Bartlett Commentaries
Market Commentary, 10 / 2009
Economic and Market ConditionsEquity and corporate bond markets surged during the latest quarter, continuing a strong rebound from bear market lows in early March. Financial markets were buoyed by more evidence of economic recovery including rising manufacturing activity, increased exports, and improved consumer confidence. Furthermore, many bellwether companies delivered admirably resilient profit reports and there was significant merger & acquisition activity, indicating greater business confidence. Unfortunately, labor markets continued to worsen. The official unemployment rate increased to 9.8%, highest since 1983, while a broader measure of underutilization, including those reluctantly working only part-time, reached 17%. This ongoing erosion is something we anticipated in our July report. We think meaningful job growth is unlikely until later in 2010 at the earliest.
What’s Next?The current mood in the markets is one of guarded relief. Given the rollercoaster ride of the last year, it would be surprising if investors weren’t fearful of another setback. Caution is reflected in recent mutual fund industry statistics showing very substantial net inflows (deposits less withdrawals) into bond funds and net outflows from stock funds. Because significant market setbacks usually begin during times of complacency and overconfidence, evidence of skepticism is actually encouraging. Other historically reliable technical indicators, such as market breadth, are also positive. All things considered, a routine correction is not unlikely - similar to the brief 8% decline during June and July - but a major decline seems unlikely. However, we are carefully monitoring conditions in the corporate bond market because any significant deterioration could be a leading indicator of more meaningful trouble for stocks.
Outlook and StrategyNotwithstanding considerable improvement, the stock market is still 33% below the peak level of late 2007. Though valuations are higher since March 2009, quality stocks still have moderate price/earnings multiples of 10-15 based on realistic profit forecasts. Many have secure and growing dividend yields of 2-4%, which is attractive compared to fixed US Treasury yields of 1-4% and money market rates near zero. The likelihood of continued U.S. dollar weakness, due to large and expanding federal budget deficits, is among the reasons we prefer American companies with significant overseas exposure. Their earnings in foreign currencies translate into more dollars. We also selectively favor foreign stocks, along with mutual funds and exchange-traded funds focused on overseas markets. As for bonds, investment grade corporate securities remain our favorite segment of the market, and are a solid complement for stocks within balanced portfolios. We are very careful in our bond selections, emphasizing issues with less sensitivity to rising interest rates. This is because inflationary pressures, though currently low, could gain traction in a few years because of the Fed’s very aggressive monetary policy. Meanwhile, we are keeping lower cash balances because we think money market rates will remain below 1% well into 2010. We will continue occasional rebalancing among asset classes as evolving market conditions change our assessment of opportunities and risks.
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