Tuesday, December 10, 2019

Happy Holidays and Giving Thanks For a Great Investment Year

We are closing in on the end of one of the best investment years of the decade. We are now enjoying one of the best economies of all time in the U.S. with unemployment at a 50-year low. We have seen the GDP in the United States hold up and more Americans are working now than have ever worked in the history of America. It is just hard to believe that when you watch the nightly news that they are even talking about the same country as the facts unfold. I will try to cover all of these subjects in this posting and hopefully provide some clarification for you. ‘Tis the season to be thankful.

Ava with a sand structure
in Treasure Island, Florida

When the first tariffs were proposed by President Trump in January of 2018, the so-called experts forecasted runaway inflation, a decline in GDP, and a wholesale lay-off of employees in American manufacturing. How could they have been so clearly wrong and yet so sure of their projections? As we close the two years of 2018 and 2019, none of those horrible economic events actually occurred. In fact, the economy continues to be strong, unemployment continues to be on the upswing and the financial markets have reflected positive trends in both of those years. As I told you in my writings that none of this would actually occur, I feel some level of gratitude that my projections were better than theirs.

I have a lot of topics to discuss in this posting. I want to talk briefly about the political atmosphere as we see it in America today and the economic effects of the proposals of the candidates running for the highest office in the country. I want to discuss the change in equity investing and what has happened over the last 10 years with the classic textbook 60/40 equity bond mix. However, before I can begin all of that truly exciting information, I want to cover the excellent financial results of November 2019.

The Standard and Poor’s Index of 500 stocks had a very excellent month in November where they were up 3.6%. For the year then ended November 30th, that index is up 27.6% and for the 10 year period then ended is up 13.4%. The Dow Jones Industrial Average also had an excellent month in November of 4.1% and year-to-date is up 23%. The 10 year average on that index is 13.3%. The NASDAQ Composite was the star performer during November, up 4.6% and is up a sterling 31.9% for the year 2019. It also leads the 10 year average index up 16.3% per year over the last decade. In order to form a comparison, the Barclay’s Aggregate Bond Index was exactly zero for November, up 8.7% for the year 2019 and has averaged 3.5% over the last decade on an annual basis. This information is what I will relay later as a change in thinking regarding equity/bond investing. As you can tell, the Barclay’s Aggregate Bond Index was up 3.5% while the three largest indexes were up high multiple digits. For a basis of comparison, bond investing has been pretty much a loser over the last decade. While the bonds have done well in 2019, up 8.7% for the year, you will note that over the last three months, even though interest rates have been cut by the Federal Reserve during that time frame, the Aggregate Bond Index is actual -0.4% over the last three months. As a comparison, over the last three months the S&P 500 has been 7.9%, the Dow Jones Industrial Average up 6.9%, and the NASDAQ Composite up 9.1%.

You do not have to have a long memory to recall that during the summer of 2019 all the so-called economic experts were projecting recession and a swift downfall in the stock market leading into the fall. The exact opposite has actually occurred. The economy has actually strengthened and would appear to be, while not rip-roaring hot, quite satisfactory at a 2.1% increase in GDP for the third quarter of 2019. As I have often mentioned in these writings, you do not want the economy too hot which would force the Federal Reserve to increase interest rates, nor too low which would stall the economy and throw the country into recession. You want the economy to be in the 2%-3% GDP increase, which is the “Goldilocks Economy”, not too hot, not too cold. That is exactly where we are today.

On Friday of this week, the Department of Congress announced a huge increase in employment during the month of November. The increase was so large it took all of the so-called experts by surprise. In fact, actual numbers were over 100,000 greater than the projections for the month and to add to better news the prior months were also revised higher. In addition, unemployment dropped to 3.5%, which is, of course, the lowest in the United States since 1969; a 50 year period. In addition, wages were announced to be up 3.1% year-over-year and job participation was announced as the highest level ever since they started keeping the index. While it is true that GDP in the United States has decreased from the 2.9% for all of 2018 to the 2.1% rate in the third quarter of 2019, I argue that is a positive move. Recall in 2018 when the Federal Reserve increased interest rates three times, which led to a selloff in stocks in the fourth quarter of 2018. This year they have cut interest rates three times which leads to higher liquidity in the economy and higher stock prices. In addition, we are seeing positive attributes throughout the economy. For months you have been reading about the collapse in the manufacturing environment in the United States, and it is true that manufacturing has softened. However, despite the projections that manufacturing would fall off a cliff due to the tariffs, it has in fact has stayed in the expansionary percentage. The employment report indicated that factory jobs were actually up 0.6% in the month of November which caught most so-called experts off guard. While manufacturing has slowed down, the fact that workers continue to find new work tells you that it is not impacting the economy. More Americans are working.

Partner Robby Schultz with 30-year client Mary Trupo

One key prior indicator of an upcoming recession relates to the increase in the price of oil. Virtually all of the recessions since the 1950’s have been created by a rapid increase in the price of oil. I vividly recall waiting in line to buy gasoline when I first came to Atlanta in the early 1970’s. In fact, many times you would wait in line and when you finally made your way to the pump there was no gas to be bought at any price. At that time the United States was importing virtually all of its oil from the Middle East since it was so cheap as compared to the United States. Of course, this was a flawed philosophy given that we became dependent on imported oil and when the Middle East shut down oil sales to the United States due to war, the United States suffered dramatically. This led to a recession in the United States that slowed growth for almost a decade. Many of you recall the double-digit inflation we had during the Carter Administration which was mostly due to higher oil prices. Inflation did not break until 1982, and then the economy exploded.

So, what we are seeing today is that the United States is almost self-sufficient in oil. Due to technology and the innovation of new oil drilling techniques, the United States only imports some oil from the Middle East and is actually now exporting oil to the rest of the world. Last week OPEC announced something that we all knew was true. They realized that they cannot compete with high oil prices and announced that they would further decrease their prices in order to stimulate demand for their products. But in reality that has created a vast diverse supply of oil throughout the world, keeping prices down. It was announced recently that the oil rich Permian Basin oil fields in west Texas are actually laying off employees. This region produces 14% of all the oil produced in the United States and the fact that they are laying off employees tells you that there is not enough demand or that the price is too low. This one fact alone should stimulate the economy as virtually every segment uses oil in some fashion which will keep prices down for several years, preventing any shock to the economy for higher prices. This is very good.

Just as I have itemized the positive attributes of the economy today, I am amazed that the current political environment promotes the people who believe the economy needs an overhaul and are proposing vast changes. If you analyze all of the politicians running for the highest office in the country, you will find one overwhelming consistent policy proposal. Each and every one of them seems to be proposing higher income taxes, one way or another, on virtually everything in the economy.

At the end of 2017, Congress passed a lower corporate tax rate, which made U.S. corporations more competitive in the world. By cutting the corporate income tax rate from 35% to 21%, corporations now enjoy competitive tax rates. Corporations were encouraged to come to the United States to do business by virtue of having a lower tax rate, but all of the politicians running for the highest office will propose increasing the rate that has helped so many American corporations.

37-year clients Roger and Linda Moffat on his 70th birthday

While everyone would like to have a better health system that is more affordable, none of the proposals to date seem to be economically feasible. A Medicare-for-all would cost trillions of dollars over the next decade. I have seen no proposals that would even come close to funding that expenditure. 80% of the U.S. population has insurance today, with the majority being satisfied with that coverage even though it is too expensive. In my opinion, to basically scrap 80% of the population’s insurance rather than focus on helping the other 20% is almost ludicrous in its implementation.

I look at countries like Argentina and Venezuela, which have basic socialistic concepts, to understand how silly a move to the left in the United States would be. The inflation in Argentina borders on 40% annualized. The GDP for last year was -27%. The only way they can compete in international commerce is by devaluing their currency, creating extraordinary inflation in their own country. Venezuela is even worse, where it is projected that their inflation may be as high as 10,000% in 2019. Everyone knows that Venezuela is on the verge of collapse and yet the people of Venezuela cannot change their government by political vote. We have all seen the shortages of food and common household items throughout Argentina and Venezuela, much of it caused by undemocratic economic policies.

As I have often said, I do not watch the news on a regular basis since I find the reporting to basically be social comment and not news. I long for the days of Walter Cronkite, who would come on and read the news and just tell me the facts. I have no desire to know the political leanings of the commentator since I feel qualified to make that determination on my own. But when I do watch the news, I am completely flabbergasted at the inaccuracy of the stories being reported. All you have to do is read Yahoo any day and know the 20 or 30 lead articles.

I am also amused at the current impeachment hearings going on in Congress. Since there is absolutely zero chance that the President would be convicted in the Senate, the democratic hearings border on ludicrous. The way I see it, the intent is to gain facetime on TV, which would appear from all rating results that most Americans really do not care. As for the facts backing up the proposed charges of impeachment, I am somewhat confused by the lack of seriousness of the charges.

Ken and Una Dooley's grandchildren: 37-year clients, 14 parents, and 19 grandchildren

First off, I have never been much of a fan to use U.S. taxpayers to support governments that could easily support themselves. The fact that we are giving the Ukraine $400,000,000 should raise the first concern. However, if, in the better judgement of Congress and the President, we elect to give them any money whatsoever, I would demand and expect my President to insist that the government getting that money should have a full-blown study of corruption. The fact that we would knowingly give any country money to support a government that was a hotbed for corruption would appear to me to be a dereliction of duty. If, however, there is an impeachment vote, as there is likely to be one in the House, the trial in the Senate will be a farce that this country will regret for generations. What is even more fascinating to me is that for a country where we are having the best economic years in generations and more Americans are working than ever in the history of American finance, we are seeking to remove the President while the economy is so good.

When I was in school, as well as when I first got into financial counseling there were certain standards in the financial world that were above reproach. These assumptions were that you would always have a diversified portfolio of some stocks and bonds - higher towards stocks as you were younger and more towards bonds as you got older. The golden rule, so to speak, was that whatever your age was would be invested percentage-wise in bonds and the balance in stock. The older you got, the higher the percentage in bonds. In fact, I hear virtually every day of my financial life someone quoting that preamble to being above reproach and not even subject to conversation. For the last decade I have been saying that this concept was an error and fortunately, I have been correct.

Recently, Bank of America/ Merrill Lynch came out with a pronouncement that rocked the financial community. Basically, the headline said that the 60/40 rule was no longer relevant and is incorrect. What a high level of heresy when one of the largest brokerage houses in the world proclaims a financial concept, rigid and set in stone, to be inaccurate for the next decade. This is exactly what I have been explaining to my clients for a decade, but to have Merrill Lynch actually promote and encourage my thinking was fulfilling. However, to the rest of the financial community, outrage was everywhere and proclamations that they must surely be wrong were widely printed.

The Dooley grandchildren

As I pointed out when I read the statistics for the last 10 years, the performance of the three major indexes was around four times as high as the performance for the aggregate bond index. To give up that level of performance has hurt many portfolios over the last decade and I suspect, in many cases, has led to sub-standard performances on a year-over-year basis. But where do we stand today?

As I write this, the 10-year treasury is at 1.8% at the current time. My projection for 2020 is that same index will go up to 2.3% sometime in 2020 due to a strengthening economy. I had projected for the end of 2019, a stock market of 3,000, which I later increased to 3,100. Today we are above those thresholds, but I once again project a stock market increase in 2020 of 10%. So, if my projections are correct, the bond market will lose money in 2020 and the stock market will increase in value.

My opinion is that you can never make the assumption that any allocation of stocks and bonds is relevant unless you take into consideration current economic environment. While over time ratios may prove to be better, it would seem that economic circumstances could change from year-to-year. At the current time, an over-allocation of bonds or a 60/40 asset allocation almost assures an underperformance in your portfolio.

As we close the year after great financial returns in 2019, I think it is time that each reader of this posting considers their own personal financial circumstances. You would absolutely be shocked to know how many young couples I meet that have children but do not have a will to take care of that child under their simultaneous death. I bet that more than 50% of the readers of this posting do not even have a current will, a Healthcare Directive in their state or a financial Power of Attorney. People do not think they are ever going to die so they never seem to get around to handling those very important legal documents.
I do not know any young couples that do not need life insurance for the care of their children. Term life insurance is so outrageously inexpensive and I do not know anyone who does not need it. I am not talking about expensive whole life insurance which is, contrary to the industry’s belief, not an investment but merely an insurance product. Yet, so many people only have life insurance provided by their employer. As is obviously the case, if you get sick and lose your job, you lose your insurance. If you change jobs, you lose your insurance. Everyone under the age of 60 should have a personal term life insurance policy to protect their family in the case of their death. I am willing to bet that most people reading this posting do not.

A few years ago, we saw a case where a client who had never gotten around to updating his IRA beneficiary died unexpectedly. I am sure you can imagine how upset his current wife was to find out that his ex-wife was still listed as the beneficiary. Many people probably do not even know who the current beneficiaries of their 401(k), IRA’s and life insurance are. It only takes a second to confirm the beneficiary, yet most people do not do it. We saw the other day a case of someone who had named a Trust as the beneficiary. Unfortunately, the Trust never existed. It is a simple and very common process to name your spouse as the beneficiary, and your children as contingents. Yet, the vast majority of accounts we take over do not have any contingent beneficiary designations on file. As we close this great year, check these for yourself.

Since they changed the laws, virtually no one falls under the Estate law. Therefore, it is imperative that you work hard to eliminate probate in the case of an early death. As an example, a husband and wife may have taxable accounts in their individual or joint names. For any account that is in an individual name, probate will be required. While I understand someone may have a reason to keep certain financial assets in their individual name, they can always put a “transfer on death” designation on the account and accomplish the same goal of avoiding probate. Your house(s) should also be in joint names if you have a long-term marriage. Basically, you want everything to pass from one spouse to another at death without probate. Every day we see where clients have multiple checking and savings accounts in their individual names and in some cases, ones that their spouses are not even aware of. We see assets strung over five or six different brokers, banks, etc. and yet many times the spouse is not even aware of their whereabouts. We highly recommend you do your best to minimize the number of accounts you maintain as well as their locations, and ensure that all are set up in a way that avoids probate.

The Rollins family sleighing into the holidays!-
Josh, Joe, Ava, Dakota and Carter

As we close out this year, which has been quite profitable from an investment standpoint, I hope that you look into the simple items above. As you have time off for the holidays, review all of your legal documents, beneficiary designations and life insurance needs. While we sell absolutely zero products, I am a registered life insurance professional and can advise on where you can buy it commission-free. We can also help you with your beneficiaries and give you advice and referrals for people to draw up legal documents. Do not let another year go by without reviewing these simple financial requirements for the future. It is very important.

We hope all of your families have a joyful holiday season and we look forward to meeting with you at any time regarding your financial needs. I see so much money uninvested nowadays, and to think that the S&P made 20+% returns this year and you have cash sitting in a money market making less than 1%. Wow!

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