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April 1, 2018

Dear Client: Returns for the major stock indices for the first quarter of 2018 and the current bond market yields are as follows:   Index YTD 2018 Dow Jones Industrial Average -2.49% S&P 500 -1.22%   Fixed Income Yields 1 year 5 year 10 year 30 year Municipals 1.55% 2.07% 2.48% 3.01% US Treasuries 2.08% 2.56% 2.74% 2.97%   The equity markets are off to a bumpy start in 2018.  After a blistering January, continuing the unprecedented, non-stop (15-month in a row) rise since the presidential election, the market experienced one of the fastest 10% declines (January 26th to February 8th or nine trading days) in history.  The markets have not recovered back to the highs of January as we have just logged our first down quarter since the third quarter of 2015.  We could write at length about algorithmic trading, tariffs and other noise associated with short-term market declines but won’t because we do not believe them to be relevant to long-term investors and do not want to give merit to this type of short-term dialogue.  As long-term investors, we know the markets regularly correct and we understand that the uneasiness associated with market volatility is the price we must pay to be long-term investors.  However, we will always continue to seek perspective, humility and assurance. The primary objective of our quarterly letters is to highlight our most relevant thoughts on our outlook for the current markets.  Despite recent market turbulence, we continue to remain positive on the equity markets for 2018 for many reasons.  The following indicators we highlighted from one year ago are still in place...

January 1, 2018

Dear Client: Returns for the major stock indices for 2017 and the current bond market yields are as follows: Index 2017 Dow Jones Industrial Average 28.08% S&P 500 21.82%   Fixed Income Yields 1 year 5 year 10 year 30 year Municipals 1.44% 1.70% 2.01% 2.62% US Treasuries 1.73% 2.21% 2.41% 2.74%   As we close out 2017, long-term equity investors have had another very successful year.  Not only was 2017 a successful year, it was one of the steadiest market performances in history.  The market increased in all 12 months and the S&P 500 index never declined over 3% in 2017.  This extraordinarily low volatility certainly will not last but is consistent with healthy bull market rallies.  The S&P 500 made 63 new highs while the Dow Jones Industrial Average logged 70 new highs in 2017.  Quite clearly, investors are buying market dips and optimism for the equity market is undoubtedly back.  While it is easy to reflect on good times and celebrate successful years, we never forget the stock market is a discounting mechanism that processes present and future expectations and current events.  Despite inevitable bumps in the road ahead, we still believe the equity markets are poised to reflect continued growth and will continue to benefit from the lack of attractive alternatives available to investors. At LYNCH & Associates, we do our best to be grounded in humility, as we have written that getting bogged down explaining away the day-to-day gyrations of the markets can be a fool’s errand.  We know that trying to interpret or predict short-term movements in the markets is impossible and has...

October 1, 2017

Dear Client: Returns for the major stock indices for the third quarter of 2017 and the current bond market yields are as follows: Index YTD 2017 Dow Jones Industrial Average 13.37% S&P 500 12.53%   Fixed Income Yields 1 year 5 year 10 year 30 year Municipals 0.92% 1.37% 2.00% 2.90% US Treasuries 1.29% 1.93% 2.33% 2.86%   As you have seen in your monthly statements, the markets continue to deliver increases in asset prices.  While we hesitate to use loaded language, we recognize the markets have been very good to long-term equity investors.  The markets have plodded along in an upward trend quite systematically in 2017.  In many of our previous letters we have written about reasons to stay the course, emphasizing long-term results while advocating the words of Warren Buffett several times.  Our portfolios have never been higher and we acknowledge the good times are here; however, we have also been around the block a few times and know that markets do not rise in perpetuity without pauses, corrections or price adjustments. It is often said that “hindsight is 20/20,” implying that everything looks clear upon reflection.  We do reread our previous quarterly letters and attempt to take inventory of how we have navigated the markets and how our advice has fared over the 23 years since our inception.  We could highlight that we have often understood the current market conditions at the time, alluding most specifically to the late ‘90s when we wrote about excessive stock prices during the tech bubble as well as the inflated housing prices in the mid-2000s.  These were two of the...

July 1, 2017

Dear Client: Returns for the major stock indices for the first half of 2017 and the current bond market yields are as follows: Index YTD 2017 Dow Jones Industrial Average +8.03% S&P 500 +8.24%   Fixed Income Yields 1 year 5 year 10 year 30 year Municipals 0.84% 1.35% 1.96% 2.81% US Treasuries 1.23% 1.89% 2.30% 2.83%   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...

April 1, 2017

Dear Client: Returns for the major stock indices for the first quarter of 2017 and the current bond market yields are as follows: Index YTD 2017 Dow Jones Industrial Average 4.56% S&P 500 5.53%   Fixed Income Yields 1 year 5 year 10 year 30 year Municipals 0.85% 1.58% 2.26% 3.07% US Treasuries 1.02% 1.92% 2.39% 3.01%   The equity markets are off to a strong start in 2017.  The markets continue to grind higher despite fearmongering about a sell-off being around the corner and the misguided notion that bull markets can die of old age alone. We fully concede the market has had an eight-year run from its March 9th, 2009 low; but we believe this was a multi-generational low that corresponded with a mass confluence of structural issues, many of which have been reconciled.  We further understand that economic cycles are quite natural and the emotions and politics that accompany these cycles are often predictable and repeated.  Below are some of the indicators we monitor that are NOT yet in place to derail the bull market: An inverted yield curve/widening credit spreads. This is when long-term rates yield less than short-term rates. Translation: the debt market sees more risk in the short term than the long term. Stock prices relative to earnings ratios excessively above norms. Earnings are still rising and no significant earnings warnings have been announced. Euphoric buying/speculative excess in public equity markets. We see no signs of excessive speculation. Heavy inflows into equity funds. Investment into equity funds vs. bond funds is nowhere near comparable peaks in the markets. Significantly increased IPO activity. When...