Dear Client:
Returns for the major stock indices for 2020, and the current bond and money market yields are as follows:
| Index | 3rd Quarter |
| Dow Jones Industrial Average | -2.65% |
| S&P 500 | 4.09% |
| Fixed Income Yields | 1 year | 5 year | 10 year | 30 year |
| Municipals | 0.13% | 0.29% | 0.84% | 1.67% |
| US Treasuries | 0.12% | 0.28% | 0.68% | 1.46% |
| Fidelity Government Cash Reserves Money Market Fund | 0.01% |
For two weeks leading into September, the S&P 500 was again making new all-time highs; a truly remarkable climb (60%) from the March 22nd lows. The month of August tallied a positive 7.19% return followed by a September decline of 4.32%. Clearly, volatility is here again after a very strong and steady climb in 2019. We all know the recent history by now: a once in a several generation pandemic and unprecedented government responses caused the markets to panic, and in just a matter of weeks dropped by 33%. Undoubtedly the pandemic and ensuing reactions created an indelible impact on many businesses. Through August, there have been 180 bankruptcies, each with liabilities of over $50 million. In total, it is estimated nearly 100,000 businesses will never return. There are many examples and statistics available to illustrate the economic destruction left in the wake. Unfortunately, the damage is still being uncovered, and despite huge gains recently in growth and jobs, a full recovery is likely still years away.
At LYNCH & Associates, we believe that despite the challenging year of 2020, the markets have held up reasonably well. We are happy that nearly all of our clients participated in the recovery and did not partake in any significant market timing. Certainly, each client is unique and has varying risk tolerances and goals, but the vast majority remained long-term investors. As we feel some solace in the market recovery, we know too well that the challenge of markets and investing is that the future never stops embarking on us, and risk decisions are always present. So again, the question continues: where do we go from here?
The new paradigm arising from the pandemic has created imbalances of all kinds, some for better and worse. One of the new catchphrases emerging in the financial media is the idea of the stay-at-home economy. In short, the virus has forced changes in everyday life, leading to more people working, staying, and playing at home. These trends have affected businesses in many ways, from skyrocketing sales at big retailers like Lowes, Wal-Mart, and Costco, to record online sales that created huge demand for home delivery companies like UPS, Amazon, and Fed Ex. Cultural shifts have taken place, and emerging concepts and innovations have been pulled into the mainstream much more quickly than anticipated. Companies like Zoom Technologies, DocuSign, and Shopify have grown to prices not recognizable since the dot-com era. We are mindful that many of these companies are exciting and positively disrupting the way we live our lives, but we believe it is always important to remember that just because we may like a company does not always make it a sound investment.
The changes and shifts in consumer behaviors have created a tale of two markets: growth versus value. These differences are eerily similar to the early 1970s when the “Nifty Fifty” names like Polaroid, Xerox, Eastman Kodak and in the late 1990s companies such as Sun Microsystems, AOL, and EMC seemed like must-own stocks. We highlight a few of these names as a reminder that with inspiring innovation also comes euphoric hype. These companies in these “new and exciting times” were bought fervently with no regard to valuation. The old saying “those who do not learn from history are doomed to repeat it” may apply to some of the recent high-flying names, as the human emotions of fear and greed often distort stock valuations.
Concerning the upcoming election, we generally believe politics is an overrated issue for long-term investors as the balance of power turns over every two years in Congress and every four years with the presidency. Yes, policy changes affect company decisions, and we do believe some outcomes are better for some businesses, but the larger lesson is that long-term investors typically are not making security selection decisions based on political winds.
We remain optimistic about the year ahead. We continue to believe the virus will be dealt with through improved therapies, testing, and vaccines and ultimately will find its seat in history as another obstacle that long-term investors overcame. The Federal Reserve has remained an equity investor’s best friend as they are committed to low-interest rates for the foreseeable future. Cash on the sidelines in money markets continues to grow to record levels, and bonds remain unattractive as rates remain less than inflation. Company earnings reports in 2021 will have a lowered 2020 bar to hurdle, as year-over-year comparisons should be viewed favorably, especially with so much pent-up demand. There continues to be no alternative to equities.
We thank you for your continued confidence in LYNCH & Associates. As always, we welcome you to schedule an appointment to review your financial situation.
Sincerely,
Ryan T. Lynch, CFP® ChFC®
President
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.
Office: 10644 Newburgh Road, Newburgh, IN 47630
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