Year-to-date returns for the major stock indices through the third quarter of 2015 are as follows:
|Dow Jones Industrial Average||-8.63%|
As we have stated in earlier letters, market pullbacks are a normal and healthy part of market growth. Broad markets historically average three 5% pullbacks each year. One out of every three 5% pullbacks develops into a 10% correction with one in ten becoming a full blown correction of 20% or more.
Market pullbacks are never easy to accept, but the good news is we do not see the current situation developing into a major bear-market selloff. Those are typically the result of a recession. Realistically, there is little expectation of a recession at this time because the supporting fundamentals are solid and stable. These economic fundamentals include:
- Private sector jobs have increased for 66 consecutive months.
- We continue to have a recovery in the housing and construction industries.
- Consumers have been steadily paying down debt and adding to their savings. Their debt ratios are back at reduced levels not seen since the 1980s which leaves room for an upswing in future big-ticket spending.
- Auto sales are near record levels and rising.
- Corporate profits, other than the energy sector, continue to grow and corporate balance sheets are loaded with cash which gives them flexibility.
Here are the major issues that are currently weighing on the equity markets:
- Uncertainty over when the Federal Reserve will begin to raise interest rates. While the media has made a huge issue out of this, the timing of this event is only a minor issue. Additionally, given short term interest rates are near zero, a gradual rise in short interest rates to 1.00% or 1.50%, which is likely to take one to two years, is NOT going to materially affect the lending habits of banks or the borrowings of American corporations and the consumer. Does anyone seriously believe a 1.00% or 1.50% Fed Funds rate is going to slowdown the creative developments of corporate America, stop the exploration for new energy sources or the cause the consumer to stop buying cars? We believe the media has blown this issue way out of proportion and it is having an unnecessarily negative influence on the markets.
- The slowdown in China is another negative that has gathered much more momentum than it deserves. We have seen business news reporters look into the camera and talk about the “collapse” of China. But the reality is Chinese GDP is still growing somewhere between 4% and 6% per year. Yes, that is down from a 10% growth rate in recent years, but they have become the second largest economy and sustaining a growth rate of 10% is unrealistic.
The obsession over China reminds us of the fascination with Japan in the late 1980s when they were the number two economy in the world. What we learned from Japan is the world will continue to consume goods no matter where they are produced. Likewise, US exports to China are just 0.7% of our GDP. Therefore, what happens in China has a limited impact on the US economy.
We know it is tough to concentrate on the long-term economic outlook when the media and everyone around you is dwelling on each day’s market action, but investors need to trust in the above fundamentals which are still signaling more growth ahead. Therefore, we encourage you to stay focused on the long-term positives and avoid the anxiety caused by Federal Reserve actions (or inactions) and by what is happening in China.
Specific to portfolio management, some clients will notice we have been actively harvesting tax losses, especially in the energy sector where we have been swapping between names like Exxon Mobil, Chevron and ConocoPhillips. We have a positive long-term outlook on all three of these companies and value their dividend polices.
On an administrative note, we would like to remind IRA clients who will have reached age 70-1/2 or older by December 31st of this year of the necessity to take the Required Minimum Distribution (RMD) from their IRA account in 2015. For those who have yet to do this, please contact us to discuss the timing of your RMD. If we do not hear from you by mid November, we will be contacting you.
We continue to appreciate your business and never take lightly the trust you place with us in the management of your financial assets. As always, we welcome and encourage you to call and schedule an appointment so together we can 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