Rising Markets

The first quarter was rewarding for investors. U.S. and foreign equity markets performed well and bonds also provided positive returns. Bartlett’s economic and market outlook has been positive in recent times, but we must admit to being pleasantly surprised by such a vigorous start to the year.

ECONOMIC PROGRESS

Higher stock prices paralleled improving economic performance throughout the world.

• The U.S. Index of Leading Economic Indicators rose again in March, reaching the highest level in over a decade, auguring continued expansion. Similarly encouraging data was recorded in surveys of manufacturing activity, small business optimism, and consumer confidence.
• While still comparatively slow, growth is improving in Europe. Recent manufacturing data is consistent with expansion throughout the region, with a variety of countries participating.
• Better performance in Japan is a welcome improvement for a major Asian economy that has lagged throughout the last twenty years.

This economic progress is occurring amid considerable political uncertainty here and abroad. Major elections are looming in France and Germany later this year, with establishment leaders on the defensive against populist insurgents. Great Britain has officially begun the process of exiting the European Union, a divorce mandated by the “BREXIT” referendum last June. Here at home, there is doubt about the prospects for tax and regulatory reforms championed by the new administration. Many economists thought these factors would compromise business and consumer confidence, but resilience has been impressive.

RISK MANAGEMENT

Sir John Templeton, a legendary investor, memorably described the cycles inherent in equity markets.

“Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.”

Much has been written about the duration and magnitude of this current bull market. By these measures, it is second only to the 1990s among bull markets of the last century. It certainly began amid despair and pessimism back in March 2009. More than 15 setbacks of 5-10% occurred during the ensuing eight years of progress, these occasional corrections reflecting the skepticism aroused by tepid economic growth and political polarization. Optimism seems to be the prevailing sentiment now, reflected in recent consumer and small business surveys, which reached the highest levels in ten years. Better sentiment is a natural byproduct of improving economic performance; businesses are experiencing stronger profit growth while consumers are benefitting from wage and salary gains amid tighter labor markets.

Bartlett is very pleased by this economic and market progress. We anticipated this resilience in reassuring commentaries last year after the BREXIT referendum in June and in January when there was fear of a global recession. But this is no time for complacency. We think risks are building and must be carefully managed. Inflation, dormant for most of the last eight years, is now rising to levels requiring higher interest rates. This means the Federal Reserve is likely to tighten monetary policy more assertively, eventually returning to more normal policy rates. At some point, this could weigh on stock prices, given that equity price/earnings ratios are above historical averages. Moreover, while the aforementioned leading indicators suggest continued growth, we are keenly aware that if the current expansion extends beyond 2018, it would be the longest economic growth cycle in U.S. history.  A prudent respect for history dictates some caution. We think this is a time for renewed focus on timeless investment principles: rebalancing asset allocation based on policy guidelines, diversifying broadly, emphasizing quality holdings with less volatility, profit-taking in positions that have exceeded expectations, and carefully reserving cash for anticipated withdrawals.

CONCLUDING COMMENTS

We hope you will recommend Bartlett to family, friends, and colleagues who could benefit from our investment management and financial planning services.