2015 First Half Review

The S&P 500 Index began the year at 2,059 and was 2,063 at the close on June 30. Meanwhile, the 10-year U.S. Treasury yield started at 2.17% and ended at 2.35%. One might think it was an uneventful first half for stocks and bonds. Actually, there was no shortage of turbulence.

• While the S&P 500 Index was almost unchanged, there were eleven swings of 3% or more during the first half, reflecting alternating spurts of optimism and doubt.
• The 10-year U.S. Treasury yield fell to a low of 1.64% in January following the introduction of aggressive monetary policies in Europe to combat deflation fears. The yield rebounded to a recent high of 2.48%, reflecting evidence of resilient economic growth in the U.S. and improvement in Europe.
• Volatility was even greater overseas. For instance, the Chinese stock market soared early in the year but then abruptly declined by 25%, reacting to slower economic growth and regulatory changes.

Greece Again

Much has been written about Greece. This tiny Mediterranean country – its economy smaller than that of metropolitan Boston – is again in the headlines due to severe financial distress and an economic depression.

Bartlett can add little to the plentiful commentary about political and humanitarian fallout from the country’s economic problems, which result from an unmanageable debt load and low productivity. As to investment implications, we believe dire outcomes, such as default and possible exit from the Euro currency, do not pose a significant threat to global financial stability, which was a legitimate risk when Greece’s problems first surfaced in 2011. This is because European policymakers deftly orchestrated the transfer of Greek debt from private owners to government institutions during the last four years, in what could be described as a financial quarantine. The result is that European bank capital levels and lending capacity should not be diminished by a Greek default. In short, what was feared four years ago – a banking crisis threatening economies throughout the continent – is much less likely today. While structural reforms are still needed in Europe, in this case policymakers maneuvered carefully and deliberately, so that nascent economic progress may continue.

September Liftoff

Here at home, economic news has been more encouraging. The recovery from the 2008-2009 recession has been slow by historical standards, but leading economic indicators suggest continued progress with no recession in sight. Labor markets are improving steadily, and the latest monthly update featured more than 200,000 job additions with unemployment down to 5.3%.

To state the obvious: an economy growing steadily with relatively low unemployment does not require zero short-term interest rates. The Fed is widely expected to initiate a ¼ point increase in September, the first increase in its policy rate since June 2006. This prospective tightening of monetary policy has prompted the usual media sensationalism. As noted in previous commentaries, Bartlett believes emergency measures are no longer necessary and a gradual shift to more normal interest rate policy is overdue.

Risk Management

History shows that extended periods of accommodative Fed policy engender complacency about risk. Realism is replaced by optimism; careful analysis and due diligence give way to speculation. This was manifested in exuberance surrounding technology stocks in 1999 and overconfidence about housing prices in 2006, resulting in “bubbles” that ultimately burst with very painful fallout. As we have noted in prior commentaries, we see just isolated evidence of “bubble” extremes today. Very high valuations of social media companies, selected biotechnology stocks, and Chinese equities (now in the midst of a severe correction) are examples. A careful value-based approach can steer around these excesses. But a risk factor of more general concern to us is the high level of margin debt (investors borrowing against their securities). This leverage can aggravate market declines when overextended investors are forced to sell. It is a very legitimate risk, but one forgotten by many because the stock market hasn’t had a serious correction (10% or greater) since 2012.

We know that returning monetary policy to “normal” will be quite an undertaking after more than seven years of zero short term interest rates. We expect that even a gradual shift will negatively impact riskier investments, especially those with returns based on leverage. It will undoubtedly reveal other imbalances too, which can’t be predicted in advance. Humbly recognizing such uncertainties, we are determined to maintain appropriate portfolio safeguards so that market setbacks do not disrupt our client’s financial plans. This is reflected in our emphasis on prudent asset allocation, diversification, and value-based investment selections. It means less volatile holdings – bonds, cash, and alternative investments – remain a vital component of balanced portfolios, helping control risk and maintaining a reserve for anticipated withdrawals. Risk management has been ignored by many who seek higher returns at a time when interest rates are low and the economic outlook seems promising. Unfortunately, indifference to risk when conditions are favorable guarantees that eventual market declines will be periods of peril rather than opportunity.

Recent Recognition

We are very pleased to report some recognition for the firm from three national publications.

• Forbes 100 Top Wealth Managers. This is Bartlett’s first year on the Forbes list, and we were proud to rank 49^th in the nation – the only Cincinnati firm to make this list.
• Investment News Top fee-only RIAs. Bartlett was featured on this list again this year, ranking 59^th nationally and 8^th in Ohio.
• Financial Times 300 Top Registered Investment Advisors. Bartlett was included again on this list.

We hope you will mention Bartlett to family, friends, and associates who may benefit from our expertise and client-focused approach to investment management and financial planning.

New Website

Bartlett launched a new website in early May. You can see the faces of all of your Bartlett team, and learn more about us. From our website, you can also review your account information online. Please take a minute to review the enclosed page describing the enhancements and, if you haven’t already, check out our new site at www.bartlett1898.com.

 

513.621.4612 | 800.800.4612

 For more information on this topic, please contact us. At Bartlett & Co, we assist high net worth individuals and their families in defining & reaching their life goals.

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The material presented here was prepared from sources believed to be reliable but it is not guaranteed as to accuracy and it is not a complete summary or statement of all available data. It represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results.