For the first quarter of 2015, the major indices had the following returns:
|Index||First Qtr 2015|
|Dow Jones Industrial Average||-0.26%|
The start of 2015 seemed to be a near repeat version of 2014 where harsh winter weather during the first quarter and anticipated Federal Reserve action shaped the tone of the equity markets.
This year, record snowfalls in the east and the coldest February temperatures on record for most Americans since 1979 likely had a negative, but temporary, effect on the economy. Combined with the port strike on the west coast, it is likely the first quarter GDP growth rate will later be reported at a rather tepid level.
On the Federal Reserve front, last year at this time the Fed was posturing for an anticipated tapering and eventual halt of quantitative easing, one of its key economic support tools. Many market forecasters at that time anticipated such Fed action would mark the top for the equity markets. This year, the Fed is preparing to raise short-term interest rates for the first time in eleven years, and again, many are pessimistic about the long-term effect on stocks.
The good news is we have seen this before and recall how similar circumstances in early 2014 eventually gave way to a 13.68% total return on the S&P 500 in 2014. Like last year, we expect GDP growth rates to bounce back later in the year after a weak first quarter. Likewise, last year’s dreaded Fed action eventually played out to be a non-event due in part to the growing strength in the underlying economy and the gradual steps the Fed took to ultimately reach its goal. As our economy continues to grow, we have continued faith in the measured steps the Federal Reserve is likely to take later this year.
The bull market recently marked its sixth anniversary. Over those six years the markets have managed to absorb and move through an enormous wall of worry that has included key issues like the “fiscal cliff,” “spending sequester,” the adoption of the Affordable Care Act, debt ceiling limits, ongoing economic problems in the Eurozone and Russia’s invasion of Ukraine. At the approach of each of these issues, various market forecasters decided a tipping point in the equity markets had been reached and a major, extended market selloff was just around the corner. So far, the markets have managed to prove their doubters wrong. Since March of 2009, the Dow has risen from a low of less than 6,500 to a recent new high of over 18,200.
Our long-term enthusiasm for the equity markets has not changed or waivered. We expect the markets to continue to reward patient investors who buy quality and stay invested. Our confidence is bolstered in part by the following:
- Since the start of the recession in late 2008, the Federal Reserve has successfully managed a very difficult situation and has engineered an orderly economic recovery. Their proven success under difficult conditions gives us confidence in their ability to manage and lead the economy in the future.
- Over the past several years, corporations have been investing in ever-expanding technologies that are increasing corporate efficiencies and enhancing profitability. These efficiency gains also help offset increased costs and keep corporations competitive.
- The U.S. economy continues to gradually grow and expand. Especially encouraging are the 3.3 million new jobs the economy has created over the past year. Wages are increasing and overall household debt levels have dropped to the lowest levels in 30 years.
- Many major corporations continue to hold historically large amounts of cash on their balance sheets. This puts them in an agile position to react to future business opportunities.
- Corporations that pay dividends have been steadily increasing their payouts. In many cases these increases have been at double-digit percentages, which help support the stock’s price.
- We continue to be surprised by reports indicating investors collectively still have 30% or more of their investable assets in money market funds. We view these assets as further support for current investors. Eventually, we expect most of these uninvested dollars will work their way back into the markets on natural and healthy market pullbacks or as each individual investor reaches their own capitulation point.
- Given modest bond yields at the moment, we feel the most practical investment option for many investors at this time is an investment in income-producing equities.
As we have stated before, to keep a balanced perspective on our pro-equities outlook, please note we take a long-term market view on stocks, which we define as a minimum holding period of five years. While we expect stocks to have mostly positive returns over the next several years, market declines are a normal and healthy part of long-term investing. Even during periods of positive returns, broad markets have historically averaged two 5% pullbacks and one correction of 10% or more each year.
We appreciate and thank you for the continued trust you place in LYNCH & Associates. As always, we welcome and encourage you to call and schedule an appointment so together we can review your investments.
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.
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