Bartlett Commentaries
Market Commentary, 04 / 2009
Market ConditionsThe market rally of the last month in which stocks have risen more than 20% from the low reached on March 6, seems born out of a long awaited sense of relief. The Dow isn’t back near 8000 because the economic outlook is suddenly good, rather it is because reality hasn’t turned out as bad as widely anticipated only a month ago. The latest economic updates for industrial production, retail sales, housing starts, and corporate profit reports, have been interpreted hopefully because they indicate an economy that by all accounts is still weak but may no longer be worsening.
The world economy should in time return to a more normal pace, buoyed by innate recuperative powers, especially innovation and productivity, which have proved to be rehabilitative following past setbacks. Forceful monetary and fiscal policies should also prove to be more effective as focus is gained on individual trouble spots and major world powers coordinate their efforts. All of this will take time and patience.
Outlook and Strategy- A major economic rebound seems unlikely anytime soon. Headwinds are significant: the negative wealth effect of deteriorating home equity and lower portfolio values, rising unemployment, and reduced borrowing capacity. European economies are also in recession and developing economies are slowing because they depend on exports to the US and Europe.
- Notwithstanding the above, we are mindful that historically, stocks rebound well before economic recovery is evident. In past cycles, stocks bottomed 3-9 months or more before the economy troughed, and more than a year before unemployment peaked.
- High quality stocks are in many instances attractively valued with moderate price/earnings multiples based on fairly conservative earnings expectations. The latest quarterly reports indicate companies are struggling mightily amid the worldwide economic slowdown, but their results thus far seem no worse than expected. Returning to where we started, great news would be nice but “not so bad” news should be enough to improve investor sentiment. Moreover, many good companies have attractive dividend yields of 3-4%, with sustainable payouts, even factoring in for subpar earnings performance this year. This is quite an attractive income return compared to US Treasury yields of only 2-3%, and money market yields near half a percent.
- Many investment-grade corporate and municipal bonds are attractively priced. Yield spreads (the difference in yield between these bonds and Treasury bonds) are very wide by historical standards. These more conservative securities are a solid complement for stocks within balanced portfolios.
These are the most challenging economic and financial times that we have ever witnessed, and we appreciate your patience and confidence. Our investment process for stocks and bonds is inherently conservative, and we believe that it will stand our clients in good stead as we make our way to recovery and beyond.
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.