Returns for the major stock indexes in 2023 and the current bond and money market yields are as follows:
| Index | 2023 Returns |
| Dow Jones Industrial Average | 16.18% |
| S&P 500 | 26.29% |
| Fixed Income Yields | 1 year | 2 year | 5 year | 10 year | 30 year |
| Municipals | 2.59% | 2.50% | 2.22% | 2.27% | 3.40% |
| US Treasuries | 4.76% | 4.25% | 3.85% | 3.88% | 4.03% |
| Fidelity Government Cash Reserves Money Market Fund | 5.15% |
| Fidelity Money Market Fund Class Premium | 5.35% |
Happy New Year! Once again, the equity markets delivered for long-term investors. After a brutal calendar year performance in 2022, the major market indexes (S&P 500 and Dow Jones Industrial Averages) have returned to all-time closing highs. The fourth quarter was among the strongest in recent memory (+11%), and the market breadth has pleasantly improved. Moreover, nine of the eleven S&P 500 sectors posted positive annual returns, and the equal-weighted indexes, despite their underperformance, have recently rallied. Notably, the S&P 500 was considerably bolstered by its largest holdings, as over 70% of the index’s components underperformed. Further, the indexes are at their most top-heavy since 1980, as the top 10 holdings now account for over 30% of the index, with Microsoft and Apple together amounting to a record 14% of the total index. Nevertheless, the equity markets have remained resilient, rebounded, and delivered strong results in 2023.
At LYNCH & Associates, we regularly discuss the virtue of humility as an imperative for successful long-term investing. One year ago, 85% of economists were anticipating a recession, and 98% of CEOs (as reported by The Wall Street Journal) were anticipating an economic downturn, while more than half of CEOs (surveyed globally) feared an impending recession could be worse than the financial crisis. “How little we all know” was recently spoken by Fidelity’s Director of Global Macro on CNBC, referring to how incorrect the forecasts for recession were for 2023. We concede that we generally agreed with the sentiment as the uncertainties seemed overwhelmingly in favor of recession. Though many of the concerns of economists and CEOs still exist today, we are again reminded of the pitfalls of short-term thinking, the virtue of contrarian opinion, and the importance of modesty. Perhaps more fittingly to long-term investors, we have again been reminded of the necessity for proper diversification, appropriate asset allocation, and adherence to long-term principles.
Clearly, the supposed experts were not right about a 2023 recession. Many of the fears have not materialized as the inflation rate has declined considerably, the unemployment rate remains near 50-year lows, and continued rising home prices have kept the consumer strong. An old saying in the investment business is “P follows E”, meaning (stock) Prices ultimately follow (company) Earnings, and analysts’ expectations for 2024 earnings estimates are projecting double-digit growth (11.8%), significantly exceeding recent historical averages. Further, interest rates are projected by the Fed and the futures market to come down significantly beginning in March. In addition, the incredible technological advances in AI (Artificial Intelligence), the emergence of quantum computing, and the potential impacts of GLP-1 (weight loss drugs) are themes that have helped keep the recession at bay and given investors reasons to be optimistic.
While optimism has returned, we also know the markets have only returned to 2021 highs, and the last two years have merely treaded water in total return. Three themes we are watching are the outsized performance differences over many years between large versus small capitalization, growth versus value, and domestic versus foreign stocks. Each is its own discussion, but each may provide opportunities for some reversion to the mean in performance. We remain with our bias toward value investing and have recently begun to build slightly larger positions in small caps. And though our bonds have performed well as of late, with interest rates supposedly coming down this year we may find it again challenging to lock in worthy yields in our bond portfolios. Lastly, our money market rates remain very attractive (5%+) and at 15-year highs, though they will also be susceptible to future interest rate cuts.
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 investment 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].