Bartlett Commentaries
Market Commentary, 09 / 2007
Given the relatively quiet trading times of 2005 and 2006, it is not surprising that volatility is higher in the latter part of 2007 amidst a growing list of concerns. A global sell-off in February was prompted by growth concerns in China, and geopolitical worries have caused regular bouts of market disquiet.
The most significant "stress test" this year was purely domestic in origin, as significant problems in the mortgage markets prompted a strong reaction against corporate debt, particularly in the more speculative areas. These worries eventually made their way into the stock market, especially the finance and homebuilding sectors. While it remains to be seen whether rising sub-prime defaults will greatly impact the broader economy in 2008, foreign economies continue to perform well, and have provided good growth prospects for multinationals of many stripes.
Realistically speaking, there are always problems in the economy and the markets. The housing bubble was three to four years in the making and it won't be resolved over night. Despite all the twists and turns, the underlying optimism in our past letters has carried the day. Equity markets are currently at record levels, building on solid gains in 2006, and buoyed by continued growth of corporate profits and dividends. Meanwhile, benchmark interest rates remain at unthreatening levels, inflation has quieted to around 2.5%, and the Fed has recently eased monetary policy.
It seems likely that other major central banks will follow the Fed's switch to slightly easier policy, and this should be a positive for the markets. The size and diversity of our economy together with its increasingly global nature provides the potential to weather these storms. Finally, and perhaps most importantly, we believe stocks are now reasonably priced relative to earnings and interest rates. We expect continued volatility and we will try to be opportunistic if desirable securities sell off during fearful occurrences. Meanwhile, balance and diversification remain our philosophical cornerstones and we continue to seek to maintain a margin of safety. Undoubtedly patience is the most important ingredient in the present investment environment.
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