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Quarterly Client Letters

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... read more

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... read more

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... read more

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... read more

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... read more

January 1, 2017

Dear Client: Returns for the major stock indices for 2016 and the current bond market yields are as follows: Index 2016 Dow Jones Industrial Average +16.50% S&P 500 +11.96% NASDAQ Composite +7.80%   Fixed Income Yields 1 year 5 year 10 year 30 year Municipals 1.00% 1.80% 2.35% 3.08% US Treasuries 0.81% 1.93% 2.44% 3.07% As we close out 2016, long-term equity investors have,once again, been rewarded with double-digit returns.  As we reflect on the year, 2016 endured more market-moving drama and bouts of fear related to geopolitical events.  The beginning of 2016 gave us a 10% pullback in the market related to uncertainty with the Chinese economy; in late June, we experienced a brief 5% sell-off from Brexit; in November, the U.S. election gave us another specific date of perceived reckoning or opportunity which had investors from both sides of the political aisle unsure of how to invest.  These three market-moving situations gave shortsighted investors cause to worry, but provided long-term investors great opportunities to invest and be rewarded. At LYNCH & Associates, we regularly discuss what it means to be a long-term investor. We believe it starts with the correct mindset: you have to believe that when you are buying ownership in a company in the form of stock that you are buying the rights to the dividends and appreciation of the company.  Because you will collect dividends from your company (typically four times a year) and have the opportunity to realize capital appreciation, there is a market value on these rights and opportunities.  The investor’s dilemma becomes, “What is an appropriate price you should pay (stock... read more

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... read more

July 1, 2016

Dear Client: Returns for the major stock indices for the first half of 2016 and current bond market yields are as follows:   Index YTD 2016 Dow Jones Industrial Average +2.90% S&P 500 +2.69% NASDAQ Composite -3.29%   Fixed Income Yields 1 year 5 year 10 year 30 year Municipals .50% 0.91% 1.35% 2.16% US Treasuries .44% 1.00% 1.47% 2.29%   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... read more

April 1, 2016

Dear Client: The major market measures posted the following mixed returns for the first quarter of 2016: Index YTD 2016 Dow Jones Industrial Average +1.49% S&P 500 +0.77% NASDAQ Composite -2.75%   The first quarter ended on a constructive note following some anxious volatility earlier in the quarter that saw the S&P 500 down over 10% year-to-date.  The concern seemed to center on the continuing health of the economy and whether it was beginning to slow toward a recession. As we stated in our last quarterly letter, we have confidence in the strength of our economy and do not think a recession is likely until at least 2018.  Our optimism is based in part on the following fundamentals: Private sector jobs have increased for 71 consecutive months. More jobs means more money circulating within the economy.  New claims for unemployment benefits have remained under 300,000 for 56 consecutive weeks, the longest stretch in more than forty years. Incomes are increasing while consumers continue to keep their debt ratios at low levels. This leaves room for future big-ticket spending and builds consumer confidence. Auto sales remain at or near record levels. Housing remains a bright spot for the economy with low interest rates helping to drive demand. There is also a continuing price recovery occurring in many regions of the country and with more people working and personal incomes rising, this looks to continue. Except for the energy sector, corporate profit margins are high, earnings continue to grow and balance sheets are loaded with cash which gives them flexibility to invest in greater efficiencies and make acquisitions. At the time... read more

January 1, 2016

Dear Client: Let us first wish you a Happy New Year!  We hope 2016 will be a healthy, fulfilling and prosperous year for you and your family. Since most of our clients have at least a portion of their investments in equities, now is a good time to review how the past year compares to the S&P 500 over the last decade:   2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 +15.79% +5.49% -37.00% +26.46% +15.06% +2.11% +16.00% +32.39% +13.68% +1.40%   From a return perspective, 2015 was a disappointing period for stocks.  The long term positives for stocks were offset by worries over the effects a Federal Reserve tightening might have on the United States economy, a drop in oil prices and a slowdown in China. While we are aware of these market concerns, they have not altered our long-term positive outlook on the markets and here is why: Federal Reserve tightening:  On December 16, 2015 the Federal Reserve raised its targeted Fed Funds rate by 0.25%. As we have stated previously, the Fed is very vested in the current economic recovery. They have gone to extraordinary lengths to build this recovery and are not going to jeopardize its durability with rate increases that are not supported by economic strength. Additionally, the Federal Reserve is not looking to slow an overheated economy, but to simply back out the highly accommodative emergency measures put in place in 2008. As such, they have stated that this is going to be a more gradual, slower tightening process than in previous cycles. Rates are currently so low that for at... read more