Dear Client:
Returns for the major stock indices and the current bond and money market yields are as follows:
| Index | YTD 2022 |
| Dow Jones Industrial Average | -15.30% |
| S&P 500 | -20.57% |
| Fixed Income Yields | 1 year | 5 year | 10 year | 30 year |
| Municipals | 1.64% | 2.27% | 2.75% | 3.25% |
| US Treasuries | 2.73% | 3.03% | 3.00% | 3.16% |
| Fidelity Government Cash Reserves Money Market Fund | 1.05% |
The first half of 2022 has undoubtedly been off to a rough start. The 20%+ decline in the equity markets from their January 3rd highs has landed us in a bear market. There has been nearly nowhere to hide as the bond market is also suffering its largest percentage decline ever (-10%) to begin a year. Every notable equity index is down by double-digit percentages, and each market sector except energy is down for the year. The value stock indices have significantly outperformed the growth indices in relative performance but are also still down for the year. The markets have declined by 20% or more 26 times since 1929, three of which have happened in the last five years: the 4th quarter of 2018, the COVID decline of March 2020, and now the first half of 2022. Though we know the market has recovered after every prior bear market, the patience, fortitude, and values of long-term investors are again being tested.
The U.S. is likely in a recession as measured by the National Bureau of Economic Research’s definition: “a significant decline in economic activity lasting more than a few months.” However, the more commonly referenced definition and harsher standard of two successive quarters of negative real GDP decline is still undetermined. This is perhaps the most unusual recession of our lifetimes, with more than full employment (two job openings for every worker), record stock buybacks and dividends, and company earnings up over 50% from one year ago.
Our economy is suffering the hangover (high inflation) from “emergency” fiscal stimulus, global supply shocks, the Russian war, and most notably, the exorbitant money supply increase. Our Central bank, led by Jerome Powell, has adopted Modern Monetary Theory (MMT), a fancy name for printing and spending money to get out of every perceived economic problem with little regard to revenues. History will sort out to what extent MMT was necessary during these times, and the U.S is certainly not the only culprit. Thankfully, the Fed is now trying to curtail its madness, and expects to stop increasing their balance sheet and to continue raising interest rates for the rest of 2022. After every Fed meeting, Chairman Powell and the Federal Reserve Board project inflation to come down significantly next year and say they will do whatever is necessary to bring inflation down. For now, pardon the metaphor, we will be watching to see how well the python (economy) can digest the pig (excessive spending).
No matter the definition or unusual nature of this recession, our main concerns are how this affects your investments and how to best allocate your capital. The rising interest rates and inflation have a sobering effect as they ultimately curtail enthusiasm in consumer spending. However, a couple of silver linings with higher rates are that bond prices are becoming more attractive, and money market yields have been rising quickly (currently up to 1.05% from .01%). The 10-year treasury is now hovering around 3%, and even brokered CDs have gotten our attention. Granted, none of these numbers are impressive, but they are significantly better alternatives compared to just a few months ago.
We continue to believe volatility will be with us as we approach the midterm elections and the end of the year. Technically, the market is still in a downtrend. We will be eagerly anticipating getting to the other side of this economic and news cycle. Inflation subsiding, interest rates normalizing, the coming Congressional gridlock, supply chains healing, and the Russian war ending are all possible news events that the markets should enjoy. Moreover, the average length of a bear market is 289 days (9.6 months) versus 991 days (2.7 years) for the average bull market. Some of the best bull markets were born after periods of great economic stress and high inflation, notably the three highest periods of inflation (1920, 1947 and 1982).
As for the rest of 2022, we will continue grinding forward with our value bias, owning the highest quality names, and looking for opportunities to implement more changes to asset allocations as bonds hopefully continue to become more attractive.
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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