Returns for the major stock indices for the first half of 2016 and current bond market yields are as follows:
|Dow Jones Industrial Average||+2.90%|
|Fixed Income Yields||1 year||5 year||10 year||30 year|
Year-to-date, the driving market forces for stocks and bonds have included some recurring as well as new themes. The most notable new theme is the coined term “Brexit,” which is shorthand for Britain’s recent vote to exit the European Union; turn on your TV and the talking heads will have you believe the “sky is falling” once again. We believe, despite some short-term volatility, investors should ignore the scare stories. Britain, the world’s fifth largest economy, will likely begin negotiating free trade deals, just as non-EU countries Norway and Switzerland. Ultimately, Brexit encourages more freedom, accountability and efficiencies and is a long-term win for world markets and investors. We hesitate to give Brexit much attention as we believe it is a non-event for long-term investors, but feel compelled to address it based on the current news cycle and recent market volatility.
We offer to point to our past letters addressing the “sky is falling” geopolitical news events related to what could be described as economic hypochondria; more specifically, recent events we have experienced in the current recovery: fiscal cliff, flash crash, debt ceiling, China slowdown, Greece defaults, quantitative easing, and sequestration, to name a few. We believe the overreaction to so many of these events originates from the fear and real pain caused from the once-in-a-generation financial crisis of 2008-2009. Conclusively, we believe it is important to monitor world events, but many of them are ultimately only distractions to the long-term investor and in hindsight are often excellent opportunities.
A notable recurring theme is the anticipation of Federal Reserve rate increases; the first rate increase in nine years came and went fairly quietly in December of 2015. Despite many experts calling for three to four rate hikes in 2016, we are without a rate hike through the halfway point of 2016. A tepid May jobs report, soft U.S. business investment, below-target inflation and the perceived risk imposed by Brexit have lessened the likelihood of a July rate hike; therefore, lending more opportunities for investors and credit-rich entities to continue to grow and expand their net worth and businesses.
We, at LYNCH & Associates, still give great weight and discussion to the acronym TINA (There Is No Alternative); this speaks to the current 10 year treasury yield at 1.47% and the 30 year treasury at 2.29%. We beg the question, where does one go with their investments? In many cases, we are not currently comfortable committing new money to bonds yielding less than the rate of long-term inflation; essentially guaranteeing a negative real rate of return. We still believe in balanced accounts relative to your risk tolerance and are quite proud of our equity accounts in the short, intermediate and long term. Moreover, with interest rates historically low, valuations in line with norms, investor cash levels at 15 year highs, record stock buybacks and an S&P yield greater than the 10 year treasury, there are ample reasons to continue to believe the secular bull market is in place.
In closing, we will continue to monitor the strength and quality of the underlying earnings for the companies in your portfolios and will make adjustments as indicated by each company specifically, but still remain positive on the big picture. Please allow us to again borrow and comment on a quote from legendary investor Sir John Templeton which we referenced in our July 2013 letter:
“Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.”
We wrote in the summer of 2013 that we were in the early stage of the skepticism phase of the cycle, and knowing secular bull markets can last for multiple decades, we believe we are yet to reach the “mature on optimism” part of Sir John’s presumption.
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