Bartlett Commentaries
Market Commentary, 03 / 2009
A great deal of media attention has been devoted to the multi-year lows that we have reached on the various market indexes since the beginning of 2009. This drop has inflicted serious damage on the portfolios and psyches of many investors. While the rally of the last few days has been encouraging, the current values are still well down from what was believed then to be low values at the end of 2008.
Investing through recessions is a fact of life and one which all long term investors face. A normal recessionary experience would last 6-12 months and be accompanied by a drop in the market of 20-30%. This experience can normally be weathered with minimal discomfort by investors with a diversified portfolio matched to their risk profile. That expectation of minimal discomfort has certainly not been the case over the last eighteen months.
The extremes that we have reached can be traced to three separate fundamental declines in economic activity. These three events-a fundamental contraction, followed by the credit crisis and the current confidence crisis- have set up like a series of dominoes.
The fundamental contraction, which began in December 2007, reflected a “normal” recession and led to stock market declines of 20-25%. Unfortunately, job losses and personal income declines that accompany a normal slowdown exposed the financial vulnerability of many sub-prime and speculative borrowers. This led to sharp markdowns in the value of residential mortgage backed securities and the subsequent failure of Lehman Brothers in mid-September.
The second event characterized by many as the “credit crisis” has had a larger impact on the markets. This is partly because it has hit many companies at a vulnerable time, when their normal cushion had already been drawn down by the recession. As the pitch of the credit crisis intensified, various governmental efforts were launched, the full effect of which we have yet to feel. In the modern world, waiting for results is not something that we are used to. The constant barrage of negative announcements with no apparent end in sight has caused many to lose confidence in the ability of private enterprise to turn around.
The third stage of the decline, felt over the first weeks of 2009, has been characterized by despair. The stock market has been largely driven by emotion, at times exhibiting price declines that are out of proportion to actual events. The current investing environment is diametrically opposed to 2007 when many companies were given the benefit of the doubt. In 2007 the market chose to ignore the early signs of the economic crisis by granting relatively higher prices to stocks than might have been warranted. Now, investors are seeing nothing but darkness in even moderate forecasts and are expecting the worst. We believe that the current global economic environment is challenging, but not as bad as the market is currently expecting.
We can measure the worth of an investment in a company or market by many different factors: earnings, sales, interest coverage, etc. What cannot be accurately measured or predicted are emotional factors that influence the day to day market fluctuation. Our investment approach at Bartlett focuses our investments in companies with strong competitive positions and solid balance sheets which we believe will survive the current storm and grow when the turmoil subsides. Until that time, continued scrutiny on our part and patience on yours are the most appropriate response and we believe should pay large dividends. We thank you for your patience and continued trust.
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.