Market Commentary – January 2022
Rewards for the Resolute
U.S. stocks registered excellent returns for 2021, buoyed by strong growth of corporate profits and dividends. Most foreign stock markets had solid increases as well, though less vigorous than America. China was a notable exception; the stock market fell more than 20% amid an authoritarian crackdown by the government. More conservative securities, such as bonds and cash, had very low returns in 2021. All in all, most balanced portfolios handily outpaced the higher inflation experienced in 2021, protecting the purchasing power of investors.
Forecasting Season
It wouldn’t be a new year without annual Wall Street forecasts. These predictions are as ubiquitous as orange barrels on a highway. But there is a key difference: you should pay careful attention to orange barrels.
Annual forecasts are rarely accurate. This is because financial markets, in shorter periods, are often swayed by factors beyond the intuition of even the best and brightest analysts. A few examples highlight this point.
- Thinking back to the end of 2017, we can’t remember anyone who predicted a U.S. – China “trade war.” It was certainly an important disruptive factor in a subpar 2018 for stock markets.
- We know of no forecaster who, at the end of 2019, expected a pandemic in 2020.
- Most analysts anticipated the bold fiscal and monetary policy responses to the pandemic, but no one foresaw the scientific miracle of multiple vaccines commercialized in record time. This was arguably the most important factor in the economic and market resurgence that continued in 2021.
We’re reminded of a memorable quote from the late economist John Kenneth Galbraith: “There are two kinds of forecasters: those who don’t know, and those who don’t know they don’t know.”
Guiding Principles
As we wrote in our last update, Bartlett’s investment strategies are not based on presumed forecasting advantages. We know market direction is guesswork over short time periods. So, at the outset of a new year, we offer updated thoughts on long-term principles that have been validated throughout our history and are guiding us now.
Patiently own Great Companies
Long-term equity investors have been amply rewarded because stock prices have paralleled higher corporate profits and dividends. There have been noteworthy setbacks, with three recessions in the last thirty years and a brief collapse in 2020, but America’s economy has been in expansion mode almost 90% of the time. As Warren Buffett memorably observed, betting against America hasn’t worked since 1776.
“Time in the Market” is more important than “Market Timing”
Occasional turbulence makes “market timing” seductive for many, but this almost always backfires. This is because the timer usually sells stocks after declines are underway and later repurchases when prices are higher. Much more important is making sure a portfolio will participate in long-term progress. After all, even a new retiree could have a planning horizon of thirty years, given expected longevity.
Be Mindful of Cycles and always Risk Aware
Stock market returns have averaged 8-10% over time, but there is a pattern of feast and famine. Over the last decade we have enjoyed bountiful years in which stocks returned more than 20% (2017, 2019, 2020, 2021), comparatively barren years (2011, 2015, 2018), and one unforgettable doozy (2008). In navigating these cycles, asset allocation – the blend of growth and safety in a portfolio – is of paramount importance.
After three consecutive years of superb progress, equity price/earnings ratios are now generally above 20, at the high end of historical stock valuation. Higher valuations have been supported by very low bond yields. However, inflation has risen to levels last experienced forty years ago (6% at year-end) and reversing it will require higher interest rates. Mindful of this risk, and other potential headwinds, thoughtful rebalancing is imperative for 2022.
Bartlett believes a blend of reasonably valued U.S. and foreign stocks, quality intermediate-term bonds, and other less volatile investments should help control risk, and cash should be carefully maintained for anticipated withdrawal requirements. With prudent asset allocation, occasional market declines should not disrupt financial plans, so that quality investments can be maintained rather than reactively sold. Moreover, a balanced strategy should allow us to capitalize on buying opportunities created during setbacks, rather than being threatened by turbulence.
Maintain Rational Expectations
Bartlett is taking no victory laps after 2021, just as we were not downcast after 2018, or glum in the early stages of the pandemic selloff in 2020. We know long-term investing is a marathon, not a sprint. Come what may in 2022, we will be dispassionate and objective, focused on key factors such as asset allocation, quality, and diversification.
Our goal is “all weather” investment results for you. This means strong participation in rising markets and comparatively resilient performance in difficult times. We think this will fortify the “staying power” needed to achieve long-term performance, which is important for successful financial plans.
Good News
We are pleased to announce the addition of Matt Whalen as a Principal of Bartlett. Matt joined Bartlett in 1990 and gradually ascended to his current role as Director of Information Technology. For 32 years he has been keeping Bartlett at the forefront of technology, helping us protect our client assets and enhance the wealth management experience.
Concluding Comments
Bartlett again achieved its client retention goal of 98% in 2021, and steadily added new clients throughout the year. We welcomed six new employees in 2021, mindful that talent is necessary to sustain our momentum.
We are privileged to be part of your success, and very grateful for your confidence. We hope you will recommend Bartlett to family, friends, and associates who could benefit from our services.
Join us virtually on January 27th at 11:00AM EST for Bartlett’s 2022 Strategy Update.
