Dear Client:
Returns for the major stock indices for 2020 and the current bond and money market yields are as follows:
| Index | 2020 |
| Dow Jones Industrial Average | 9.72% |
| S&P 500 | 18.40% |
| Fixed Income Yields | 1 year | 5 year | 10 year | 30 year |
| Municipals | 0.13% | 0.22% | 0.69% | 1.47% |
| US Treasuries | 0.10% | 0.36% | 0.91% | 1.64% |
| Fidelity Government Cash Reserves Money Market Fund | 0.01% |
Happy New Year! Believe it or not, markets are back to all-time highs. Despite all the problems of 2020, we have again weathered the storm as investors. As we know too well, the panic from the virus created havoc for countless lives, businesses, and livelihoods. We have all dealt with the effects of the virus within our own families; the stress and effects are real and challenging. As for the markets in 2020, the fear and panic created one of the greatest market opportunities of all time. The major market index (S&P 500) has rallied 70% since the March 23rd low. During this recovery, the markets also gave us an 8% decline in June, an 11% decline in September, and a 9% decline before the election in October. Through it all, long term investors again logged a positive year in the markets. Once again, the day-to-day grind of market volatility, along with all the stresses related to the virus, made perseverance as difficult as ever.
We believe the momentum in the current bull market has legs into 2021 for many reasons. First and foremost, the virus is being conquered through vaccines. We believe the rollout will transpire better than expected, and every American will have access to the vaccine in 2021. The heroes in American private industry met the call, as drug companies like Moderna (who designed their vaccine in two days) and Pfizer are already vaccinating Americans. More vaccines are coming soon, as we expect Johnson & Johnson to begin delivering their vaccine immediately upon its approval later this month. Other companies (AstraZeneca, Novavax, and more) will follow, and a glut of vaccines will ultimately put Americans back to normal. We are all excited and expect pent-up demand to prevail and charge the economy.
Additionally, we have the largest increase in the money supply since World War II, historically low interest rates, no attractive bond market alternatives, and year-over-year earnings reports that should be impressive. Moreover, record cash levels in money markets and a Federal Reserve committed to low interest rates until 2024 is a recipe for growth and price appreciation in equities.
While we are bullish for now, we know the 2020 recession caused lasting damage that will take time to heal. Unemployment, though improving, is still years from returning to pre-virus levels and the money printing, exorbitant stimulus packages, and artificially induced interest rates cannot continue in perpetuity. The Federal Reserve will play an integral part in how this game of reflation plays out. If the rate of inflation does not run away, and the value of the dollar can sustain itself, then perhaps the incredible increases in the money supply may prove to have been the best solution available for these times.
In the meantime, with these supply and demand imbalances, and an already rising market, comes speculation that leads to stock prices becoming extended beyond reasonable valuations. So, while we remain bullish, we are not without reservation. We see the historically high forward earnings valuations and understand that to justify these prices, we need the bullish case we highlighted to play out in order to maintain an optimistic outlook. We believe the current equity market is extremely bifurcated, meaning many stocks are extraordinarily overvalued while others are nearly ignored (cheap).
At LYNCH & Associates, we have historically favored large-capitalization stocks that have stood the test of time. Our overriding philosophy is that we want to own companies that have been great for decades, have raised dividends annually for generations, and are recognizable brand-name companies. Hence, we want to own blue-chip companies and build diversified portfolios for our clients. We believe, wholeheartedly, that this model serves our clients well over time and allows us to sleep at night. As a registered investment advisor, it is our duty to serve as a fiduciary, one who is entrusted to act in your best interest. Because we remain bullish but do have concerns over some of the euphoria in the market, we are as resolute as ever to maintain our investing values. As of this writing, we intend to continue to steer more, not less, to the large capitalization, dividend paying, and value side of the market. We concede that we will not be chasing the Tesla’s of the world, and that ultimately preserving and stewarding your assets for the long haul is why you have entrusted us as your advisor.
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 Parts II & III 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 [email protected].
Office: 10644 Newburgh Road, Newburgh, IN 47630
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