Returns for the major stock indices for the first half of 2017 and the current bond market yields are as follows:
|Dow Jones Industrial Average||+8.03%|
|Fixed Income Yields||1 year||5 year||10 year||30 year|
The good old days! When I began work at LYNCH & Associates in 1995, I was a 22 year old recent graduate from Purdue’s Krannert School of Management. I was excited to be in the investment business and to work alongside my dad who had been in the business since 1979. Little did I know, we were in a Goldilocks era for investing; the S&P 500 Index was in the middle of a 37% year; followed by a 22% year in 1996, a 33% year in 1997, a 28% year in 1998 and a 21% year in 1999. Accumulating wealth was easy, and we heard regular drumbeats that “it’s different this time” and “it’s the new economy” when explaining why we could come to expect big double-digit years in the stock markets. Many in the industry began to believe you could assume a greater than 10% annualized return in the market. As we know, the market corrected with three consecutive negative years (-9% in 2000, -11% in 2001, -22% in 2002), reversion to the mean ran its course, and valuations came back to normal. Those with undiversified portfolios (most notably, overweightings in technology stocks), those using leverage to buy stocks, and those who thought it was “different this time” learned many lessons about investing, asset allocation and the humility, wisdom and temperament necessary to truly be a long-term investor.
The equity performance numbers for the first half of 2017 are again delivering impressive positive returns and rewarding investors. Are we now in the “good old days” again? Are we near a peak in the market? The answers are never clear looking forward and stories can always be crafted to paint any picture about the future. In our last quarterly letter, we highlighted that we see NO signs of euphoria (like in the late 90s), there are NOT heavy net inflows into equity mutual funds and ETFs, the yield curve has NOT inverted, earnings ARE rising, and stock prices relative to earnings (although increasing) are NOT excessive. Moreover, while we fully recognize that U.S. equity markets have not experienced a 5% selloff since before the 2016 election and have not had a 10% decline since February of 2016 (despite the historical average of three 5% corrections and one 10% correction per year), we at LYNCH & Associates remain optimistic on the equity markets.
As in our previous letter, we continue to encourage our clients to see the big picture. When the selloffs come and the negative headlines ride on their backs, we will again likely encourage you to have faith in the market forces unleashed from the entrepreneurship and unquantifiable productivity of innovation and the growth that follows. Always try to keep in perspective, that new wealth and productivity will come in ways we can and cannot yet imagine just as we have seen in a wave of new technologies including smartphones, apps, tablets, fracking, 3-D printing, the cloud, Uber, mapping the human genome, and the self-driving car. Progress and investment opportunities are always present, as Thomas Edison expressed in the early 20th century: “We have merely scratched the surface of the store of knowledge which will come to us. I believe that we are now, a-tremble on the verge of vast discoveries – discoveries so wondrously important they will upset the present trend of human thought and start it along completely new lines.” Edison was right; the 20th century indeed delivered enormous progress and new wealth, as has the beginning of the 21st century.
So, it is our duty to allocate and steward your assets accordingly, being mindful of the valuations, and to remember the lessons learned in the 90s while adhering to time-tested wisdom like Edison espoused. The never-ending balance of long-term objectives with the uncertainty of the day-to-day markets is and will always be a challenge. We like the quote from Warren Buffett’s mentor and economist, Benjamin Graham, as he attempted to explain the unpredictability of the market by saying that “in the short run, the market is like a voting machine” (tallying up which firms are popular and unpopular), “but in the long run, the market is like a weighing machine” (essentially assessing the value of a company).
While we remain optimistic on equities for many reasons not limited to valuations, we do concede that valuations relative to expected earnings per share are at twelve-year highs but pale in comparisons to the late 90s. Our short-term optimism will continue to hinge on the earnings reports we carefully monitor; if the reports continue to be strong, then the P/E ratios should come down, as can be expected in strong bull markets. Until this time, and given that yields on fixed income are at meager levels, we will continue to subscribe to the TINA
(There Is No Alternative) outlook and proceed with owning the highest quality securities in this bull market, as we fully respect that it is not “different this time” and we must continue to grind forward with appropriately balanced and diversified portfolios.
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