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.
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| 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!
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| 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.
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| 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.
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| 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.
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| 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.
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| 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.
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| 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.
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| 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
