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IMPACT COMMENTARY
The Impact of the Affirmative Action Decision on Corporate America
On June 29, 2023, the Supreme Court overturned affirmative action policies at the University of North Carolina and Harvard University, effectively terminating the consideration of race as an admissions factor. The purpose of affirmative action was to address the historical marginalization of various racial groups, but the Supreme Court ruled, by a vote of 6 to 3, that race-based admissions policies are unconstitutional. The Supreme Court, led by Chief Justice John Roberts, predicated its decision on the Equal Protection Clause of the 14th Amendment to the United States Constitution. The court argued that the universities’ desire for a diverse student body did not justify their race-based admissions policies. Instead, it suggested that each applicant should be evaluated on the basis of his or her distinctive experiences, rather than race.
Even though the ruling does not affect the corporate sector, advocates of diversity, equity, and inclusion (DEI) initiatives are grappling with the potential pushback and legal challenges against these programs, as well as the implications of the ruling for its future efforts to promote workplace diversity. Companies that defund DEI initiatives may reduce certain legal risks associated with “reverse discrimination” claims, but they may introduce new risks to employee engagement and morale, reputation, and legal risks from the pro-DEI side.
It is essential to note, however, that DEI initiatives in the workplace are vastly distinct from college affirmative action policies. They comprise a wide range of programs, including anti-bias training, mentorship programs, employee resource groups, leadership development programs, and targeted outreach efforts, including recruitment and hiring practices. However, the immediate effect of the decision may be a shrinking applicant pool and difficulty retaining and recruiting talent from underrepresented communities. As colleges are now able to accommodate less diverse classes, the pool of graduates applying for entry-level positions may also become less diverse. This could present significant obstacles for businesses seeking to employ diverse talent.
In spite of this, the business environment has undergone a significant shift in recent years toward the promotion of racial equity in the workplace. Companies’ increased disclosure of workforce diversity data is at the vanguard of this shift. This change represents a significant step forward in terms of transparency, demonstrating corporate America’s commitment to DEI practices. There has been a significant increase in the number of companies disclosing workforce diversity information. This development is the consequence of institutional investors and shareholder proposals’ concerted efforts to promote demographic disclosure.
The general public shares this sentiment as well. According to a recent survey by Just Capital, a staggering 92% of respondents believe that promoting equity in the workplace is crucial for businesses. Moreover, 76% concur that disclosing demographic data is a crucial step in advancing racial equity. Organizations such as JUST Capital have played a pivotal role in influencing corporate behavior change regarding DEI issues. Their initiatives range from documenting progress on DEI measures to guiding businesses in the development of equitable practices and demonstrating the financial case for addressing DEI issues.
In a recent analysis of the Russell 1000 shown below, it was determined that the percentage of companies publicly disclosing workforce demographic data, particularly via their EEO-1 Report, a mandatory annual data collection that requires all private sector employers with 100 or more employees to submit demographic workforce data, including data by race/ethnicity, sex, and job categories, increased from 11% to 34% between 2021 and 2022. Intriguingly, a companion study found that companies that disclose EEO-1 or equivalent intersectional data outperformed those that did not by 7.9% over the one-year period ending in 2022. This finding strengthens the business case for greater transparency.
The Supreme Court’s decision on affirmative action is a truly significant development. It should not, however, diminish the commitment to fostering an equitable and inclusive workplace. According to studies, companies that promote diversity and inclusion have a higher rate of employee retention and perform considerably better. Despite the recent Supreme Court decision, the increasing trend of companies disclosing workforce demographic data is a clear indication of the growing importance of DEI practices in the corporate world. As an increasing number of businesses embrace transparency, they not only nurture a more inclusive work environment but also position themselves for improved business outcomes.
JULY GLOBAL EQUITY COMMENTARY
Written by: Newday Investment Team
After a choppy May, equities moved up in June even as Treasurys sold off and rates moved higher, breaking with the recent positive correlation.1 Despite the move up in rates, corporate bonds had positive returns as risk premia narrowed offsetting the negative impact of duration. Market breadth widened as all sectors moved higher together, led by high beta and value, although defensive sectors and factors also had positive returns for the month. The VIX moved sharply lower and appears to have re-entered a pre-pandemic normalized “low vol” range between 10 and 15 for the time being.2 As expected, the Fed held its benchmark rate at 5% at its June meeting. Given the more sanguine environment in markets but with inflation still above the Fed’s 2% target, Fed Funds futures show the market expects the Fed will hike another 25bps at its July 25th-26th meeting and likely pause thereafter.3
Global growth continued to show signs of cooling. The JP Morgan global composite PMI fell to 52.7 in June from 54.4 in April, the first decline since November of 2022, but remains in expansionary territory4 The US composite PMI fell along with PMIs in Europe, Japan, China, and Brazil, amongst others.5 US nonfarm payrolls grew at the slowest pace since late 2021 and YoY wage growth has been flat for three months, remaining at the slowest pace since mid-2021. On the flip side, unemployment claims came off recent highs6 along with layoffs.7 U.S. Bureau of Labor Statistics data also showed headline CPI again decelerated more than expected to 3%, the lowest level since March 2021 and nearing the Fed’s 2% target.8 Core CPI also decelerated sharply, evidence of broader disinflationary pressures than just lower commodities and goods prices.9 Eurostat data continued to show lower headline inflation although the YoY core inflation rate ticked up and remains near the highest level on record.10 Despite evidence of a synchronized global growth slowdown, the US dollar fell as Eurozone inflation is showing more persistence than in the US, perhaps necessitating incrementally tighter relative monetary policy.11
Despite lower inflation, the front end of the US yield curve moved up, fully pricing in at least one more hike this year and the possibility of a second before year-end, with potential rate cuts pushed back to Q1 2024.12 We believe this change was driven by more positive sentiment in markets, which may indicate a lower probability of a recession this year. Nonetheless, the yield curve continues to be inverted with the spread between 2-year and 10-year Treasurys at -0.94%, likely indicating a recession farther down the road.13 We believe the shape of the yield curve shows that while we may see some modest further tightening by central banks, we are most likely near the end of the current Fed hiking cycle.
We were pleasantly surprised by the drop in US core inflation and we continue to believe inflation is unlikely to accelerate meaningfully from here. Given the substantial progress on inflation and an absence of obvious macro risks, we are not surprised that volatility in markets continued to fall sharply in June. We are cognizant of the historical evidence showing a less favorable environment for equities over the summer months, with September returns negative on average for the S&P 500 since 1945.14 Nonetheless, we continue to believe that downside to global equity markets is relatively constrained absent an unexpected adverse geopolitical event. We maintain our belief that the volatility in financials since the March bank failures has created some opportunity in the sector. S&P 500 sector performance shows financials continue to be a laggard YTD, but performed in-line with the S&P 500 in June and so far in July.
We continue to debate tactical and thematic changes to our portfolios.15 Earlier this year, as indicated in prior newsletters, we changed our view on the US dollar, expecting that dollar upside could be limited and further downside was more likely in the near-term. European companies continue to lead the world on ESG policy implementation and disclosure as EU regulators have pushed forward ESG-related rulemaking with the SFDR, RTS, CSRD, and EU Taxonomy frameworks to be progressively implemented over the next few years. We believe these frameworks have supported a rise in sustainability mandates at EU-based companies and fund managers. We see the EU continuing to lead on this front. With the US dollar entering a weaker trend, it has created greater alignment between macro market opportunities and the ESG investment landscape. We expect to continue to add to exposure in Europe across our portfolios this year.
Footnotes:
[1] See below table citing ETF performance calculations using Trading Economics data.
[2] See https://tradingeconomics.com/vix:ind
[3] See https://www.cmegroup.com/markets/interest-rates/stirs/30-day-federal-fund.html
[4] See https://tradingeconomics.com/world/composite-pmi
[5] See https://tradingeconomics.com/china/nbs-general-pmi, https://tradingeconomics.com/united-states/composite-pmi, https://tradingeconomics.com/euro-area/composite-pmi, https://tradingeconomics.com/japan/composite-pmi, https://tradingeconomics.com/brazil/composite-pmi
[6] See https://tradingeconomics.com/united-states/non-farm-payrolls, https://tradingeconomics.com/united-states/average-hourly-earnings-yoy, https://tradingeconomics.com/united-states/jobless-claims-4-week-average
[7] See https://tradingeconomics.com/united-states/job-layoffs-and-discharges
[8] See https://tradingeconomics.com/united-states/inflation-cpi, https://tradingeconomics.com/united-states/core-inflation-rate
[9] See https://tradingeconomics.com/united-states/core-inflation-rate
[10] See https://tradingeconomics.com/euro-area/inflation-cpi, https://tradingeconomics.com/euro-area/core-inflation-rate
[11] See below chart from S&P Global as well as table citing ETF performance calculations using Trading Economics data.
[12] See https://www.cmegroup.com/markets/interest-rates/stirs/30-day-federal-fund.quotes.html
[13] See https://fred.stlouisfed.org/series/T10Y2Y
[14] See https://www.reuters.com/graphics/USA-MARKETS/SEPTEMBER/zdvxozbwqpx/
COUNTRY GOVERNANCE RESEARCH COMMENTARY
Ukraine’s counteroffensive slowly moves forward
As Russia’s full-scale invasion of Ukraine nears its 18th month, Ukraine has sought to regain the initiative after spending much of the winter on defense. To that end, Ukraine has continued moving forward with its counteroffensive, albeit more slowly than many had hoped. The pace of its advance has been stymied by vast minefields, which have forced the Ukrainians to adjust their tactics. Instead of advancing with large columns of Western supplied equipment, they have been sending small teams on foot to undertake the painstaking and dangerous task of clearing a path through the minefields for follow-on troops and equipment. At the same time, Ukraine has been careful to preserve its combat potential having thus far not committed the majority of its newly trained and equipped reserves to the fight so that they will be available to employ when their forces are able to achieve a breakthrough somewhere along the frontline. The Ukrainian strategy has been described as a “policy of starve, stretch, and strike” with a heavy emphasis on hitting targets deep inside occupied territory in order to destroy Russian supplies and disrupt their logistics. Most recently, Ukraine managed to again strike and severely damage the only bridge connecting the occupied Crimean Peninsula with mainland Russia. Shortly thereafter, Russia announced it was pulling out of the grain deal brokered by the UN and Turkey, which had allowed Ukrainian grain exports to bypass Russia’s naval blockade.
Implications: Inside Russia there have been further signs of disarray amongst their military leadership with the most dramatic example being the aborted march on Moscow by the mercenary leader, Yevgeny Prigozhin, and his Wagner fighters. Details about all that transpired over those days and the time since have been murky, but expectations are that the turmoil could exacerbate long-standing morale issues for Russian troops. Finally, while NATO’s recent Vilnius summit did not provide Ukraine with a defined timetable for eventual membership, it did deliver significant commitments of support for now and into the future.
Netanyahu restarts judicial overhaul and reignites protests
Prime Minister Benjamin Netanyahu’s coalition of far right and ultra-religious parties has begun voting on contentious judicial overhaul legislation after having paused the process in March in the face of nationwide protests. The reforms aim to lessen the power of Israel’s Supreme Court to overturn legislation and government decisions, which opponents fear would weaken the independence of the judiciary and harm minority rights. After putting the reforms on hold, Netanyahu’s government began three months of negotiations with the opposition to try and find consensus on the legislation, however those talks ended without a deal. With talks having stalled Netanyahu announced plans to push forward with the legislation without the support of any opposition parties. The overhaul consists of several bills, and the first of these, which would restrict the Supreme Court’s ability to base decisions on the grounds of “reasonableness,” passed the first of three ratification readings in parliament on July 11. In order to try and tamp down on anger over the legislation Netanyahu has said he would scrap some of the originally proposed changes, such as a provision that would have allowed parliament to override Supreme Court rulings.
Implications: The government aims to pass the first of its judicial overhaul bills before the parliament session ends on July 30th. However, members of Netanyahu’s cabinet have said that intensifying protests could lead the government to rethink its plans. The Biden administration, which only recently extended an invitation for Netanyahu to meet the President, has called for broad consensus on reforms instead of rapid unilateral changes.
Burkina Faso is the world’s ‘most neglected crisis’ as focus remains on Ukraine
The displacement of 2 million people in Burkina Faso from five years of militia conflict has been named the world’s most neglected crisis, while attention and aid remains focused on Ukraine. Our work with Georgie Badiel and the Georgie Badiel Foundation continue to focus on this vital issue.
“We must do more to end the suffering in Burkina Faso before despair becomes entrenched and it is added to the growing list of protracted crises. That this crisis is already so deeply neglected shows a failure of the international system to react to newly emerging crises, as it also fails those lost in the shadows for decades,” said Jan Egeland, NRC’s secretary general.