Returns for the major stock indices for 2017 and the current bond market yields are as follows:
|Dow Jones Industrial Average||28.08%|
|Fixed Income Yields||1 year||5 year||10 year||30 year|
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 made fools out of intelligent people. As legendary mutual fund manager Peter Lynch once quoted “I am not sure where the next 1,000 points in the market will be, but I’m pretty confident the next 10,000 points will be higher.” We know and regularly repeat that the equity markets have been the best asset class over any reasonable measures of time. We have been recently citing a research report that highlights from the peak of the market in 2007 until now that stocks have once again outperformed bonds, gold, oil, cash and real estate. If you had been a brand-new equity investor at the top of the market in 2007, before the multi-generational financial crisis, and if you had held to 2017 you would again have outperformed all other asset classes.
As for 2018, we believe the upward trend for equities remains bright. As we wrote one year ago, we expect stocks to benefit from the tax cuts (both corporate and individual) and the regulatory reforms currently underway. The corporate tax cut from 35% to 21% will be a direct contribution to earnings growth and we believe it has not been fully priced into the stocks we own. We do believe the market has priced in some of the anticipation of improved earnings but has yet to put an overly concerning premium on our companies. Eventually, all stock prices follow earnings; as earnings grow, stock prices follow. We firmly believe when the repatriation of foreign earnings comes back in the form of stock buybacks, higher dividends and capital investment our companies can only increase earnings per share and result in even more attractive valuations. As we have written in our last several letters, we still cannot justify significantly altering our asset allocations with the 10-year Treasury at 2.41%. So, while we could paint a scenario where there is pent-up selling coming in the new year because of the anticipation of lower income tax rates in 2018, we believe any decline will be short-lived and an opportunity to add to equities.
With many of you at or near all-time highs in your accounts, we ask you to recognize that with greater wealth comes bigger nominal swings in your accounts; a 10% decline is a bigger dollar amount than in years past. We remind you that if your accounts are to double or triple from their current levels in the decades ahead, then not only do you have to remain in equities, you have to be willing to embrace market declines as a percentage figure of the account and not in absolute dollars. We concede this is common sense for most but worthy of a reminder. Also, with growth in your accounts comes greater emphasis on the tax implications in your taxable accounts, being that you likely have significantly greater unrealized gains. We have to balance being careful not to generate unnecessary capital gains while not being handcuffed because of them; translation: some of you will need to take some gains in the years to come. We would also like to mention that dividends have been steadily increasing and your dividend income has likely increased 10% or more year over year, which should be comforting to keep in mind especially when the markets do turn down.
We genuinely appreciate your business and value the trust you have placed with us in the stewardship of your financial assets. As always, we welcome and encourage 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