Saturday, December 11, 2021

“Patience is bitter, but its fruit is sweet.” - Jean-Jacques Rousseau

From the Desk of Joe Rollins

I am starting to feel like the famous former New York Yankee’s catcher, Yogi Berra, when he quipped, “It’s like déjà vu all over again.” The last several weeks of trading have reminded me, once again, of what took place in March of 2020. At that time there was irrational trading based upon rumors, innuendos, and just outright lies. The market would move 1,000 points one way or another based on information regarding the virus. We saw all types of exaggerated trading, but we also learned a valuable lesson during March and April of 2020. I am going to explain all of that in this posting today, so you can hopefully understand it.
Joe and Ava at the Lincoln Memorial
I also want to try to explain why stock prices at these levels are neither irrational nor exuberant. The key component of that valuation relates to long-term interest rates and that offers the explanation. In addition, I want to give you my feelings related to my recent trip to Washington, D.C. I have not been there for a few years, but this reminded me so much of the many things in government that turns off Americans.

I also want to better explain some of the implied hidden tricks in the “Build Back Better Act” which has recently passed the House, but not the Senate. A better title for this would be the “Build Back Broke Act.” I hope to explain some of those provisions. There is so much volatility and so much misinformation in the financial news and I want to focus on how good the economy really is as compared to the negative news we all hear on a daily basis.

Lastly, but most importantly, I want to explain why it is true today that Americans are back to work. The evidence is incredibly overwhelming, and it is staggering to see the misperceptions as reported in the financial news. Yes, we have many, many problems, but what we now know is that we thought the economy was great in 2019, but this economy today is even better. The Federal Reserve Bank of Atlanta is forecasting 8.6% GDP growth in the 4th quarter. Wow!

Before I cover all those interesting topics, I must give you the scorecard for the financial markets for the month of November. It was honestly quite a good month up until the last two trading days of the month. What we saw was gigantic-sell offs on Good Friday and the last two trading days in November. This was based on the threat of the new Omicron virus that broke out in South Africa. Wild swings in the market during those last few days brought the month of November basically to break-even. Overall, it has been a fabulous investment year!
Alexis Chambers (Rollins Financial Staff) and Evan Bentley at the University of Virginia
The Standard and Poor’s Index of 500 stocks lost 0.7% in the month of November, yet year-to-date is up 23.2%. It is interesting to note that since the low of March 2020, the S&P 500 Index is up almost exactly 80%. During the month of November, the NASDAQ Composite was actually up 0.3% and is up 23.3% for the year 2021. The Dow Jones Industrial Average was down 3.5% during the month of November but is up year-to-date at 14.6% and up 18.5% for the one-year period ended in November.

I always like to give you the Bloomberg Barclays Aggregate Bond Index just for a comparison between bond returns and stock returns. This index actually grew in November at 0.2% but is down 1.5% for the year 2021 and its return for the one-year period ended November 30, 2021, is negative 1/3%. I have been telling you and warning you in these postings for years that bond-investing is almost assuredly going to lose money in the coming years. This has proven to be so true, and it is likely that we see additional losses into 2022.

It seems like every month or so we get a new variation of the virus that for reasons not totally clear to me have a major impact on the stock market. As you recall in 2020, we suffered massive losses during March and April of that year due to the perception of the danger that the virus would bring to the American economy. I told you at the time that the sell-off was ridiculous and you could not even comprehend the value of $3 trillion thrown all at once into the economy by the U.S. government. Fortunately, I was right, and we enjoyed one of the best financial years of all time during 2020. What we learned as a valuable lesson during that time was that only those people who try to trade around major market declines will lose money. If you stay invested and continue to treat your investments correctly, you will be much better off than the people that try to time the market due to perceived financial news. As the title of this posting implies, it is not easy to suffer though market declines, but it is those that do stay invested that enjoy the benefit of higher portfolio values in the future.

During November, we actually had one day where the market reversed over 1,000 points on the news that only one patient had been found at that time in the United States with the new version of the virus, which was first located in California. It is hard to believe that in the middle of the day, market traders can the Dow Industrial Average around 1,000 points over such incredibly trivial news. First off, it was only one case, and this country is significantly better prepared now than it was in March of 2020. The weirdest part of this major sell-off was that the news contained information that was incredibly meaningful. The doctors in South Africa reported that this version of the virus was highly transmittable, but the people that currently had this strain of the virus were having very mild symptoms, and none had been critically ill. We know almost nothing about this new variant of the virus, yet traders took it to their advantage to move the markets in a negative manner.
Dakota and Ava in front of The White House
On Black Friday after Thanksgiving, the markets were down dramatically, but as I told many clients, that move was absolutely meaningless. What you have on a day like the day after Thanksgiving is very low volume and virtually no trading activity. The traders take advantage of this situation by moving the markets dramatically one way or the other. Why anyone would be even remotely concerned about trading activity on a given day with low volume belies the reason behind any type of investment philosophy. We saw incredibly volatile trading action during the month of November and to the start of December. However, none of that was terribly unexpected nor really means anything in the long run. Even with this heightened volatility recently in the market, you should recall that the returns this year have been quite extraordinary. Last year the S&P earned close to 20% and this year the S&P is likely to earn 20% again. Think about the very remote possibility of anyone forecasting a return of over 40% in the time frame when a pandemic was controlling basically the entire world’s economies.

There was also high volatility when the labor reports came out on Friday after the end of November. The market sold off dramatically since the number of new jobs was not in keeping with the forecast. Every time I see a selloff like this, I think that we are focused more on the people that make the projections rather than the numbers themselves. Maybe in this case the projections were wrong, and the numbers were right. Notwithstanding the missed projections, the numbers from the labor department for November were extraordinarily positive. Maybe you didn’t read anything beyond the headlines, but I will give you a few of the facts. In the week preceding the labor report, we got news that the new unemployment claims fell to a 52-year low. Let me repeat that just for emphasis. People filing for unemployment that week was at the lowest level in over 52 years. If nothing else that should tell you dramatically the direction of the labor market.

Did you read anywhere in this November labor report that there were 1.1 million new jobs created? Also, for the first time in a long time, the labor force actually grew by close to 600,000 people. I have written many times in these postings that as soon as we got rid of the government subsidies to the unemployed, people would get off their couches and actually go back to work. This month we are seeing 600,000 people now seeking jobs that were not seeking them previously. In addition, the unemployment percentage fell from 4.6% to 4.2%. We are now approaching unemployment levels that comparable to pre-Covid employment.
Dorothy's Ruby Slippers from The Wizard of Oz at the Smithsonian National Museum of Natural History
It is believed by economists that each employed person directly or indirectly supports six additional Americans. This report may include the people in their households, but also includes the employees of the stores they frequent. Indirectly they support the shopkeepers and those employees of the store and other places where they spend their money. Envision those 1.1 million new jobs in one month providing financial support to over 6 million Americans. How anyone can read any of these numbers as a negative, obviously has a political bias that is not represented by the numbers in this report. Look at the year over year numbers and you will see the improvement. One year ago, there were 10.7 million workers in the United States out of work. Today, there are 6.8 million. That is a 36% improvement, year over year. What is even more interesting today is that there are almost 11 million posted job openings and there is only 6.8 million unemployed in the United States. As you can tell there is a high likelihood that many of these unemployed will be absorbed in the coming months and improve the economy even more.

Also written in the report but not emphasized on the financial news is that average hourly earnings rose 4.8% year over year. That is an incredible increase on average for the 156 million employed Americans. However, in given sectors of the economy, those wage increases were significantly better. In leisure and hospitality, the increase was 13.7% higher and 8.9% higher for transportation and warehouse. There is a major movement to increase wages throughout the economy and that can only be good news for both the workers and for the economy in general as the workers have more disposable income.

There was even good news regarding inflation during the month of November. When the current President took office, West Texas Crude Oil was trading at around $42. During the month of October that same price was close to $85 a barrel or basically doubled during the period of this current Presidency. As I quoted previously in these postings, when you cut off the supply as this President did, you are going to have a gigantic increase in the price to consumers. Since the price of oil effects virtually everything we buy, you would expect inflation to move up dramatically when you had a 50% increase in oil. I think realizing their mistakes, the current administration went around begging Middle Eastern countries to produce more oil to keep the price down. We can all agree that depending on the Middle East in the case of a commodity we absolutely have to have, would clearly be a danger going into the future.

It was argued by Washington that cutting off the supply of oil would have little effect on inflation. They could not be more wrong. Also, they have argued that the $2 trillion “Build Back Better Act” would not hurt inflation but would in fact help it. For any of you shade tree economists, try to visualize throwing $2 trillion into the economy and not creating inflation. That would be the economic bonanza of all time if it were true. However, both actions by the current administration have dramatically moved up the fear of inflation from investors. Oddly, information is very good for stocks and bad for bonds.

But in November the price of oil actually fell fairly dramatically down to $66 a barrel. It is still up 50% for the year, but no longer up 100% as before. I think it is fairly clear that the swift move-up of inflation during the summer, was as the Chairman described, “transitory.” Even though he has abandoned that term it appears to me that he was actually correct. There will be a move up in pricing, but it will not be a crippling runaway inflation as we saw in the 1970’s.
The Capitol Building from our hotel room
I recently went to Washington, D.C. for a tax seminar, but I decided to arrive a little bit early to do some sightseeing with my family. It has been several years since I have been in Washington, D.C. but the vastness of it is always a little bit staggering. These governmental buildings encompass an entire block and they are huge and overwhelming in their size. I one time had a client seeking an FHA loan for his business. On behalf of that loan, I was asked to go to Washington to the Federal Home Administration to lobby for its approval. As I walked down the halls of this building, not only was the building itself enormous, but in each office at least three desks were jammed in with people busily working. I thought to myself at that time, what on earth could all these people be doing since I rarely ever hear about anything that this governmental agency does. But the overwhelming number of people employed by the government as represented by these office buildings is downright staggering. We all know very well that the private sector could do what these bureaucrats are doing with half the people and with half the cost. But other parts of Washington, D.C. were also interesting.

First it was extraordinarily cold for us from Atlanta to spend much time in Washington D.C. I have not had the pleasure of being in cold weather like this in some time. But the overwhelming presence of an armed guard is a little bit scary. Virtually all the buildings are armed by service members with automatic weapons. We stayed at the hotel where President Reagan was shot in the 1980’s and this massive building was only partially filled. Occupancy was so low that the restaurants were not even open. I do not think that I have ever been in a full-service hotel where they did not have a lunch service somewhere in the building. The number of restaurants that have failed was devastating. Virtually every other store front was a restaurant that had gone out of business. The one thing you notice in Washington proper is that they have no fast-food restaurants and that they have no service stations. I am sure there are many of both in the suburbs but downtown proper there are none. Unfortunately, most of the governmental buildings are not even open yet to the public. Even though we are 18 months after the start of the pandemic it looks like most of Washington has yet to bother to go back to work. It is unfortunate since tourism was obviously a major part of Washington, D.C. but given the mandates of the government very few of those sights are even open.
World War II and Vietnam Veterans Memorial
I actually had an opportunity to read the Build Back Better Act for a client. Obviously, it is 2,000 pages of a great deal of legalese that I am sure no one clearly understands at this time. I would bet that most of the members of Congress voting on this bill have never even bothered to read the voluminous pages making up the detail. There were however a couple provisions I found quite interesting.

One of the provisions was to increase the mandatory credit for electric vehicles in the United States. Basically, it indicated that if you buy an electric car, you will get a credit of $7,500 off your income taxes for purchasing that automobile. That is basically the same law we have today in the U.S. However, what is terribly unusual about this provision is that if you buy an electric car built buy a union shop, you get a credit of $12,500 as compared to a credit for a non-union electric car which is $7,500. Maybe I can give you some perspective on this provision.

This country owes a great gratitude to Elon Musk and his building of Tesla cars. Without him we would probably not have electric cars in the U.S. today. The brilliance that he brought to this technology has allowed other companies to copy his work and make electric cars available to all. However, when they announced the increased credits, astonishingly Elon Musk was not invited. Tesla Motors is a nonunion shop and therefore not supported by the current Washington administration. But you must put in perspective what the President is trying to accomplish. He wants to make sure that unions have preference over any other workers in America. Just for the record, currently in the United States only 10.8% of all workers are covered by union contracts. In 1955, 33.2% of all workers were under union contracts, but today that percentage has dropped dramatically. What is even more astonishing is the number of workers that are covered by union contracts; while 34.5% of public employees are covered only 6.3% of the civilian workforce is covered by union contracts. The actual numbers as of last month are 7.1 million workers in America covered under union contracts in private sectors.
Washington Monument with the moon overhead
So basically, what the bill says is that we favor the 7.1% of workers in America and to the other 92.9% of the workers, we do not care about you going forward. It is hard to believe that any administration would turn their back on the vast majority of workers in America just because they are being supported by the unions for reelection. But it happens.

Also in that particular bill is an astonishing provision that I have not heard virtually anyone comment on. As everyone knows there is roughly $555 billion in this bill for environmental improvement. This is in the form of grants, credits, and deductions for green-energy projects. But it also contains a provision that is lost on most people reading the Act. Basically, it says that any contractor that would like to receive any of these grants or construction contracts must pay, under the definition, “prevailing rates”. What that means is that if you are to work any of these contracts under this provision, you must pay union labor rates on them. Just to give you an example, the prevailing rate for an electrician in middle class Orange County, New York earns a prevailing wage of $47 an hour. That is 70% above the national average for electricians in the United States.

So basically, what this means is that nonunion subcontractors would have to pay prevailing rates to all their employees. Given that these subcontractors are not likely to be able to afford this increase in labor rates, all these jobs will almost assuredly be guaranteed to be worked by union shops. It does not require further explanation to realize that the only reason that the Democrats have favored these union jobs is because the unions have supported them and provided political and financial support to their campaigns. However, what is baffling is how the other 92.9% of the workforce benefits from them receiving this political support.
Elizabeth and DeNay getting into the holiday spirit
In summary for this month, I will not apologize for the volatility. Volatility is part of investing, and you must rely upon the people that have gone through it to weather the storm. This is our 40th year in business and certainly not our first rodeo. However, take assurance that the economy is extraordinarily strong and in fact getting stronger. More and more Americas are going back to work, and this will make the economy even better. Yes, there are problems everywhere, but on average the economy today is better than it was even pre-pandemic.

Workers in the U.S. are now finally going back to work. They are spending the money they saved or the money the government gave them during the shutdown. All of this leads to the conclusion that coming up we will have even higher stock prices as the economy continues to improve and earnings get better. As with any market rally, you will have excess and companies that sell at prices unrealistic to their underlying value. We certainly have that today. However, investing means you invest in the long-term, not the volatility of short-term.

As we get to the end of this year we would love to sit down and go over your portfolio and your investment criteria for the 2022 year and beyond. We never left the office during COVID and have been here since day one of the pandemic. If you would like to schedule an appointment to come in and go over your financial goals, we welcome you to visit with us. In the meantime, stay healthy and stay invested.

As always, the foregoing includes my opinions, assumptions and forecasts. It is perfectly possible that I am wrong.

Best Regards,
Joe Rollins

Thursday, November 11, 2021

You’re Totally Misreading the Supply Chain and Labor Shortage Statistics - Good News is Everywhere!

From the Desk of Joe Rollins

I watched in amazement as the media distorted financial information based on an uninformed reading of the above statistics. I never really know whether this misinformation is due to the lack of intellect in economic terms or maybe there is a political motivation to their lack of clarity. This month was a really good example of how the media misinterprets information and unfortunately misleads investors.

I told you last month that October was the scariest month of the year for reasons other than Halloween. It is a month of extraordinary volatility and sometimes major corrections. How surprised were we this month to have an extraordinarily profitable month of October in the face of staggering misrepresentations of economic data?
Father + Son - Josh & Joe at the World Series
I really want to cover some subjects that the media is misleading you on and I also want to reflect on the ineptness of Congress and how they are misleading you on current legislation. I want to into words the economic damage that they are trying to force onto the American public. Hopefully you will find this information as interesting as I do. But before I cover all of those interesting topics, I must report on the stock market performance for the month of October. It was quite a remarkable month all around.

The Standard and Poor’s Index of 500 stocks was up nicely at 7% for the month of October and for the year 2021 is up 24%. For the one-year period, that index is up a very satisfying 42.9%. The NASDAQ Composite was up 7.3% during October and year-to-date is up 20.9%. Like the S&P 500, it is up 43% for the one-year period then ended. The Dow Jones Industrial Average was up 5.9% during the month of October and for the year 2021 is up 18.8%. The one-year performance on the Dow Jones Industrial Average is 37.7%.

I always like to compare stock market indexes with the bond index just so you have a reference point to the different asset classes. The Bloomberg Barclays Aggregate Bond Index was absolutely zero for the month of October and for the year 2021 was down 1.7%. The one-year performance on this bond index was -0.4%. As you can tell the major market indexes were at a minimum of 37% for the year while the bond index was a negative. I often think about this bond index when I see the recommended asset classification by other advisors. I saw one this week that was most distressing. An advisor put 70% of a portfolio in bonds for a client that was in their early 50’s. I really do not know whether that allocation to the bond index was due to a lack of intellect or just a misunderstanding of the economic circumstances today. Anyone that would allocate a 70% allocation to a bond index which will almost assuredly lose money over the next year is certainly not doing their clients a service.

Over the last several months there has been constant talk in social media about how ending unemployment benefits was not helping the job market. Basically, these articles were stating that the employment situation in America had not improved after unemployment benefits were stopped in most states. That is absolutely, unequivocally, incorrect yet the article stated otherwise. It just goes to show that nobody fact checks social media and when you classify anything as an opinion, you can rest assured there is some agenda behind that opinion. The evidence is clear that ending extended unemployment in the United States has greatly increased employment. While it seems so intuitive to think that would be the case, many have argued the opposite.
Reid Schultz, Age 6, with his pit crew
The unemployment report for the month of October clearly illustrates this economic reality. This is the first job report that actually included the entire period not covered by the extended unemployment in the United States. The report showed private payrolls jumped 604,000 during the month and the unemployment rate dropped from 4.8% to 4.6%. While that was certainly good news for employment even better news was that for the months of August and September, jobs were increased by 235,000 from the reported totals. They were a lot of reasons why employment was better in October, but undoubtedly the fact that the virus counts have dropped dramatically have certainly helped. Kids going back to school and childcare freed up a lot of people to go back to work that previously were not. But there is no question that cutting off the pandemic unemployment programs including the $300 federal bonus and the 79 weeks of eligibility versus the normal 26 weeks, have forced people off the government payroll and back to private employment. This is very good for America.

We have not yet reached the unemployment rate of 3.6% that we enjoyed prior to the pandemic but clearly, we are headed in the right direction. If you want a sign of how far employment has come, just take unemployment in the city of Atlanta. In September of 2020, the unemployment in the city of Atlanta was 7.3%. For the month of September 2021, the unemployment in the city of Atlanta was 2.6%. It is almost impossible to get unemployment down to zero. There will always be some people that are unwilling to work, regardless of their financial circumstances.

I sat down and I read all the reports regarding the unemployment in October. For the most part, the articles raved about how good the report was, but there was this underlying contentious perception that somehow the numbers were distorted because the participation rate was only 61.6%, which was the lowest level since the 1990’s. Basically, that means that of all the workers that were available to work, only 61.6% either had a job or were looking for a job. At the current time, there still remains 10.4 million posted job openings and the number of unemployed people in America is 50% of that number. There are many reasons why certain people do not go back to work, but why anyone would consider that to be a negative is beyond me.

If American citizens want to stay out of work, for whatever reason, that should not form a negative reflection on the economy. There are many reasons why they do not want to work and why we care makes no difference. I am of the opinion that these people that do not want to participate in employment have their own issues and we as investors should ignore this particular economic reality.
Austin, Dakota, Joe, & Shelley - chilly night, hot win for the Braves
A good example of how the press misinterprets economic data is the current supply chain and labor shortage issues. There is no question that these issues have slowed down production in the United States and have created delays in delivering product. But it is not a negative. You have to realize that the real reason that we are facing these issues is a demand surge unprecedented in the United States. We had a period of 18 months where people were restricted from buying, traveling, and doing things that they want. When the negative vail of the Covid-19 shutdown was released, there was an unprecedented surge to buy. We were seeing it throughout all phases of the economy. And that is a good thing.

There is a shortage of new cars. There is a shortage of used cars. There is a shortage of hotel rooms in resort areas. Americans are buying like “drunk sailors” in every phase of the economy. Resort properties and mountain homes have essentially doubled in value over the last several years. It is reported that Hawaii has virtually no hotel rooms available during the upcoming holiday season. Las Vegas has reported records unprecedented and even larger than the pre-pandemic. Everywhere you look there is a shortage because of the extraordinary post-pandemic demand and available cash.

As I reflect on the things I have written above, maybe you can understand why the media misunderstands this concept. While certainly all of these are problems, they fall into that “high-rent” district problem of a good thing. Americans would not be traveling, buying, and investing if they did not have money. This surge in demand is created by tons and tons of government money forced on American citizens during the pandemic. Since people were restricted in what they could do, travel, and purchase, they just waited until they got the green light. Once they started spending, the supply chain just could not keep up. It is not a negative that all these supply chains are backed up, it is very much a positive. People have money and they are using that money for additional consumer items and pleasure traveling.

While business travel is not back to pre-pandemic levels, leisure travel has exceeded it. I have not been on an airplane in over a year that was not filled to capacity. Unfortunately, I travel a lot and the airports are overwhelmed with people going somewhere to their liking. This huge demand by definition would slow down the supply lines, but is not a permanent problem. Logistic experts tell us that the price of ocean freight has gone up 10 times pre-pandemic prices. Once again, a positive outcome for excess demand exceeding supply. There will be a day in the next year or so where supply chains will catch up and prices will fall. The reason I do not fear major long-term inflation is I see already prices moderating in real estate and in automobiles. Once the supply chain catches up with demand, prices will moderate, and inflation will not be a major concern.

Ava & Randy Wittman relaxing at the Rollins Beach House
Recently one of my clients sent me a video regarding the governmental debate over the new stimulus bills. It was a simple video that got me thinking about exactly what is going on in Washington these days. Basically, the video said that if you counted from one to a million and each second was another number it would take you 12 days to get to one million. While I did not try that myself, it certainly seemed reasonable. The video went on to say that if you did the same counting to one billion it would take you a cool 31 years to get to that number. It gave the impression that most people believe that one trillion is 100 billion. In fact, one trillion is 1,000 billion, not 100 billion. To count from zero to one trillion it would take you 31,688 years. There are not many readers of this posting that will live so long.

Put this perspective to what we are witnessing in Washington at the current time. There is no question that the country needs the roads, bridges and airports fixed and that would be money well spent by the U.S. government. The other bill debated in Congress is less clear that it is even wanted or needed. But make no misunderstanding exactly what is going on here. In my opinion, it is not a matter of satisfying the needs of the American people; it is more likely an attempt by the progressive party to do long-term damage the American economy to meet their political goals of weakening America against the rest of the world.

Believe me, I am not a conspiracist, but I do know numbers and I do understand them. Take for example Senator Bernie Sanders, age 80, who has indicated that rather than $3 trillion, this social spending bill should be $6 trillion. Just for comedic effect, the number of years it would take to count to 6 trillion is 190,000 years. But the reason that Bernie Sanders wants to spend $6 trillion has nothing to do with the programs in the bill. It has more to do with weakening the American economy for generations to come. He will not be alive that long, but it will be his legacy. To spend $6 trillion, basically the U.S. government would have to print new currency for the full amount. The long-term effect will be devastating.

DeNay flashing Braves signs at the game
If you understand economics, you understand that printing more currency creates inflation, creates debt, and creates long-term negative economic effects. While certainly spending that much money over a short period of time would make the economy better over the short-term, the long-term effects would be devastating to the future U.S. citizens. There is no justification for that type of spending where it clearly would all be deficit spending. I have looked at the provisions that they represent would raise the money necessary to fund a bill such as this, and it is an illusion that has no economic backing. Hopefully more informed politicians would put a stop to this silly provision and allow the U.S. economy to grow on its own without governmental backing.

One-time President Obama said, “Elections have consequences,” and the new presidential election certainly had consequences. I will not focus on the politics; I will just focus on the economics. If on the first day of office you shut down a major pipeline to deliver oil to the United States and you cut off all new permits in Alaska and in the Gulf of Mexico, you have reduced the supply of oil. What is the economic effect when you reduce supply in an economy where the demand is going higher? The basic answer is that you have shortages.

The price of oil during the writing of this posting has gone up 70% in 2021. Could anyone be surprised that it went up when you restrict supply? It would have been very easy to phase in each of those changes over a two- or three-year period, but rather the decision was made to do it immediately rather than with common sense. While certainly the people that desire more protection for the environment were elated, they clearly did not think of the unintended consequences of shortages and the price of oil.

Since oil is a major component of virtually all pricing, you can fully expect to see almost everything go up in price based on the price of oil. Whatever you call this, it is a tax on the American citizens. This tax more heavily weighs against the poor people and the people that must commute to maintain a job. If you increase the cost of commuting to these U.S. citizens, you have lowered their standard of living just like an additional tax would do.

Ava, The Little Sure Shot of Buckhead
All around the world we are seeing governments make stupid decisions based on environmental concerns. All of us should have environmental concerns, but we should do so with informed data and not by making rash decisions such as we have made in the United States regarding fossil fuels. The examples are overwhelming, and their consequences are downright scary.

Europe is a prime example of many environmental concerns gone awry. While France produces almost all their electricity with nuclear power, Germany has banned nuclear power in that country. Given that they do not have nuclear power plants in Germany, they are running dangerously short on energy and most of their heating is generated with natural gas. The main source of natural gas for Germany is the pipeline coming out of Russia and is controlled by the Russian government. Now if that does not scare you, nothing will. In a time of war what would Germany do?

Although a serious topic, you had to be somewhat amused that recently the President asked the Middle East to produce more oil for the United States to keep the prices down. Basically, the amusing part of this analogy is that we cut off your own supply and production in the United States and the price of oil went up. So now, once again, we are asking countries that are not particularly friendly to the United States to help us out of the energy crisis. Since it takes about 20 years to build a nuclear power plant in the U.S., we are backing ourselves into a corner since we can no longer use coal. Think about it for a second. If we restrict the production of oil and natural gas in the United States and coal is restricted, how are we to produce energy for the future? While solar energy and wind generated energy are nice, at the current time they do not even contribute a rounding error to the needs of energy in the U.S.

It is interesting to see all the car manufacturers reporting that they will be converting to electric cars in the future. Elon Musk made a great point the other day that we should consider. He indicated that if the majority of cars in the United States were converted to electric, we would need five times as much electricity than is being produced in the U.S. at the current time. Just exactly how can we get to those numbers with a restriction on fossil fuels and coal? The only alternative would be nuclear and currently there are no new nuclear plants being planned in the United States. While understanding environmental concerns, this is an area where common sense needs to prevail.

There was much handwringing in the financial media when the GDP was announced for the 3rd quarter at 2%. This was a major move down from the 2nd quarter of 2021 when the GDP was announced at 6.7%. While some of the financial press was sending out an alarm over this sharp reduction, it is quite obvious that they do not understand enough about economics to even form an opinion. While it is true that the GDP fell dramatically, the 2% number is a more realistic reflection of where GDP should be rather than the 6.7% in the 2nd quarter. In the first half of 2021 we had the government passing out money to virtually anyone who asked for it whether they needed it or not. As we now know, much of that money was fraud and siphoned off from the United States by foreign criminals. Whatever the reason, much of this money went into the economy and created excess GDP.

It is always scary when GDP gets that high, since you know the major concern of the Federal Reserve is to control inflation. As inflation goes up, surely higher interest rates will follow. Fortunately, since the GDP took a major step down, it gave the Federal Reserve an opportunity to sit back and wait on higher interest rates. It now looks like there will be no interest rate increases until the end of 2022. Stable interest rates are the most powerful force that leads stock markets higher. It looks like, at the current time, interest rates should be stable and low for another year.

If you believe the 3rd quarter GDP at 2% was correct and that the economy has slowed to an exceptional level, you would be incorrect. We are seeing the economy strengthening all around us before our eyes. Currently the Federal Reserve Bank of Atlanta is forecasting GDP growth in the 4th quarter to be up 8.5%. While the forecast of the Atlanta Federal Reserve has been fairly close in prior quarters if they are correct on this estimate, that would be a huge increase going from 2% in one quarter up to 8.5% in the very next. As mentioned above, one of the reasons why you are seeing such shortages throughout the economy is due to excess demand due to people holding on to excess cash. The reason why you see the stock market going higher is because much of this cash is being deployed in investable assets making all time new highs by the indexes. It only makes sense that people accumulated money over the last 18 months are now free to move around and spend it, creating higher GDP. That is exactly what is driving the markets higher.

I have often written that the major component to higher stock prices is higher earnings. When you see higher earnings then you can justify premium prices for stocks. Of the first 100 companies reporting in the Standard and Poor’s Index 0f 500 stocks this quarter, 84% of them had beat earnings expectations. You are seeing earnings growth throughout the economy in virtually every sector. Bank earnings this quarter were nothing short of spectacular. All of the bad loans that the banks anticipated happening during the pandemic never came to fruition. In fact, loan losses by banks are at one of the lowest levels ever. What we are seeing is corporate earnings exploding to the upside due to U.S. demand, which has been funded by governmental money. Whatever the reason, earnings have been so spectacular it has led to higher and higher stock prices.

Joe & Ava enjoying daddy-daughter time with the Braves
Almost daily I am confronted by someone pointing out the inconsistency of higher stock prices as compared to historic averages. They will explain to me that stocks are selling at 27 times forward earnings when historically have been more in the 16 times forward earnings range. Their statistics are not incorrect, but looking in the rearview mirror gives you no perspective of the economy we are in today. One of my go-to comments in these circumstances is show me a time when corporate earnings could be compared to a time when interest rates were virtually zero. It has never happened.

If you go back and look at the average of interest rates when 16 times earnings were reasonable, you will find the Federal Funds Rate at 4% to 5%. Interest rates have never been so low for so long. Yes, you can argue that stock prices are disproportionally high, but that is not the case if you base it on interest rates. Since we know that bonds will likely produce negative returns and cash is paying virtually nothing, the only game in town is stocks. And we are also seeing a huge demand to purchase stocks by the general public given the excess cash they have accumulated during the pandemic.

The Infrastructure Bill will now pass and that is another $1 trillion in government money that will flow to the private sector. Interest rates we know will stay stable or lower for the next year. We also know that corporate America is running at full capacity in every aspect. Hotels are full, airlines are full, manufacturing is robust, and construction is out of control. Everywhere you look around you there are shortages, but not because of an inability to produce but rather due to excess demand over supply. All of that even tells a shade tree economist earnings will be spectacular in 2022. I full expect to see new highs on all of the indexes for at least the next 12 months. As we get closer to the end of the year, I will give you my forecast on 2022, but already the performance of the indexes on 2021 have exceeded the expectations.

As we get to the end of this year we would love to sit down and go over your portfolio and your investment criteria for the 2022 year and beyond. We never left the office during COVID and have been here since day one of the pandemic. If you would like to schedule an appointment to come in and go over your financial goals, we welcome you to visit with us. In the meantime, stay healthy and stay invested.

As always, the foregoing includes my opinions, assumptions and forecasts. It is perfectly possible that I am wrong.

Best Regards,
Joe Rollins

Thursday, October 7, 2021

Get Ready For the Best Time of the Year to Buy Stocks!

There is no way to sugarcoat the fact that the month of September was a real stinker for the stock market.  Even though there was no fundamental reason why the market went down, I guess the weight of seven straight “up” months finally meant the traders needed to reestablish their dominance.  But it has still been a great year for investing so far and I certainly anticipate that it will be for the rest of 2021.  

There were so many “reasons” why the market went down in September that I need to address a few of the main culprits. We had the infamous Evergrande collapse in China which, for some reason, put some level of fear in U.S. investors in the market.  And as occurs every couple of years and means nothing, we had the debt crisis of extending the Federal borrowing limit.  We also endured the typical textbook move of traders selling tech due to a small increase in interest rates.  This argument is so full of holes, it is laughable that they even continue to quote it.

I have a lot of other things I want to talk about in this posting; the effect that potential Estate tax changes will have on you as investor, the current crisis in energy and how it was self-created, the incredible job the government did in 2020 to bring the country out of recession in comparison to the 2008 recession, and many other topics I hope you will find of interest. 

C-A-R-O-L-I-N-E Schultz, Age 7,
 ready for the big game

Before I get into those truly interesting subjects, I must discuss the very negative month of September.   The Standard & Poor’s Index of 500 stocks ended down 4.7% for the month of September but is still up a very satisfying 15.9% for the year 2021 and up 30% for the one-year period ended September 30th.  The Dow Jones Industrial Average was also down 4.2% during September but is up 12.1% for the year 2021 and is up a very satisfying 24.1% for the one-year then ended.  The NASDAQ Composite was down 5.3% for the month of September but is up 12.7% for the year 2021 and is up 30.3% for the one-year period then ended.  So even with the huge loss that we lived through during the month of September, the year-to-date numbers are all double digits and continue to be outstanding.  I fully expect that we will add positively to these numbers as the year progresses.  

The Bloomberg Barclays Aggregate Bond Index was also down 0.8% for the month of September.  If you thought being in bonds during a market sell-off was a good idea, you would have found it was not.  The bond index is down 1.7% for the year 2021 and for the one-year period it is down 0.9%, as compared to the double digits increase in the equity indexes.  It was somewhat surprising for the month of September that bonds actually got crushed as much as they did.  Not only were taxable bonds down, but the muni-bond market took a big hit during the month.  While it is true interest rates increased marginally during the month, this overreaction seems to be based on fear rather than economics. 

I guess the biggest event during the month was the potential failure of the Evergrande company, which is a huge real estate developer in China and was at the point of total default during the month.  There was a lot of handwringing here in the United States thinking that the failure of Evergrande would be the equivalent to the bankruptcy of Lehman Brothers in 2008.  Apparently, the analysts that drew that comparison did not live through the 2008 debacle, as I did, as certainly this was nothing compared to 2008.  

If you read the history of Evergrande, you will see how it got into trouble.  The Chinese government believes that to keep their citizens happy, they must keep them working.  It had been reported that China built entire cities with no one to move in just so the workers could stay busy.  While Evergrande is a semi-public company, it is heavily influenced by the Chinese government.  You have to wonder if all of these empty projects built by Evergrande were their own doing or at the insistence of the Communist government.  

As the day of the default came around, there was huge selling on the U.S. market for reasons not clear to me.  I can only assume that the traders thought that they could build up enough volatility and fear in investors that they would force them out of their positions so that they could buy into them cheap.  What was not reported was that the day after, Evergrande sold an interest in its banking subsidiary to the Chinese Communist government.  Surprise, surprise, the Chinese government injected $1.5 billion into the company to keep it from defaulting.  The most likely outcome of the Evergrande debacle, will be that the government will end up buying the company (or forcing another company to buy it), as it does with so many other companies on the verge of failure in China.  In my opinion, there is no way the Chinese government is going to put this many workers building real estate out of work.  

It appears that the Chinese Communist government is really scrambling now to reduce the positive aspects of capitalism on their economy.  They are proposing, in my opinion, restrictions that could not possibly be enforced.  One of the new ones that is fairly interesting is that Chinese children are not allowed to play video games during the week and then only three hours on Saturday and Sunday.  Good luck trying to enforce that one.  Interestingly, some of the most successful companies in China are video game providers.  

La Vie en Rose! Ava and Dakota 
on a beautiful day in Paris

Another one that came out during the month was that China will outlaw all crypto currencies, making it illegal to both buy them and even hold them.  This has more to do with the ability of crypto to be untraced and money moving out of China to a more stable economy like the United States.  There is no question that the Chinese government is scrambling to try to reduce the strength of the capitalist in China, which is pretty easy to do as the government can basically just step in and take over your company.  As you know, virtually all companies in China are owned partly by the Chinese government and, therefore, they will do as told.  

Another interesting aspect of China right now is that they are suffering a huge power shortage.  A great deal of the manufacturing in China has been restricted since there is not enough power to run the factories.  In Europe there is a huge shortage of natural gas.  The price of natural gas over the last several months has gone up four-fold and natural gas providers in Europe are failing daily.  Going into the cold winter months, all of Europe is concerned about having enough natural gas to heat their homes.  Most of the natural gas in Europe comes from a pipeline from Russia and they’re also a huge importer of natural gas from, of all places, the United States.  Even in the United States, the price of gas has gone up from $2 per thousand cubic feet to well-over $6 per thousand cubic feet, just in the last couple of months – the highest rate in over a decade.  Do you have any idea why the world is suffering an energy crisis? 

Economics 101 is pretty simple.  If you reduce the supply, then prices will increase.  Given equal demand, but less supply, unquestionably the price will go up in any economy.  The very first act of the new President was to put a stop to the Keystone Pipeline out of Canada, not over time, but that day.  Keystone is now suing the U.S. government for an excess of $10 billion for stopping this pipeline.  Also, the current Administration stopped all drilling in Alaska and would not issue any additional permits for drilling in the Gulf of Mexico.  Coupled with the hurricane season which took offline a lot of drilling capacity in the Gulf of Mexico, we have a supply constraint.  

Did anyone really believe that if you change the supply overnight, you wouldn’t have an increase in price?  Not only have we seen a dramatic increase in the price of gas and oil in the United States, but it is also clear that the entire world is suffering from a shortage of natural resources from the United States.  Do you realize that China is the largest importer of coal out of the United States?  China has such terrible problems with air quality because their principal source of energy is coal.  If you restrict coal and natural gas and you also prevent additional drilling for oil, you are going to have shortages around the world and the prices are going to go up.  We worked for five decades to divorce the U.S. from Middle Eastern oil.  Overnight we are now totally dependent on them again.  

Reid Schultz celebrating his
 6th birthday with friends Rex & Rattles

During the month, there was a lot of handwringing over the extension of the Federal government’s debt limit so that the government would not face a shutdown.  I am absolutely bewildered by the fact that people are concerned about this subject.  It happens every couple of years and is a major negotiating point for whichever party is not currently in the majority.  But the whole argument is almost silly considering the alternative.  Does anyone really think that there is a chance, even remotely, that they will not extend the debt?  If they didn’t extend the debt, what would be the repercussions?  Will they quit spending money – no way!

The U.S. government would shut down and our Defense Department would disband.  And more importantly, all the “pork barrel” programs that Congress has created would come to an end.  So, like so many times in the past, the financial press creates this frenzy regarding extending the debt, but they always do.  It almost amuses me to watch these speeches in Congress where basically the many members of Congress pronounce that the world will come to an end without the extension of the debt and how they hate each other for bringing up this subject.  Then at the very last second, they extend the debt at 11:00 pm on the night it expires, and they all sit around the campfire singing “Kumbaya,” while patting themselves on the back for cooperating and putting the country in deeper debt.  The new current extension of the debt is only for three months so we will suffer through this again in December, but you may rest assured, it is not an economic problem since they always extend it.  There is no reason for the market to go down.  

It is also hard to believe that our elected officials know so little about economics.  If you took the time to watch the questioning of Federal Reserve Chairman Jerome Powell and Secretary of Treasury Janet Yellen by Congress last week, you could see the economic wasteland that is in Congress.  Honestly, some of the questions were so ill-informed, I was embarrassed for them.  If you recall, former Federal Reserve Chairman Alan Greenspan used to make up flowery language to answer Congress without an answer.  I felt the same way this time with Powell and Yellen.  Some of the questions were so naïve as to not even merit a response, but trying to respect Congress, they gave articulate answers to inarticulate questions.  

Josh, many moons ago, finding fame 
on the Jumbotron at Turner Field

For reasons I am not totally clear on, the financial press continues to assert that October is the worst month of the year for the stock market.  The evidence absolutely does not support that assumption.  September, which has now passed, is by any definition the worst month of the year.  The only thing that can be said about October that has been proven by history is that it is by far the most volatile month of the year.  Yes, there have been many selloffs in October, but there have also been huge rallies.  Looking at this October, I expect volatility will continue.  However, I think we have a positive trend as earnings are starting to be reported in mid-October.  

It is hard to believe, but the projection now for increasing earnings for the third quarter of 2021 over the third quarter of 2020 is a projected increase of 27.6%.  It is true that it is comparing current earnings with a prior COVID quarter but if you look back into 2020 you will notice by the third quarter of 2020 the economy had already recovered.  Interest rates, while somewhat higher during September, were by historic standards extraordinarily low and the economy continues to expand at a more comfortable level.  

There is no question that the economy has slowed down from the second quarter.  At that time, we were running a GDP greater than 6%.  It is now believed that the GDP for the third quarter may be half that or 3%.  But it is extraordinarily important that we understand that we cannot run the economy too hot without creating higher interest rates, inflation, and other negative aspects.  A 3% economy is much better than a 6% economy where we would have capacity overloads and shortages in almost every industry.  Therefore, the trifecta of components leading to higher stocks are now in place and after the sell-off in September, we should see higher prices for the rest of the year.  Assuming no major economic event, of course.  

Ava chopping it up on the Jumbotron
 at Truist Park – Go Braves!

 I often wonder why investors do not see what I see when it comes to major market selloffs.  If a major selloff occurs during a negative economy, everybody understands that you need to protect your portfolio against further declines.  But when you have a major selloff for no particular reason, investors really should not do anything.  As you saw in the last week of trading of September every day was down huge, but then up huge when October rolled around.  It is so absolutely clear that the traders were forcing the market down and after the end of the month they covered the shorts so that their month-end balance sheets would not be distorted.  

I looked at the listing of over 125 mutual funds run by Fidelity Investments.  During the month of September, less than 10 were actually higher. This includes not only U.S. stocks but also international securities, bonds, and other types of investment products.  When you see that virtually every mutual fund was down, you must realize that this was not a natural move by investors.  So, when you get these types of selloffs that occur, which are principally concentrated by the hedge funds and the traders, your best investment advice is to do nothing.  As is often the case during selloffs, your best strategy is typically to look the other direction.  

It still surprises me that the U.S. government has not received better marks for its response to the 2020 pandemic.  I follow the trend of COVID very closely.  The vast majority of the states are trending down in number of new cases.  Although the death rate has remained stubbornly high, most of these deaths are people with preexisting conditions and the unvaccinated.  Even Dr. Scott Gottlieb, former head of the FDA, has projected that by Thanksgiving of this year the country will be back to normal due to the combination of the vaccinated (including children) and the people that have some immunity from previously having the virus which will significantly reduce the spread.  The economy continues at full speed ahead notwithstanding the virus.  

Marti and Mitch Musciano-Howard,  Age 17, 
 looking “TWO-rrific” for 
Homecoming 2021

The 2008 recession should be a close approximation to 2020.  If you recall in 2008, we had a major credit problem where companies were going out of business daily.  Even though the government came along and bailed out the banks and stabilized the economy they did nothing for the out-of-work employees.  In fact, it took three years for the economy to come back from its pre-2008 downfall.  

However, in 2020, due to the governments intensive funding of individuals and businesses, the recovery was almost overnight.  What we found was that the recession in retrospect only lasted roughly 90 days and already today the GDP is at pre-pandemic levels, although why employment is not where it needs to be seems to be a mystery to all economists.  Currently as of today there are 10.5 million job openings posted in the United States and there are only 8.5 million unemployed.  You have to think that shortly the unemployed will run out of resources and have to actually go back to work.

What is also interesting is that during 2020, which was a so-called recession year, the number of people living in poverty in the United States fell from 10.5% in 2019 to 9.1% during 2020.  How ironic is it that the actual number of people in poverty would fall during a recession year?  All these positive aspects are attributable to the Federal Government jumping in and bailing out the economy.

There is no question that the negative is that the amount of debt, as compared to the GDP, has soared.  Prior to the pandemic the Federal debt was 79% of the GDP.  It is now 98% of the GDP and the current Congress is spending at a rate that is unprecedented.  I am not exactly sure which economy Congress sees, but it is certainly does not need the $3.5 trillion injection of funds which would benefit some but make the amount of Federal Debt soar.  If you believe that the bill would be fully funded by additional taxes, then you don’t understand how the government works.  

One of the new provisions of the bill going through Congress is that it will reduce the amount of estate tax from a threshold of roughly $11.7 million per person to roughly $5.7 million per person.  If this bill were to pass in its current form, a lot more people would be covered under the estate tax than are currently.  In the United States there were only 1,900 Estate tax returns for the entire year of 2020 that were filed and owed estate tax.  As you can see, estate tax was almost nonexistent for most Americans.  However, if you reduce the exemption amount to the $5.7 million threshold a great many Americans will be affected.

Mia and family catching
 a Braves night game 

One of the financial concepts that I have always advocated for is that you gift to your children and others during your lifetime rather than at your death.  Did you realize that you could give $75,000 per child into a 529 account without gift tax and without it being included in your estate?  However, almost no one elects to do so.  

If you elect to make a transfer today, all the appreciation of those assets go to the second generation and avoid estate tax.  Yet so many people and certainly so many investors that I know refuse to make lifetime gifts.  I was meeting with a lady the other day on this subject.  She was in her 80’s and concerned about long-term care and her future.  Even though she had $8.6 million she was unwilling to gift any of it to her children who were struggling economically.  I finally asked her what exactly her concern was in making these transfers.  Her voice shrilled when she stated in uncertain terms that it was her money, and she may need it one day.  Given the fact that this lady was very frugal and long-term care while expensive is not exorbitant, the possibility of her needing all this money during the rest of her lifetime was strictly remote.  However, even with all my persuasive conversation with her she remained unwilling.   

I would like to briefly explain why traders believe that when interest rates go up you sell tech.  The origin of that axiom goes back to when tech companies had to borrow substantial sums of money to finance their operations.  However, large tech companies now hold more cash than probably any other industry by far.  If you look at the balance sheets of Apple, Google, and Microsoft you will note that they have cash balances well in excess of a hundred billion.  The thought that any of them would be required to borrow money is almost laughable.  It is true that all of them have some debt on their balance sheet, but mainly because the debt is U.S. based and the assets are foreign.  

Marti and Mitch reassuring Mia 
with their best, 
"We promise we’ll behave” looks

Anyway, I hope the traders did not scare you out of your positions these last couple of weeks when they were busy selling tech under the false pretense that tech goes down when interest rates go up. The most profitable companies in the world are tech and everything in our lives is controlled by them.  You can go around the world and see Microsoft Windows in every country.  Any increase in interest rates will have no impact on the financial results of these huge companies.  What is even more interesting, as the end of September came by interest rates actually fell.  So basically, a small increase in interest rates during the month of September may have led to the uncomfortable selloff this past month.  

As always, the above comments are based on my personal research and opinion and certainly no one can forecast the future accurately.  However, the realization that the economy has already turned should be self-evident and those who are sitting on cash should be moved to make appropriate investments. 

As we get to the end of this year we would love to sit down and go over your portfolio and your investment criteria for the 2022 year and beyond.  We never left the office during COVID and have been here since day one of the pandemic.  If you would like to schedule an appointment to come in and go over your financial goals, we welcome you to visit with us.  In the meantime, stay healthy and stay invested.

As always, the foregoing includes my opinions, assumptions and forecasts. It is perfectly possible that I am wrong.

Best Regards,
Joe Rollins 

Thursday, September 9, 2021

Sell in May and Go Away… Better Slow Your Roll

The title above is one of the most famous sayings on Wall Street.  For the decades that I have been in this business, all I have heard from professional traders is that you sell in May, go to your summer estate, and come back in the fall.  The theory was that in the old days trading stocks from the Hamptons without automation was very difficult and so rather than risk the negative effects of the market, you just sell everything in May and buy back in when you return from holiday.  In this posting, I will show you how big of a mistake that was this year.

I also want to cover some items that I find interesting.  At the current time the economy in the U.S. is slowing and that is a very good thing. Many would be surprised by this, so I will attempt to explain.  Also, I want to revisit the September 11, 2001, terrorist attack which was a scary time for all of us in the U.S., and a particularly scary time for stock market investing.  I want to cover that event to illustrate an important point, which is to be fully invested at all times.  I also want to emphasize the most important thing we as advisors can do on behalf of our clients.  And finally, I want to go over why China is having such a difficult time with the newfound wealth that their entrepreneurs are realizing.  The Chinese government hates income inequality, but maybe this time there are just too many millionaires to overcome their fear.  

CiCi dreaming about money

Before I cover these topics, I wanted to give you the score card for the month of August.  Remember, August, by many, is considered to be one of the worst months for investing.  While the evidence indicates that September has historically been the worst performing month and August second, this past month was quite excellent.  The Standard & Poor’s Index of 500 stocks was up 3% during the month of August and its one-year return is up 31.2%.   The NASDAQ Composite was up 4.1% during the month of August and is up 30.5% for the one-year period then-ended.  The Dow Jones Industrial Average was a lagger this month, up only 1.5% and its one-year performance at 26.8%.  

As a comparison, the Bloomberg Barclays Aggregate Bond Index, was down 0.2% for the month of August and for the one-year period it is also down 0.2%.  As you can see, all the major market indexes were up substantially during the one-year period and the bond index was negative.  You do not have to be a “rocket scientist” to figure out that a 10-year treasury today is paying 1.36% and the rate of inflation may be as high as 4% over the next year.  Even if the rate of inflation is half the projected rate, holding bonds will still give you a negative real return over the next one year.  Given that cash earns you exactly zero and the likelihood that bonds will have a negative rate of return over the next one year, investing in stocks may be the only game in town.  

Every day I hear from new investors who have no interest in investing in the market at all-time highs.  When they express this, I ask them exactly what all-time high they are referring to in the year 2021.  Just for the record, through August 31, 2021, we have had 53 all-time highs on the S&P 500 for the year 2021.  I know it is remarkable, but through 

Reid and Caroline ready 
to take on the world

August we have already generated enough all-time highs to rank 5th over the past century in the terms of record highs.  The record continues to stand at 77 in 1995, yet we are at 54 only through August.  There is a good chance that we will exceed the 1995 record closing.  So when you say that you are unwilling to invest because the markets are sitting at all-time highs, you may be disappointed as the markets continue upward. 

You may also be surprised to learn that the S&P 500 was up 3% during the month of August.  This is its 7th consecutive monthly advance during 2021.  Remember we are only eight months into the  investing year, which means only January was negative for this index.  In the history of American finance, this is only the 15th time this has occurred since 1950.  That is quite a remarkable run and coupled with the outstanding investment year we had in the year 2020, you can see the huge gains that investors sitting in cash have forever forfeited.  

Back to my comments on the title of this posting regarding sitting in cash during the slow summer months, 2021 refutes that argument in a huge way.  If you sold in May and did not return until September, you missed out on three full months.  Just look at the performance of the indexes during that fateful 3-month period.  The S&P 500 index for the last three months was up 8%.  The NASDAQ Composite was up 11.1% for the last three months and the Dow Jones Industrial Average was up 2.9%.  As you can see, the last 90 days were quite satisfying.  I know it seems like every day there is a new crisis to report in the national media, but as you can see, stock market performance continues to move higher notwithstanding the negative news everywhere you look.  I recognize that there are many things to worry about, but at the end of the day financial performance affects stock prices more than sensational news.  

As I have pointed out repeatedly, the most important component to stock prices rising are earnings.  Now we have almost the final tally of the S&P 500’s earnings for the 2nd quarter of 2021.  At the current time, we have 91% of the top 500 stocks in the U.S. reporting and a stunning 89% of those have shown year over year earnings growth.  That kind of earnings recovery hasn’t been seen since the end of the financial crisis in the 4th quarter of 2009.  

Reid excited for his first day 
of kindergarten

I do not want to sound simplistic when I say stocks may be the only game in town, but clearly that might be the case.  With market returns for the last year above 30%, I cannot imagine how investors in cash and bonds must feel.  Over the last one-year period, cash has earned virtually zero and bonds were either zero or negative.  So, in stocks you get a 30% gain and in those other assets you have losses.  It doesn’t seem like there are many other players in the investing world other than stocks.  

As I have emphasized to you, the big difference and change in Wall Street over the last few decades is the absolute tsunami of money that flows into the market daily from 401(k) plans.  No longer do the big cats control the flow of money as there is close to $1 billion a day flowing into the markets from small investors’ 401(k) plans.  This money comes in during good times and bad times and continues to stabilize the market at a higher level.  No longer can the hedge funds distort the market in a big way without suffering major risks of the small investor creating losses.  This change in the flow of money is good for all investors and provides very important stability to the U.S. retirement plans for older employees.  This could be nothing but a positive for those investing in the future.  

I referenced earlier one of the most important functions that we, as advisors, can provide to our clients.  In my opinion, that most important attribute is our ability to keep investors invested during difficult times.  I will explain that further in my analysis of the September 11, 2001, sell-off later in this posting.  But over the last couple of years, it has become self-evident.  In March 2020, we received an avalanche of phone calls from investors wanting to get out of the market. Of course, their fear in 2020 was the damage that the COVID pandemic would have on the economy.  As they called with their fear of the upcoming market, we tried to explain as best we could that they did not realize what the economy would do with an infusion of over $3 trillion from the Federal Reserve.  As we now know, the recession lasted only two months in 2020 (March and April) and at the end of the year the S&P 500 had a total return of 18.4%.  

I have several clients who call me on a regular basis panicking that they want to turn their investments into cash for various reasons, many of which are not economic.  I think my most important role is to try and calm their fears and keep them invested.  When you think about it, over the last 19 years, since 2003, the S&P 500 index has only been down two of those years.  If you calculate that, it’s roughly 10.5% odds of losing money in the S&P 500, but 89.5% odds of making money.  Therefore, you do not have to be a Philadelphia lawyer to understand you are always better invested than not invested.  An even more compelling number is that since 1970, the average rate of return for the S&P 500 has been 10.98% over that time.  Once again, history tells us that you are much better invested than trying to time the market.  If you could get rich timing the market, then you would be on the list of the wealthiest Americans.  As of today, there is not one single market-timer who makes that list.  

Caroline before her first day
 of 2nd grade

There is no question that over the summer months the economy has slowed down.  I am here to tell you that that is nothing but good.  The level we were functioning at in the first quarter of 2021, was just not sustainable.  The U.S. economy cannot grow at 6%+ without major disruptions.  We have seen that since the first of 2021, with the shortage of goods in the supply chain and the over-the-top need for employees to satisfy job positions.  There has been displacement in the automobile construction due to a lack of microchips and, of course, the shortage of construction supplies in the building industry.  The fact that the economy is now slowing will give pause to the Federal Reserve’s perceived need to cut bond purchasing and to increase interest rates.  Just as Federal Reserve chairman Jerome Powell indicated, the increases in prices most assuredly would resolve their own issue as the summer wore on.  The fact that the economy is slow now gives the Federal Reserve time to slowly transition into a more stable economy, earning a GDP more in the range of 4% rather than 6%.  

On Friday, the Federal Reserve of Atlanta reduced its estimate for the growth in the 3rd quarter to 3.7% GDP.  Only the previous day, that estimate was 5.3% growth.  Yes, these are huge moves to the downside, but are warranted by the supply chain issues and the shortage of products in the production cycle.  Also, quite frankly, it has a lot to do with summer vacations and a general slowdown in activity during those months. But I think this is getting ready to move to a higher level come the 4th quarter.  

Finally, this week the supplementary unemployment benefits will end and workers that were on long-term unemployment will be faced with either finding a job or doing without.  In addition, across the country schools are starting and childcare, which was such an enormous issue during COVID, will now decline.  At the current time there are roughly 11 million job openings posted and only 8 million unemployed.  At some point those numbers have to become closer.  

Last week the job report for August was a disappointing one at 235,000 new jobs.  But you must realize that this survey is taken in the middle of August and as we all know, August is a major vacation time up until the time school gets back in session.  But there were whirls of good news in this report that the media seemed to ignore.  For the month of August, unemployment dropped from 5.4% in July to 5.2% in August.  When I was studying economics back in the dark ages, the U.S. economy was considered fully employed at 5%.  We are very close to that level.  

In addition, during the financial boom before COVID, unemployment was around 4% and we are quickly reaching that higher level of employment.  There was also great news for wages in the report.  Wages went up 0.6% in a month and have increased 4.3% from a year ago.  When you consider the number of people employed in the U.S. a 4.3% increase in wages will do a lot to create additional commerce where these people have a discretionary income to support their families.  If you were expecting that I would write that the economy had slowed and that was a bad thing, you do not follow the Federal Reserve’s actions very closely.  In respect to Federal Reserve increasing interest rates, “bad news is always good news” and “good news is always bad news”.  This report very clearly will slow down the Federal Reserve’s action to slow the economy since it is slowing with its own momentum and, more likely than not, any interest rate increases will not be until 2023.  Even though the consensus growth of GDP for the year 2021 is at 6.6% growth, it would not surprise me to see that lowered to a more sustainable and more important growth of 4-5%.  

Fresh air isn’t so bad after all…

This year we will observe the 20th year of the terrorist attack in the United States on September 11, 2001.  I watched several features over the last week about September 11th on Netflix and Apple TV that were quite excellent.  If you do not remember the sense of terror we all felt on that day, I recommend you go back and watch these specials to reflect the anxiety and fear we all experienced.  

Many do not remember that the attacks were on a Tuesday around 9:00 am.  The stock market was just getting cranked up when the full impact of the terrorist attack was realized.  In fact, the New York Stock Exchange was within the shadow of the World Trade Center and many feared that the U.S. Stock Exchange would be damaged or destroyed when the two towers fell on that fateful day.  I vividly remember watching the second plane strike the second tower in my office at Colony Square.  Within the hour security guards came to our suite and told us to evacuate the building given the unknown nature of the attacks.  I thought to myself, if they are abandoning a B-rated office building in Atlanta over the attacks in New York City, we must really be in trouble.  I went home like most Americans and watched continuous television for hours before finally going to bed. 

It was a foregone conclusion the next day when the U.S. Stock Exchange could not open due to the damage in the building.  In fact, never in the history of the New York Stock Exchange had it been closed four continuous days, and it looked like this would be the first time this would happen.  We received an enormous avalanche of phone calls expressing outright fear and a desire to liquidate as quickly as possible.  I think we did our best work in convincing our clients that as horrible and as devastating as this attack was it was likely to be short lived.  This was a prime example of my philosophy of staying invested at all times.

On September 10, 2011, the Dow Jones Industrial Average closed at 9,605.51.  After finally opening six days later, the market bottomed on September 21st at 8,235.81 suffering a 15% decline in the 10 days after the attack.  I vividly recall the market swinging at hundreds of points a day during this sell-off.  A 100 point drop today is not as near important as 100 points were during 2001.  However, with the Federal Reserve’s help the market was stable even though it was highly volatile.

Do you realize how long it took for the market to fully recover after this sell off?  Exactly 90 days - after the September 11, 2001 attack, the Dow Jones Industrial Average closed up 9,888.37 for a 1% gain form the day preceding the attack.  If you sold into this sell-off, you clearly would have done a disservice to your investments. What was even better news on March 11th, exactly six months after the terrorist attacks, the market closed at 10,611.24 which was exactly a 10% gain from the day preceding the attacks.  Therefore, in the intervening six months after the worst terrorist attack ever on American soil, the Dow Jones Industrial Average had increased 10% over the levels preceding the attack. 

For Ava, the sky’s the limit!

Having been in this business for nearly five decades, I have seen many selloffs and many recoveries.  If you think about it just for a second, the day after the markets opened after the September 11th attack, the market closed the Dow Jones Industrial Average at 8,235.  Today that same index is 35,369 which means it has gained 368% in the intervening 20 years.  If you had stayed invested during that entire time, your portfolio would have increased almost four times the September 11th value.  

There has been a lot of publicity and questions by U.S. investors as to what is going on in China and their crackdown on some of their most high-profile companies.  Do not believe for a second that China is not a communist economy.  It is absolutely true that the government in China is controlled by the communist party, but their economy is clearly the second most powerful in the world.  What has developed over the last 40 years is an economy in China that is growing exponentially and correspondingly adding millions into the middle class.  Anytime you read statistics about the Chinese economy, you need to think that in the United States we have 330 million people, but China has 1.4 billion people.  Therefore, everything they do would need to be almost four times greater than the United States to be in a comparable basis.  But what has happened to the economy is very much hated by the communist government.  As you know one of the bedrock philosophies of communism is that everybody would be treated equally and there will be no winners or losers in that economic race.  Because of the newfound wealth of the Chinese companies, multibillionaires are being created on a regular basis.

The Chinese government now has decided that they have seen enough prosperity with their entrepreneurs, and they are anxious to get back involved in these businesses so they can ensure their wealth.  They recently shutdown an IPO of Jack Ma for no other good reason other than this IPO would have created too much wealth in one person’s hands.  Interestingly, Jack Ma has not been in the public eye since the Chinese government pulled the plug on this IPO for him.  

Chinese government has been coming out against cryptocurrency in every form or fashion.  They have shut down the miners of cryptocurrency and have closed down any exchange that allows for the trading of it.  The reason for this is very clear. One of the major advantages for those illegally moving money is cryptocurrency does not leave any audible trail.  Therefore, the Chinese government cannot control the movement of cryptocurrency exporting China into the United States, etc.  Rather than try to fight the trend it is easier to outlaw the trade, making it nearly impossible for those wanting to transfer funds out of China and into overseas markets.  

Elizabeth Flores’ three-legged pup
 smiling big for the camera

In recent weeks, the Chinese government has attacked some of the best-known industries in the world located in China.  They have basically shutdown the Uber of China and have placed enormous restrictions on any internet-based company located in China.  As you know, many of the U.S. based internet companies are forbidden by the Chinese government to operate there.  

It is pretty clear to me that the Chinese government is scrambling to regain control of their industries from the American securities markets.  Shortly after the Chinese version of Uber went public, the Chinese government moved in and essentially shut it down since they were forced to remove their app from further use by consumers.  Shortly after the IPO in the United States, the stock dropped close to over 40% and would you be surprised to know, after that drop the Chinese government agreed to invest in that company.  What is clear is that the Chinese government will do whatever necessary to ensure that individuals are not more powerful than the government.

As we enter September, which historically is the worst month of the year, you need to reflect on the fact that we have had seven straight positive months in the S&P 500.  This unprecedented run after the banner investment year of 2020 has left the S&P 500 almost 40% higher from when it began in January 2020.  While I do not expect that the market will move dramatically higher immediately, I do expect that the market will trade higher by the end of this year than it is today.  While it would not be a straight line up, I believe the market will grind on a slow basis with high volatility throughout the rest of the year.  As pointed out above, even with the extraordinary volatility, an investor is always better of being invested than not. 

As always, the above comments are based on my personal research and opinion and certainly no one can forecast the future accurately.  However, the realization that the economy has already turned should be self-evident and those who are sitting on cash should be moved to make appropriate investments. 

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