Bartlett Commentaries
Market Commentary, 07 / 2008
At midyear there is an abundance of pessimism. Our outlook is more balanced at this juncture, and in fact we remain very comfortable with the reassurances outlined in previous quarterly updates. Nevertheless, we are keenly aware of economic and market headwinds, and we begin by acknowledging some painful realities.
- The US is probably in recession and European economies are weakening.
- Inflation is higher: 3-4% in the US and Europe, and 8-10% in many emerging economies.
- 2007 was the first year since 1941 that US home prices fell nationwide, and another decline seems certain for 2008. Similar weakness is evident in many overseas housing markets, notably the UK, Ireland, and Spain. Because real estate is collateral for all manner of debt, falling prices have been crippling for many US and European banks.
- Bellwether companies, facing higher costs and tighter credit, are cutting profit forecasts.
- The Fed is navigating “stagflation” – slower growth and higher inflation – for the first time in thirty years. Tightening policy to quell inflation may be very difficult medicine to administer for a weak economy with a fragile banking system. On the other hand, moderate inflation untamed today may become serious inflation later on, necessitating more severe measures. Central banks throughout Europe and Asia are navigating a similar tightrope.
Amid all the gloom, a tumultuous June put an exclamation point on an extremely volatile and ultimately very disappointing six months for the US stock market. The Dow and S&P indexes fell 12-14% in the first half, and only one major market sector (energy) delivered positive returns during the period. There was no relief overseas; foreign stock markets generally fared worse. High quality bonds were steady by comparison, posting slightly positive returns, providing a good shock absorber for balanced portfolios. We are pleased to note that the bonds we own are characterized by solid credit quality and generally of intermediate maturity, the latter an important factor in limiting inflation risk, which is otherwise inherent in bond investments.
Where do we go from here?These very unsettled times recall Warren Buffett’s suggestion that for long-term investors, temperament is more important than intellect. This means keeping a level head, in good times and bad, avoiding extreme optimism or pessimism. History clearly demonstrates the danger of unbridled optimism (“New Economy” investing in the late 1990s) just as surely as it reminds us of the high opportunity cost of being too negative.
There is no surefire way to capture the growth provided by good markets while completely avoiding the deterioration, however temporary and however dispiriting, that comes in bad times. Market timing is a “fool’s errand” – occasionally successful but a proven loser over the long haul. On the other hand, our experience shows value-oriented investing captures most of the growth in good markets while limiting the damage of bad markets, and thus it is our philosophical mainstay as we aim for good long-term performance with moderate risk, an “all weather” approach.
In conclusion, please be assured we are trying to strike an appropriate balance between being opportunistic based on the likelihood of eventual economic and market recovery, and having appropriate safeguards in place to protect portfolios in the event of continued adversity. This is the essence of portfolio management – balancing long-term reward against short-term risk.
For more information on this topic, please contact us. At Bartlett & Co, we assist high net worth individuals and their families in defining & reaching their life goals.