Happy New Year! We hope 2015 will be a healthy, fulfilling and prosperous year for you and your family.
Since most of our clients have at least a portion of their investments in equities, now is a good time to review how the past year compares to the S&P 500 over the decade:
The long-term historical return for large company stocks, similar to those in the S&P 500, is around 10%, so 2014 was an above average return year. However, as those who follow the markets day-to-day know, 2014 was a year of volatility where both significant market gains and losses came over short periods of time, sometimes in just a matter of a few days. This reminded us of two closely related market idioms:
- Time in the market is more valuable than timing the market. While this is a very old market theme, it served those who practiced it in 2014 well, where volatile markets at times were giving up year-to-date returns of more than 5%, only to quickly gain them back, and significantly more.
- Market pullbacks are a healthy part of market growth. Broad markets historically average two 5% pullbacks and one correction of at least 10% each year. A focus on just 5% pullbacks shows only 1 out of 3 develops into a 10% correction and only 1 in 10 becomes a correction of 20% or more. We offer this data as a way of saying that market pullbacks, even in healthy, advancing economic periods, are a normal part of market growth and don’t deserve the “sky is falling” reaction the media often hypes. For long-term investors, who are closely following the economy and are armed with this knowledge, 5% pullbacks often equate to buying opportunities…the markets are on sale.
Looking forward into 2015, we continue to have a positive overall view of the markets. We agree with Richard Bernstein, former chief strategist for Merrill Lynch, who was recently quoted as saying, “One of the greatest bull markets of most Americans’ lifetime may just be in the 5th inning.” Continuing with that baseball metaphor, we would like to add, “and we believe this game could go into extra innings.” Here is why:
- Past behaviors that have ushered in recessions and bear markets are not on the horizon. While corporations and consumers are spending, they are not doing it aggressively. In fact, one argument for the likely longevity of these markets is both corporations and individuals seem to be cautious about loosening their belts significantly. This spells future potential for our economy.
- The Federal Reserve remains in a highly supportive economic posture. Despite ending their quantitative easing program in October, they currently continue to support the economy by targeting short-term interest rates at near zero percent. We agree with media reports that suggest the Fed will likely begin to raise interest rates sometime in 2015; however, we strongly disagree with those who believe this signals the beginning of the end for the bull markets. In fact, we believe just the opposite: a Fed tightening will be a positive signal for the economy. The Fed has over six years invested in nursing our economy back to health and we are confident they will not risk taking any action that might jeopardize the positive economic momentum currently underway.
- Conservative corporate management continues to be a cornerstone of our advancing markets. Corporate earnings are solid and look to be on firm footing as the economy continues to expand. As we have mentioned in previous letters, corporations are lean, efficient and capitalizing on ever-expanding technologies that are countering increased costs and ultimately adding to earnings profitability.
- Large corporations are holding unusually high amounts of cash. For a variety of reasons, this is positive and allows them flexibility to capitalize on future opportunities.
- At current levels, equities may be fairly valued, but an advancing economy, with the wind at its back in the form of an accommodative Federal Reserve, will support further earnings growth. In turn, this will allow trading multiples to remain at reasonable levels or even expand.
- Even after five years of advancing markets, it is estimated that over a third of investable assets remain in cash. Given low interest rates, the most reasonable investment option for the growth of these funds is in the form of some type of stock related asset. Going forward, this holds huge potential for the equity markets.
- Consumer spending is estimated to be around 67% of the driving force behind our economy. The purchasing power of the consumer is growing with more jobs and higher incomes.
We hope you sense our overall long-term optimism for the equity markets. We also want you to realize there is a natural and healthy up, down and sideways grind to the markets, but through the careful monitoring of your individual positions and the markets, we are here to guide you and your assets through the uncertainties in the coming year and beyond.
We genuinely appreciate your business and value the trust you have placed with us in the management of your financial assets. As always, we welcome and encourage you to schedule an appointment to review your personal situation.
Ryan T. Lynch, CFP® ChFC®
Form ADV Part II of the LYNCH & Associates Uniform Application for Investment Advisor Registration and the LYNCH & Associates Code of Ethics are available to all clients at any time. If you would like to receive a copy, please contact Jennifer Farless at (812) 853-0878 or jfarless@LNAonline.com.
Office: 10644 Newburgh Road, Newburgh, IN 47630