The month of October 2019 turned out to be quite an extraordinarily good month for investors. Even though the “news of the day” was, in a word, discouraging, the economy and the financial markets continue to move higher. I am sure that the impact of all the negative news and political strife we find ourselves in today has a psychological effect on investors. While it should not, it is human nature to assume the worst. I have to admit, after watching the evening national news you certainly would believe the world is on the brink of destruction. Who could be encouraged after hearing all of the negative reports?
Consistently over the last year I have been telling you that the economy continues to be strong and the controversy related to tariffs would mean absolutely nothing. Even though the financial press has tried to convince you that recession was inevitable in 2019, the economic facts never supported that conclusion. I wish I could explain to viewers of the financial press that the people that speak frequently on these shows have implied biases. It is not hard to determine these biases, but so many people believe the words without reviewing the background of the speaker. Hopefully, I can provide some facts that support my position in the following commentary. However, before I can jump into this enlightened conversation, I have to report the results of the month of October.
Consistently over the last year I have been telling you that the economy continues to be strong and the controversy related to tariffs would mean absolutely nothing. Even though the financial press has tried to convince you that recession was inevitable in 2019, the economic facts never supported that conclusion. I wish I could explain to viewers of the financial press that the people that speak frequently on these shows have implied biases. It is not hard to determine these biases, but so many people believe the words without reviewing the background of the speaker. Hopefully, I can provide some facts that support my position in the following commentary. However, before I can jump into this enlightened conversation, I have to report the results of the month of October.
Jennifer, Lucy, Harper, and Eddie Wilcox in New York City
For the month of October 2019, the Standard & Poor’s Index of 500 stocks was up 2.2% for the month. That index is up 23.2% for the year 2019, and over the last five years has averaged 10.8% per year. You may recall that I forecasted a year-end S&P 500 Index value of 3,100. Today, that index is at 3,037.6 and is moving in the correct direction for a year-end rally.
The NASDAQ Composite Index was the real winner of the month, up 3.7% in October. That index is up 26.1% for the year 2019 and has averaged 13.6% per year over the last five years. The Dow Jones Industrial Average was up 0.6% for the month of October and is up 18.2% for 2019. Over the last five years, that index has averaged 11.9% per annum. For purposes of comparison, the Barclay’s Aggregate Bond Index was up 0.3% for the month of October 2019 and is up 9.2% for the year 2019. For bond investors this has been an extraordinarily good month, but the five-year average on this index is only 3.6%. As you can tell from the above numbers, the three major market indexes all have averaged double digit returns over the last five years. However, the Barclay’s Aggregate Bond Index has only averaged 3.6% and, therefore, is roughly one-third of the major market indexes total returns.
It seems like for the last six or seven months, the financial press has screamed at the top of their lungs about the worldwide slowdown and the recession coming to the United States. Earlier this week, the unemployment announcements for the month of October seemed to belie all of this hysteria. Once again, the U.S. economy added new jobs during the month of October. Even though the so-called experts were only expecting modest growth with the General Motors Strike, the economy continued to be strong. The jobless rate ticked up a tenth of a percentage point from 3.5% to 3.6% during October, but you must recall that the rate of 3.5% was the lowest in this country over the last 50 years. Not only were the October numbers a surprise, the Department of Labor increased the number of workers for both September and August. How anyone under any definition can view these positive employment numbers as negative certainly belies all facts.
As I have mentioned so many times in these commentaries, the secret for the economy to remain strong is to keep people working. We also need to control the economy in a positive, but steady manner. While everyone likes a robust economy, that certainly is not what is best for investors. Stability is much more important than robust gains and losses.
Also, during the last week of October, the Federal Reserve announced a third cut to the Federal funds rate by 0.25% of 1%. What is most important about this rate cut is that the Federal Reserve is being preemptive in allowing the economy to slow down. What we all want is a U.S. economy that is growing at a stable but slower rate. If the growth rate turns negative, they will cut again.
I was asked recently what the difference would be between the 4th quarter of 2018 when the market sold off 20%, and the 4th quarter of 2019. I am often confronted by people who only compare the year’s previous numbers without understanding the external forces that control the marketplace. In the 4th quarter of 2018, the Federal Reserve announced that they would be increasing interest rates at least three or four times over the coming year. Also, the Federal Reserve has announced that they would be restricting the economy by allowing the bonds held by the Federal Reserve to run off and be redeemed, therefore, taking liquidity out of the economy. Contrast that to 2019 when the Federal Reserve announced that they have cut interest rates for the third time and would be willing to cut interest rates even further if the economy were to slow down at some point in the future. Basically, the difference is that of an accommodating Federal Reserve in 2019 and a tight policy Federal Reserve in 2018. When you evaluate stocks and bonds, the difference in those two scenarios is substantial.
I am probably one of the few people who actually read the economics and statistics on the back of Barron’s. I have been watching them for the last several months and I may have discovered something that the national financial media does not want you to know. It looks to me like the economy and its most vulnerable sector, manufacturing, have actually bottomed out. This seems to have a stabilizing effect on manufacturing as the economy continues to pick up in other sectors. Service sectors are extraordinarily strong, but manufacturing has been weak. I am forecasting now that contrary to an economy that is ready to turn down, it looks to me that this economy is actually ready to turn up. If I am reading the charts correctly, beginning in the second quarter of 2020 we should see an economy starting to grow again, as compared to an economy that is falling off a cliff as the financial news would want you to believe.
Also, it appears that the financial markets are telling us the same thing. Some of the European markets have turned around and are performing admirably. With all that has been said about the Chinese market, their year-to-date returns have been equal to the U.S., or better. As we have often addressed in these pages, the markets are predictors of the future. These markets would not be turning up if the underlying economy in these countries was turning down.
The NASDAQ Composite Index was the real winner of the month, up 3.7% in October. That index is up 26.1% for the year 2019 and has averaged 13.6% per year over the last five years. The Dow Jones Industrial Average was up 0.6% for the month of October and is up 18.2% for 2019. Over the last five years, that index has averaged 11.9% per annum. For purposes of comparison, the Barclay’s Aggregate Bond Index was up 0.3% for the month of October 2019 and is up 9.2% for the year 2019. For bond investors this has been an extraordinarily good month, but the five-year average on this index is only 3.6%. As you can tell from the above numbers, the three major market indexes all have averaged double digit returns over the last five years. However, the Barclay’s Aggregate Bond Index has only averaged 3.6% and, therefore, is roughly one-third of the major market indexes total returns.
It seems like for the last six or seven months, the financial press has screamed at the top of their lungs about the worldwide slowdown and the recession coming to the United States. Earlier this week, the unemployment announcements for the month of October seemed to belie all of this hysteria. Once again, the U.S. economy added new jobs during the month of October. Even though the so-called experts were only expecting modest growth with the General Motors Strike, the economy continued to be strong. The jobless rate ticked up a tenth of a percentage point from 3.5% to 3.6% during October, but you must recall that the rate of 3.5% was the lowest in this country over the last 50 years. Not only were the October numbers a surprise, the Department of Labor increased the number of workers for both September and August. How anyone under any definition can view these positive employment numbers as negative certainly belies all facts.
As I have mentioned so many times in these commentaries, the secret for the economy to remain strong is to keep people working. We also need to control the economy in a positive, but steady manner. While everyone likes a robust economy, that certainly is not what is best for investors. Stability is much more important than robust gains and losses.
Also, during the last week of October, the Federal Reserve announced a third cut to the Federal funds rate by 0.25% of 1%. What is most important about this rate cut is that the Federal Reserve is being preemptive in allowing the economy to slow down. What we all want is a U.S. economy that is growing at a stable but slower rate. If the growth rate turns negative, they will cut again.
I was asked recently what the difference would be between the 4th quarter of 2018 when the market sold off 20%, and the 4th quarter of 2019. I am often confronted by people who only compare the year’s previous numbers without understanding the external forces that control the marketplace. In the 4th quarter of 2018, the Federal Reserve announced that they would be increasing interest rates at least three or four times over the coming year. Also, the Federal Reserve has announced that they would be restricting the economy by allowing the bonds held by the Federal Reserve to run off and be redeemed, therefore, taking liquidity out of the economy. Contrast that to 2019 when the Federal Reserve announced that they have cut interest rates for the third time and would be willing to cut interest rates even further if the economy were to slow down at some point in the future. Basically, the difference is that of an accommodating Federal Reserve in 2019 and a tight policy Federal Reserve in 2018. When you evaluate stocks and bonds, the difference in those two scenarios is substantial.
I am probably one of the few people who actually read the economics and statistics on the back of Barron’s. I have been watching them for the last several months and I may have discovered something that the national financial media does not want you to know. It looks to me like the economy and its most vulnerable sector, manufacturing, have actually bottomed out. This seems to have a stabilizing effect on manufacturing as the economy continues to pick up in other sectors. Service sectors are extraordinarily strong, but manufacturing has been weak. I am forecasting now that contrary to an economy that is ready to turn down, it looks to me that this economy is actually ready to turn up. If I am reading the charts correctly, beginning in the second quarter of 2020 we should see an economy starting to grow again, as compared to an economy that is falling off a cliff as the financial news would want you to believe.
Also, it appears that the financial markets are telling us the same thing. Some of the European markets have turned around and are performing admirably. With all that has been said about the Chinese market, their year-to-date returns have been equal to the U.S., or better. As we have often addressed in these pages, the markets are predictors of the future. These markets would not be turning up if the underlying economy in these countries was turning down.
Caroline was a Georgia cheerleader, Reid was Spiderman, and Ava was a policewoman for Halloween 2019
In January 2018, the President announced his first major tariff announcement. As we are all aware, the markets went crazy during that cycle as each and every economist appeared on television to explain the world would surely end with the President’s tariffs. As they explained, these tariffs would quickly lead to recession in the United States, make inflation go up exponentially over the next few years and would create total havoc in the world’s economy. Absolutely nothing even similar to that has actually occurred. As I explained to you at the time, tariffs were such an insignificant part of the U.S. economy that surely such a minutiae could not possibly have had any type of material effect on the U.S. economy. It looks like that proved to be exactly the case. We were right – they were wrong.
What about inflation? We do not even have enough inflation in the United States to register the Federal Reserve’s mandate of 2%. So, my opinion is that the economists are either reading from textbooks that are out of date, or maybe they are just on television making an extreme position to get their names in the press. It is fairly clear now that the tariffs have had no material impact on the U.S. economy over the last two years. Only one person was the source of reasonable judgement in this matter. You are welcome.
These so-called experts were screaming at the top of their lungs that we were going to see an earnings recession sooner rather than later. Year-over-year earnings would completely evaporate and this would forecast the upcoming recession. As we are mostly through the reporting season for the third quarter earnings in 2019, the truth of the matter is that the earnings are almost flat year-over-year. No earnings recession has been noted by any of the major companies. What is even more bewildering is that fourth quarter earnings are now forecasted to be up close to 8% over the prior year. So, there is no major negative earnings announcements and, in summary, the financial markets could not be in a better place.
The best period of time for stock market performance is November through April. The average return during this time period is 6.62% and the market tends to be positive over 76% of the time. If you look at a chart of all of the time periods when the market performs well, this by far is the best.
So basically, we have a period where earnings are trending higher, interest rates are moving lower and the economy is stable. The most important characteristic of the economy is its stability. Not too hot, not too cold; the “Goldilocks” economy. Stable and just right. There is no reason to assume that over the next six months the economy will not continue to be stable. With lower interest rates, stable earnings and a stable economy there, is a high likelihood that the markets will continue to go higher.
Partner, Eddie Wilcox, and his family
in front of the Statue of Liberty
It looks like at the current time, with the political environment that we live in today, we may very likely have a democratic socialist candidate running against the current President. Every time I hear a candidate speech, I just want to ask them to illustrate exactly where such an economic concept has been successful. We know it has not been successful in Russia, Cuba, Venezuela, and to a lesser degree, Argentina. Certainly, China is not a socialistic economy even though it is run by Socialists. While certainly Sweden, Denmark and Norway have their socialistic economy concepts, these are relatively small economies in the world and hardly compare with the largest economy in the world.
One of the most striking examples of this concept is “Medicare for All”. This would eliminate private health insurance plans and turn over the medical healthcare in America to the government. This is one of the standard principles of socialists. They want the government to do more in your everyday life, not less. In my opinion, the government does virtually nothing better than the private sector except national defense. So basically, all of private insurance as we know it today would be eliminated and the government would be in charge of your healthcare for the remainder of our lifetime.
It is projected that if all of the insurance companies are eliminated, over 2 million Americans would be put out of work. Just as well as the Obamacare website worked five years ago, can you imagine the government, so inefficient that they could only handle the few million people covered under the Obamacare Act, covering medical insurance for everyone in America? Just envision your local DMV with their superior intellect and ability to function properly being responsible for your healthcare. Truly a scary concept that would be. They could not even handle the 13 million people on Obamacare, what are they going to do with 300 million? You know the answer.
The Wilcox girls in Central Park
And how would we all pay for this wonderful healthcare concept? Essentially, corporations in America would pay a fee to the government for this healthcare and presumably this would be in lieu of private insurance. As all of you will suspect with the efficiency of the government, this fee would almost surely rise year-over-year. Even though private insurance provided by employers is extraordinarily well-approved by employees covered by it, all of that would be ripped out of the hands of private insurers and turned over to the government for the future. I am not exactly sure who thought this was a good idea, but clearly I am not one of them. It would seem to me that if, as the polls tell us, 80% of the population that is covered by health insurance is happy with it, since this perceived Medicare for all is going to cost $52 trillion over the next decade, it might be cheaper to buy all of the uninsured a policy from a qualified insurance company.
The other concept that is clearly advocated is to tax the super wealthy. That concept only affects a relatively small part of the population and certainly people that are not super rich would support a higher tax on the wealthy. Recently, France also instituted a tax on the extraordinarily wealthy. Has anyone ever looked at the effect that this tax had on the economy?
According to Barron’s, “ Éric Pichet, a professor at Kedge business school in France, estimates that the now-repealed French wealth tax raised 3.6 billion euros ($4.01 billion) a year, but cost the nation’s economy some €7 billion annually in fraud and shrinkage of the tax base.” Obviously, when they announced that the French citizens would be paying the higher tax, wealthy taxpayers escaped to countries with lower taxes such as Switzerland. What they found out was that the biggest problem in administering the wealth tax in Europe was to value the assets. The U.S. would have exactly the same issue with valuation. Exactly how much would your business be worth if you were required to value it in a wealth tax? Do you think your personal home would be at the high level of valuation or at some lesser, liquidated value? Conceptually, fair market value is a moving target and either could be correct.
There is no question that the cost of administering a wealth tax would create daunting problems for an already overworked and undereducated Internal Revenue Service. To think that the wealth tax could collect anywhere close to the projections by these candidates is almost as illusionary as the candidates who believe that the government is more efficient than the private sector. The other mistake these candidates are making lies within their perceptions. The major problems in America to them are the ones that are not so problematic to most Americans.
If 80% of the population with company-sponsored medical plans is happy, why blow up the whole system to support the 20% that are unhappy? And to think that the U.S. government could administer any type of medical plan borders on the hysterically uninformed. I guess it does not hurt to take extreme positions, but I can assure you that if they believe the politics on the East and West Coasts agree with the politics in the interior of the country, they are woefully uninformed.
The other concept that is clearly advocated is to tax the super wealthy. That concept only affects a relatively small part of the population and certainly people that are not super rich would support a higher tax on the wealthy. Recently, France also instituted a tax on the extraordinarily wealthy. Has anyone ever looked at the effect that this tax had on the economy?
According to Barron’s, “ Éric Pichet, a professor at Kedge business school in France, estimates that the now-repealed French wealth tax raised 3.6 billion euros ($4.01 billion) a year, but cost the nation’s economy some €7 billion annually in fraud and shrinkage of the tax base.” Obviously, when they announced that the French citizens would be paying the higher tax, wealthy taxpayers escaped to countries with lower taxes such as Switzerland. What they found out was that the biggest problem in administering the wealth tax in Europe was to value the assets. The U.S. would have exactly the same issue with valuation. Exactly how much would your business be worth if you were required to value it in a wealth tax? Do you think your personal home would be at the high level of valuation or at some lesser, liquidated value? Conceptually, fair market value is a moving target and either could be correct.
There is no question that the cost of administering a wealth tax would create daunting problems for an already overworked and undereducated Internal Revenue Service. To think that the wealth tax could collect anywhere close to the projections by these candidates is almost as illusionary as the candidates who believe that the government is more efficient than the private sector. The other mistake these candidates are making lies within their perceptions. The major problems in America to them are the ones that are not so problematic to most Americans.
If 80% of the population with company-sponsored medical plans is happy, why blow up the whole system to support the 20% that are unhappy? And to think that the U.S. government could administer any type of medical plan borders on the hysterically uninformed. I guess it does not hurt to take extreme positions, but I can assure you that if they believe the politics on the East and West Coasts agree with the politics in the interior of the country, they are woefully uninformed.
Ford Smith with his painting at my house
For some reason, people tend to enjoy the personal accounts that I have of things that have happened in my 70 years. Therefore, I thought I would relay the time I actually ran across former President Clinton playing golf. In 2004, I was enjoying a round of golf on the famous “Blue Monster” golf course at Doral Country Club in Miami. Ironic as it is true, those golf courses are now owned by current President Trump.
As we were rounding the 13th hole, the drink cart girl informed us that she no longer had any vodka as the President had used up the last of it. I was excited to hear that then-president George Bush might be playing golf in front of us. She quickly corrected me to inform me that it was not President Bush, but rather former President Clinton. I was certainly excited to have the opportunity to meet him but did not want to interrupt his game. I did, however, think it would be neat to at least catch a view of him. It was almost hysterical to see the security guards riding around in golf carts in their dark suits and sunglasses. Obviously, they did not seem to be very hospitable and certainly I had no intention of disturbing the President’s game.
As the day grew darker, along with the influence of some form of alcohol other than vodka, my courage increased. Eventually, I just drove my cart right up to the President’s cart thinking, what could they possibly do to me on the golf course? He was smoking a cigar and I have to admit that former President Clinton was as nice and sociable as he could possibly be. He took the time to sign the score book I had with me that day and even made a point of going down and shaking hands with the guys raking the sand traps.
As we were rounding the 13th hole, the drink cart girl informed us that she no longer had any vodka as the President had used up the last of it. I was excited to hear that then-president George Bush might be playing golf in front of us. She quickly corrected me to inform me that it was not President Bush, but rather former President Clinton. I was certainly excited to have the opportunity to meet him but did not want to interrupt his game. I did, however, think it would be neat to at least catch a view of him. It was almost hysterical to see the security guards riding around in golf carts in their dark suits and sunglasses. Obviously, they did not seem to be very hospitable and certainly I had no intention of disturbing the President’s game.
As the day grew darker, along with the influence of some form of alcohol other than vodka, my courage increased. Eventually, I just drove my cart right up to the President’s cart thinking, what could they possibly do to me on the golf course? He was smoking a cigar and I have to admit that former President Clinton was as nice and sociable as he could possibly be. He took the time to sign the score book I had with me that day and even made a point of going down and shaking hands with the guys raking the sand traps.
President Clinton at the Blue Monster golf course
It was quite an interesting and memorable evening. It made me recall when President Clinton initially won in 1992, how the media called him fat, overweight, etc.. My personal impression having met him was he was significantly smaller than I am and certainly not as broad. Either he had lost a lot of weight since the presidency, or those accounts, like so many other things with the media, were misplaced.
On that note, come visit with us and discuss your goals and financial plans. If you are interested in discussing your specific financial situation, please feel free to call or email.
As always, the foregoing includes my opinions, assumptions and forecasts. It is perfectly possible that I am wrong.
Best Regards,
Joe Rollins
