Dear Client:
Returns for the major stock indexes in 2023 and the current bond and money market yields are as follows:
| Index | YTD 2023 |
| Dow Jones Industrial Average | 0.38% |
| S&P 500 | 7.03% |
| Fixed Income Yields | 1 year | 2 year | 5 year | 10 year | 30 year |
| Municipals | 2.47% | 2.41% | 2.23% | 2.28% | 3.38% |
| US Treasuries | 4.59% | 4.03% | 3.57% | 3.47% | 3.65% |
| Fidelity Government Cash Reserves Money Market Fund | 4.59% |
| Fidelity Money Market Fund Class Premium | 4.77% |
The markets are off to a positive start in 2023. The S&P 500 is up 7%, while the Dow Jones Industrial Average is flat. We have had some reversion to the mean from 2022 among the economic sectors, as last year’s best-performing energy sector is down 5%, while the top performers (communication services and technology) have bounced well off their brutal 2022 lows. Growth stocks (+9%) and value stocks (+4%) have also performed well year-to-date. The bond market has gained slightly (+2%) after its worst year in history. Though the S&P 500 index is still trading at the same levels as in April 2021, the markets seem to be gaining some momentum. Despite the many uncertainties and concerns, we are encouraged by the market’s recent performance, now 17% above the October lows.
Investors have undeniably had much to endure in recent memory; one year ago, the markets were rattled by the uncertainty of Russia’s invasion of Ukraine and rising inflation. Before that, we had to grapple with the impacts left in the wake of the COVID response. Now, the rapidly rising interest rates are exposing the age-old problem of interest rate risk. Each of these significant situations is different, but each has brought about systemic fears that continue to test markets.
The “banking crisis” is the problem of the day, but is not new in many respects. Ultimately, this has been caused by poor asset allocation by some bankers in a rapidly rising interest rate environment. Combine this with an excessively high percentage of uninsured deposits (greater than $250,000) at some banks and too many customers withdrawing their deposits, and you have an insolvent bank nearly overnight. This was the fate of Silicon Valley Bank, the poster child and largest bank failure to date. They sold some of their securities portfolios for a significant loss which immediately sparked fear on the street and caused a bank run, bringing the bank to its knees.
Then the conversation became fear and contagion; hence, who is next? The fear was perhaps the Fed’s and Treasury’s most pressing concern. Their response was to quell the fear by greatly reducing the need for banks to sell their bonds by setting up a borrowing facility that offers loans against their qualifying assets as collateral. Additionally, the Fed implicitly (not written into law) guaranteed all bank deposits (regardless of size) for one year. These moves seem to have significantly calmed fears for now.
Of course, each lending institution has a unique balance sheet and set of circumstances, but these troubled banks clearly made mistakes. The speed of Fed rate increases after essentially zero interest rates for 15 years, along with generally unattractive deposit rates relative to money markets, set the stage. Further, the enormous dump of new cash into the system from the COVID response, and the difficulty of making loans during the government lockdowns, led bankers to buy a disproportionate amount of long-duration fixed income.
The investing universe once again has been reminded of interest rate risk and how its mismanagement can negatively affect bond prices. We have written many times in recent years about excessively high bond prices and have held off adding bonds to many portfolios despite conventional wisdom suggesting otherwise. Ultimately, we could never come to peace with negative real rates of return, let alone putrid nominal returns.
At LYNCH & Associates, we do not own small banks in any of our stock models. We take some peace knowing the Fed has room for interest rate cuts when necessary, which would immediately provide some relief to troubled banks. We will be monitoring these events carefully. Along these lines, we have had many clients deposit cash into Fidelity’s money market funds, currently yielding 4.77% for individuals. Though we have recently added more bonds, the steady rise in money markets over the last year has allowed us to remain more patient within fixed income. Additionally, we will continue with our dividend and value bias in our equity models as we look to add to more high-quality growth names as the market conditions and the many extraordinary circumstances continue to improve.
As always, we encourage our clients to remain focused on their long-term investment goals. Our team is here to provide guidance and support as needed, and we remain committed to helping you achieve your financial objectives. We thank you for your continued confidence in LYNCH & Associates.
Sincerely,
Ryan T. Lynch, CFP® ChFC®
President
Form ADV Part II and III of the LYNCH & Associates Uniform Application for Investment Advisor Registration and the LYNCH & Associates Code of Ethics are 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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