Wednesday, May 12, 2021

“Who You Gonna Believe, Me or Your Own Eyes?” – Groucho Marx

I know I have used this famous Groucho Marx quote in many of my postings, however, I find it particularly compelling at this particular time.  It is hard for me to imagine that a great many Americans cannot see the explosion of the economy that is occurring around us.  I guess it is influenced by the overwhelming negative attitude of Washington and the continuing flood of cash into the economy from our lawmakers.  Of course, that will lead to short-term positive trends, however clearly long-term negatives. 

Ava and Byrdie catching a 
 Braves game – Braves won in 12

In this posting I want to give you the facts and not the fiction.  I recently had a client tell me that he did not like reading my newsletter since all I did was express positive thoughts.  I guess I am guilty of the obvious.  However, as I pointed out to him, the S&P Index of 500 stocks has had positive returns in 16 of the last 18 years.  I also pointed out that when it was down 37% in 2008, it was followed by an increase of 26% in 2009 and 15% in 2010, making back most of the losses.  In 2018 the market was down 4%, but up 31% in 2019 and 18% in 2020.  If you had odds of 16 chances in 18 to double your money in Las Vegas, I rather suspect you would take those odds any day. 
 
I want to cover so many things that indicate the strength of the economy.  The evidence is all around us and if you do not grasp the facts, you may miss one of the greatest buying opportunities of all time.  Before I can get into all those interesting items, I must report on the month of April which was quite an excellent month.  For the month of April 2021, the Standard and Poor’s Index of 500 stocks was up 5.3% and up 11.8% for the year in 2021.  The one-year performance on that index is a cool 46%.  The Dow Jones Industrial Average was up 2.8% for the month of April and up 11.3% for the year 2021.  The one-year return on that index is 42%.  The NASDAQ Composite was up 5.5% during the month of April and is up 8.6% for the year 2021.  The one-year return on that index is 58%.  Just to give you a basis of comparison, the Bloomberg Barclays Aggregate Bond Index was up 0.8% for the month of April, yet it was down 2.7% for the year 2021.  For the one-year period ended that index had a negative return of 0.5%. 

As you can see from the above analysis, the lowest return for any of the major indexes for the one-year period was the Dow Jones Industrial Average which was up 42%.  Compare that with the bond index, which was a negative for the one-year period then ended, and you will see the divergence that is occurring between stocks and bonds.  Anyone not recognizing the underperformance of bonds will probably continue to lose money for the remainder of 2021, which is sad given the upward potential other asset classes hold. 

Lucy and Eddie Wilcox after
 the Girls on the Run 5k

As I predicted in the last several postings, the economic explosion in the United States is just beginning.  What we are now seeing are the early stages of an economy unlike any we have seen since World War II.  The GDP growth for the 1st quarter was a very high 6.4% and based upon the projections of the Federal Reserve, this year should generate a total GDP growth of 7.2%.  Take into context that growth percentage would be the highest since 1984 when Ronald Reagan was President.  Also remember that in 1984 we had basically come out of recession from the previous three years and that jump in GDP was somewhat prevailed by lower tax rates and reduced oil prices in the economy.  The GDP growth in 2021 is not a reflection of a jump back from a recession, but clearly an explosion of printing money by the Federal Reserve and turning that money over to the average consumer. 

The evidence as to this explosion is occurring everywhere around us.  If you are unaware of the shortages in the economy, you really have not read current financial news.  The automobile companies are reporting that they have cut back production because they do not have enough semiconductors to build a car.  Take into context that virtually everything we buy nowadays has semiconductors and the production around the world is not adequate to keep up.  That tells you the public is on an unprecedented buying spree. Currently, Home Depot has no dishwashers, refrigerators or washers and dryers available for delivery.  Their latest indication is that it may be October before they are resupplied.  Just when exactly have you ever known Home Depot to not have refrigerators available? 

Even more distressing is that contractors are reporting that they have no 2x4’s of lumber.  How can the housing boom continue without 2x4’s?  Those contractors lucky enough to find 2x4’s are noting that the price is double what it was 6 months ago.  I am also sure that you have read that home sales are beyond ridiculous at the current time.  It is reported that homes selling in Atlanta oftentimes will get double digit offers to purchase above the asking price.  The days of taking the asking price and discounting it 10% are long gone.  In fact, for a decent house inside the perimeter of Atlanta, to stay on the market more than one day, there must be a serious problem with the house.  Now how could any potential consumer not understand these shortages and not understand how good the economy will be if all these shortages occur? 

The numbers for April were nothing short of spectacular.  Consumer income during the month of April was up over 20%.  Yes, I understand a great deal of this was due to the stimulus payments paid to most anybody who asked for them, but it also had a lot to do with more people going back to work.  What was more interesting to me was that retail sales for the month of April were up 21.3% over a year ago at the same time period and the savings rate of consumers set an all-time high of 21%, as compared to a  normalized savings rate of 7.5%.  So, in summary, people were making more money, but were also saving more money and clearly this saving of money bodes well for future spending by consumers. All this explosion in the economy has to be taken in perspective of the actions of Congress where they have already distributed almost $4 trillion in stimulus money and are desiring to distribute another $4 trillion in the upcoming months. 

Mitch Musciano-Howard accepting
 his Varsity Letter for soccer

While certainly things on that list of Federal expenditures are needed, the vast majority of this amount will do nothing but create hyperinflation in the United States.  If you take an economy that is already scalding hot and you flow an additional $4 trillion of liquidity into that economy, almost assuredly the economy will overheat leading to adverse economic effects of inflation in the coming months.  Just exactly what they are looking at in Washington defies the ability of someone trained in economics to actually understand. 

Make no secret about it, the way the Federal Reserve has created all this money to be distributed is by using their very efficient printing presses to produce more cash.  While the flooding of the economy certainly has positive economic effects over the short-term, if you overheat the economy and if interest rates start to go up because of the overheated economy, the long-term trends on $8 trillion of manufactured money would be significantly bad.  I do not want to imply that negative aspects will occur in the next day, week or month, but certainly 10 years from now we will all feel the burden of repaying debt that was created today. 

I told you in prior postings that you should be extraordinarily positive with the progress that has been made on vaccinations in the U.S.  I indicated that you were likely to see by the middle of the summer the ability to reopen the economy virtually everywhere.  I was certainly wrong in that projection.  That day is here today, and it is happening.  I went to the Atlanta Braves game last night and the stadium was at full capacity.  There was no social distancing occurring, but the numbers support that confidence by consumers.  For all the people in the United States over the age of 18, 43% are now fully vaccinated and another 57% have already had their first vaccination.  Everybody wonders why this percentage is not higher.  Remember that there are no vaccinations given to anyone under the age of 18.  However, beginning next week children between the ages of 12-17 will begin vaccinations, which should run the percentage up dramatically over the next few months. 

Ava and her bunny sharing 
a delicious snack 

But even more encouraging are the U.S. citizens above the age of 65.  A remarkable 83.5% of those U.S. citizens over age 65 have already had one vaccination.  Also remarkable, is that 71%  of U.S. citizens over the age of 65 are fully vaccinated at the current time.  We are going to see an explosion of the economy as the U.S. citizens feel confident that the vaccinations will allow them to travel and spend money once again. 

People think it is remarkable that the amount of increased savings during April was 21%, however, do not forget that people have not been allowed to travel and eat out for the last 14 months. If all those restrictions are lifted you will see an absolute explosion of spending throughout all levels of the economy and, in fact, we may be seeing it right now with all of the shortages that are occurring.  

Almost every day I hear from an investor asking how the stock market can keep going up because stocks are clearly “overvalued.”  I wonder exactly where those investors are getting their information.  If we all agree that stock prices are based on earnings and earnings are going up, there is a high likelihood that stock prices will continue to follow earnings.  But have you or has that investor looked at the current increase in income?  For the first quarter of 2021, the high-tech companies such as Apple, Facebook, Google, and Microsoft reported income that was nothing short of breathtaking.  The numbers were absolutely staggering in their magnitude and shattered all expectations as to future income. 

DeNay visiting scenic Roswell, New Mexico

It is now anticipated that net income as we go forward for all S&P 500 companies will be 25% higher by the end of the year than they are today.  That almost seems to me to be a conservative estimate given the avalanche of cash that is going to be spent by the consumers in the next nine months.  Once these consumers feel comfortable that their job is protected and they do not fear from the COVID pandemic, they will once again travel, eat out in restaurants and spend money on consumer goods.  We as investors do not really care what happened last year, that is in the past.  What we want to know is what is going to happen in the next couple of years.  It is fairly clear to everyone that is reviewing the information that the next couple of years should bring a substantial increase in profits due to this pent-up demand that is now going to be released on the American economy.

It almost seems comical to me that in the 1970s, ExxonMobil reported a quarterly profit of $10 billion and the congress of the United States was outraged.  In fact, there were calls at that time by Congress to break up Exxon and to impose a windfall of profits tax on them due to their higher profits.  This last quarter, the company Google reported net earnings that were double Exxon’s quarterly earnings and there was not a whimper out of Washington.  In fact, when you think about it, Exxon spends substantial sums of money to extract oil from the ground, refine it and sell it to the public.  Google sells no products to speak of and collects money at an invisible way by key stroke.  Today the super large technology companies dwarf the oil companies and are likely to report substantial profits that will stagger the investing public and embarrass the older companies like Exxon and GE. 

It must be spring – the roses are
 blooming at my house

What is interesting about this time and the reaction of the Federal Reserve is the distinction between what happened in 2008 and what happened in 2020.  You remember in 2008, we reached the point where all the banks were virtually going to fail, and the financial backbone of America was in danger.  The reaction to that by the Federal Reserve was to bail out the banks and the brokerage houses and other significant financial businesses to protect the general public.  But the Federal Reserve did nothing whatsoever to try to help the individual consumer.  Their assumption was if they help the banks, the banks would help the public.  They could not have been more wrong.

It has been reported by many that even though the banks received over $300 billion in Federal TARP subsidies they did not go out and lend to the consumer.  In fact, they used that money to shore up their own balance sheets and to compensate their people.  It is little known, but true, that virtually all the banks paid 100% of their money back to the Federal Reserve.  In fact, now the reports indicate that TARP was a roaring success for the government.  The Federal Reserve actually made more money on this plan than it cost them.  However, it cost the American public quite a lot more.  There was huge unemployment, many people lost their jobs, and it would take years to recover from that recession.

In comparison, what occurred in 2020 was the exact opposite.  During March and April of 2020, the Federal Reserve did not bother with helping the banks, but went directly to compensate the individual citizens in the U.S.  By virtue of throwing $4 trillion into the economy, they instantly turned it around.  As I pointed out in those postings in 2020, if you do not realize what $4 trillion will do to the economy, you have not been around economics very long.  By flooding the economy with money, the Federal Reserve created an economy supported by Federal money that only lapsed into a recession for a few months in 2020.  Now, less than a year later, we are looking at an economy that is virtually exploding.  The Federal Reserve Bank of Atlanta is now forecasting GDP growth in the second quarter at 11%.  Short of wartime, this country has never had such high GDP growth. 

What is bewildering about the reaction of Congress today is that they just cannot be satisfied with the good work that the Federal Reserve has already done.  They are insisting that they need to throw another $4 trillion into the economy, which as pointed out above is likely detrimental.  Almost daily we hear speeches of how many people are unemployed and the terrible economic circumstances of the unemployed.  As we all now know, we could quickly solve the unemployment issue if we just reduced the subsidy by the U.S. government.  We have paid unemployment greater than what was necessary during the crisis, which has continued almost beyond any time of realistic need for the money.  Virtually every employer that I know cannot hire employees to work at their business.  The golf course that I am a member of had to close two of its three restaurants because it does not have enough employees to work.  Everywhere you go you see help wanted signs and employers with the inability to hire workers.  That is not an economy that is represented by high unemployment.

DeNay hoping to spot some 
UFOs in Roswell

Not only did the Federal government pay too much in the way of unemployment, most recently it has been determined that the first $10,000 of unemployment is tax-free for many recipients.  It is estimated by the Bank of America economist that the unemployment today would be equivalent to a salary of $33,000 in the private sector.  Most of the hospitality workers do not make that much money anyway and therefore it is better for them to not work than for them to give up the governmental subsidy.  While it is true that there are still eight million U.S. workers not working today, you must wonder if they cut unemployment, a great number of those would return to work immediately.  As of today, there are already two states that have totally rejected Federal unemployment subsidy not because they do not like receiving Federal money, but because there is such a shortage of labor in their state.  They are hysterically trying to get people back to work by cutting the unemployment benefits.  There are 8 million open jobs in the U.S.

A lot of ink has been wasted on the proposed tax increases proposed by the current administration.  Quite frankly, I think there is a high likelihood that I have a better chance of playing shortstop for the Atlanta Braves today than all these tax proposals getting through Congress. I have no doubt that some will, but the majority will not, or they will certainly be modified.  To give you an example of one that is an extreme, the President is proposing that for anyone making a $1 million, the capital gains rate would be equivalent to the ordinary income rate which is roughly 43%.  If you add to that number state income tax, that means on a capital gain that size, you would be paying over 50% tax of that gain.  In my opinion that will never happen.

People have lost sight of the real reason why taxation occurs.  The reason you tax things is because you want people to buy less of them.  Remember we have always overtaxed tobacco, alcohol, and gasoline, the theory being if we tax these items high enough, people will not spend money on them and therefore reduce consumption which will help the economy.  For us to even consider taxing capital is a dangerous precedent.  I thought I would never get to the point where the government is taking actions that are detrimental to the entrepreneurs of the U.S.

There is no question that capital is the secret to why America is the most inventive country in the world.  Have you ever considered that virtually all the software and medical achievements occur in the United States and not in other countries?  Japan and China have proven that they are very skilled workers that can copy U.S. products and produce them well.  Neither Japan nor China have proven that they can develop these products as the U.S. has. The reason that companies can participate and create new products is because of capital.  Sometimes it is private capital and sometimes it is government capital.  In the most recent example, there is no way that these pharmaceutical companies could have developed a COVID-19 vaccine in less than12 months without the government’s involvement. By virtue of throwing billions of dollars into these pharmaceutical companies, vaccines were created within one year that are inexpensive and actually work.  The last thing we would want to do is reduce the ability of entrepreneurship in America by taxing capital to such an extreme level.  While capital gains taxes may go up to something like 28% which is the rate that it was during the Clinton Administration, certainly, to tax at that ordinary income level is not in the cards. 

Marti Musciano-Howard celebrating 
her Varsity Letter and MVP
 award for soccer 

As we gear back up to full production in the U.S., it always concerns me when I hear Washington misstating the facts to prove a political theory.  The most recent example of that is the State of the Nation Address by President Joe Biden.  During the course of his speech he said, “Wall Street didn’t build this country.  The middle class built this county, and unions built the middle class.”  While not surprising, a similar opinion was represented by former President Barack Obama.  Why is the government misstating facts that are clearly easily checked to be incorrect?  I understand political payback and certainly the unions almost universally supported the President in the last election, and he would want to give them due respect - I understand that part of the program.  However, the facts are indisputable. 

Today less than 11% of the U.S. population is covered by union contracts.  And the number of U.S. workers covered by unions previously is even less.  The number of union workers during the 1920s was roughly 5 million.  That number declined to three million in 1930 and almost none of these union jobs were in large U.S. industry such as steel or automobiles.  In fact, most of the union jobs were all held in mostly craft skills that required specialized training to be a part of a union.  Therefore, to assume that labor unions were instrumental in building America, is disingenuous and incorrect. 

As we go into the summer, we have time to sit down with you and review your financial plan.  I anticipate that this year is going to be bumpy with many ups and downs, but the trend is clearly up, and you need to participate.  I believe bonds will not make any money in 2021 and that investment could potentially drag down your portfolio.  However, the biggest obstacle to building wealth today is this over-mounting gush of money that is being held by the public in cash.  I can almost assure you the vast majority of people reading this posting has more than one year of cash at their disposal, uninvested.  If you are talking about a lost opportunity, there it is, just as crystal clear as it can be.  


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 

Thursday, April 8, 2021

“It’s Tough to Make Predictions, Especially About the Future” – Yogi Berra

Every time I read the quote from Yogi Berra above, I have to nod my head in agreement.  He definitely had a way of simplifying complex subjects.  Predictions are difficult when the facts are unknown and the conditions heading into the future are unpredictable.  We found ourselves in that exact predicament one year ago, in March 2020.  Rarely have I seen as much fear by investors than I saw in that month when the first lockdown occurred.  

At that time, investors were falling all over themselves to get out of the market and into cash, which was earning nothing.  I tried to assure them that the economy would quickly turn around and the stock market would react positively with the economic support of the federal government.  When you throw basically $3 trillion into the economy at one time, that money is going to get spent and is going to create economic activity which will lead to higher profits and higher GDP.  

Ava celebrating winning first place in
 her Figure Skating division

So Yogi, we actually projected that one correctly.  If you look at the time period from March 2020-2021, the S&P was up 56.3%.  The NASDAQ Composite was up 73.4% and the Dow Jones Industrial Average was up 53.8% over that one-year period.  Those types of gains are not normal.  They are extraordinary gains based on extraordinary circumstances.  The one thing we absolutely know when it comes to economics is that money creates spending and spending creates profits.  Remember, the most important driving force in making stock prices go up is earnings. 

As I sit here today reading all the financial information, I am blown away by the positive nature of the economy, yet the negative nature of so many investors.  All around, commerce is returning to normal, yet for some reason there is a high level of skepticism by the public based on fear or unknown economic circumstances that I am not aware of.  I will attempt to cover some of those items as well as some other information that I find interesting.  

As I must provide in all my postings, here are the rates of return for the month.  The Standard & Poor’s Index of 500 stocks was up 4.4% in March.  Year-to-date it is up 6.2% and as mentioned up 56.3% for one-year.  The NASDAQ Composite was basically breakeven at 0.5%, year-to-date is up 3% and for the one-year period is up 73.4%.  The Dow Jones Industrial Average was up 6.8% during March, up 8.3% for the year 2021 and up 53.8% for the one-year period.  Just for purposes of comparison, the Bloomberg Barclays Aggregate Bond Index was down 1.3% for the month of March, down 3.5% for the year 2021 and for the one-year period was up a measly 0.4%.  During the month of March there was this highly publicized conversion from growth into value type stocks.  As you see the excellent month that Dow Jones Industrial had, that is because many of its components are value-related stocks.  I think that will be a temporary shift and as earnings start to come in during the month of April, investors will convert back to growth investments.  

Cameron, 13, enjoying virtual “band class”
 while his parents are at work

Everyone asks me about the so-called axioms of investing - the unwritten rules of traders.  One of those axioms that has been illustrated lately is the concept that if interest rates go up, you sell growth investments.  The theory goes something like this.  If interest rates are going up that means the Federal Reserve is doing so to slow down the economy.  If you slow down the economy, then growth instruments would clearly suffer.  Therefore, one of the axioms that is held dearly to trader’s philosophy is that once interest rates start to go up you must sell growth and buy value-related investments.  

As we all know, axioms sometimes fail because they are not supported by facts.  In this particular cycle, we already had the Federal Reserve telling us that they have no intention whatsoever to increase interest rates until 2023.  We are in a situation now where the economy is exploding with growth and the government keeps throwing gasoline on the fire with new stimulus and governmental spending.  In March of 2020, the U.S. came into that month with a deficit of roughly $22 trillion.  Over the intervening 14 months, if the infrastructure bill is passed we will have added another almost $6 trillion in debt over a one-year period.  If you truly don’t believe that $6 trillion is going to move the economy, then you do not really understand economics.  If the GDP in the United States is $23 trillion this year, but you dispose another $6 trillion worth of stimulus into the economy, whatever the Federal Reserve does to try to slow that down would be a complete waste of time.   

I am not sure where most people get their economic facts, but as we sit here today this economy is getting ready to explode upward.  As we have learned, the most important component to making the economy come back is the vaccinations.  As of this morning, roughly 162 million Americans have been vaccinated.  Based on the last 30 days, we are newly vaccinating 3 million people a day and the simple arithmetic would be that by the end of April we should have at least 250 million Americans vaccinated out of the 330 million population.  I am absolutely positive that everyone will not get vaccinated, but we don’t need 100% to reach herd immunity.  

Reid and Caroline at 
Drive, Chip & Putt

Everywhere you look the economy is picking up.  The Employment Report that just posted yesterday was nothing short of gangbusters.  That report showed that not only was the hiring of new employees paramount, but we also saw hiring in such industries as entertainment, restaurants and hospitality.  You may rest assured those employers would not be hiring if they did not feel safe after vaccination.  

You are getting ready to see a tsunami of spending occur in America.  All the money that has not been spent over this last year for travel, vacations and outside entertainment has accumulated in people’s checking accounts.  It is estimated that today there is roughly $5 trillion in checking accounts waiting on some sort of resolution for the future.  It is my best guess that as we get closer to the summer you will see an explosion of spending unprecedented in the United States for many years.  

It was only announced this week by the CDC that if you have been vaccinated it is safe for you to travel again, yet airline travel is up dramatically over the last few weeks and it is reported in the hospitality industry that vacation hospitality has reached the level similar to that of pre-pandemic.  All of that is interesting but should also lead you to the conclusion that earnings will follow all this money.  If you have the general public taking vacations, flying on airplanes and staying in hotels, it will benefit the hospitality industry, the restaurants and everything in between, which is exactly what is happening today.  

Caroline, Reid and Flat Stanley 
resting in the park

Just so you do not think that I have lost all perspective in connection to basic economics, I will explain my position on the economy. There is absolutely no question that all the stimulus that the Federal government has put into the economy will help businesses put people back to work and help America grow.  It is, however, a wonderful short-term asset, but a very much long-term negative for the U.S. economy.  When the Federal government goes out and prints $6 trillion, at some point someone has to repay that debt.  At the current time, interest rates are extraordinarily low and it does not take a whole lot of money to serve as the debt structure to keep that debt in place.  That will not be the case forever.  While I focus on the positives in this newsletter, I just want you to be aware that all of these positive moves in 2021 will more likely be negative moves in 2031.  However, for now let’s just enjoy this runup of the stock market.  

While there are many states in the U.S. that have already recovered, it is now estimated that there are roughly 1.7 million jobs in the U.S. that cannot be filled due to lack of qualification by employees.  One of the strange coincidences that is happening is with all the federal government funding of unemployment, there is a high disincentive for people to go back to work in lower paying jobs.  If you can make more money at home with unemployment, why would you actually go back to a job that doesn’t pay a livable wage?  It was hoped by many employers that the unemployment subsidies would run out but with the newest stimulus package, even those employment benefits have been extended to the end of 2021.  

But it is fairly clear that some states are already back to normalized rates.  In Florida, only 4.7% of their population is unemployed.  Nationwide unemployment is at 6%, but to clarify there are still 8.4 million less jobs than there were at the start of the pandemic.  Even the state of Georgia now has unemployment of 4.8% and every client I know is seeking new employees but cannot find them.  Recently our firm advertised for a CPA for our company and we did not get even a single resume of a qualified CPA looking to change work.  If you get into the more technical areas, the number of people that can fill these jobs with expertise are just not available.  

There is no question that certain states are actually falling well behind this unemployment report.  You could argue that it is self-inflicted, however, I guess we will never know exactly the reason.  As you compare Georgia’s unemployment report at 4.8%, California is 8.5%.  If you compare Florida’s unemployment report at 4.7%, New York is at 8.9%.  Therefore, much can be done to bring the economy back to normalized, but it is these larger states that will have to do the most.  It can clearly be argued that roughly one-half of the states are already back to pre-pandemic levels, while the other half are dragging behind.  

Ava showing off her favorite horse
 “Why the long face?”

So the general consensus is that if you throw $6 trillion into the economy, by necessity you will have to create inflation.  Yes, it is true enough that in recent weeks the long-term interest in the 10-year treasury has gone up to 1.7%.  At the current time, that 10-year treasury rate of 1.7% is equal to the dividend rate of the S&P 500 index.  Many would argue that numerous investors will leave the 500 index and invest their money in 10-year treasuries because the income component is the same.  I find that assertion to be absolutely ridiculous.  

One of the reasons why bonds have returned negative rates of return, as illustrated above, is because interest rates are moving up and will likely move up further.  Also, I do not believe that a 1.7% treasury rate will actually draw money out of the stock market to buy that bond yield.  There will be a time when interest rates will be high enough where money that is currently in the stock market will be drawn into the bond market.  However, I think we are a long way from that point.  So therefore, should we fear inflation as we go forward in the current environment?  

As many of you know the Federal Reserve sits down every six weeks and makes projections of the future economic circumstances.  Remember these are very conservative members that make up the Federal Reserve.  They are not one to exaggerate or even take extreme positions on any economic event.  At the most recent meeting of the Federal Reserve each member was asked to vote relative to their projection on GDP growth and in the United States for the year 2021.  As unbelievable as it sounds, the average projected GDP rate by the Federal Reserve was 7.2% for this year.  If you take that into consideration, that number is so over the top as to be clearly unbelievable.  

The last time the United States enjoyed GDP growth of that rate was in 1984 when Ronald Reagan was President.  Those of you that lived through that period know that the first two years of the Reagan Administration were recession years designed to break the back on inflation, which it did.  As the economy turned in 1983 and 1984, we enjoyed a period of hyper-economic growth, but it was more a reflection coming out of the economy than anything.  We are not in that situation today.  While the economy was bad during the pandemic, it could be argued that we only had recession for two months during that time frame.  If the economy actually generated returns of 7. 2%, that means a large portion of this economic growth will occur at the end of 2021.  All this falls in place with my projections above.  Six trillion creates a lot of economic activity.  

Ava reveling in the snow
 in Akron, Ohio  

As we get into the summer months, the fear of the pandemic will ease with the vaccinations which have proven to be extraordinarily effective.  As more and more Americans utilize their capital, to travel, visit their grandchildren or just go on vacation, it will improve the economy everywhere.  Already we are suffering through severe shortages of components in the supply line to produce products.  Over the last few weeks, the automobile companies have been closing production because they cannot buy enough semiconductors to build cars.  Think of that term for a second.  With all the semiconductors produced in the world we cannot buy enough to keep automobile production running.    

We hear about the major docks in California and along the Eastern Seaboard where ships are lined up to get in, sometimes having to wait weeks to be unloaded.  I happen to know someone who works on the docks in Los Angeles, and they are working 24/7 trying to unload the boats.  Why are all these boats coming to America at this time?  It is a very simple concept - money draws products and products go where money treats it best.  Already the economy is turning to a consumption economy and is growing so quickly we cannot even supply the products.  If you assume that the consumer is 70% of GDP, all this plays into a higher GDP rate of 7.2% for this year.  

So here we have the situation where the economy would be hard pressed to be in better shape.  It is fairly clear that the corner has been turned and with the excellent effectiveness of the vaccines, more and more people will feel comfortable with traveling and spending more money.  If all of that is true, which the evidence is overwhelming that it is, the byproduct of all this spending will be higher earnings which will bring higher stock prices.  

Cameron heading back to school
 after one very long year

If the government had not already provided enough capital, now we are discussing a bill that would provide infrastructure to Americans.  Who could possibly not be for better roads, highways, and airports?  That is almost as good as American pie. However, it is a very precarious time to be putting more stimulus and more debt into the American economy.  In reading the most recent bill proposed by the President, it only allocates about $500 billion a year for these types of repairs.  In respect to a bill of $2.3 trillion, that is relatively a small amount.  It might be worthwhile to postpone that passage of the bill until the economy is more stabilized, probably in a year from now.  

So those who would argue that the government has spent too much money would have a stable platform, however, no one will ever know because Yogi Berra and I cannot forecast it.  As an example, in 2008, when the economy clearly collapsed the government stepped in and provided support for the banks, but not the general public.  That was a very painful recession that lasted for two years and many people got hurt.  

Reid and Caroline waiting patiently
 to tee up at Augusta

During 2020, the government stepped up immediately and funded the economy with $3 trillion, which brought back the economy after only 90 days.  I had clients call in during this timeframe and ask my opinion on how long I thought this recession would last.  I continuously quoted a 90-day time period for this recession, which turned out to be pretty close.  Not that I was any better than anyone else forecasting the future, but I did know that if you throw $3 trillion in the hands of consumers, it would create profits.  

So, the argument could be made that the government is injecting all this money into the economy, which will clearly create inflation.  No one wants inflation like we had in the 1970s, where inflation was growing double digits per year, however the last thing you want in this country is deflationDeflation is much more difficult to come out of than inflation. If you study the 1930s in America and the Great Depression, it was principally caused by deflation more that any one item.  Deflation is the most difficult of all economic events to satisfy.  You may recall that in the 1930s, we suffered through deflation and 25% unemployment in the United States for over 11 years.  Not until the U.S geared up for World War II was the back of deflation broken.  

In summary, the economy is actually quite good and anyone that tells you otherwise really has not been reading the current numbers.  As America wakes up and gets on the road again in the coming months, economic activity will accelerate.  As I projected earlier, this economic activity will lead to more commerce and higher earnings and almost assuredly higher stock prices.  If you are not invested, now is the time without question.  

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 

Wednesday, February 10, 2021

There Is Light At The End Of The Tunnel ... And It Is Not A Train Coming

There is so much good news to report this month that I am bewildered by the overall tone of the news you read every day.  I guess it has become so commonplace to be negative that people just cannot see the good from the bad, so this month I would like to talk about things that I believe you would be interested in and my projections regarding the U.S. economy.  I will discuss the extraordinarily good news regarding housing in the U.S, the pent-up demand that will come at the end of the pandemic and will stun you with the current earnings of Big Tech in America today.  I will also give you a heads up on the inflation that is coming and its causes, and the extraordinarily good news regarding the economy.  It is hard to keep down the excitement as we see the economy shift from a total shutdown to accelerating and growing again. 

I also must discuss the facts regarding the pandemic and what the scientists told us.  All of this affects the economy in a way that should get you excited about the upcoming year.  We finished the year 2020 with one of the best financial years of all time.  A gain of 18.4% is certainly something to be proud of in a pandemic.  Given the extraordinary circumstances of 2020, who would ever have expected that the stock market performance could be one of the best.  I have so much to report on and so little space, I guess I need to get started.  


Ava on her first day of school in 2013 and in 2021 – they grow up so fast!

As I always do before discussing more interesting things, I need to give you the scorecard for the stock market for the month of January 2021.  The S&P 500 was down 1.0% for the month of January, however its one-year return is still excellent at 17.3%.  The NASDAQ Composite was up 1.5% during January and its one-year performance is at 44.1%.  The Dow Jones Industrial Average was down 2% for the month of January, but up 8.5% for the one-year period.  Just as a basis of comparison, the Bloomberg Barclays Aggregate Bond Index was down 0.7% for the month of January and has a one-year return of 4.9%.  

It is hard to believe that we are not even at the one-year anniversary of the true start of the pandemic.  So much has happened over the last year, it is hard to believe it has only been 12 short months, seems much longer.  As I wrote in the first quarter of 2020, to solve the issue of the pandemic we need to turn loose the American Spirit and let corporate America solve the issue of this current virus which turned into a pandemic.  In this short one-year period, we saw our Federal government step up and fund research that led to vaccinations being approved at a record pace.  Even though we are not at the one-year anniversary, during this one-year period we not only created and tested a vaccine, we rolled it out to many Americans.  

As I write this posting, there have been 42.4 million Americans already vaccinated for the virus.  In addition, there have been roughly 27 million cases in the United States.  With a combination of the two, we have roughly 69 million Americans that already have some form of protection from the virus continuing to spread.  Whether you realize it or not, just a short 6 weeks have elapsed since the first vaccination and we already have close to 20% of the U.S. population that has some sort of protection from additional spread.  This is a remarkable rollout by anyone’s definition.  Whatever the newspapers and television media are talking about – I have no idea.  

But the best part is only beginning.  This morning Pfizer announced that they were increasing their production of vaccines by a full 50%.  Johnson & Johnson will receive their emergency approval of their vaccination this month.  By some accounts, there are roughly 15 additional vaccinations in the final stages of approval.  We will have more than enough supply; the implementation will be the challenge.  What is even more fascinating to me is that, as of today, there are 20 million doses of the vaccine sitting on shelves that have yet to be administered.  We are currently vaccinating at a rate of 1.5 million people per day.  This will be a low point as we roll out vaccinations in the coming weeks to the common man in drug stores and then retail stores.  It is now estimated that 40,000 drug stores and retail stores have applied for licenses to administer the vaccination in the coming weeks.  As we provide the supply of vaccinations to the drug stores, I fully expect the number of vaccinations a day to increase substantially.  

Caroline Schultz (7) celebrating her birthday weekend

From March 1st until June 30th, there are 122 days.  If you assume that we can continue to vaccinate 1.5 million people at a minimum per day, that is another 183 million vaccinations to be added to the ones already completed.  It is fully conceivable that by June 30th we will have vaccinated nearly everybody in the U.S. who actually wants to be vaccinated.  Whenever that day comes, you will see such a rush of spending and increase in commerce, unlike anything we have seen in this country in many generations.  It is going to be exciting!  

Notwithstanding all the negative news you hear about the vaccine and its rollout, no matter how hard you squint, or what angle you look at it from, the coronavirus vaccinations are an overwhelming triumph.  You want the actual proof of their success?  With only 20% of the U.S. population currently vaccinated, the number of new cases in the U.S. over the past two weeks is down 35%.  There are some states now that have only a few thousand active cases.  For all the things that have gone wrong and for all of the criticism levied on the Federal government over the last few years, the vaccinations themselves have shattered even the most ambitious expectations.  Not only has the American Spirit pitched in to solve a pandemic in record time, it also bodes well for the future where vaccinations can be created, tested and implemented over a short period of time.  Unquestionably, this will lead to a healthier world population due to the experiences learned over the last 12 months.  

It is already true that the economy is improving dramatically.  The unemployment report for the month of January indicated an unemployment rate of 6.3%.  There is no question that there are still 10 million people unemployed, but the government has funded these unemployed with lucrative benefits of unemployment and continues to extend those unemployment benefits well into 2021.  As the vaccinations roll out in the spring, you will see restaurants reopen and retail stores get back to full employment.  It would appear to me that employment should move up dramatically in only a few short months from where we sit today.  

Caroline enjoying her sweet birthday treat

Every day I read about the pandemic and all the various mutations of the virus that could bring down the world economy.  I am not exactly sure where these people get their facts since the scientific evidence, overall, is quite overwhelmingly positive.  It is now estimated by some that the GDP in the United States will exceed 7.5% for the year 2021.  That rate of growth has not been accomplished for decades in the U.S.  What we now know from prior investing experience is that the one sure-fire reason that the market will go down is due to a recession forthcoming.  Nothing that I have indicated so far would call for anything close to a recession in the year 2021.  

I read with great interest that so many of the experts were forecasting the demise of Big Tech in America.  Surely since the stocks had run up during the year 2020, we would see a gigantic pull-back in the performance of these large companies.  After reviewing the fourth quarter earnings of the largest tech companies, it was almost breathtaking.  Just look at the quarterly net income of Big Tech.  During the fourth quarter, Apple earned a net profit of $29 billion.  That was not gross, that was net.  Add to that Google and Microsoft both had net profits of $15 billion for the quarter.  Lowly Facebook, that sells no products only advertising, had an $11 billion net profit.  And Amazon clocked in with a profit of $8 billion.  By any definition, those performances were beyond extraordinary.  

Take into comparison the former most profitable company in the world, ExxonMobil, which had a loss in the fourth quarter of 2020 of -$20 billion.  At one time, it was thought that Congress was going to create a windfall profit tax because Exxon was making too many profits.  It is now known that Apple makes more profits now than Exxon ever dreamed about in its heyday.  

If you want good news about your home, then you do not have to look very far to get it.  During December, existing home sales are up 22%, but more importantly, the average home price had increased a cool year-over-year at 12.9%.  If you think about it for a second, an increase of almost 13% of the value of every home in the United States is a staggering amount of money.  New home sales were also strong, going up 19% with the median price increasing by 8%.  Keep in mind, the consumer’s net worth is directly linked to the value of his real estate.  

As the value of someone’s home goes up, the value of their net worth increases, and their disposable income is freed up for consumer goods.  This increase in housing prices bodes well for future spending by consumers.  Now it can be said that home prices are directly attributable to the low interest rates we enjoy today, and I am sure that is true.  However, never before have we seen interest rates stay this low for such a long period of time.  You can attribute that directly to the Federal Reserve’s stated intent of keeping interest rates low for the next two years.  

As we change administrations, you have the unwelcome influence of government, which is a negative in many aspects of our economy.  Newly elected President Biden during his first week in office made moves to restrict the exportation and drilling of oil in the United States.  By immediately canceling the Keystone Pipeline and revoking leases on the drilling of oil on Federal land, we all know (including him) this will lead to higher oil prices in the future.  In fact, in a period of less than three weeks, the price of oil has gone up $10/barrel due to these actions.  Part of the increase, I am sure, relates to the anticipated stronger economy coming this summer, but when you restrict exportation and drilling coupled with a stronger economy of people wanting to travel after the pandemic, certainly you will see higher oil prices.  

There is not a more critical component of future inflation than the price of oil.  The price of oil figures into virtually every aspect of every item we purchase.  Due to transportation and the cost of manufacturing, this increase in the price of oil will be passed along to consumer goods, which almost assuredly will increase inflation.  

Ava and Josh at the Statue of Liberty

So, what we are already seeing is that an increase in interest rates is taking place.  The 10-year treasury now is up to 1.017%, considerably higher than it was less than 90 days ago.  The 30-year treasury is still trading below 2%, but it is nearing that level for the first time in over one year.  As explained here many times before, this increase in inflation will diminish the return on bonds, since they move inversely to the increase in these rates and very likely will provide a negative rate of total return for bonds for the year 2021.  As I have predicted before, there is a high likelihood that cash will outperform bonds during this year of 2021.  

We all understand the concept of political payback and we understand why President Biden moved quickly to support the environmental cause of many of his supporters.  However, if he had moved more slowly and announced these changes to come up in the future, we probably would not have had this shock of inflation so quickly.  The real danger, of course, is that if inflation starts to gain momentum, we could see the Federal Reserve change its theory of prolonged low interest rates and begin to increase them again.  

If, by chance, the Federal Reserve started increasing interest rates, prior to their stated timetable of constant rates through 2023, that would certainly have a negative effect on the U.S. economy.  Oil producing third world countries around the world must be applauding President Biden’s actions.  The super-producers in the Middle East and Russia will receive instant gratifications of higher rates with these actions in the U.S. with President Biden doing more to support the economy in Russia in one week than President Trump did in four years.  

What we know about the pandemic now, is that it was a terrible tragedy for the United States - for both the people who got sick and died as well as for the U.S. economy.  What is fascinating to me, is the amount of conflicting information we received at the beginning of and during the process of the pandemic.  You will recall, there were projections that we may lose as much as 5% of the population who would die from this pandemic.  That would have been a death rate close to 15 million total.  In the United States, we have tragically lost 473,000 deaths due to the pandemic, although many of those deaths were inevitable due to old age and ill health.  But certainly, nowhere close to 5% of the population.  

Partners Danielle Van Lear, Robby Schultz, 
Joe Rollins and Eddie Wilcox 

We were told that if you lock down your economy, you will prevent the spread of the virus and on the other end of the lockdowns, you will isolate and come out quicker.  Just take the case of New York, where they proved the opposite to be true.  Even though New York went through an extended period of lockdown, they have one of the worst records in all the United States.  They are still mostly on lockdown today.  In the process of shutting down their economy, they have destroyed their hospitality industry and have crippled their tourism business, maybe forever.  And to what end did they accomplish this draconic shutdown?  

New York has the largest number of deaths of any state in the union with almost 45,000.  The state of Georgia, which has roughly 50% of the population of New York State, has lost a tragic 15,000 lives, but has a much better record than the state of New York.  Florida which has a larger population than the state of New York, which did not put its economy through long periods of lockdown, had only 28,000 deaths as compared to New York’s 45,000 deaths.  So, with the expressed desire to shut businesses down, they have accomplished virtually nothing positive in fighting the pandemic.  Today Disneyland in California is still closed while Disney World in Florida has been open for months.  

The poster boy for doing what is right during the pandemic was Governor Andrew Cuomo, who argued that he needed 40,000 ventilators, which he never used to fight the pandemic.  Yet, his state has the worst record of any state when it comes to controlling the pandemic.

None of us know really what the long-term effect of children missing an entire year of school will be.  My 9-year-old will go to her first class on February 8th.  I guess you can say that this year was a total waste of her education, since clearly sitting in front of a computer for seven hours a day was not the equivalent of in-person educational instruction.  That is a year of education that can never be recovered.  

There are many lessons we have learned over the last year that hopefully will be beneficial in the future.  What we now know is that large, enforced shutdowns were not the answer and clearly should not be in the future.  But we have learned lessons regarding medicine that will benefit all of us going forward.  In a record amount of time, we have created vaccines that not only work but are relatively inexpensive and are highly efficient.  It is now believed that these vaccines can be adapted and used for many things which can be highly beneficial to future potential pandemics.

Partner Robby Schultz with 35-year client Mary Trupo

I just do not know how you can get more excited about the economy going forward.  The economy is already building steam and it is highly likely that by late spring anyone who wants to go back to work would be allowed to do so.  The projections of GDP growth in 2021 at 7.5%, which is almost too high to believe. Notwithstanding the very positive prospects of future economic growth, Congress and its ultimate wisdom will likely approve a $1.9 trillion stimulus sometime in the coming weeks.  

If you recall the last stimulus about one year ago, was roughly $3.2 trillion, the one right at Christmas was close to $1 trillion and you have another $1.9 trillion this year.  There is no question that putting this amount of money into the economy will be an economic boom of commerce and of individual consumer spending.  As this money starts to flow through the system in the spring, along with the reopening of the economy and the hospitality and travel industry, you should see an economic explosion unparallel in multiple decades.  

Ava and Dakota with 35-year clients
 Gerry and Allen Davidson

While stock prices are clearly high, you must compare them with the extortionary low interest rates.  Given that my projection is that bonds will have a negative return in 2021 and cash will earn virtually zero, stocks have become the only game in town.  If compared to long-term interest rates, today stocks are actually not overpriced, but rather fairly priced.

In retrospect, when you think about it, the Federal government has or will put roughly $7 trillion worth of stimulus in the economy over the year; it is a mind-blowing reality.  People ask me all the time how it is that they can create $7 trillion of new money.  When you own the printing presses you can virtually create any amount of money you want.  

Sheryl Matton, Gary McDade, Kathryn and 
Mark Keramidas celebrating Mark’s
 birthday in Deer Valley, Utah

There is absolutely no question that this is a long-term negative for the United States economy, but there is also no question that it is a short-term positive.  No one knows what the future holds, but at some point, that $7 trillion will have to be repaid by future generations.  You would expect that this flooding of the economy creating demand for commodities such as oil, food and housing will certainly increase the rate of inflation.  Moderate inflation is actually good for the economy in many regards.  It is not good if it is out of control.  The combination of higher inflation and the potential of higher rates to reduce inflation will almost surely be a negative for the economy in 2023 and 2024.  However, that is two years away and we need to enjoy the ride until the ugly inflation gauge stars to go higher.

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 

Wednesday, January 13, 2021

“Bull Markets Are Born On Pessimism, Grown on Skepticism, Mature On Optimism and Die On Euphoria” – Sir John Templeton

I often refer to the above quote by the famous investor Sir John Templeton to explain what is currently going on in marketplaces. Not a single day goes by that I am not confronted by the question from clients regarding the ever-advancing stock markets. It seems that everyone would like to project the decline in the market since everyone now has become an expert on valuations of stock. In each of those cases, I attempt to talk clients out of any rash moves since we all know that “market timing” is virtually impossible, but it is really difficult to convince clients of that fact. So in this writing, I thought I would explain why we have not reached the level of “euphoria”, referred to above, by Sir John Templeton. 

While it is certainly not 1999 again, for too many reasons to explain, I will give you the basics of the difference between then and now. And we certainly cannot party like it is 1999 any longer. Also, I want to reflect back on the incredible year of 2020, which none of us are sad to see pass. If you are not excited about the upcoming 2021 year, you really do not have a firm concept of basic economics. In Economics 101 we learned the importance of supply and demand. We all learned that if the demand is higher than the supply, then prices will most assuredly rise. We learned many other basic economic provisions during those years in school that will come into play during the 2021 year. I will try to explain all of those. 

Ava (9) and CiCi enjoying a Florida Christmas

At the beginning of every year, I try to make a projection for the upcoming year. If you refer to my blog posted in January 2020, you will note that I projected that the S&P 500 Index would be at a level of 3600 at the end of 2020. That projection reflected a total gain in that index of 13%. I am not disappointed to report that I actually missed that projection by roughly 5%. The S&P 500 Index finished the year at 3756, with a total return of 18.4% for the year 2020. But quite honestly, that does not tell the entire story. 

So many investors have been lured into the mistaken concept that they can invest strictly in an index fund and outperform professionals who actually manage money. The year 2020 was a clear example of how flawed that concept really is. Most of the actively managed mutual funds with professional management teams outperform the S&P 500 Index by a multiple of 1.5 to 2 times that rate of return. It was not unusual to find many actively managed growth funds that returned 35%-45% during 2020, far exceeding the level of index funds. There are many reasons for this outperformance, some of which I would like to point out later in this writing. Of course, I want to give you my projection for 2021, which is always based on my reading of the economic data. If anyone could accurately forecast the future, they would certainly be too wealthy to write this monthly posting. 

The Wilcox family taking in the view
 from Rabun Bald 

I have so much to discuss and so little space, but I must give you the excellent financial results for the year 2020. Who would have ever thought in March of 2020, when the markets declined over 30%, that we would end the year setting all-time records in virtually all indexes? I guess you could say maybe I projected that, but even I had an uncertain comfort level with that projection. As the markets came roaring back in April through the rest of the year, there were many that fought the concept of higher returns and did not participate. In many cases, I talked until I was literally hoarse to convince clients to stay invested, but many elected otherwise. They missed the basic concept of economics that drives stocks higher. In this period of time liquidity exceeded the number of stocks available to buy and coupled with the avalanche of cash the government threw into the economy, stocks moved higher, notwithstanding the economy. 

During the year 2020, the Standard & Poor’s Index of 500 stocks had a total return of 18.4% for the year. The five-year annual average for this index is 15.2% and the 10-year at 13.9%. The Dow Jones Industrial Average returned a total return of 9.7% during 2020 and has a five-year average return of 14.7% and a 10-year average return of 13%. The NASDAQ Composite, once again, was the leader having a sterling return in 2020 of 44.9% with a five-year average at 22.1% and a 10-year average at 18.5%. As you can tell, all of the one-year, five-year and 10-year numbers were excellent rates of return. Just to form a comparison, the Bloomberg Barclays Aggregate Bond Index was up 7.8% for 2020, has a five-year annual increase at 4.5% and 10-year annual increase of 3.8%. As you can tell, the bond index has not kept up with the sterling returns that the stock indexes have returned over the last decade. 

The Schultz family spending their Christmas
in beautiful Amelia Island, Florida

Recently, the 10-year Treasury Bond jumped over 1%, which by any definition is a historically low level. However, with the flush of cash provided to the economy by the Federal Reserve, almost assuredly we are facing inflation going forward. You could not expect that the Treasury furnishing $3.5 trillion worth of liquidity into the economy would not create a supply and demand issue related to certain hard assets. When this demand for hard assets exceeds the supply, you will eventually get inflation. It is my projection that by the end of 2021, the 10-year Treasury Bond will be closer to 2% than the 1% it is today. If that forecast is correct, during the year 2021, there is a high likelihood that cash earning the meager rates that it currently earns, will outperform the total return on bonds for the year 2021. 

For those of you that are concerned about the current chaos in Washington, the only comfort level I can give you is that with the Congress being equally divided in both houses, there is hardly any likelihood of major change that will occur very quickly. It would be a miracle of legislative speed if a tax bill could be approved by Congress within a two-year period. Given that the Senate is exactly 50/50, it only takes one sitting Senator to make any bill impossible to pass. I think it speaks very well for the economy that Congress is likely to be in a period of chaos for some time to come. As we all know, the best years ever in investing occurs during times when the politicians do not affect our pocketbooks. 

I have so many people that try to give the impression that the year 2020 was like the year 1999. Most investors today really weren’t around in 1999 and did not understand the dynamics of the market. That was a time when Dr. Alan Greenspan, as chairman of the Federal Reserve, was very concerned about the Y2K problems and flooded the economy in 1999 with a ridiculous amount of liquidity in order to avoid any potential risk of a Y2K meltdown. During that time, the so-called “dot.com” stocks came on selling at many times their value, given the potential of the newly formed internet. You can easily see where a company coming out of nowhere that can reach virtually everyone in the world at no cost would have huge potential. What we now know is, of course, many of these are not real companies and the run-up in the dot.com marketplace quickly failed in the year 2000. However, the major difference did not relate to any of these matters. The major difference related to what the Federal Reserve did to close down the dot.com era. In March of 2000, Dr. Greenspan immediately restricted the money flow and “choked” the financial markets to a major correction. Just as he hyperinflated the market in 1999, he deflated it in 2000. The strangulation of the economy was solely at his desire to burst the bubble of speculation in the dot.com era. Fortunately, we do not have a similar situation in 2020. 

Caroline (6) and Reid (5) Schultz taking 
Santa’s chair in Rosemary Beach, Florida 

As the new Congress comes to be at the end of January 2021, you can expect that the spigots of governmental spending will explode. You can expect another stimulus package of higher rebates to taxpayers and more than ever before governmental spending for municipal projects and supporting municipal governments. If we had a Federal Reserve that was conscious regarding reducing the speculation, they would not have announced that there would be no significant rate increases through the end of 2023, three years from the beginning of this year. 

As I have pointed out before, the decade that ended in 2019 was the only decade ever in the history of American finance that we did not have a recession. We actually did have a recession in 2020 for a couple of months, but the Federal Reserve dumped $3.5 trillion into the economy and, in turn, the economy came roaring back. Just in the last couple of weeks, Congress has approved to add an additional $900 billion stimulus directly into the economy. Along with that, I project, we will see a couple trillion dollars more in stimulus will come almost immediately. All of this money will create a gush of cash in the economy which will not only bring the economy back to life, but will almost assuredly lead to higher stock prices. There are many commentators that have pointed out that cash levels sitting in checking accounts are at all-time highs. One of the reasons for this is when the economic fallout occurred in March of 2020, the average citizen in the U.S. was concerned about their future employment and the savings rate spiked to an all-time high of 35% in April of 2020. At the end of 2020, cash levels sitting in checking accounts were 15.3% higher than they were at the beginning of 2020. Now we are not talking about money in investments, we are talking about actual cash sitting in checking accounts. What has been proven over and over again is that cash sitting in checking accounts is not a savings vehicle, but rather a spending vehicle. It is only a matter of time before this cash will be put back to work, either in additional consumer goods or that cash will be invested. Even though we are standing at record levels of cash today in checking accounts, this number is only going to get larger as the Federal Government flows through additional stimulus that will end up in people’s checking accounts. 

Jennifer, Harper (11) and Lucy (9) Wilcox 
admiring the festive light display

So, what we can assume in 2021 is that as we move forward, we are going to see less of the influence of the virus on the economy. As of this writing, it is believed that 23 million Americans have already contracted the virus and roughly 10 million have been vaccinated against the virus. Therefore, we have already reached a level of 10% of the population that has some level of immunity going forward. It is believed, and I concur, that there will be vaccination rollouts to the general public, which will lead to vaccinations of roughly 1 million per day going forward. If we are able to vaccinate 100 million people in the U.S. before the end of the first quarter of 2021, along with the people that have already contracted the virus, we will have reached the level where businesses can reopen, and a level of normal activity can return. 

It is now projected that corporate earnings would increase roughly 38% in 2021 over earnings in 2020. What you will see almost assuredly is a flood of Americans this summer wanting to go on vacation and spending money for pleasure that they have missed during the pandemic and a rush to visit restaurants, movie theatres, cruise ships and airlines. All of this bodes extraordinarily well for earnings and the economy, and ultimately for stock prices. 

What we will not see like we did in 1999 is the Federal Reserve pulling out the rug and tripping the economy. The Federal Reserve has already committed to long-term low interest rates and they intend to allow the economy to continue to accelerate which should be nothing but great for stock prices. I fully anticipate that the current euphoria in real estate prices will continue as more and more money chases hard assets such as real estate. We are seeing the effect of supply and demand on virtually all commodities. You are seeing record prices in copper, gold and other commodities that give you the impression that certainly inflation will eventually follow. 

Printing all this money that the Federal Reserve is pushing into the economy is certainly a long-term negative and a short-term positive which, at some point, some generation will be tasked with the obligation of repaying. However, that is likely decades, rather than years, away. At the current time, the need to stimulate the economy was important in March 2020 but it appears that the economy has quickly recovered on its own and an additional stimulus will probably only accelerate asset appreciation in the coming months. Even though the negative for the future is well documented, we have years to prepare for that and we should participate in any market increases that occur due to this flooding of cash by our Federal Government. 

Mia Musciano-Howard and her
family enjoying their annual, 
traditional Christmas PJ picture

Sometimes, I like to reflect upon the growth of our firm here in Atlanta. In 2015, CNBC ranked our firm the 20th best financial advisor in the country. This is not an award that we asked for, applied for, paid for, or even actually knew was even going on. At that time, the information they utilized was from our SEC filing that listed our assets at $274 million. Today, five years later, we are approaching $1 billion dollars in assets with clients all over the United States, as well as clients in Europe and Asia. It has been a remarkable run of accumulation of assets and we are truly blessed with the clients that rewarded us with their hard-owned assets and allowed us to grow those assets for them. 

At the beginning of every year, I give you my projection for the upcoming year for investing. It is impossible to project for 2021 based upon any type of documented price/earnings ratio. All these calculations are totally out of whack because of the extraordinarily low interest rates that we are enjoying today and the earnings that were unfairly punished during the pandemic in 2020. What would be different in 2021 is that we expect the earnings to come roaring back as the economy loosens up and we return to a normal lifestyle in the second half of 2021. But interestingly, we do not anticipate a large increase in interest rates which would normally be the result of a strengthened economy in 2021. 

Morgan Miner and her cat, Drake, 
who is on the naughty list this year 

Since the Federal Reserve has essentially guaranteed low interest rates for three more years, it appears that will allow the economy to accelerate based on its earnings without interruption of governmental intervention. Therefore, I expect that during 2021 we should see another excellent investment year that will be very satisfying for your long-term retirement needs. I see the S&P 500 Index ending the year at a level of 4400, which would mean that it would gain 644 points during 2021. This would be a total increase of 17%. In addition to that, the annual dividend rate of this index is roughly 2%. So, I project today that the total return for the S&P 500 for the year 2021 would be a total return of roughly 19%. This would be another extraordinary excellent year. I really hope I am correct. 

What I do not expect to happen is that this really nice gain in 2021 will be straight up. I fully expect that it will be choppy along the way and there will be periods of time where there will be extraordinary volatility. Once again, I want to point out that any short-term disruption in the market is likely to be very short-term. While you will always have traders attempting to move the market to their benefit, just exactly where are they going to go to invest? As illustrated above, we do not believe that bonds form a reasonable alternative to stocks and the very low rates of returns on cash are not very attractive. Therefore, while the traders may move in and out of stocks, it is unlikely that they will be out very long. So, while you may see major swings of the market, these will only be temporary and will lead to a very satisfactory year before year-end. 

We are also seeing strength throughout the world as the economies recover. Already in Asia, their economies are back to full capacity. You are seeing major advances in Vietnam, Indonesia, Malaysia, and Southeast Asia. Already China is back in full production even though their political issues continue to overwhelm their financial markets. While Europe is not fully recovered, they are making significant progress. With the advent of the rollout of vaccines throughout the world by the summer of 2021, virtually all economies will have at least stabilized and start to move higher. All of this will lead to a worldwide rally in stock markets which is likely to be unprecedented in its coordinated move higher. Make no mistake that this coordination of higher economies is solely due to the assistance with the central governments of all those countries flooding their economies with liquidity. If for whatever reason the central governments elect not to continue to fund the economy, this projection may change. However, I highly doubt that any change will be in the offering in 2021. 

Musciano-Howard twins, Mitch and Marti (16)

So, in summary I am very optimistic for 2021 as compared to the pessimistic view held by many. One of the things I have been able to do to successfully invest, is to separate my feelings regarding most everything and rely upon all my instincts of economics regarding stock prices. Every time I hear a client express the negativity of restaurants not being open as a reason why the economy will not succeed gives me greater confidence that I am correct. As we went through 2020, we suffered huge economic declines, buy yet cash continued to accumulate in peoples checking accounts. Even though many will forever distain the activity of 2020, the vast majority of investors have benefited even from the turmoil of that year. 

I fully expect 2021 to go through major ups and downs, but by the Fall of 2021 the outlook should be much clearer and more positive than today. For those of you that are not invested and refuse to invest due to your perceived conceptual idea of stock prices being too high really are not taking into account the economic benefits of the gusher of money reaching the economy by the Federal Government.      

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