Returns for the major stock indices for 2019, and the current bond and money market yields are as follows:
|Dow Jones Industrial Average||16.81%|
|Fixed Income Yields||1 year||5 year||10 year||30 year|
|Fidelity Government Cash Reserves Money Market Fund||1.69%|
As we celebrate our 25th year at LYNCH & Associates, we believe it is important to recognize that the equity markets are having a great year. Despite the negative sensationalism in the financial media, the markets are only one percent off of their all-time highs. The month of August gave investors a negative return as the looming recession was the focus and every media pundit seemed certain of its imminence. As near all-time highs came in September, much of this hype has subsided. We believe it is important to remember that even though recessions are a natural part of the business cycle, they do not always bring certain market declines. We remind you that during five of the last ten recessions the equity markets increased. As we have written, a common thought process is to immediately ascribe the pain of the most recent recession (Great Recession of 2008-09) as the standard market reaction to a recession. It is easy to think we may be due for a recession (and perhaps we are) being that a decade has now passed, but recessions do not come from old age as we note that Australia has not had a recession for 28 years. For many reasons, we have grown less concerned about the timing of our next recession and still remain optimistic in the equity markets.
As advisors and long-term investors, we regularly discuss
and attempt to categorize the current world events and financial news to assess
whether they affect our investments in the short and/or long term. We have become more reluctant over the years
to be overly sensitive to the latest “market-moving” events. The current discussion regarding the severity
of the “trade war” and the effects of tariffs on our markets is perhaps the
highest profile item in the news seemingly affecting the markets. We understand that with every controversial
argument comes the
discussion of the slippery slope; that minor actions will lead to the extreme. Conventional wisdom in investing says that raising tariffs will cause negative retaliation and consequences will spiral into perceived doom. In some cases throughout history this has proven to be true.
The most often expressed example is the Smoot-Hawley Act of the 1930s and its contribution to the Great Depression. We believe it is worth noting that those tariffs were 30 percent across all countries and goods imported into the U.S. Our current trade dispute is primarily with one country: China, our 3rd largest trading partner. The threat of tariff escalations with our other largest trading partners, Mexico, Canada and Japan, have all been reconciled for the moment. We would love to see a resolution with China sooner than later but do not believe this trade stand-off will prove to be a long-term problem for the equity markets. Fortunately for both countries, there is too much at stake to ultimately not come to some type of mutually beneficial agreement. As always, time will tell, but we do not believe the slippery slope argument, and do believe that ultimately our equity markets will shake off this trade dispute as well.
We live in unusual times with respect to the prices of stocks and bonds. We have written multiple times how the prices of bonds have run off the rails; how the 10-year Treasury is trading at a 2.5 times premium to the S&P 500 while only yielding 1.6 percent compared to the S&P’s 2 percent dividend yield. This seems to make no sense by any objective attempt at reconciliation with past prices.
So what is different this time? There are several contributing factors. We believe the biggest difference now is that the Federal Reserve has been buying bonds as a way to control prices and suppress rates. They have spent more than four trillion dollars doing so and have kept short-term rates near zero for over a decade. The Fed has artificially affected the prices of bonds and in turn contributed to the wrong assumption that bond prices do not go down and are forever a safe place to park money. When you mix these low rates, Fed bond purchasing, and three decades of rising bond prices, along with mandated purchases of bonds through state and corporate pensions, target date mutual funds, annuities, insurance products and the like, you create imbalances and unchallenged thinking that has to unwind. We believe the above described situation has contributed significantly to the nearly complete lack of alternatives available in the bond market and that equity markets will ultimately benefit as the reallocation of capital occurs.
Thank you again for your continued confidence in LYNCH & Associates. We look forward to the opportunities and challenges ahead of us. As always, we welcome you to schedule an appointment to review your personal financial 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