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812-853-0878  |  800-355-9624

October 1, 2016

Dear Client:

 

Returns for the major stock indices through the third quarter of 2016 and the current bond market yields are as follows:

 

Index YTD 2016
Dow Jones Industrial Average +5.07%
S&P 500 +6.08%
NASDAQ Composite +6.08%

 

Fixed Income Yields 1 year 5 year 10 year 30 year
Municipals 0.74% 1.05% 1.52% 2.28%
US Treasuries 0.59% 1.15% 1.60% 2.32%

 

As we head into the fourth quarter, we recognize that 2016 is on pace to be a positive year in the equity and bond markets.  The economy continues to improve modestly as we are reaching full employment, seeing annual household incomes rise for the first time in nine years, and benefiting from increased consumer spending, low gas prices, and low inflation.  We also know that GDP growth has been slow and global tensions abound, but we believe the economy needs to see improvement in GDP growth, as corporate earnings are highly correlated to growth.  The United States has not had GDP growth over 2.7% since 2005 and only twice above 3% since the roaring markets and internet boom of the late 1990s.

As addressed in our second quarter letter, we at LYNCH & Associates continue to monitor economic numbers and global events, but we subscribe more to the micro view of individual securities.  In the words of legendary investor Warren Buffett, “We have never bought a business nor not bought a business because of any macro feeling of any kind.”  When asked his thoughts of the interest rate cycle, he responded “If Alan Greenspan (ex-Fed Chairman) was on one side of me and Bob Rubin (ex-Treasury Secretary) the other and both whispering in my ear exactly what they were going to do in the next 12 months, it wouldn’t make any difference to me, what I am going to do, or what price I am going to pay for my next company.”

Those words from Buffett’s 1990s speech reflect his “bottom up” style of investing in individual securities and speak to his desire to own companies for his lifetime (his preferred holding period), which we agree is the most fundamental and sound investing ideology for accumulating wealth.  We know that not everyone has Buffett’s capacity to ride out every market dip, but we highlight it because we understand the humility and long-term approach necessary to be a successful investor.  Contrary to our investing philosophy, too many “experts” want to sell more active investing, or introduce new asset classes like “alternative investments.”

At LYNCH & Associates, we believe we have utilized appropriate stewardship in the allocation of your individual stocks and/or bonds, which we believe are the only asset classes that belong in your securities investment portfolios.  We are pleased with how we navigated our clients through the “Great Recession” and take great pride in the satisfaction that comes from owning the highest quality individual stocks and bonds.

We often quote Buffett to remind our clients to continue to be less concerned with short-term events such as the current presidential election cycle, which we believe is a highly overrated factor to the success of a long-term investor.  Certainly, fiscal policy plays a part in the health of the global businesses we own, but in many respects it is playing less of a role because of the effects globalization has had on many of our companies.  The hyperbole about the economy and fiscal policy coming from politicians is often reflective of the current business/economic cycle.

We certainly understand the emotions and noise associated with the expansions and contractions of a business cycle.  While we have endured 11 recessions since 1945, it is important to understand that the equity market’s performance does not always directly correlate with the negative effects of recessions.  We note that in four of the last nine recessions, stocks have risen.  In six of nine recessions, the stock market was positive the year prior and increased an average of 15.3% the year after the recession.  The last recession ended in June of 2009.  Knowing recessions are a natural phase of the cycle and typically occur every four to ten years, we acknowledge a recession will come.  Statistics aside, we continue to find it challenging to invest new money into government bonds that yield less than long-term inflation; however, we do look forward to when interest rates rise and we can invest your portfolios in more conventional asset allocations.

On an administrative note, we would like to remind IRA clients who will have reached age 70-1/2 or older by December 31st to be thinking about the timing of this year’s “required minimum distribution” (RMD) from their account.  For those who need to do this, but have not done so, we will be contacting you.

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 financial situation.

 

Sincerely,

Ryan T. Lynch, CFP® ChFC®

President

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