You may have noticed that I took a couple months off from writing my monthly blog. During the highly debated election season, I opted to just take some time off rather than create any unrest due to the friction of the election process. Now that it is over and we are ready to move forward, I can get back to discussing some of the things that I find of interest without any political overtones.
In this blog I want to reemphasize again the strength of the American economy which I have been discussing all year. Contrary to what you hear in the media, the economy is strong and is getting stronger. No question about it, there are weak spots and there will continue to be weak spots for months to come. But clearly, there is light at the end of the tunnel, and it is time to position our portfolios for bigger and better gains.
Ava, Age 9, as a magician
for Halloween this year
I also would like to discuss some of the impressions I have regarding the change in the environment of investing over the last decade. Things have shifted so quickly the past ten years it is hard to believe that some of the companies that were once leaders are now laggers. I will try to cover some of those events for you.
Much has been said regarding the economy due to the election and what would happen if we had a “blue wave” in the Presidential election. That clearly did not happen and in fact there is much positive news from the election whether you want to believe it or not. I will try to point some of those items out for you, as well.
Before I do all that, I must explain the month of October. It was basically a down month, but mainly due to the final week of October leading into the election. For that week, the market was down 5%, basically wiping out all profits for the month. The real positive news came in November.
The Standard & Poor’s Index 500 stock was down 2.7% for the month of October, but is higher for the year 2020 by 2.8%. The NASDAQ Composite was down 2.2% for the month of October but is up a very satisfying 22.5% for the year 2020. The Dow Jones Industrials was down 4.5% for the month of October and is down 5.4% for the year 2020. And just for comparison, the Bloomberg Barclays US Aggregate Bond Index was down 0.5% for the month of October, but is up 6.4% for the year 2020.
Harper Wilcox, Age 11, as an Arctic huntress
and Lucy Wilcox, Age 9, as Harry Potter
While certainly October was a disappointing month from an investment standpoint, there is clearly strength in the financial markets; albeit it is difficult to identify given the avalanche of negative news related to the pandemic and election. Just as an example, the one-year total return for the S&P 500 is 9.7%. The NASDAQ Composite is up 32.9%. Even the Dow Jones Industrial Average is up a little bit at 0.3% for the one-year period there ended.
If you go back and read the blogs I have written for all of 2020, you will notice that I have consistently advocated that you stay invested at all times. The unfortunate truth is that the only people that lost money during the pandemic sell-off of March and April 2020 are the people that actually sold. I do not know how many ways we can say, never try to time the market, but yet there is always some investor that believes they have the absolute answer to market timing. They could not be more wrong.
The numbers above reflect the returns of the S&P 500 Index. Quite frankly, for this year, actively traded mutual funds are significantly higher than the S&P 500 Index. In many cases, the better managed funds have rates of return that are more than double the Broad-Based 500 Index. It is all about stock picking. The nest mutual funds have the best fund managers and we pick the best of the best. It is often said only 10% of the mutual funds outperform the S&P 500 Index. Yes, that may be true, but 10% of 6,000 available funds is over 600. We invest in less than 50 mutual funds throughout our entire portfolio.
For this entire year I have been emphasizing to you that the economy was much stronger than you realized and much stronger than is represented by the media. It has become a national embarrassment that so much of the media is now tainted by its own political bias and reporting of the news has become as obsolete as the buggy whip. I long for the days when Walter Cronkite would just read the news to me. I had no idea of the political leanings of Walter Cronkite until long after he retired. Who would have ever suspected that Walter Cronkite was very much a liberal-leaning person? You would have never known it from hearing his news reports. He should be the model for how all news reports should be handled today.
Reid Schultz, Age 5, working
for NASA this Halloween
For those of you who thought I was delusional for thinking that the economy was better, the news this month documented that reality. For the 3rd quarter the GDP was up 33.1% on an annualized basis. If you break it down to a quarterly basis that is roughly a 7.4% increase. That is the highest increase in one quarter ever in the history of American finance. Yes, I fully recognize that on an annualized basis the GDP is still down, but it is working its way back to zero. As I write this, the Atlanta Federal Reserve is forecasting an increase in GDP for the final quarter at 3.2%. If that quarterly increase becomes true, we will be at a very near breakeven for 2020.
Evidence of the increase in the economy is everywhere, but you don’t hear it in the news. The Institute for Supply Management has said its manufacturing index rose 59.3% last month. Incidentally, that was the highest since 2018. How could manufacturing be so strong in the face of such negative financial news? In addition, the forward-looking component of new orders for manufacturing was the highest it has been in over 17 years. This is extraordinarily good news for the economy going forward.
The unemployment picture is improving. Even with many states continuing to restrict their workers from their jobs, the unemployment rate fell to 6.9% during the month of October. While certainly it is a high rate by recent standards in the U.S, it is a vast improvement over just four months ago and the components of unemployment were extraordinarily encouraging. Much of the improvement in unemployment is related to hospitality and restaurants, which are just starting back to work.
Finally, businesses are going back to work and putting their employees back on the job. I forecast as we move forward, we will see greater improvements in these labor reports. What is very surprising to most people is that the U.S. consumer is strong. Retail sales have now risen in five straight months - the highest they have been even prior to pre-pandemic level. Credit card spending is actually up, while credit card balances are down. The average consumer credit score is at the highest level in the history of the U.S. Don’t you find it astonishing that the media is forecasting the demise of the average consumer, yet the economic facts are completely different?
The news on the vaccine is nothing short of remarkable. Pfizer reported their preliminary results of the vaccine with an over 90% effective rate. The FDA had forecasted an effective rate of 50% to 60% on these proposed vaccines, but a 90% rate is beyond anyone’s anticipation. When you get a 90% effective rate on a vaccine, you are talking about an effective rate similar to that of measles, smallpox and chicken pox. Those particular viruses have a vaccine rate in excess of 90% and this vaccine holds the same promise of success. As we roll out the vaccines over the next 12 months, you will see America return to normal. People will no longer be in fear of crowds, travel, staying in hotels or even eating at their favorite restaurants. I forecast that by this time next year, this will all be a bad dream.
Caroline Schultz, Age 6, as
a colorful butterfly
The government has done an extraordinary job of funding and expediting the technology for these vaccines. They have pre-funded roughly two billion doses for the vaccine, not only for the U.S but for the rest of the world. Four to five vaccines could be fully authorized for emergency use prior to the end of 2020. As these vaccines work through the population, you will see corporate America gear back up to its pre-pandemic strongest economy ever. Remember we only need 50% of the population to get vaccines to reach mass immunity – very exciting.
The year 2020 will be looked at as an extraordinary year in many regards. But one thing that I think will clearly be proven is that the shutdown of the American economy was a serious mistake. Admittedly none of us knew exactly what might happen and what the effect would be. What we are finding out though is that as the economies that were shut down have begun to reopen, the virus is spreading through areas where it had not been before. We are now seeing a serious rise of cases in the Midwest, which previously had avoided any major virus spread. The state of Georgia was one of the first states to reopen and to this point the pandemic has been under control. The economy continues to strengthen in Georgia as we move forward with virtually all segments of industry now open.
The reason I think we will look back on this time period with regret of shutting down the economy relates to the $3.5 trillion the Federal Reserve had to borrow to stimulate the economy. It will take generations to pay off this much debt, which will be a drain on future Federal budgets. I fully recognize that without this deficit spending the economy could have been much worse, and the outcome could have been different. However, the economy was shut down by governmental agencies as businesses that could have and wanted to work were prevented from doing so. Even to this day many states are not open for their economy. While there is some evidence that their infection rates are lower, I wonder whether anyone can justify the economic cost of these shutdowns. The issue for school closings is complete nonsense – I will not go there this month.
Erik Kramschuster’s dog, Knox,
as a mighty lion
While certainly it is a tragedy that people continue to die of the virus, I personally think that the deaths of this virus is well overstated. While certainly it is true that deaths recently are averaging at about a thousand a day, many of the experts contend that these deaths are mainly older people at the end of their life. There is very little evidence that younger people are dying; the closing of schools is doing much more harm to the kids than the exposure of the virus. You do not hear about it too much in the press, but even before the pandemic roughly 7,000 people/day die in the U.S., and that is always a tragedy. Whether the pandemic increased these numbers dramatically is debatable. What is not debatable is that the shutdown had dire financial circumstances to the people prevented from working which may take generations to overcome.
It is now time for us to move forward and put industry back to work with the anticipation of a vaccine in the very near future. It is forecasted that 20 million Americans will get vaccinated each month going forward. There is light to be seen at the end of the tunnel.
As a commentary of the election, those who forecasted a “blue wave” throughout the United States were clearly wrong. There is a great deal of positivity in these election results that the average person does not even consider. All the polls showed the Democratic party winning vast majorities in virtually every state. However, that was not the case, and, in fact, they lost ground in many regards. Even though the Democratic party won the White House, they did not win the Senate and they lost ground in the House.
A divided Congress is truly great for stock market investing. The biggest shock in this election was that the majority party in the House actually lost ground. How could the polls have been so wrong when it came to the election results? By losing six seats in Congress, it appears that the voting public is becoming more conservative rather than more progressive. The wild forecast of the defunding of the police and lawlessness in some states led to a backlash of conservative voting.
The face of education in America today
How could you possibly explain how the state of Florida, with its elderly population, could have possibly voted for a President that the media solely blamed for the pandemic? Throughout the voting in the United States it was clear that conservatism outweighed progressive causes. That is very much a positive for the financial markets. A Congress without any ability to increase taxes, increase regulations or slow the growth of business with progressive actions is very much pro-stock market. Therefore, all the dire projections of a negative regulatory environment under a “blue wave” government will not happen for another two years at least.
I was sitting around thinking about the changes that have occurred over the last decade and how extraordinary some of those have been. When I first started in the business, the two giants of the American industry were General Electric and ExxonMobil. If you have followed their stock prices, you would notice that they are no longer dominant. GE is barely above survival and Exxon is cutting back while trying to protect what was once the most profitable company in the world. No longer do the oil companies control the price of oil and, therefore, while the consumption of oil is down, the price of oil has plummeted. Additionally, there have been so many other changes that you have to look at from a bigger perspective.
Who would have ever thought that Netflix, which was a company that used to rent DVDs by mail, could now be bigger than all the broadcast networks combined? Who would have ever thought that we would see CBS, NBC and ABC overtaken by a total streaming company?
Who would have ever thought we would see the cab industry basically eliminated? Uber and Lyft now control the ridesharing business and are putting many of the cab companies completely out of business. Here in Atlanta, virtually no cab companies are profitable.
Rollins & Van Lear, P.C.’s Morgan Miner
enjoying a sunset on the coast
Over the last decade, we have seen the explosion of Google. They built the better browsing service and now are hugely profitable. Would anyone prefer to own Proctor & Gamble with a 25 multiple as compared to Google with a 29 multiple? That would be an easy selection for me. Who had ever heard of the company Facebook 10+ years ago? Can you even fathom that 1.8 billion people log on to Facebook daily around the world? If it is true that there are over 7 billion people on this planet, then more than 20% of those people log on daily to this simple software application. When you consider that a large portion of that population does not even have computer applications, that makes that number even more stunning.
There is so much criticism of Amazon today by people that really do not understand the significance of that company. They have singlehandedly created a third-party manufacturing platform for small businesses to sell their goods. Yes, they are a dominant company, but they provide an extraordinary service that has taken the place of shopping at brick-and-mortar. I would never even consider driving to a mall to buy something when I could buy it from Amazon and have it delivered within a couple days.
Oftentimes, when you go to the store, they do not even have what you want. That would not be the case on Amazon since they have virtually everything. The people that criticize Amazon truly do not understand the positive economic benefits it brings to the economy. I was reading an article last night that forecasted that both Amazon and Apple would have sales in excess of $100 billion during the fourth quarter of 2020. Here is Amazon, which was hardly a company at all 10 years ago, and Apple 10 years ago that was virtually bankrupt. The past decade has been nothing short of breathtaking.
Those who expressed concern regarding the government interfering with Big Tech really do not understand how ineffective any challenge would be. First, technology is forever changing and you only have to look at IBM to understand that. At one time IBM was the most powerful tech company of them all. Today, it is an afterthought of a shrinking market taken over by entrepreneur-type companies. Who would have ever thought a company like Apple, making consumer goods, could become, by far, the most profitable company in the United States? If challenged by the Justice Department, it would take decades through the court system; you only have to look at Microsoft’s history to understand the impact.
My bird friend visiting my deck in Florida
Even though the Justice Department challenged Microsoft on antitrust, anticompetitive grounds, for over 10 years during that same time period Microsoft stock increased over 10 times the price that it started. However, none of these tech companies are immune from new technology. As new companies develop better and more technology, the names we know today as Tech Barons are likely to pass by the wayside.
There is no question that the last 10 years have been an extraordinary time in American finance. Things have happened that no one could have ever forecasted or believed. I also believe that these are the types of changes in technology that will keep the American economy strong. We have the best technology in the world and there is no one even close to second. As long as we channel that American Spirit and increase the economy by creating new jobs with new technologies, no amount of governmental interference or regulation will slow that down. We now have an opportunity for the next several years to build the economy back to where it was and growing again. I think we are only a short time away from that happening. If you want to be part of growing your retirement dollars for retirement years, you need to be fully invested in the American growth economy, which today is so clearly represented by technology.
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
