After months of steady progress, stock prices declined in September, with equity benchmarks down 4-6%. Notwithstanding this setback, most stock indexes are up for the year to date. As for bonds, prices of these more stable securities also fell in September, weighed down by rising long-term interest rates. Bartlett is accustomed to turbulence, mindful that shakeouts occur almost every year. We are not despondent when prices fall just as we are not exultant when markets are rising.
Low inflation is necessary for sustained prosperity. Stable prices support steady consumption by households and businesses; erratic prices lead to phases of hoarding and liquidation resulting in “boom / bust” economic performance. Inflation has steadily declined this year and is 3.7% as of this writing. This improvement has been a catalyst for better investment performance. However, further progress toward the goal of 2% inflation is necessary before the Federal Reserve will have accomplished its mission of restoring price stability. This means monetary policy will remain cautious for a while. The Fed’s “higher for longer” guidance has been disappointing for aggressive investors who long for the tonic of lower interest rates, but Bartlett believes a pivot to easier policy would be premature and eventually regretted.
Higher, but not High
For additional perspective on interest rates, we look to the U.S. Treasury 10-Year Bond. This proxy for interest rates recently rose to a 16-year high of 4.7%. However, by historical standards, this is a relatively low interest rate. For example, the 10-year yield averaged 6.7% during the 1990s, a period of modest inflation and relatively low government borrowing, the latter condition quite unlike today when we have chronically high fiscal deficits.
Bartlett sees a silver lining in higher interest rates, which allow for more appealing bond purchases, a nice benefit for balanced accounts. We have been capitalizing on opportunities, but in a careful way, emphasizing quality securities and intermediate maturities. We also think higher rates favor the quality stocks we prefer; proven companies are generally self-financing while borrowing is a necessity for more speculative and cyclical businesses. A “higher, but not high” mindset keeps us grounded in our assessments of stocks and bonds, which are always based on realism rather than optimism or pessimism.
Rising labor costs are contributing to inflation, complicating the achievement of price stability. A United Auto Workers (UAW) strike will eventually be resolved with significant wage and benefit increases. These concessions will be comparable to the huge cost increases absorbed by UPS to avert a Teamsters strike during the summer. Bartlett highlights these as two examples of a strengthened bargaining position for labor. We think this is an important change requiring some historical perspective.
Labor’s power in the economy was eviscerated by globalization over the last forty years. The movement of production to lower-cost regions was turbocharged by the end of the Cold War and China’s entry into the World Trade Organization. Businesses and investors enjoyed a nice tailwind, as corporate profits grew to 13% of the economy, up from 8% fifty years ago. But the strains of a pandemic, the tragedy of war, and diplomatic tensions with China have prompted a reassessment of globalization. A nascent shift to more local production is underway and resulting in higher costs.
Bartlett does not foresee a return to labor militancy that was common in the inflationary 1970s when unions were prevalent. But higher costs will be a continuing challenge for businesses and policymakers.
Built to Last
Longtime readers know we are fond of describing investing as “a marathon, not a sprint.” While pleased by improvement this year, we are ever mindful of risk. Bartlett’s foremost goal is to produce durable investment results, helping clients enjoy the long-term rewards that accrue to the steadfast. Our formula is a combination of thoughtful financial planning, careful asset allocation, and investments based on quality and realistic valuation. We bring to this a mindset that sees occasional market declines as periods of opportunity, rather than peril.
We are very grateful for your trust and loyalty. We also appreciate your recommendations of Bartlett to family, friends, and associates who could benefit from our services. Bartlett has achieved record new business and a client retention rate of 99% this year, results made possible by your support.
This material provided by Bartlett Wealth Management (“Bartlett”) is for informational purposes only and is not intended to serve as a substitute for personalized investment advice or as a recommendation or solicitation of any particular security, strategy, or investment product. Nothing in these materials is intended to serve as personalized tax and/or investment advice since the availability and effectiveness of any strategy is dependent upon your individual facts and circumstances. Past performance is not a guarantee of future results. Opinions expressed by Bartlett are based on economic or market conditions at the time this material was written; actual economic or market events may turn out differently than anticipated. Facts presented have been obtained from sources believed to be reliable. Bartlett, however, cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Any reference to an index is included for illustrative purposes only. Indices are unmanaged vehicles that serve as market indicators and do not account for the deduction of management fees and/or transaction costs generally associated with investable products.