Returns for the major stock indices and the current bond and money market yields are as follows:
|Dow Jones Industrial Average||20.84%|
|Fixed Income Yields||1 year||5 year||10 year||30 year|
|Fidelity Government Cash Reserves Money Market Fund||0.01%|
Happy New Year! The equity markets delivered impressive results in 2021 as long-term investors were again rewarded. We experienced three declines of 5% in the S&P 500 index, reaching no greater than a 6% decline. The market rose steadily, similarly to 2019, in broad-market support. All of the sectors comprising the S&P 500 appreciated more than 10%. Small, mid, and large company indexes performed in excess of 20%, as did growth and value stocks. It was difficult to NOT make money in equities this year. The bond market, on the other hand, had negative returns. The Total Bond Market Index was down 1.86% in total return. The real rate of return factoring in the current inflation problem made fixed income especially painful in 2021. For many reasons, the equity markets continue to attract demand, and asset prices have been rising everywhere.
As an investor, I cut my teeth in a golden era of investing (the late 90s). Back then, the market delivered five straight years of 20%+ returns. Similar to now, market participants were making money seemingly ‘hand over fist.’ Many portfolios had gravitated away from diversification, and many market newbies had portfolios littered with the latest high-flying stocks. Moreover, they were often leveraged in margin and excessively overweighted in the hottest flavor (technology sector). That generation of investors heard the scary words “it’s different this time” or the “new economy” when describing reasons to abandon time-tested investor principles of long-term investing. The bull market ended in March of 2000; the following three markets years were -9%, -11%, and -22%. Known as the dot-com era, the market bust was one of the most significant in history, and prices reset ruthlessly. Those negative years were agonizing but necessary for me to come full circle with the power of markets and the value of humility in investing. The stories in the late 90s were of bulletproof stocks and great expectations, which is often the case near market tops.
The generation before me had similar stories of the Nifty Fifty stocks of the 1960s and 1970s. The narrative that certain stocks were perceived as invincible, where valuations seemed to no longer matter, was on par with the late 90s. The investment ideas/stories of these times are often interesting, hopeful, and exciting. There is a reason the expression “it’s different this time” is one of the most feared phrases in the investing lexicon. Yes, investors’ circumstances are always different with respect to the macro environment, global events, or the latest technologies. But what is never “different this time” is the behavior and emotions of fear and greed that move markets. Ultimately, markets move on the supply and demand of investor appetites.
Perhaps the most valuable lessons I learned were the same as those taught by my mentors: that it’s difficult to learn from others’ mistakes, that there is no better teacher than the school of hard knocks, and that valuation ALWAYS ultimately matters.
We feel compelled to highlight these times as a backdrop for our continued bias toward value investing going forward. Though we can never know when a bear market will come, the conditions are mounting for a reset in many assets, including high valuation stocks. Value investing, or the Warren Buffet way, is often out of favor in bull markets. We have written before how we will not be chasing the high valuation stocks. We refuse to play musical chairs with your money, meaning we do not buy stocks just hoping to get out when the music/rally stops. There continues to be plenty of value in the market, as the economy is still recovering from the virus and shutdowns.
As for 2022, despite areas of elevated valuations and the litany of unprecedented events, we continue to be optimistic. We believe there will be more volatility in 2022, as is consistent after years of low volatility, in election years, and as the virus mutates. We continue to believe inflation remains a manageable problem (see our previous letter). A tidal wave of stock buybacks looming, continued low interest rates, and still no attractive bond market alternatives remain notable tailwinds. As for asset allocation, we continue with our equity bias and will continue to build your portfolios toward the value side of the market with securities that have long-proven histories. We certainly do not know whether the next bear market is around the corner or when the next black swan event will occur, but do know we want history on our side and will not be abandoning our investing principles during those times.
Our LYNCH & Associates staff grew in 2021. Joe Berry has joined our team as an associate after more than a decade in education. We are excited to have the new energy and talent Joe brings.
We 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 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