The Bear Facts
We begin this quarterly message by acknowledging some sobering realities.
- Stocks entered “bear market” territory in June. At the recent low, the S&P 500 Index of large company stocks was down 22% from January record highs, while benchmarks of more aggressive stocks were almost 30% below 2021 highs. Foreign stocks generally paralleled the setback in America.
- Bonds, often stable in periods of distress, declined in tandem with stocks. The Barclay’s Aggregate Index, the broadest benchmark, posted a -10% total return for the first half.
- A global inflation surge, which began in 2021, worsened this year. U.S. inflation recently reached 8.6%, a dismal level last experienced forty years ago.
- The Federal Reserve Board, admitting its earlier assessment of inflation was too hopeful, recently implemented three progressively larger increases of its policy interest rate and forecasted more adjustments in the second half of 2022. A similar “tightening” of monetary policy is underway in many foreign countries, as central bankers try to restore lower inflation.
- A recession now seems probable rather than possible. In fact, based on preliminary data for the second quarter, a downturn may already be underway.
Bartlett believes financial stress could worsen until the Fed is finished raising interest rates. Of note, most projections of 2023 corporate profits are premised on slower, but still positive, economic progress. Even a brief recession would render these business forecasts too hopeful.
President Truman was fond of Mark Twain’s observation that history doesn’t repeat itself, but it rhymes. Bartlett is reminded of this as we navigate a bear market for the eighth time since 1990. Time-tested principles that guided us through past setbacks are fortifying our resolve today.
Investing is a marathon, not a sprint.
Notwithstanding frequent market declines, including a selloff in 2022, long-term investing has been lucrative. Using the S&P 500 as a proxy, stocks provided an annualized return of almost 10% since 1990. This rewarded those who stayed invested when tested with turmoil.
Falling markets should not disrupt a careful financial plan.
Because turbulence is inevitable, safeguards should be maintained based on factors including risk tolerance and withdrawal needs. A well-prepared client can maintain a steady lifestyle; a down market in 2022 should not require austerity.
Market selloffs exact a lasting penalty for investors who sell at low prices.
We believe our approach, based on careful planning and investment policy, should instill the fortitude needed to maintain quality holdings. Moreover, a disciplined strategy should allow us to look for buying opportunities created by distress, thus benefitting from occasional setbacks.
Bartlett practices steady risk management, in good times and bad.
We believe in thoughtful rebalancing and fine-tuning of portfolios over time, not aggressive overhauls based on market forecasts. We think more extreme methods—”risk on” in good times and “risk off” in bad times—are unreliable because they depend on assumed market timing prowess.
The above observations are all behavioral in nature. Reflecting on his investing success, Warren Buffett memorably commented that temperament was even more important than intellect. Indeed, how we react to good and bad times is more important than the actual market conditions.
Absent from our comments is any prediction of when inflation will peak or when the Fed will finish raising interest rates. While we think late 2022 is possible timing, we know these and other macroeconomic factors are very difficult to forecast. We are keenly aware that changing expectations for these variables will contribute to market volatility. This will keep us mindful of risks that must be managed but also alert to opportunities created by distress.
We started this report with a doleful litany. Of note is the negative returns for stocks and bonds in the first half, a condition evident only 3% of the time since 1926. This synchronized decline has prompted some commentators to write obituaries for balanced investing. A few have done so with obvious schadenfreude.
Bartlett believes in asset allocation and balanced investing just as strongly as ever, and we are suspicious of recent critics. We find they often have a vested interest in the argument. They are usually marketing more esoteric portfolio strategies that are quite profitable for them and very expensive for the investor.
For almost all investors, we think a surefire balance is 60% optimism and 40% humility. We think this is the right combination for success in long-term investing. You may lose some sprints, but we think you’ll win the marathon.
Bartlett is not defensively hunkering down amid recent market distress. Quite the contrary: we have hired ten terrific people so far in 2022. These new colleagues can be found in investment management, financial planning, and client service. They make Bartlett even stronger. Please help us keep them busy by recommending us to friends, family, and associates who could benefit from our services.
Please join us at 11:00 AM (EST) on Wednesday, July 13 for an online Mid-Year Review and Q&A. This will be a follow-up to our January Strategy Update. To register and submit your questions, please click here. We look forward to seeing you then.