Market Commentary – April 2022

Markets in Reverse

Financial markets sputtered during the first quarter, with negative returns for both stocks and bonds. “Inflation + Putin” was a toxic combination for investors. As we write in early April, significant shifts are underway in economic and foreign policies, and the resulting uncertainties have taken a toll on investor confidence.

Proper Perspective

Bartlett is accustomed to turbulence. Years like 2021, featuring great progress and no meaningful setbacks, are unusual. In fact, most years feature significant market selloffs, though the provocations vary. Using the S&P 500 Index as a proxy, stocks had at least a 5% selloff in all but two of the last forty years. In 21 of the last forty years, stocks had at least a 10% decline during the year. Stocks had a 15% slump in thirteen years, and a “bear market” decline of 20% or greater occurred seven times.

Despite these frequent shakeouts, over the entire forty-year period, stocks delivered an annualized total return of nearly 12%. The patient investor was amply rewarded. Staying resilient and disciplined during occasional scares was a “cost” the investor paid to secure long-term results. We think this will always be the tradeoff for investors.

Issues and Answers

Notwithstanding the reassurance provided by experience, we recognize the concern aroused by recent events at home and abroad. There are many challenges. What does this mean for your investments?

Inflation is a real problem, and not just in America.

Europe’s inflation just reached 7.5%, a 40-year high, almost identical to the latest measures for the U.S. Bartlett thinks some of this inflation reflects pent-up demand and supply shortages created by the pandemic. These unique factors should ease over the next year, but we think inflation will probably stay higher, perhaps in a 3-5% range for a while. Bartlett believes this magnifies the appeal of stocks in dominant companies that have pricing power, steadier profits, and strong dividend growth. As for bonds, it makes us favor securities with less sensitivity to higher inflation.

The only surefire remedy for inflation is a change in monetary policy.

This is finally underway. Bond markets are reflecting expectations for many interest rate increases by the Federal Reserve during the rest of 2022. Bartlett thinks sustained market progress will resume after the Fed is finished raising interest rates, so patience and fortitude will be very important this year. A silver lining is that we are now seeing better yields on bonds, giving us more attractive choices when reinvesting cash. As for stocks, higher market volatility will keep us on the lookout for buying opportunities.

Higher interest rates are a favorite “recession alert” for many commentators.

A slowing economy is the usual fallout from higher interest rates because borrowing costs increase for households and businesses. This makes us favor investments that should be more resilient in a slowdown. But it is nearly impossible to accurately gauge the timing of a recession, so Bartlett thinks aggressive “risk off” moves (big cutbacks in equity allocation) do not make sense.

Many pundits are lamenting the prospect of “stagflation.”

This is a doleful combination of low growth, high unemployment, and high inflation, last seen in the 1970s. It makes for an interesting headline, but Bartlett believes it does not describe current or prospective conditions. In fact, unemployment is only 3.6%, business profitability is strong, and most companies are anxious to hire good workers. Bartlett is not tailoring portfolios to a stagflation scenario.

The Ukraine Crisis intensifies a nascent “de-globalization” trend.

Free trade and open markets have held sway since the Berlin Wall fell in 1990. This long period of globalization was very positive for investors because it increased both competition and growth opportunities. This resulted in lower inflation, accelerated productivity improvement in many industries, and higher corporate profitability. Global interdependence seems to be unwinding now, replaced by regional cooperation, and an economic “Cold War” of indefinite duration may be underway. This is important for investors because it raises the probability of slower economic growth and lower long-term investment returns. This is one reason we are using more measured performance expectations in Bartlett’s financial planning assumptions.

All Seasons

We recognize that the worry aroused by higher inflation, magnified by an awful geopolitical crisis, could tempt an investor to make sweeping changes. However well-intended, we think this would be tantamount to “market timing” and would result in costly behavioral penalties. Bartlett has long practiced what we describe as “all weather” investing, aiming to participate well in good markets while moderating the fallout of bad periods. We think this is a more reliable approach, disciplined rather than dramatic, and it maximizes the probability of long-term success.

Bartlett describes investing and financial planning as “a marathon, not a sprint.” Fair weather or foul, we will keep running. Our resilience is fortified by owning quality investments. Rest assured we will be pragmatic and objective, looking for opportunities created by occasional setbacks, so that you ultimately benefit from occasional distress that may be threatening for less-prepared investors.

Concluding Comments

First, please note that Bartlett and our custodians will be closed on Good Friday, April 15. If you require information or a disbursement before Tax Day on Monday, April 18, please contact your Bartlett team by Tuesday, April 12.

Now for some exciting updates. The Bartlett team keeps growing! Keith E. Dershem, CFP® and Justin M. Ellis, CFA recently joined the company. These skillful and seasoned professionals will help us sustain our growth and client service. Please help us keep Keith and Justin very busy by recommending Bartlett to family, friends, and associates who could benefit from our services.

The work we love doing is only possible because of your loyalty. Thank you for your support and confidence. We will work hard to keep it.

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