Clients and Friends,

As we write on Monday morning, U.S. and foreign equity markets are selling off again, adding to declines sustained last week. At times like this, we feel it is very important for Bartlett to share helpful perspective and analysis. Our goal is to provide insight to keep you focused on long-term investment and financial planning goals, and help temper the sensational media coverage that might otherwise create anxieties.   ​

First, a summary of what happened.

• The Dow Jones Industrial Average fell 531 points on Friday, a 3.1% decline for one day. Such volatility isn’t as extraordinary as it seems. In fact, it was the eleventh time since March 2009 that this index fell 3.1% or more in a single day. If present trends continue, the market could sustain an even worse decline today.
• The Dow fell 1,018 points last week, and a similar 5.7% decline was registered by the S&P 500 Index, a broader market barometer. Putting the latter setback in perspective, it was the 38th weekly drop of this size or larger since 1940.  So based on historical experience, weekly declines of this magnitude happen once every two years.
• Measured by the Dow and S&P, the U.S. equity markets are currently in “correction” territory as of Monday morning, each benchmark down 10% or more from 2015 highs. The last correction occurred in 2011, so some distress was arguably overdue.
• Seen in global context, the recent declines in the U.S. are moderate in comparison to market selloffs in both emerging countries (Asia, Latin America, etc.) and in developed countries such as Australia, Canada, Germany, and Great Britain.

What caused it?

• There are many contributing factors but Bartlett believes economic slowdown in China is the primary cause of recent distress.  Last week brought the latest monthly update for China’s Purchasing Managers Index (PMI), a key gauge of manufacturing activity. The August reading of 47.1 was the lowest in four years. Generally speaking, for developed economies like the U.S., PMI readings below 50 are a recession warning flag. While China may not sink into recession, much slower growth seems likely to persist. This is why the Chinese government has recently introduced more stimulative measures, including a currency devaluation that was both surprising and controversial.

Are the concerns legitimate?

• Bartlett recognizes that China’s problems are of global significance, given the size of its economy. Countries heavily dependent on export of raw materials have been profoundly impacted – notably Brazil and Russia which have experienced economic recession, stock market selloffs, collapsing currencies, and political turmoil. But ripple effects have been felt in almost all economies. Hopes for improving global growth this year and next, based on resilience in the U.S. and nascent recovery in Europe, have given way to recognition that the more likely scenario is continuation of the very slow global growth experienced over the last six years.

Is a Bear Market underway?

• Bear market declines (20% or greater) usually occur before and during recessions. Bartlett’s ongoing assessment of U.S. leading economic indicators makes us believe a recession is not likely during the next year. The expansion that started in 2009 has been very slow by historical standards, with growth averaging just above 2%. Some economists have lamented that this is a “New Normal.” Nevertheless, improving labor markets, higher home values, and low interest rates are key positives that make us believe moderate progress is likely to continue.

• Bear markets often occur when the Federal Reserve is tightening monetary policy, especially when significant interest rate increases are implemented to combat inflationary pressures. This is not likely anytime soon. Inflation is currently very low and this is likely to continue because labor costs are rising at a slow rate and commodity prices have declined significantly, with $40/barrel crude oil the most widely recognized example.

• Risk is elevated when valuations are high, which usually coincides with optimism or exuberance. Such is not the case today. Equity valuations seem “average” by historical standards, given low inflation and low interest rates. Based on the latest data from Bloomberg, the S&P 500 Index is valued at 16.7x estimated earnings for 2015. Moreover, equity dividend yields in many cases exceed the yields provided by U.S. Treasury securities.

Concluding Thoughts

As noted above, U.S. equity markets are in correction mode for the first time since 2011. This has aroused the usual media hyperbole including dire prophecies of economic distress and continued market declines. Bartlett is accustomed to turbulence, mindful that it “goes with the territory” for long-term investors. We will continue to navigate using careful value-based strategies that are grounded in realism rather than optimism or pessimism, always endeavoring to make sure occasional market declines do not disrupt client’s financial plans. We think the most sensible strategy is to maintain sound long-term investments while remaining on the lookout for opportunities to upgrade into even better holdings that we might have previously deemed overvalued. We’ll do this in the context of sound portfolio investment policies that recognize key factors including asset allocation, diversification, and withdrawal requirements.

We are privileged to serve you and will endeavor to maintain your confidence. Please call or email your investment advisor if you have any questions about our thinking.