Market Commentary – July 2021

Halftime Report

Continuing economic growth, robust corporate profits, and low interest rates have been a very bullish combination for equity investors. As we write in early July, U.S. stock market benchmarks are near record highs, up more than 10% for the first half of 2021. Foreign stocks have also performed well, despite troubling infection trends in some countries. Bond and cash returns have been comparatively low so far this year, as investors have favored growth over safety.

Some timeless investment principles, validated by the 2020 snapback from pandemic lows, have been further confirmed by ongoing progress in 2021. Patient investors have achieved solid gains, while most traders have not. As Bartlett is fond of saying, time in the market is more important than market timing.

Prices: HIGHER

Are you concerned about inflation? If so, you have plenty of company. It tops the worry list for many businesses and households. The evidence of higher prices is widespread. We highlight a few noteworthy examples.

  • The ISM Prices Paid Index, a proxy for manufacturing costs, recently reached a 35-year high.
  • A National Federation of Independent Business (NFIB) survey of price increase plans among small companies reached the highest level since 1981.
  • Home prices rose by 18% from a year ago, according to a national survey. An index of Median Family Home Prices is higher, relative to inflation, than at the peak of the 2006-2007 Housing Bubble.

Interest Rates: STEADY

Former political advisor James Carville once quipped that he wanted to be reincarnated as the bond market “because you can intimidate everybody.” In past times, the bond market “intimidated everybody” by selling off when inflation was rising. This resulted in higher interest rates that slowed the economy and reduced asset values, until inflation cooled. Thus, in the 1990s it was said that “bond market vigilantes” disciplined policymakers to contain inflation.

Today it seems the vigilantes are on vacation. Despite higher inflation, interest rates are historically low and actually declined in the second quarter. Indeed, the expected long-term inflation rate implied by U.S. Treasury bond yields was recently just 2.3%, still moderate and down slightly since March 31. The trend suggests that, unlike households and businesses, the bond market is not yet anxious about higher inflation. 

Explaining the Disconnect

A plausible explanation for the disconnect between worried households and sanguine bondholders is that inflation, while currently high, is peaking. Bartlett believes this is possible. We think some of the recent pressures resulted from temporary conditions last experienced at the end of WWII. That was the last time the U.S. economy was “re-opened” after a period of imposed restraint. Pent-up consumer demand collided with supply shortages, provoking higher prices throughout 1946, until companies ramped up production. There is evidence of similarly transitory price spikes today. For instance, a Bloomberg index of lumber prices rose by a whopping 16% in the first quarter, climaxing a huge rebound from depressed levels at the outset of the pandemic, but then fell by 30% in the second quarter as supply/demand conditions normalized. We think this will probably happen with other currently scarce goods, ranging from semiconductors to used cars.

This does not mean Bartlett is unconcerned about inflation. We know the Federal Reserve is prioritizing employment and is willing to tolerate more inflation. Furthermore, even a moderate 2.5% long-term inflation rate results in a doubling of living costs in thirty years, a reasonable time horizon for most investors. This magnifies the importance of careful financial planning and sustainable investment performance.

Navigating Volatility

These days it is frequently said that a correction or setback is overdue. We don’t disagree. History shows that stock market declines of 5-10% occur every year, and more significant selloffs of 20% or worse happen every three to four years, usually provoked by a crisis (i.e., the pandemic) or recession fears. Occasional turbulence is the rule, not the exception. Some investors try to “time” their way around market fluctuations – selling before declines and waiting for setbacks to buy – but this is usually counterproductive. It is practically impossible to trade in and out of stocks with consistent success, and there can be significant tax costs as well.

We know portfolio values will fall from time to time, sometimes dramatically, as during the market selloff in early 2020. Bartlett cannot prevent these setbacks, but with careful financial planning we can help prevent disruption of your lifestyle. By keeping appropriate portfolio safeguards, quality investments can be maintained during occasional scares, rather than reactively sold at low prices. Even better, careful asset allocation and diversification allow for rebalancing and opportunistic buying when stock prices are lower, so that occasional shakeouts can be times of opportunity rather than peril. Rest assured we are focused on Bartlett’s investment management goal of “all weather” long-term performance, participating well in rising stock markets and holding up comparatively better during difficult periods.

Concluding Comments

Midway through 2021, Bartlett is tracking toward another year of high client retention, meeting or exceeding our goal of 98%. We are very grateful for your business. We hope you will recommend us to family, friends, and colleagues who could benefit from our services.

We wish you a happy, healthy, and fulfilling summer!

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