Dear Client:
Year-to-date returns for the major stock indices and the current bond and money market yields
are as follows:
| Index | YTD |
| Dow Jones Industrial Average | 10.57% |
| S&P 500 | 14.68% |
| Fixed Income Yields | 1 year | 5 year | 10 year | 30 year |
| Municipals | 0.18% | 0.56% | 1.13% | 1.73% |
| US Treasuries | 0.07% | 0.98% | 1.52% | 2.08% |
| Fidelity Government Cash Reserves Money Market Fund | 0.01% |
The markets have continued to grind upward in 2021. The year-to-date performance numbers frankly speak for themselves. This bull market continues to reward long-term investors as the climb has been steady over the past year. Despite the healthy market rally, we continue to grapple with the effects from Covid and the imbalances that have been caused in its wake. We continue to believe Americans are learning to live with the new normal and the worst of the economic disruptions seem to be behind us. Despite some areas of the market being overvalued and a market correction overdue, the market has remained resilient, and we remain optimistic.
Inflation continues to be at the forefront of concerns facing investors. Inflation means rising prices or too many dollars chasing too few goods and services, and currently is the symptom of underlying reproachable issues; some will self-correct in the short run, while others will take more time. The most notable causes are: supply problems, labor shortages, massive fiscal stimulus packages, seemingly endless manufactured low interest rates, and asset purchases (the Fed balances sheet). Each of these is its own discussion, but all are contributing to rising prices.
Once again, the question is where to go from here? For starters, we believe the labor shortages and supply problems are temporary and have begun correcting back to normal levels as the contributing factors (pandemic shutdown fears and extraordinary unemployment benefits) are subsiding. The issues of excessive government spending, manufactured low borrowing rates, and the seemingly never-ending asset purchases are the more significant threats to longer term inflation.
Conversely, deflationary forces also exist in the economy. The growth of technology in our lives has seemingly never moved so quickly. The technological advances in recent years have been incredible, with examples not limited to: electric vehicles, blockchain, 5G, the cloud, RNA gene therapies, and unfinished advancements like Elon Musk’s Starlink company attempting to provide readily available internet anywhere in the world. Moreover, the “Amazon effect,” a phrase coined to reference the powerful disruption of eCommerce, has significantly contributed to pricing pressures. These advances in technology ultimately increase competition, lower costs, and empower masses of the global population. The innovation examples are endless, but the point is the same: the supply side is at work pushing back on the problem of elevated inflation.
So, how to invest during times of inflation? Conventional wisdom says to invest in hard assets: real estate, commodities, or stores of value in the real world. A look at history shows us that stocks have performed relatively well during high inflation. Inflation became a significant problem during the oil crisis of 1973-1974 as a limited supply of oil increased prices dramatically. My father’s generation remembers well the soaring inflation of the late 1970s and early 1980s. The CPI inflation rate posted annualized averages of 11.3%, 13.5%, 10.3% in 1979, 1980, and 1981. We believe it is worth noting the markets gave us 18.5%, 31.7%, -4.7% in those respective years followed by 20% years in 1982 and 1983. Translation: during the height of inflation over the last 100 years, the equity markets proved to be a solid place to park money.
We can point to having history on our side, but we believe the case for equities during inflation is also inherently understandable. The equities we buy are loaded with the real assets that increase in value when demand is outstripping supply. For example, McDonalds Corporation owns 30+ billion worth of real estate globally; so with rising inflation, what is happening to the prices of their real estate? We could point to many examples like McDonalds, but the point is, for many reasons, we believe your equities can perform relatively well during high inflation.
We fully recognize that valuations are above historical norms in the markets, and other assets including real estate have performed well in recent years. Our challenge continues to be how to allocate capital while reconciling above-average valuations with very unattractive fixed income alternatives. We concede that we sound like a broken record, but despite the great run from the virus lows, we remain constructively optimistic on the equity markets going forward.
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 jfarless@LNAonline.com.
Office: 10644 Newburgh Road, Newburgh, IN 47630
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