Dear (INSERT CLIENT NAME HERE),
As our nation continues to recover from the COVID-19 Coronavirus pandemic, the economy as a whole and the equity markets have made and continue to make significant progress.
My midyear report to you comes in two parts. First, a brief review of our shared investment philosophy. Second, my perspective on the present situation. I welcome your questions and comments. Thanks for being a part of the (Company Name) family.
General Principles:
We are long-term, goal-focused, planning-driven equity investors. We have found that the best course for us is to formulate a comprehensive financial plan, to build portfolios, based on our most important life goals and not on what the economy or the markets are doing. Since the year 1960, the S&P’s 500 Stock Index has appreciated around 70 times. The cash dividend of the index has gone up about 30 times. Over the same time period, the Consumer Price Index (CPI) has increased by a factor of nine.[1] Historically, mainstream equities have functioned as an efficient hedge of protection against long-term inflation and a generator of real wealth over time. We believe that this is more likely than not to continue to hold true in the long run. Our investment policy of owning successful companies rather than lending to them is a direct reflection of this truth. We believe in acting continuously on a rational plan instead of reacting to current events. It offers us the best chance for long-term success in investing. Very simply, unless our goals change, we see little reasoning in altering our financial plan. If our portfolio is well-suited to that financial plan, then we don’t often make significant changes to that either.
We do not believe that the economy can be consistently forecast or that the markets can be significantly timed. Therefore, we are thoroughly convinced that the most reliable way we can capture long-term return of equities is to ride out their frequent but temporary declines. The performance of our equity portfolios relative to their benchmark(s) is irrelevant to the success of investments as we are concerned. It is also an uncontrollable variable. The only benchmark we are concerned with is the one that indicates whether or not you are on track to achieve your outlined financial goals.
Current Observations:
The American economy continues its dramatic recovery after a whirlwind first half of 2021, propelled by vaccines against COVID-19, the retreat of the pandemic, massive monetary and fiscal accommodation, and its own deep fundamental resilience. The S&P 500 ended the first half at 4,297.50, an increase of 14.4% from its close at the end of 2020. Coming into this year, the consensus earnings estimate for the index in 2021 was around $165. Currently, the consensus for the next twelve months is up to $200 and continues to be raised.
The economy is still struggling with imbalances in the supply chain and the historic mismatch in the number of job openings available and the still high but rapidly declining unemployment rate. Those who talk continue to provide speculation on when the blockages will clear. To the long-term investors like us, the key is that we believe that they will in due time. We are in the midst of an unprecedented experiment in both fiscal and monetary policy. The outcome of which is impossible to forecast. The possibility that the economy was overstimulated was highlighted in the spring by a significant resurgence in inflation. But as the first half ended, statements from Fed Chairman Powell indicated a keen awareness of the risk and a readiness to act against it. The markets evidently aligned with this notion as inflation hedges like gold and oil sold off, the equity market pulled back modestly, and the yield on the bellwether 10-year U.S. Treasury note retreated to the area of 1.5%. We do not read too much into short-term phenomena like these, suffice it to say that the Fed seems to be aware that its credibility is on the line here.
There is also the issue of the Biden administration’s somewhat radical tax proposals with respect to capital gains and estates. The best that can be said on this subject is that, as the first half ended, the momentum behind these initiatives seemed to be ebbing. Yet the political climate remains as inimical to capital (and capitalists) as it has been in a while.
Regardless, the most important economic report of the last six months for investors like us came just recently. It was that household net worth in this country spiked 3.8% in the first quarter of the year, to $136.9 trillion, propelled by broad gains in the equity market and in home prices. More importantly, is the fact that the ratio of household debt to assets continued to fall and is now back to where it was 50 years ago.2
The power of consumers in this economy have rarely carried more manageable debt levels relative to disposable income and have simply never held more cash than they do today. In June, the National Retail Foundation raised its outlook again. It now expects retail sales to grow 10.5% to 13.5% year over year. In the last month, the retail giant Target raised its dividend by a whopping 32%.
On February 19th, 2020, the market’s peak just before the pandemic took hold in the United States, the S&P 500 closed at 3,386. Then, it declined 34% in just 33 days, amid the worst global health crisis in a century. If you had bought the index at that epic top and were still holding it on June 30th of this year, your total return with reinvested dividends would be close to 28%. Never have we seen and don’t anticipate seeing again, a more vivid demonstration of Peter Lynch’s dictum that “The real key to making money in stocks is not to get scared of them.”
We continue to stay focused on our goals and stay the course as the year continues. I appreciate the confidence you place in me as your trusted advisor. I am honored to serve you.
Sincerely,
(Name)
Financial Consultant
Financial Planning Specialist
[1] https://www.investopedia.com/ask/answers/042415/what-average-annual-return-sp-500.asp
2 https://www.federalreserve.gov/releases/z1/dataviz/z1/balance_sheet/chart/