sales in its native China. Those numbers helped the company hold onto third place globally, just ahead of Fitbit.
Even Apple is offering up lower cost devices by keeping older model Apple Watches around, hitting the $200 price point The company’s new, premium devices continue to dominate, however. The Series 5 comprise upwards of 60% of the company’s global shipments for the quarter.
As I spoke with various early-stage startup founders presenting at the event, chatted with U.S. and European venture capitalists and brain-stormed with my colleagues, I reflected on my last 12 months inside the tech bubble. Soon, I’ll be publishing an extended look at what I see as the 10 biggest themes in startups and VC in 2019. But for now, here’s a sneak peek at my top picks.
SoftBank screw ups. From WeWork to Wag to Fair.com, SoftBank made headlines over and over again this year—for all the wrong reasons.
WeWork woes. SoftBank’s star portfolio company struggled the most. This was the biggest story of the year and its complete with drugs, private jets, burned cash and upset employees.
CEO exodus. From Away co-founder Steph Korey to WeWork’s Adam Neumann, a whole lot of executives exited their posts this year.
Unicorn IPO struggles. Uber, Lyft, Pinterest, Zoom and more unicorns went public this year. Some fared better than others.
The fight for seed. There was more competition than ever at the earliest stage of venture capital. As a result, investors got creative, hired fresh faces, raised new funds and even gave founders lavish gifts.
Y Combinator growth. Everyone’s favorite accelerator got a whole lot bigger this year. Not only did its cohorts swell, but its president, Sam Altman, stepped down and the firm cemented changes to its investment process.
VCs + direct listings = <3. When venture capitalist weren’t busy gossiping about WeWork and SoftBank, they were debating a new and innovative path to the public markets: direct listings.
Every startup is a bank. Brex raised hundreds of millions, Stripe launched a corporate card, credit card startup Deserve nabbed $50 million. 2019 was the year that consumer banking upstarts became the new e-scooter businesses.
VC isn’t the only option. While VCs were going crazy for consumer financial services, companies like Clearbanc and Capital expanded to give founders alternatives to venture capital, like revenue-based financing and venture debt.
If you like this newsletter, you will definitely enjoy Equity, which brings the content of this newsletter to life — in podcast form! Join myself and Equity co-host Alex Wilhelm every Friday for a quick breakdown of the week’s biggest news in venture capital and startups.
This week, I sat down with Chris Mayo, head of primary markets at the London Stock Exchange, to discuss the rise of direct listings.
Amazon Alexa can now play podcasts from Apple, making Amazon’s line of Echo devices the first third-party clients to support the Apple Podcasts service without using AirPlay. Before, this level of support was limited to Apple’s HomePod. According to Amazon, the addition brings to Alexa devices Apple’s library of more than 800,000 podcasts. It also allows customers to set Apple Podcasts as their preferred podcast service.
To get started, Apple users who want to stream from Apple Podcasts will first need to link their Apple ID in the Alexa app. Customers can then ask Alexa to play or resume the podcasts they want to hear. Other player commands, like “next” or “fast forward,” work, too. And as you move between devices, your progress within each episode will also sync, which means you can start listening on Alexa, then pick up where you left off on your iPhone.
In the Alexa app’s Settings, users will also be able to specify Apple Podcasts as their default player, which means any time they ask Alexa for a podcast without indicating a source, it will stream from the Apple Podcasts service.
Of course, Spotify Premium users have been able to use Spotify Connect to stream to Echo before today.
But now, Spotify says that both Free and Premium U.S. customers will be able to ask Alexa for podcasts as well as set Spotify as their default player.
Alexa’s support for Spotify podcasts was actually announced in September (alongside other news) at Amazon’s annual Alexa event in Seattle, so it’s less of a surprise than the Apple addition.
At the time, Amazon said it was adding support for Spotify’s podcast library in the U.S., which would bring “hundreds of thousands” of podcasts to Alexa devices. That also includes Spotify’s numerous exclusive podcasts — something that will give Echo users a reason to set Spotify as their default, perhaps.
Shortly after that announcement, Spotify said its free service would also now stream to Alexa devices, instead of only its paid service for Premium subscribers.
As the holiday slowdown looms, the final U.S.-listed technology IPOs have come in and begun to trade.
Three tech, tech-ish or venture-backed companies went public this week: Bill.com, Sprout Social and EHang. Let’s quickly review how each has performed thus far. These are, bear in mind, the last IPOs of the year that we care about, pending something incredible happening. 2020 will bring all sorts of fun, but, for this time ’round the sun, we’re done.
Our three companies managed to each price differently. So, we have some variety to discuss. Here’s how each managed during their IPO run:
How do those results stack up against their final private valuations? Doing the best we can, here’s how they compare:
So EHang priced low and its IPO is hard to vet, as we’re guessing at its final private worth. We’ll give it a passing grade. Sprout Social priced mid-range, and managed a slight valuation bump. We can give that a B, or B+. Bill.com managed to price above its raised range, boosting its valuation sharply in the process. That’s worth an A.
Trading just wrapped, so how have our companies performed thus far in their nascent lives as public companies? Here’s the scorecard:
You can gist out the grades somewhat easily here, with one caveat. The Bill.com IPO’s massive early success has caused the usual complaints that the firm was underpriced by its bankers, and was thus robbed to some degree. This argument makes the assumption that the public market’s initial pricing of the company once it began trading is reasonable (maybe!) and that the company in question could have captured most or all of that value (maybe!).
Bill.com’s CEO’s reaction to the matter puts a new spin on it, but you should at least know that the week’s most successful IPO has attracted criticism for being too successful. So forget any chance of an A+.
Image via Getty Images / Somyot Techapuwapat / EyeEm
(This story is part of the Weekend Brief edition of the Evening Brief newsletter. To sign up for CNBC’s Evening Brief, click here.)
ESG investing — or strategies that take a company’s environmental, social and governance factors into consideration — grew to more than $30 trillion in 2018, according to Global Sustainable Investment Alliance, and that number is set to keep rising as consumer tastes shift and investors demand more transparency. Once a niche approach thought to come at the expense of returns, these strategies have proven that they can be market-beating. And as investor momentum builds, some argue that companies can no longer afford to discount their ESG ratings.
Definitions of “ESG” are wide-ranging. The inherently subjective nature can make these factors hard to quantify — my good could be your bad.
Putting that aside, here we’ll take a look at the evolution of ESG investing — what’s behind the drive, especially as millennials and Gen Z take over the workforce, and the very real implications for companies that do not act. We’ll also consider some of the most popular ESG strategies, including ways in which investors can buy into the socially responsible investing movement.
ESG is already big, and it’s only growing. According to predictions from Bank of America, another $20 trillion is set to flow into ESG funds over the next two decades, which the firm called a “tsunami of assets.” For context, the entire S&P 500 is worth about $25.6 trillion.
These strategies are not new. The term “ESG” was coined in 2004 and the idea of investing with a broader goal in mind has been around for decades. But while taking this approach was once an exception, it’s now becoming the norm. More than 2,250 money managers who collectively oversee $80 trillion in assets have now signed on to the United Nations-backed Principles for Responsible Investment.
Traditionally some argued that taking this approach could mean sacrificing returns. But research suggests otherwise. There’s no shortage of ways in which to enact an ESG style, but perhaps the most basic approach — buying ESG-focused ETFs that track indices — have shown to yield returns similar to their benchmarks. Nuveen ESG Large-Cap Growth and iShares ESG MSCI USA are such examples. Both are beating the S&P 500 this year.
“This is not in any way concessionary to returns. We actually think it’s going to improve returns because it’s going to help us select better companies to invest in,” said Cliff Robbins, founder of $2.2 billion hedge fund Blue Harbour Group, at “Delivering Alpha” in September. “I think it’s so powerful. I’m telling public company CEOs that I’m investing in today that three years from now their P/E is going to be affected by their ESG rating.”
Within sustainable investing, styles range from ESG integration, to socially responsible investing to impact investing. Put simply, the primary factor in ESG integration is still financial performance, while impact investing is meant to maximize, with a quantifiable impact, societal reach. Socially responsible investing is somewhere in the middle.
Different reasons fuel investors’ appetite for ESG strategies. Some do it for moral reasons, choosing to completely shun companies that do not align with their views. Others, and the majority, consider ESG factors from a financial risk standpoint. For example, if a company doesn’t employ equal pay practices, there could be backlash and a high turnover rate which could, in turn, impact the stock performance.
But as these strategies gain popularity so, too, do the issues surrounding this approach. For one, it can be difficult to assign an ESG “score” to a company since many of the factors like brand appeal, for instance, are subjective. It can also be hard to prove that ESG is, in fact, being integrated into investment divisions. And some say that while ESG can weed out bad behavior it’s not sparking innovation and moving the ball forward on things like climate change.
While there might be an array of approaches to ESG investing on the Street one thing is certain: it cannot be ignored.
Sustainable investing surge
If sell-side research from Wall Street firms is any indication of market sentiment, investors are really interested in ESG. Analysts are devoting more and more pages to ESG strategy reports, and many firms are integrating ESG analysis into their regular research notes.
“ESG … looks set to dominate investors’ agendas in the years ahead,” Credit Suisse said in a recent report, and Bank of America said that “70% of US assets can’t be analyzed without using ESG.”
“As ESG issues become increasingly material across many industries, our GS analyst teams have taken pen to paper to address the impact on corporates,” Goldman Sachs analysts said in November.
“The demand for Sustainable Investing has been clearly growing over the past year,” JPMorgan noted.
As investors’ interest has spiked, the Street has taken note. New ETFs and mutual funds focused on ESG strategies have launched in record numbers, and there are a number of different ways for investors to deploy their capital in ESG strategies.
According to data from Morningstar, this year, through the end of November, $17.76 billion flowed into sustainable-focused ETF and open end funds available to U.S. investors. Last year’s total inflow reached $5.5 billion, which was then a record high. 2019’s number has already tripled that, and the year isn’t over.
“Increasingly proactive, they [individual investors] seek products and solutions across asset classes tailored to their interests. They also want to measure the environmental and social impact of their investments,” Morgan Stanley said in an Institute for Sustainable Investing report.
Rising, not necessarily risky, returns
One of the initial criticisms against ESG investing was that it meant compromising on returns. Of course, if you limit your options you could potentially sacrifice financial performance.
But the data tells a different story. 65% of sustainable funds rank in the top half of their respective Morningstar category through November, the firm said, and 48% of large-cap blend sustainable funds are beating the S&P 500 this year. By comparison, overall only 26% of large-cap blend funds are beating the market.
The longer-term figures show a similar trend. Morgan Stanley analyzed the performance of nearly 11,000 ESG-focused funds from 2004 – 2018, using data from Morningstar, and found that performance was comparable with that of their non-ESG focused peers.
“The returns of sustainable funds are in line with those of traditional funds, while also offering lower downside risk for investors,” the firm said in its Sustainable Reality report. “What’s more, in an uncertain market, sustainable funds may offer a layer of stability for investors looking to reduce volatility.”
There are many ways to incorporate ESG strategies into a portfolio, and one thing that just about everyone agrees on is that there’s not a “one size fits all” approach.
According to the Global Sustainable Investment Alliance, negative and norms-based screens are among the most common approaches. The first one means avoiding one category of stocks entirely — tobacco, for instance — while the latter is based on compliance with international standards established by organizations like the OECD or the United Nations Global Compact.
ESG integration is another popular method that’s gaining steam. This is when an investor takes into consideration a company’s ESG profile — and any potential risks — as one of the evaluated factors when considering whether or not to buy a stock. This analysis can be done independently, and then there are also a number of agencies that provide research and issue ESG “scores.”
ESG-focused shareholder activism is another approach that’s gaining traction, particularly as investors call on the country’s largest investment management firms — sometimes a company’s largest shareholder — to push for change.
Generally speaking, the first priority for ESG integration strategies remains financial performance, while impact investing’s focus is the greatest possible societal reach. This latter form of investing can be difficult for individual investors to access through the public market.
Morningstar’s head of sustainable research Jon Hale said that he’s seeing large inflows into diversified sustainable funds, or funds that could be substituted for an investor’s conventional holdings. These funds track indices like the S&P 500 or the Russell 2,000, but an ESG evaluation is central to the fund’s security selection process. Factors like a stock’s weighting, for example, could differ from the benchmark.
Hale said there’s been an especially noticeable increase in money going into sustainable fixed income funds, in part because a number of new funds have launched. “More investors I think are starting to understand that they can use ESG funds, sustainable funds across their entire portfolio,” he said to CNBC.
In some smaller areas of the sustainable investing landscape funds are posting returns far ahead of the market. This is especially true of some renewable energy-focused funds. Invesco Solar (TAN), Invesco WilderHill Clean Energy (PBW), ALPS Clean Energy (ACES), SPDR S&P Kensho Clean Power (CNRG) and Shelton Green Alpha (NEXTX) have all returned more than 40% this year.
It is important to note, however, that these funds can be volatile. While Invesco’s solar fund has surged 60% year-to-date, it ended 2018 with a 26% loss.
Picking a sustainable portfolio
When it comes to evaluating specific stocks, things can get tricky. There are some companies that obviously fall into either the “E,” “S” or “G,” but the holistic picture might be harder to judge.
ClearBridge Investments portfolio manager Derek Deutsch said that he looks for companies that are “best in class” with “very strong sustainability profiles.”
“We want companies with sustainable competitive advantages, and that would include excellent corporate governance, and companies that treat their employees well, interact in a positive way in communities where they’re located, etc.,” he said to CNBC.
The former is a Colorado-based manufacturing company which, among other things, makes aluminum beverage cans. Demand for aluminum is growing since it’s a much more sustainable material than glass or single-use plastic. Deutsch said that the company’s seen volumes double, driven in part by rising sales from carbonated drinks and craft beers. The stock has gained 38% this year. “We think this is going to be a secular trend because everyone is concerned about these issues,” he said.
Trex Company, the fund’s fifth largest holding, makes house decks from recycled plastics. The stock has gained 50% this year as the company takes market share from traditional lumber manufacturers. Deutsch said he believes the company can double earnings in the next 3-5 years.
ClearBridge Sustainability Fund has an ESG mandate, so it might come as a surprise that the top four holdings are Microsoft, Apple, Alphabet and Costco. Deutsch said that part of what they consider when determining whether or not a stock belongs in the fund is the societal impact of the product or service that the company offers.
When it comes to top-holding Microsoft, for instance, he said there are a number of factors that make it a “sustainability leader,” including their productivity-enhancing software. He also noted that the company has been progressive on a number of social fronts, and that they’ve pushed to source energy from renewable sources.
This particular fund has no exposure to any company that’s primarily engaged in fossil fuel extraction or mining, although other funds at parent company Legg Mason, which has $790.5 billion in assets under management, could have exposure to traditional oil companies.
ESG analysis is also playing a greater role in sell-side research from Wall Street analysts.
For instance, DA Davidson said that TJX, Lyft, Etsy and Synovus are among the buy-rated stocks in their coverage universe that look best from a governance standpoint. In a recent report JPMorgan said its top alternative energy picks going into 2020 are First Solar, SolarEdge and Sunnova Energy as investors pivot to cleaner sources of energy.
Taking a more thematic approach, Credit Suisse said the most attractive areas within sustainable investing are education, future of work and healthy living. Based on this, they scanned their analyst coverage looking for outperform-rated companies that fall into these categories, and found that Informa, Honeywell, Stryker and VF Corporation are among the companies that look best from this standpoint.
What’s driving the surge?
The key driving factor behind the surge in ESG investing is most probably investors’ demand for clarity when it comes to a company’s stance on social issues, as well the significant financial consequences that a company can face if it fails to adapt to changing consumer behavior.
Europe has traditionally been a leader when it comes to ESG, and a new wave of regulation is set to accelerate how investment managers account for ESG factors. But the United States is catching up.
“Unquestionably we are seeing more ESG demand worldwide and probably the biggest net changes in demand in the U.S.,” BlackRock Chairman and CEO Larry Fink said on CNBC’s “Squawk Box” in 2018.
Credit Suisse found that more than 85% of S&P 500 firms now disclose ESG information, up from just 20% in 2013, as “investors globally have become increasingly engaged with the concept of ‘responsible investing.'” This means a growing reward for those that score well on ESG metrics, with steepening consequences for those that do not.
“While many would argue that much remains to be done in order to achieve long-term sustainability targets, we stress that the growing focus on them by investors and the wider public is starting to have a real impact … ESG is increasingly driving investor agendas. We see this focus only increasing,” the firm added.
ESG investing may have started out with moral goals at the forefront, but as society changes it’s now viewed as an imperative metric when looking at a company’s future potential.
Calvert International Equity Fund portfolio manager Ian Kirwan used the example of electric vehicles. A few years ago many automakers weren’t interested in EV since it’s hard to make money without government subsidies. But suddenly they had to catch up with companies like Tesla as regulators, as well as consumers, pushed for greater EV adoption.
“What started off as ESG-related issues, or sometimes controversies, they used to sit on the side of the stage. And all of a sudden they’re getting catapulted right into the center of the stage,” Kirwan said to CNBC.
In an effort to maximize returns, ESG-related issues and any resulting stock impact is one of the many factors taken into consideration at Calvert, which is a division within Eaton Vance’s $497.4 billion in assets.
“We use ESG as a source of information to hopefully tell us something about the investment we’re looking at. We don’t treat it with anything special … it is one of a number of different components that we use to paint the holistic picture,” he said.
One potential issue with ESG investing is that it can be difficult to prove that these factors are truly being considered, so Kirwan said that he helped develop an approach to make sure it’s not just an afterthought.
At the most basic level, the firm breaks every company into four buckets of information, where it’s then evaluated on metrics like capital allocation and cash flow. Kirwan said that rather than creating a fifth and final bucket for ESG questions, it’s instead considered alongside all of the more traditional financial factors.
But companies that rate poorly on ESG metrics can also create potential buying opportunities, particularly if investors think they can encourage change at the company in question.
This is part of Pzena Investment Management’s strategy. The firm, which oversees more than $38 billion, uses a deep value investing style, which means it targets the cheapest quintile of stocks — including those that might have unfairly sold off.
“Sometimes we might reject a stock for an ESG reason. Sometimes we might actually see that the ESG reason is part of the reason why the stock is cheap, but also part of the potential turnaround, and we have confidence in management to help fix some of those issues,” Pzena Investment Management ESG analyst Rachel Segal said to CNBC. This ESG-lens is one of the many ways in which the firm approaches a stock.
“From our perspective it’s really about the material risks to the investment and understanding how we can analyze those in a way to try and get the best risk-adjusted performance for our clients,” she added.
The wide-ranging definition and inherently subjective nature of the term “ESG” means there are plenty of critics of this methodology. Some investors say that fossil fuel companies, for example, have no place in socially conscious funds. Others argue that since companies are going to be producing oil no matter what, investors should reward the best actors.
Given the sheer volume of information required to judge a company’s environmental, social, and governance profile, a number of research firms have sprung up that score companies on these factors, including Sustainalytics, As You Sow and MSCI.
Simon MacMahon, head of ESG research at Sustainalytics said that the main focus of the rating is to evaluate the degree to which companies face ESG issues that lead to unmanaged ESG risk, and therefore potentially negative economic outcomes.
“It’s a two-dimensional rating in that it looks at exposure on the one hand, so the degree to which companies are exposed to issues and how much. And then the degree to which they are managing those issues, and what is the gap between those two components,” he said to CNBC. “We take as much as possible a data-driven approach, and it’s a very structured approach,” he added.
He said that Sustainalytics recently overhauled its rating system, and that it now offers “absolute” ratings which allows for companies to be compared across industries. The majority of the company’s clients are institutional investment managers, although through the company’s partnership with Morningstar, MacMahon said that more and more retail investors are using their data.
But some say that too much credence is given to these ratings, given that significant investment decisions can be made based on them, and also since scores can differ drastically between research providers.
In June SEC Commissioner Hester Peirce likened the affixing of E, S and G labels to Nathaniel Hawthorne’s “The Scarlet Letter.”
“In our purportedly enlightened era, we pin scarlet letters on allegedly offending corporations without bothering much about facts and circumstances and seemingly without caring about the unwarranted harm such labeling can engender,” Peirce said.
The next decade of ESG
If the last decade saw ESG become mainstream, the next ten years will likely bring a new wave of shareholder-driven accountability from the world’s largest companies.
As issues like climate change and global poverty become more immediate, and as megatrends are set to take shape, people will increasingly call on the most powerful players to take action. Corporations will have to step up, and ESG metrics will need to crystallize.
“The largest investors in the world, which control how stocks are ultimately valued, care about this. Endowments and foundations are totally focused on ESG considerations … pension funds care about it, labour unions care about the safety of their employees … the biggest asset managers in the world have now awoken and said ‘ESG matters to me,’ and therefore it’s going to matter to companies,” Robbins said.
– CNBC’s Michael Bloom contributed to this report.
Treasury Secretary Steven Mnuchin speaks to the news media after giving a television interview at the White House in Washington, December 3, 2018.
Leah Millis | Reuters
The “historic” phase one trade agreement reached Friday between the U.S. and China will boost global growth, according to U.S. Treasury Secretary Steven Mnuchin.
Speaking to CNBC’s Hadley Gamble at the Doha Forum on Saturday, Mnuchin said the partial deal would address a host of issues central to Washington’s trade agenda.
“This deals with intellectual property, this deals with technology transfer, it deals with structural agricultural issues, financial services are opening up, currency understandings, as well as a commitment to purchase U.S. agriculture and U.S. goods,” he said.
Mnuchin also dismissed the notion that the U.S. was pushing back on the rules-based trading system, arguing that a level playing field with China would benefit the global economy.
“For a very long period of time the U.S. was open to China, China was not open to the U.S. There were very strong restrictions and for the first and second largest economy in the world, there should be more trading back and forth and that’s what we’ve been working on, and I think these agreements will not only be good for the U.S., but will be very good for global growth,” he added.
Global stocks surged Friday as Washington and Beijing announced that the partial accord had been reached, averting the next round of U.S. tariffs after a bruising 18-month trade war.
U.S. and Chinese negotiators will now work toward setting a timescale to sign the agreement, which is still subject to legal procedures, with U.S. Trade Representative Robert Lighthizer telling reporters Friday that the two sides would aim to ink the deal in January in Washington.
(This story is part of the Weekend Brief edition of the Evening Brief newsletter. To sign up for CNBC’s Evening Brief, .)
A long-ago world leader famously called politics “the art of the possible.”
Wall Street strategists, for their part, practice “the art of the plausible.” Knowing that financial markets in any given year are inherently unpredictable, they construct a reasonable forecast using uncontroversial assumptions.
Yet what is perfectly plausible is, in most ways, not at all probable as the ultimate outcome.
The consensus strategist forecast for the S&P 500 for any given year typically falls in the 5% to 10% range. Right now, CNBC’s strategist survey shows a median predicted 2020 S&P 500 gain of 6.5% to 3375. The average forecast is up 5%, and the maximum target right now is 3450 by BTIG’s Julian Emmanuel, which would be about a 9% advance.
Sounds perfectly sensible and defensible, right? After all, the long-term average annualized gain for U.S. stocks is right in that zone around 8%.
Yet in a counterintuitive quirk, the short term almost never conforms to the long-term average. Since 1928, the S&P has only showed a gain of between 5-10% six out of the 91 calendar years – suggesting the consensus forecast for a high-single-digit rise in 2020 has a 93% chance of being wrong.
A year ago, strategists as a group were looking for an 11% gain for 2019 – but the forecasts was likely as high as it was because stocks had already fallen sharply since October of last year – and the then-aggregate target of 2940 for the S&P was merely a call that the index would recover back to its prior record high.
This was not the popular outlook: “Stocks in 2019 will surge by more than 25% for their best year since 2013 while corporate earnings finish about flat and long-term Treasury bonds will return more than 10%, as the Fed turns tail to cut interest rates three times and successive rounds of tariffs are imposed on China until halfway through December.” Hardly a plausible-sounding story at the time, but exactly what happened.
Oh, and this year’s huge run higher in stocks despite flattish earnings followed last year’s negative equity return in a year when profits surged by 20%.
None of which is to denigrate the performance of brokerage-house strategists, for whom arbitrary index targets are a small and thankless part of the job, and who try most often to steer clients to the right parts of the markets rather than nail the number.
But it does help to observe the widely shared expectations for the year to come, if only to gain a sense of what potential trends or market behavior might most surprise the majority.
How Wall Street sees 2020
Sifting through the run of 2020 year-ahead dispatches, the collective best guess goes something like this:
Recession will be avoided and the global economy will pick up in coming months, with U.S. GDP returning toward long-term trend growth around 2%. Corporate earnings will improve to a mid- to high-single-digit growth rate, which should allow for similar progress for an already fully valued equity market. Overseas stocks have a good chance to outperform after years of severely lagging the S&P 500. Within the U.S. market, cyclical sectors should do better than defensive or secular-growth areas. Bond yields probably won’t move much with the Fed on indefinite hold. The first part of the year should be strong – but expect more volatility ahead of the election.
BlackRock Investment Institute comes close to distilling this general view: “Growth should edge higher in 2020, limiting recession risks. This is a favorable backdrop for risk assets. But the dovish central bank pivot that drove markets in 2019 is largely behind us. Inflation risks look underappreciated, and the lull in U.S.-China trade tensions could end. This leaves us with a modestly pro-risk stance for 2020.”
Here’s RBC Capital’s Lori Calvasina: “We expect 2020 to be a year of moderation, turbulence, and transition in the US equity market… Down years are rare in the US equity market, outside of periods associated with growth scares, recessions, or financial market bubbles. With those scenarios unlikely in the year ahead, we expect 2020 to be another positive year for the US equity market. But we do think full year returns will be less robust than 2019 and that the year will end up being closer to trend.”
One notable tendency: As J.C. O’Hara of MKM Partners points out, since 1950 there have been 18 years when the S&P has gained at least 20%. The following year was up 15 of those times, for an average total return (including dividends) of 11%. Of the three down years following a 20%+ gain, two involved a recession (1981 and 1990) and the other (1962) was a rare non-recession mini-bear-market.
Another pattern to toss out there: The very broad NYSE Composite Index last week made a new record high for the first time in nearly two years. LPL Financial’s Ryan Detrick points out that since 1980, it’s gone more than a year without a new highs eight times. One year after a new record was finally set, the index was up one year later all eight times, for a median gain near 14%.
Nothing is ever assured, of course, and this market doesn’t owe investors anything after a 14% annualized total return the past three years and a 18% yearly take since the March 2009 bear-market low. Stock valuations in the U.S. genuinely do appear stout, if not at egregious extremes. And there remain some indicators that look wobbly and resemble prior pre-recession phases.
But with stocks reaching record highs with credit markets sturdy, a perceived scarcity of cash-flow-producing assets globally and no outright overconfidence yet being shown by investors, stocks enjoy some tailwinds that keep alive the prospect that the market could start running well ahead of that plausible pace now predicted by Wall Street’s handicappers.
The so-called “Dogs of the Dow,” a classic value investing strategy that simply calls for buying the 10 stocks with the highest dividend yield in the Dow Jones Industrial Average, failed to beat the market this year. In fact, only one of the 10 names — Procter & Gamble — outdid the S&P 500’s 26% gain in 2019, and the average return for the group is merely 8.6%.
“The strong market returns this year proved tough to beat,” Ann Larson, managing director of global quantitative research at AB Bernstein, said in a note on Friday. “The popular Dogs of the Dow year-end trading strategy failed to work in 2019.”
This year’s record-setting rally in stocks has been largely led by momentum stocks, leaving stable value names relatively unloved. Coca-Cola, Exxon Mobil, Cisco, Verizon and J.P. Morgan Chase all posted single-digit returns, while Pfizer lost more than 12% this year, the worst-performer in the 30-stock index.
2019 could just be an unfortunate year for the Dogs of the Dow strategy as it actually has a strong track record. The strategy has outperformed the markets for the past four years straight and seven out of the last 10 years, according to Bank of America Merrill Lynch.
Yesterday, Adobe submitted its quarterly earnings report and the results were quite good. The company generated a tad under $3 billion for the quarter at $2.99 billion, and reported that revenue exceeded $11 billion for FY 2019, its highest ever mark.
“Fiscal 2019 was a phenomenal year for Adobe as we exceeded $11 billion in revenue, a significant milestone for the company. Our record revenue and EPS performance in 2019 makes us one of the largest, most diversified, and profitable software companies in the world. Total Adobe revenue was $11.17 billion in FY 2019, which represents 24% annual growth,” Adobe CEO Shantanu Narayen told analysts and reporters in his company’s post-earnings call.
Adobe made a couple of key M&A moves this year that appear to be paying off, including nabbing Magento in May for $1.7 billion and Marketo in September for $4.75 billion. Both companies fit inside its “Digital Experience” revenue bucket. In its most recent quarter, Adobe’s Digital Experience segment generated $859 million in revenue, compared with $821 million in the sequentially previous quarter.
Obviously buying two significant companies this year helped push those numbers, something CFO John Murphy acknowledged in the call:
“Key Q4 highlights include strong year-over-year growth in our Content and Commerce solutions led by Adobe Experience Manager and success with cross-selling and up-selling Magento; Adoption of Adobe Experience Platform, Audience Manager and Real-Time CDP in our Data & Insights solutions; and momentum in our Marketo business, including in the mid-market segment, which helped fuel growth in our Customer Journey Management solutions.”
All of that added up to growth across the Digital Experience category.
But Adobe didn’t simply buy its way to new market share. The company also continued to build a suite of products in-house to help grow new revenue from the enterprise side of its business.
“We’re rapidly evolving our CXM product strategy to deliver generational technology platforms, launch innovative new services and introduce enhancements to our market-leading applications. Adobe Experience Platform is the industry’s first purpose-built CXM platform. With real-time customer profiles, continuous intelligence, and an open and extensible architecture, Adobe Experience Platform makes delivering personalized customer experiences at scale a reality,” Narayan said.
Of course, the enterprise is just part of it. Adobe’s creative tools remain its bread and butter with the Creative tools accounting for $1.74 billion in revenue and Document Cloud adding another $339 million this quarter.
The company is talking confidently about 2020, as its recent acquisitions mature and become a bigger part of the company’s digital experience offerings. But Narayan feels good about the performance this year in digital experience: “When I take a step back and look at what’s happened during the year, I feel really good about the amount of innovation that’s happening. And the second thing I feel really good about is the alignment across Magento, Marketo and just call it, the core DX business in terms of having a more unified and aligned go-to-market, which has not only helped our results, but it’s also helped the operating expense associated with that business,” he said.
It is no small feat for any software company to surpass $11 billion in trailing revenue. Consider that Adobe, which was founded in 1982, goes back to the earliest days of desktop PC software in the 1980s. Yet it has managed to transform into a massive cloud services company over the last five years under Narayan’s leadership and flourish there.