Returns for the major stock indices for 2020, and the current bond and money market yields are as follows:
|Dow Jones Industrial Average||-9.55%|
|Fixed Income Yields||1 year||5 year||10 year||30 year|
|Fidelity Government Cash Reserves Money Market Fund||0.01%|
So far, 2020 has been quite a tumultuous year; and we are only halfway through! As we all know too well, the decade-long bull market came to an abrupt halt in February as COVID-19 created a nearly unprecedented type of fear and great uncertainty. In the fog of the times, traders panicked and pushed the markets down 33 percent from the all-time highs. As we remember, there were no easy answers for investors. In March, we wrote that everything we have ever understood about investing is not to panic, and not to overreact. We know that trying to time the market is difficult, and just when the fear is at its highest, the markets can turn quickly without pause; and sure enough, March 23rd marked the beginning of the best 50-day rally in market history. As the markets recorded their best quarter since 1998, the age-old contrarian axiom to “buy when no one wants them and sell when everyone wants them” again proved to ring true. We have again been reminded that truly buying low is always difficult because the fear and uncertainty are at their highest and this time was no exception.
Undoubtedly, we live in unusual times, and with investing it is no different. These markets have many of the most respected voices on Wall Street voicing an array of differing opinions. The bear-market case perhaps seems the most obvious. We are experiencing a sharp recession, a record decline in consumer spending, an increase in market volatility, and an assuredly contentious election season looming. Moreover, second-quarter earnings will certainly be miserable for many companies, as mandated shutdowns have led to unemployment numbers at the worst levels since the Great Depression and a lingering pandemic virus continues to haunt the country for an unknowable amount of time. We know the bear case, as we hear it loudly every day.
The bull market case is perhaps less obvious. We believe the case goes something as follows: The fears are temporary. The recession, though severe, is nearly over and may prove to be the shortest in history. The virus will soon be conquered through innovative therapies and ultimately effective vaccines. The M1 money supply is up 25 percent. The Federal Reserve’s implemented monetary expansion has provided the greatest liquidity injection since World War II and will continue to provide support. The bond market has been essentially back-stopped by the government, and consequentially has continued to offer almost no yield for fixed-income investors. Money market balances are at an all-time high at nearly five trillion dollars. Where will this money ultimately land, and how long can investors parked in cash earn less than the rate of inflation?
Only six months ago, we had just recorded a stellar year in the markets, and the economy seemed to be firing on every cylinder. We know it is an understatement to say that 2020 has been tough, but we encourage you to continue to look forward as 2021 has the potential to produce incredible year-over-year growth for earnings, GDP, employment, and the like. We believe those with a hoard of cash on the sidelines will have no choice but to again buy the great American companies like those who brought us the therapies and vaccines in 2020. With interest rates at near-record lows, we believe there are still no attractive alternatives to equities, especially looking further into the future.
At LYNCH & Associates, we believe it is notable to reflect on how the economic shutdown has created imbalances that rewarded large companies. Certainly, each company has faced unique challenges, but we cannot ignore how so many of the large companies were allowed to stay open, continue to compete, and grab market share. Though this recession was exacerbated by government intervention, in many cases, we believe the large companies will ultimately come back stronger than ever. While the bear-market case has concerning merit and is indeed unsettling, we think it is generally a short-term perspective for investors. Though 2020 will be remembered as a stressful and challenging time, it also will likely mark the birth of a new bull market, and ultimately a buying opportunity for stocks. The truly long-term investors need to continue to grind their way forward with faith in their stock ownership positions.
We again, thank you for your continued confidence in LYNCH & Associates. As always, we welcome you to schedule an appointment to review your 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 is 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.
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