The end of a great quarter and the best Estate planning plan ever…

From the Desk of Joe Rollins

Rollins & Associates “working 9-5” back in the Fall of 1988

No two ways about it - the third quarter of 2024 was an excellent quarter. As was the year ended September 30th, when all major indexes enjoyed double digit returns. Given all the strife currently in the world, it is hard to believe that the U.S. economy continues to remain resilient.

I have many items to discuss in this posting, including the progress in the U.S. economy and where we stand today. Also, I have written often about generational wealth, but it seems to be misunderstood by some people, so I want to further explain what I mean by it. I want to also explain why the markets are more stable than before due to increased participation and the amount of money flowing into it both daily and weekly. It would not be a normal posting if I did not discuss the inefficiencies of the government, and I will give you two examples of such. When discussing the government, I often mention President Ronald Reagan and his famous quote, “The most terrifying words in the English language are I’m from the government, and I’m here to help.”

Say Cheese! Long-time friends and clients
Fred and Janet Bland came by the office to visit!

Before commenting on those interesting items, I must discuss the excellent quarter we just ended. The Standard and Poor’s Index of 500 stocks was up 2.1% in September and was up 5.9% in the third quarter of 2024. Year-to-date, that Index is up 22.1%. The NASDAQ Composite was up 2.7% during September and up 2.7% for the quarter ended September 30th. For the year 2024, that Index is up 21.8% at the end of the quarter. The Dow Jones Industrial Average was up 2% in September and up 8.7% for the third quarter of 2024. That Index is up 13.9% for the year 2024 so far. It is clear from reading these Indexes that the market rally is broadening away from tech into more of the traditional blue chip type stocks. The fact that the Dow Jones Industrial Average outperformed all other major Indices except the small-cap index in the third quarter is telling. I do not believe for a minute that the rally in tech is over, but it is certainly welcoming to see other stocks participate.

Due to falling interest rates, the Bloomberg Barclays Aggregate Bond Index was up 1.4% in September, and up 5.2% for the quarter that ended on September 30th. Year-to-date, in 2024, that Index is up 4.6%, a significant turnaround for performance in bonds. It is remarkable that for the one-year period, the Bond Index is up 11.5%, which is an excellent return, but pales in comparison to the S&P 500 Index, which for the one-year period is up 36.4%. Just so you are not disillusioned and misled by the Bond Index's strong performance, the 15-year return on the Bond Index is 1.4% over the last 15 years compared to the S&P 500 Index, which has returned 14.1%. Therefore, it could easily be said that the S&P 500 Index has performed ten times better than the S&P 500 Bond Index over the last 15 years.

Barb + Mia celebrating their 25th on a Royal Caribbean Cruise

There is new evidence that the “Goldilocks” economy continues to flourish in the United States. Last Friday, the Labor Department announced that there were 254,000 new jobs created during September. That far exceeded any estimate by so-called economists for the month. Even more importantly, they reported 72,000 more jobs than previously reported in July and August, making those months very similar in employment to the strong month of September. Also, they announced that the unemployment rate had dropped to 4.1% at the end of September. All of this is very important since the economy is very dependent on people working, and the fact that employment picked up in September is a very positive sign.

We continue to be in a strange time when it comes to unemployment. As of last Friday, it was announced that there were 8 million jobs available and, in the U.S., there are 6.8 million unemployed. You may recall in my postings that I have previously pointed out that there are two jobs for every other unemployed person in the U.S. That is falling to just over one job but is still extraordinarily strong. Employment in the U.S. could be next to zero if people really wanted a job and were willing to relocate.

Guess who Reid and Caroline are rooting for?

As the news on the economy continues to be lackluster, which is a good thing, it was finally announced that the second quarter of 2024 had a GDP growth of 3%, which is excellent. Not too strong, not too cool. The Atlanta Federal Reserve has forecasted that the GDP growth in the fourth quarter of 2024 will be 2.5%. I need to emphasize again that these are the types of numbers we want. We do not want GDP growth to be too low or too high. It needs to be somewhere in the 2.5% range to not create economic imbalances. We want growth, but we want controlled growth. We do not want to make the same mistakes we made previously when trying to create growth by printing money and creating inflation.

There has been a lot of conversation in the financial media about why the U.S. went through such high inflation growth in 2022. You may recall that during COVID, the administration put through numerous spending plans to stimulate the economy. One of those plans was to dump $1.9 trillion into the economy through payments to individuals and favorite political supporters. The only way the government could have created this $1.9 trillion in aid was to print that money. When you print money, basically, you are creating dollars from nothing.

Barb, Marti and Mia ready to cheer on “the A!”
Better luck next year, Braves!

That means more dollars are in circulation seeking the same goods and services. There is no question that this one act contributed mainly to the advent of inflation in 2022 and 2023. No actions by the government are immune to creating problems in the overall economy. If you think inflation has not set in for the long term, just look at this fact. The average price of a new vehicle in the U.S. in September was down 3% from 2023, which is certainly good news. However, the average price of a new vehicle in the United States is up a mind-blowing 29% from 2019. This is a good example for those who think inflation has not impacted on almost anything we purchase.

While the U.S. is enjoying a nice economy at the current time, the rest of the world has not been so lucky. It is particularly true that Europe is slow and has many problems keeping their economy above negative. Also, as we all know, China has suffered serious economic declines and recently provided huge stimulus to jump-start its economy again. View this fact if you want to know exactly how far China has gone to stimulate its economy and use public works to support it. It is estimated that there are 90 million unused but finished empty housing units in China at the current time. As you know, China has built entire cities to keep people busy and not unemployed. However, they have no one who can occupy these units or afford them. It is estimated that these 90 million unused housing units in China could house 270 million people. If you do not believe that China’s problems are severe, you truly do not understand the economics of the government creating jobs for people to create certain products and services that are not needed.

For DeNay, no road trip is complete without a stop at Buc-ee’s

Almost daily, I get the question of what happens when China invades Taiwan against the U.S.’s desire. Roughly 70% of China’s exports make their way to the U.S. one way or another. If China were to invade Taiwan, which is a staunch supporter of the United States, the U.S. would create sanctions on Chinese exports that would essentially destroy their economy. I do not believe for a second that China would be so stupid as to create this self-inflicted wound over the small island of Taiwan.

For the last several postings, I have talked about the flowing down of wealth to future generations. I explained how this is currently occurring in a way unlike anything we’ve ever experienced before. We are seeing daily the transfer of wealth passed down from our generation to the younger generation, which will significantly change how the new generation consumes and retires. As I have pointed out, this is a very good thing if it is controlled, and the younger generation gets good advice. However, I did have some clients raise objections and want to know if I was asking them to do without so that the younger generation could inherit more. Basically, must I suffer so that my children benefit? That is not what I am proposing.

Megan feeling at one with the gaming community at
DreamHack Atlanta (Georgia World Congress Center)

I suggest that if properly invested, almost everyone can create wealth beyond their spending ability. I had one client say to me the other day, “I have been frugal for 50 years of my life; I cannot just change overnight.” And I agree with that philosophy, but you should also spend your money. I am suggesting that there is plenty for you to enjoy retirement and yet pass money along to the next generation. You cannot imagine the benefits of starting a young couple off with a nest egg that they never would have had if not given to them by you.

There are many changes regarding retirement. I see it in our business now, where young people come in and sign up for the 401(k) plan immediately. If there is any resistance to the 401(k) plan, it is by the older generation, not the younger one. They understand that if you begin saving early, you can accumulate wealth for retirement, and even a small contribution today saved for 40 years would be substantial in the future.

One happy grandchild – Jim + Patty Radney’s
pride + joy made it on Braves Vision!

You would be surprised how often I hear middle-aged clients complain about how much they contribute to their 401(k). The standard answer I get is they either contribute 4% or 5% based on whatever level their employer matches. It is hard for me to imagine that people could be so naïve. The beauty of a 401(k) is that you can contribute money on a tax-deferred basis, yet you still get to keep the money. Of course, that money is taxable in the future, but it is taxable at the tax rates in the future, which may or may not be as high as the ones today. If you do a time value analysis of those future taxes, you will see that they are minor compared to not contributing to the 401(k) plan and paying the taxes now.

Parents also miss the golden opportunity to create Roth accounts for their children. Creating a Roth account for them is the way to go if you have a child who earns a few thousand dollars in a summer position. Think about the growth that would happen if you contributed $3,000 for an 18-year-old, and they do not touch that money until retirement at age 65. The growth would be exponential, as compared to the initial investment. Parents can teach them the value of investing by starting them early and helping them learn the benefits of future growth.

Mia and Sophia the Sloth in Roatán, Honduras – never letting go!

I see the issue related to 529 educational accounts almost daily. President Obama wanted to curb 529 accounts and focus on the American Opportunity Credit because 529 accounts primarily benefitted those higher on the income scale. I counter to indicate that 529s should be used by everyone, not just the rich. The benefit of accumulating money for future education on a tax-exempt basis is just too good to pass up. Both parents and grandparents should begin contributing to a 529 educational plan at the baby's birth. If you allow money to build up for 18 years tax-exempt, maybe you can alleviate the extraordinarily outrageous cost of college.

The point I am trying to make here is that there are billions of dollars flowing into investments on a daily and weekly basis from all these sources. People are contributing to their 401(k) plans, IRAs, and 529 accounts on a weekly or monthly basis. These billions of dollars flowing into the marketplace increase the opportunity for those stocks. Never in the history of American finance has such a flow of money been available for future appreciation of stocks and bonds.

I thought I would give you a history of investing to illustrate my point. I was around when the first IRA was put into effect in 1974. Virtually everyone viewed it as a skeptical device because many people believed that it was just a scheme by the government to confiscate money from you. It took many years before a significant number of people actually used the IRA.

Watch out East Atlanta, Harper got her learner’s permit!!
Happy belated 15th!

If you do not believe that IRAs have become successful, all you have to do is look at the amount of money invested in our IRAs today. At the end of the second quarter of 2024, it is estimated that $14.5 trillion was currently invested in IRA accounts. It is also estimated that total retirement assets today are roughly $40 trillion. When you think about the future generation, generational wealth passed down to them is $40 trillion, which will flow down for generations to come. It is not a one-year or two-year flow down. This $40 trillion will be felt for the next decade and passed down to multiple generations in the future. This has never happened in U.S. finance, and it will change everything we know about generational wealth going forward. Do you realize that $6 trillion of cash is now in money market accounts waiting to be invested?

The biggest change in investing and retirement came in 1981 when the IRS proposed the formal rule for a 401(k) plan. I was practicing then, and the skepticism and the adoption of the 401(k) plan was slow. Once again, people did not view it as a viable retirement plan. Prior to that time, the standard retirement vehicle was a Defined Benefit Plan. In a Defined Benefit Plan, money is paid to you in retirement for your lifetime and maybe for the lifetime of your spouse. But when your spouse dies, all that money evaporates. There was no money to pass along to your heirs.

The 401(k) changed that concept. The 401(k) would allow you to contribute to the plan during your lifetime and draw on it in your retirement. But if you died prematurely, this entire amount would flow to the second generation, being your children or grandchildren. So, as the 401(k) plans became popular in 1983, 7.1 million employees participated in a 401(k) plan. But that number grew to 38.9 million in 1993. Suppose you want to know the buying power of 401(k) plans today, in 2019. In that case, it is estimated that 80 million people, or basically one out of every two employed people in the United States, benefit from a 401(k). Currently, $5.7 trillion in assets are contained in those 401(k) plans. As you can see, the growth of these plans has substantially made available new money daily, buying stocks and bonds and supporting the market.

Mia and Barb enjoying a beautiful beach in Cozumel – rough life, ladies!

I get many questions about the new election's effect on the U.S. stock market. My answer generally is that it will have little or no long-term impact on the market. You may get a whiplash sell-off or a buy-in opportunity at the election, but it will be short-lived. As illustrated above, the flow of money into the market will stabilize, and over time, this election will have absolutely no effect on long-term results. It is true that the two competing partners for the presidency represent entirely different ideologies and different economic goals. They could not be any further from each other. However, the effect of the market will be minimal and will last only a short period of time before it stabilizes. The thought of trying to cash out before the election and buy back afterward would be deemed to be “market timing,” and we all know that market timing is impossible.

As mentioned, regardless of the outcome I do not anticipate any major long-lasting effect on the market, although both candidates have floated tax trade and spending ideas that I find populist and sometimes bordering on the ridiculous. Both candidates propose cutting taxes, which is alarming, given the huge deficits that the government is running today. There was substantial support for running up deficits during the pandemic a few years ago, but there is no economic justification for deficits today.

Interestingly, neither candidate has even broached the subject of less spending by the government. I would be a true advocate for any candidate who would reduce the size of government and reduce spending. We do not need higher taxes. The deficit this year is $1.8 Trillion. What I think we need is a smaller government. Suppose you can even imagine that the number of people on the government payroll has reached over 23 million Americans now. Roughly 15% of every employee in the United States is employed by the U.S. government. I am sure those numbers go up exponentially for people not employed by the government but supported by the government. I cannot even imagine what 23 million people do that is beneficial for the country.

Freddie Falcon found some adorable sports fans at
Lymphoma + Leukemia Society’s Light the Night

The federal government just finished its fiscal year, which ended September 30, 2024, and financially it was a total disaster. The deficit for this fiscal year ended at $1.83 trillion. Believe it or not, that is 13% larger deficit than the previous Biden year. What is baffling to virtually everyone is that a considerable amount of this deficit was created when there was no pandemic, financial crisis, or major war involving large U.S. forces. This is an excellent example of the government running amok.

You would be wrong if you think this deficit was due to a lack of tax revenue. Tax revenue actually increased by 11% this fiscal year to $479 billion in virtually every tax category. Individual income taxes were up 11%, and corporate income taxes were up a stunning 26%. But even though tax revenue was up close to half a trillion dollars, the government figured out a way to spend that money and substantially more. The total tally of expenditures by the U.S. government went up 11% from the previous year. Therefore, they spent $699 billion more than the last year for total spending this fiscal year of $6.75 trillion. The sad part of the previous two paragraphs is that neither candidate running for the current office of president has offered any solution to government spending, which is quite unfortunate for us all.

I would love a President who would go in and say it is time to balance the budget; therefore, we must reduce the size of employment in the government. Some of you were not even around when government budgets were in a surplus condition. As recently as President Bill Clinton's administration, there was actually a surplus in the budget. Unlike the multiple trillion-dollar deficits we have today, the government budget was actually in balance. Do I believe that governmental deficits are a long-term harm to the economy? Of course I do. Do I think it is devastating? No, that would not be the case.

Any time you have a government that can print its own money, deficits will never be of concern. However, when printing your own money, you will, by nature, create inflation, and inflation is a hidden tax on us all. While I find the upcoming election interesting, I think the effect on the stock market, whoever wins, will be minimal and I think the government will continue to govern even against our wishes in the future.

Some cute Marti + Mom time at the
Melissa Etheridge + Jewel concert (Sweetland Amphitheatre)

However, at some point, some governments are going to have to figure out a way to spend only the money they earn and create less government rather than more. At a deficit of $1.8 trillion this year, I feel as though they are not even trying.

I thought I would give you a couple examples of the inefficiencies of government and how destructive their inefficiencies can be. You may remember that in 2021, the Biden administration passed an infrastructure law for $42.5 billion to expand broadband to underserved, mostly rural communities. Who could have disagreed with this policy? The idea of providing broadband internet to underserved communities can be a tremendous benefit for young kids and for businesses. It could create new jobs, educate children, and accelerate the abilities of these communities to expand and grow. What a wonderful concept that virtually everyone could have supported.

Here we are three years later, in 2024, and you know how many contracts have been made regarding this wonderful service. As of this time, not a single project is underway. It seems that once the government got involved, they put into the contracts a lot of administrative garbage that kept the project from being built. It had to follow Federal labor and employment laws, and many other types of restrictions. This kept people from wanting to work on these projects. Further, they insisted upon this rollout being in fiber broadband cable. As you know from looking at your own community, running fiber cable is expensive and inefficient. Running it to rural areas is almost impossible and very expensive. For less than one-third of the allocated budget, they could have installed Starlink and other wireless carriers that could expand the coverage at a lower cost. Basically, for less than $15 billion, the entire United States could be covered by satellites providing internet access, but three years later, the government plan did not provide any access.

You’re never too old to learn something new! Cameron joined the football team post mid-season of his senior year – good luck, kid!

But, if you want a further example, think about the famous 2021 program to build an electric vehicle charging network throughout the United States. In 2021, the government passed a law that would allow EV charging networks to be built throughout the United States at a cost of $7.5 billion. Certainly, if you were going to mandate further EV promotional ideas, you would need more charging stations. Basically, the inability to charge has slowed the growth of EV cars. Only Tesla has a nationwide charging network. Even major car companies now rely on Tesla charging stations to create charging opportunities.

However, everyone rejoiced when the government decided to provide funding to build charging stations throughout the United States in 2021. Here we are three years later, and exactly eight stations have been constructed in six states. The reason more stations have not been built is due to the government's interference in building these stations and the restrictions they put upon them. If, instead of directly overseeing the construction of these charging stations, they turned the money over to private industry to build them, most of the network would be finished by now. These are just two examples of the inefficiencies and everything the government does. The private sector could do all these projects cheaper, faster, and without governmental interference in their completion. In my opinion, the only thing this government does well is the military, and that is only because there is no private sector.

In conclusion, I want to give you the best estate planning advice of all time. Estate planning is going to become particularly important over the next few years. Currently, the estate exclusion is roughly $13.6 million per person. Therefore, a married couple could exclude estate problems worth $27.2 million. After 2025 this exclusion is scheduled to expire and be reduced to $7 million. Therefore, a couple could exclude only $14 million compared to $27 million, a major reduction if Congress doesn’t act.

Nadine + Steve Hooks enjoying retirement! Fun fact, Nadine is a former Rollins’ employee and is pictured along with Joe at the top of the blog

Everyone should consider estate issues regarding the growth of their assets. Over the last few years, the value of real estate has increased significantly, and of course, the value of your financial assets continues to grow. Many people are now having estate issues that were never there before. If you are not doing gifts of 529 accounts and funding the Roth IRAs of your children, you should be. If you wait to deal with your estate issues in the last years of your life, you may find out there are not enough years left to satisfy and get you below the exemption.

I talk to clients every day about gifting money now to their children. Please reference my comments on generational wealth and helping your heirs today rather than waiting until you die. Make their life a little easier and not affect your own. It seems so simple to me, yet getting clients to give up assets to children is so hard. While it may be hard, I am going to keep trying.

Often, I am asked for the best estate planning. The simple answer is a quite simple plan of action by you. On the day you die, you write a check for the exact amount of all the assets you have left… and it bounces!

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

Best Regards,
Joe Rollins

All investments carry a risk of loss, including the possible loss of principal.  There is no assurance that any investment will be profitable.

This commentary contains forward-looking statements, which are provided to allow clients and potential clients the opportunity to understand our beliefs and opinions in respect of the future.  These statements are not guarantees, and undue reliance should not be placed on them.  Forward-looking statements necessarily involve known and unknown risks and uncertainties, which may cause actual results in future periods to differ materially from our expectations.  There can be no assurance that forward-looking statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements.

The Best Months of The Stock Market Are Coming – Get Ready For Gains!

From the Desk of Joe Rollins

A big CONGRATULATIONS to Lily Holmes –
recent graduate of American University Washington College of Law!

In the first part of August, I received many phone calls from clients who believed the world was surely coming to an end. I reassured them that the sell-off in early August was based on incomplete information and the work of professional traders. As I wrote in the last posting, I did not anticipate that there would be a major sell-off during August, and fortunately, I was correct. The month of August actually ended higher, despite all the concerns of investors.

I have found many topics I would like to discuss in this month’s posting. I think I will finally make reference to gold and Bitcoin and my thoughts on why we do not invest in them. Also, after two long years, the yield curve is no longer inverted. This is a major economic event, and I need to explain why this has suddenly become such a controversial topic.

Eddie scoring major points with daughter Lucy at
Olivia Rodrigo’s GUTS World Tour!

It would not be a political season if I did not give you some insight into the politics of the tax proposals by the new candidates. Some of them are ridiculous, and some are beyond ridiculous, but I will explain. Interestingly, it seems that the U.S. is running out of energy. Nuclear energy may be the only solution for us in the future. It is amazing that the environmental lobby is so against nuclear, even though it may be our only alternative clean energy in the future.

I have always been interested in Cuba and became even more interested in their local economy and politics after I visited there a few years ago. It appears that anyone who can get a job elsewhere is now leaving the island and mainly heading to the U.S. It is especially important that we discuss the economy and why Cuba has failed and will likely not recover without additional help.

Yeehaw! Cameron ready for Western night
at the high school football game!

Over the last several years, job openings have doubled the number of unemployed people in the U.S. Finally, now, the number of job postings is almost equal to the number of people unemployed, and therefore, the economy sits poised to turn either higher or lower. I will explain.

Before I get into those exciting topics, I do need to report on August, which was an excellent month for the financial markets. Even though the anticipation was something extremely dreadful, the exact opposite actually occurred. Once again, the quick turnaround in the financial markets during the month of August emphasizes how important it is to be invested at all times. At the point where things look bleakest, that is the time when you need to be invested.

Evan and Alexis cruising along’ in Nassau, Bahamas

For the month of August, The Standard and Poor’s Index of 500 stocks was up a very satisfying 2.4%. For the year 2024, that Index is up 19.5%, and the one-year total return for that Index is 27.1%. The Dow Jones Industrial Average was up 2% for the month of August and is up 11.7% for the year 2024. The one-year return on that index is 22.1%. The NASDAQ Composite was up 0.7% for August, and for 2024, it was up 18.6%. The one-year return on that Index is 27.2%. As you can see, the three major indexes are all up in excess of 20% for the one-year period. Given the dour prospects for the economy from the so-called experts, the markets have returned excellent results for the last one year.

Just to give you some basis for comparison, the Bloomberg Barkley Aggregate Bond Index was up 1.4% for the month of August and is up 3.1% year-to-date. For the one-year period, that Index is up 7.2%. With interest rates most likely to fall in the next few months, it is possible that the bond index should show better results; however, as you compare it to the three major Indexes of stocks, it is a very dismal performance. Many people believe that you should have at least 40% of your assets in bonds. If you base that on returns, you can see that a 40% allocation to bonds would have been a serious mistake over the last 12 months.

Caroline and Reid (is that really you?)
proudly displaying their new faces on Amelia Island!

At the beginning of 2022, all the so-called experts on Wall Street predicted that the U.S. would almost surely go into recession during that year. Even though they did not have a lot of evidence to support that theory, the one that they did roll out to explain a recession theory was that the bond market had an inverted bond yield. For those who are not familiar with bonds, what that meant was that the two-year treasury bond yielded a higher rate of return than a 10-year treasury bond.

The theory behind this logic was when interest rates are high for two years, that indicates a Federal Reserve that is restrictive and trying to control the economy by slowing it down, which would in turn throw it into recession. Also, the fact that the 10-year bond was yielding a lower percentage than the two-year bond would indicate that, more likely than not, the economy would be in recession due to the restrictive nature of the two-year since it clearly was not in sync with the yield 10-year bond. The so-called forecasters on Wall Street predicted that this inverted bond yield created recession 100% of the time; therefore, you should abandon stocks immediately. As would be the case, 2022 ended up being a bad year on the stock market, with the S&P 500 Index stock going down roughly 20% in 2022.

Ava extending her love of all animals to the Charging Bull on Broadway!

I predicted during that same period that the economy would not go into recession because the momentum was just too strong to allow it to go into any type of pullback. I was right, but the stock market proved me wrong. Notwithstanding my explanation of why the economy would not fail, the market went down anyway. But I have excellent news to report. After two years of the inverted bond yield, it has finally right sided itself. The current yield on the two-year treasury is 3.654%, while the current yield on the 10-year treasury is 3.716%. I recognize that the difference is small, but the fact that the two-year treasury is now below the 10-year treasury is quite a positive for the U.S. economy.

It is interesting to me that these so-called experts who predicted a recession in 2022 have not changed their opinion and still believe a recession is likely to occur. Those who quoted the inverted bond yield as evidence of the recession have not come out and changed their opinion because the inverted bond yield is no longer inverted. I recognize that these are extremely technical issues in investing, but you need to understand why the market goes down even without any rational reason. The markets went down in 2022 without any good reason, but the pain was felt in that year. However, it is encouraging that for 2023 and the current 2024 year, the same Index that lost 20% in 2022 is up 20% in each of those subsequent years.

Proud Papa Michael Holmes with daughter, Lily. Kudos to you both!

Since it is a political year, I thought I would reflect on the proposed tax conversation with the current political candidates running for the Presidency. One candidate has proposed that they would be anti-price-gouging from big corporations and pharmaceutical houses. Literal price controls have never worked anywhere in the world, including the United States. Price controls did not work in Cuba (to be explained later), Argentina, Russia, Venezuela, and other third-world countries. If you think that the U.S. economy is more sophisticated than the others, remember Republican Richard Nixon imposed price controls in early 1971, and they were a dismal failure.

What true price controls do is lead to scarcity. This is not a difficult concept for anyone to understand, but if a producer cannot increase prices and therefore would produce at a loss, then they would not produce at all. Suddenly, while you have an oversupply of products, now you have scarcity. The question always centers around the fact of which is the worst situation. Controlling prices is a good thing for the consumer, but having no product to purchase, in my opinion, is a much worse situation. Look at the situation that they have in South American countries where they cannot produce the food necessary to feed their population because the farmers cannot make money on the sale of goods.

Mia giving extra love to dad – Happy 97th, Muzzy!
Cheers to you, and the fabulous journey that is your life!

The obvious answer is, of course, to eliminate those price controls to increase the supply of products. Of course, when you do that, you get immediate inflation and a worse-case situation, such as currently being felt in the Argentina economy, where inflation is up 1000% over the last five years. The most uneducated economist would tell you that price controls are disastrous for the economy and cannot be enforced, and they would clearly be negative to consumers, not a positive, but it sounds good in commercials.

Another candidate running for office proposes that all the problems in the U.S. economy would be saved by putting tariffs on all products brought into the United States. The argument being that it would ensure that more manufacturing takes place in the U.S. since there would be tariffs to keep the prices high for goods produced outside the United States. Once again, the concept is a “populist” concept but is absolutely ridiculous from an economic standpoint. You cannot have tariffs without inflation. If, by definition, you would increase prices on all goods produced outside the United States, that would allow the U.S. manufacturers to exploit the market and increase prices, which would clearly create inflation and destroy consumer’s pocketbooks in the United States.

Alexis and Evan celebrating her 25th at a pasta making class
with friends (not pictured)! Welcome to adulthood, Alexis!

Goods produced outside of the United States have an incredibly positive benefit to the economy as has been clearly shown in the past. During the 1960’s and before, there were only three major car companies producing cars in the United States. The cars were expensive, and the quality was awful. I remember buying a brand-new car in the early 1970’s and taking that car back to the dealer the next day with a long list of things that were wrong. The quality was just not particularly good and since the car companies basically had a monopoly, they just did not care.

However, that philosophy changed when foreign car companies began manufacturing cars and shipping them to the United States. The cars coming out of Germany and Japan were of higher quality and of similar price than the cars produced in the United States. This increase in quality cars made the big car companies in the United States better. They had to improve their quality in order to compete. And they did. There are many examples where foreign manufactured goods have improved the quality of U.S. goods and competed on a level playing field with goods produced in the United States. There is no question that we all desire more goods to be manufactured in the United States to create more jobs and taxes, but the way to do that is not through higher tariffs but through a better working environment.

Another example that both candidates are against is the acquisition of U.S. Steel by Japanese steel companies. Both the current administration and candidates have come out against this acquisition. While you certainly think it would be a desirable interest to keep steel manufacturing in the United States, the way to do that is not as proposed by these candidates. If you were to turn over virtually all the steel manufactured in the United States to one manufacturer, that would obviously lead to issues where they could increase prices any time they wanted to.

Joe using props to explain bullish vs. bearish markets to Ava

The major difference would be that the Japanese manufacturers have agreed to spend $2.5 billion upgrading U.S. steel manufacturing and making it more efficient and cost-effective. This would be an enormous positive for the U.S. economy. First, the spending of this $2.5 billion would create vast amounts of jobs that would be high-paying and long-lasting. The innovation and production of cheaper steel would benefit many industries and construction in the U.S. In my opinion, the acquisition of U.S. Steel by foreign manufacturers would be incredibly positive for the U.S. consumer, yet from a “populist” standpoint, all the candidates are against it.

They argue that in the case of war, steel would be controlled by a foreign government, and therefore the U.S. would be deprived of the steel needed to produce military armaments. The ridiculous part of that statement is that in the case of war, any foreign manufacturers could easily be nationalized, and we would get back the industry for free that they have innovated and spent money to improve. The acquisition of U.S. Steel for many reasons should be approved, yet for political reasons, all candidates for the highest office in the country cannot see the benefits.

The most outrageous proposal is that one of the candidates would like to tax unrealized gains on stocks. You almost have to be amused by this proposal given the extreme complexity of doing so. Having completed tax returns for over 50 years, computing realized gains is hard enough, but to tax unrealized gains is virtually impossible.

I know it only affects taxpayers with over $100 million dollars in assets, and those are very few, but those people control a large portion of the population and employees in this country. But first, think of how you calculate the fair market value of your assets and how that has been done in this calculation. No one knows exactly what a business is worth if it is a private industry. As an example, we all know that the price of your house is subject to many fluctuations and changes year to year. How one with that amount of assets would calculate the fair market value of all their assets would be an exceedingly difficult situation.

Take as an example an entrepreneur who has only one privately held business and virtually no other assets and is stuck in this unrealized appreciation quagmire. Due to the success of that business, the value of that company goes from $100 million to $150 million in one year. Therefore, the $50 million increase would be taxed at 25%, and he would owe $12.5 million dollars in taxes under this proposal. Where does that money come from? It is clear that he would have to sell the stock of the company, which would endanger the company and employees and almost ensure the loss of jobs.

The interesting part of the proposal is that, let us say that the following year, the value of the company falls back to its $100 million level. Does he now receive a $12.5 million refund from the government? I doubt it, but who knows what is under this proposal? But the most important part of this proposal is that, almost assuredly, it is unconstitutional. While it is a “populist” idea to tax the rich, it is not realistic to tax gains that have not been realized. This proposal will not pass Congress, but it is interesting how it has been characterized by the media as being a positive thing when it would be an economic disaster.

DeNay and family enjoying some fresh air and
beautiful views at Rocky Mountain Park

I believe the one proposal that would create a better U.S. economy is the proposal to cut taxes on big corporations. One candidate wants to increase taxes on big corporations, and another wants to decrease them. It is hard to believe that the media just does not understand the difference. If you decrease the taxes of the corporation, you will get more companies that want to operate in this country. They would create new plants and equipment, hire employees, and pay local taxes. The higher the taxes are the more they will stay away and produce in other countries with lower tax rates.

I find it such a simple concept that it is hard to believe it is misunderstood. If you increase taxes on corporations, that is money that they could not use to hire people, expand plant equipment, and produce better goods. Obviously, there is a major difference between higher and lower taxes, but it solely depends on your view of what is better for the country. It is good to have wide-ranging opinions, but I only wish people understood the economic effect rather than the populist idea. It seems the better solution is to cut government expenses, not raise higher taxes.

I have always been interested in Cuba, and more so since I have visited the island. It is an example of why socialism just does not work and will never work in any economy. From an idealistic point of view, you would think that everyone would be better off with socialism than they are under capitalism. But that has never proven to be the case, yet people continue to believe that we are becoming more socialistic in our government in recent years.

Point to Cuba and you see exactly what the issues are. It recently came out that from the year beginning of 2022 to 2023, the island lost 1,011,269 residents (10% of their population). Over a million people left the island since there were no work opportunities, and they had a better chance of finding those work opportunities in other countries. What was the most distressing was that of this amount, over 800,000 of the people that left the island were between the ages of 15 and 59. This is also the age group that produces future generations. That means the most productive part of the population is abandoning the island in droves. Basically, what that means is that they are leaving the incredibly old and the noticeably young on the island, which is creating a financial disaster for the Cuban government. The care of the elderly is of serious concern, and the island has no way to raise revenue, since the majority of the tax paying populace has left to go to a different country.

Mitch, Marty, Barb and Mia trying out their sea legs in Tampa!

The other interesting aspect is that the food production in Cuba has collapsed. Since people are not willing to work on the farms because the pay is equal to those sweeping the street, the production of food in the country has completely collapsed. To give you an example, the production of pork in Cuba fell to 3,800 tons in the first six months of this year, compared to 149,000 tons in all of 2018. The country is headed to a severe crisis since it cannot feed its population and will not accept help from other countries. Most of the people leaving Cuba are coming to the United States. It has now been reported that 645,122 Cubans have come to the United States over the last two years seeking asylum with hopes of residency.

I am asked every day about the potential for recession in the United States, and maybe I look at it differently than most people. And looking back over my financial career of over 50 years, it seems like that every recession in the United States was created with a spike of prices of oil and the effect it had on the consumer. I vividly remember the Jimmy Carter years, where the price of oil virtually doubled overnight. But worse than that, we had scarcity of oil, and therefore scarcity of gasoline. And every year since then, other than the COVID-19 year, a recession has created a spike in energy prices.

All that has changed. While the current administration has fought the production of oil and gas at every turn, the U.S. is now energy independent. We produce more oil and gas than we consume in the United States, and if the current administration would allow us, we would export to more countries. The exporting of natural gas to Europe creates many well-paying jobs and helps the U.S. economy. Therefore, I do not think recession is likely at the current time, because the price of oil has actually fallen over the last year or so or has remained basically stable.

Shelley and Cameron spent Labor Day rescuing
382.9 pounds of food for Second Helpings Atlanta!

People ask me all the time about why we do not invest in gold and Bitcoin. My answer to that is relatively simple. I do not have any way of evaluating what the value of gold or Bitcoin is or should be. It is impossible to evaluate whether those assets have the ability to go up or down, because they have no income stream and basically the only way they have any value is scarcity.

So therefore, they are like collectibles, which would be paintings or fine bottles of wine or autographs of professional athletes. The value has nothing to do with the ability for it to produce income, but more on the ability of scarcity. Since I find neither of these assets to be particularly scarce, I question whether over the long term, they can continue to go higher. I often cite the rednecks that promote gold on television on Friday night as a good example of why gold is not likely to continue to be scarce. If this hard-working group can produce gold, then more likely than not, more gold will be produced in the future. I understand the price of gold has gone up in recent years, but that is mainly due to inflation and not due to scarcity. If you compare those assets with U.S. stocks, you get a dividend flow and an increase in value in those assets that can be quantified. Currently, I see nothing in gold or Bitcoin that allows it to be evaluated on a total return basis, yet I do with stocks, which is why I went into stocks.

For the first time over the last several years, the number of unemployed is 7,115,000. It has approximated the number of job openings, which is 7,673,000. For the most part of the last several years, the number of jobs has doubled for the number of unemployed. As I have written and many times in this posting, we wanted the economy to slow so that the Federal Reserve would cut interest rates. We have now accomplished that goal without destroying the economy, and now we are almost assuredly looking at rate decreases.

I project over the next 90 days that we will see rate decreases of 0.75 which will dramatically improve the economy with lower interest rates and, importantly, lower mortgage rates. We could not have accomplished these rate decreases until the economy slowed, which we have now accomplished. You hear so much about the soft landing and the hard landing and the desire for one over the other. We have now clearly accomplished this soft landing, and that is almost a sure indication of higher stock prices in the future.

Following in her father’s footsteps?
Ava in front of the New York Stock Exchange

The U.S. is running seriously short on power. With the increase in electric vehicles and the use of electricity by technology, the U.S. is clearly running out and private industry is not responding. The answer to the energy problem is nuclear energy. I have never really understood why the environmentalists are so against nuclear energy. It is the only clean way to produce more energy and yet, for some reason, every time we begin a new facility, the environmentalists fight it.

The rest of the world has caught on and is building nuclear power at a rapid rate. In France virtually all their electricity is produced by nuclear energy. In China they are producing nuclear plants at an efficiency unseen in this country. They can build a nuclear reactor in seven years or less, at a fraction of the cost in the U.S. Over the last several years, it has taken over 20 years to build a nuclear reactor in this country, and everyone has been overdue and overbudget.

There are simple solutions to these issues, yet, due to the environmentalists fighting every nuclear plant, we cannot move forward. First off, the production of nuclear plants in the United States should be standardized, and rather than each being unique, they must all be built the same. This is not a novel concept. Also, the government must move in and provide protection to the producers of environmentalists’ legal challenges. Basically, the government would have to guarantee the uninter rupted production of a nuclear facility in the United States. It is amazing to me that politicians are so short sighted that they cannot see the obvious. The obvious is that we are running out of electricity and if we do not begin shortly, almost assuredly, there will be shortages in the future.

Almost everything I read; I see that America is becoming increasingly rich as we move forward. Over my last several postings, I indicated that the passing down of wealth by the current generation to the second generation is going to be historic in its high value. This passing down of wealth will materially alter the U.S. economy for decades to come. It will provide for a consumer; unlike anything this country has ever seen in the past. All these huge attributes can mainly be attributed to investing in the stock market. I have been saying this over the last decade, but the population just does not seem to understand or believe it. There are still too many people sitting on cash, earning virtually nothing as compared to the positive aspects of investing in stocks. I received a notification the other day that supported my assumption.

“Brother and sister, together as friends,
ready to face whatever life sends!” Caroline + Reid

Fidelity Investments announced that there were 497,000 401(k) accounts in the U.S. with assets in excess of $1 million. That is 31% greater than from the previous year. This means that these 401(k) accounts have grown since they were invested principally in equities. This does not include the 401(k) accounts of all the other major brokerage houses such as Schwab, Merrill Lynch, etc. It also does not include the likely millions of investors that have $1 million or more in their IRA accounts, and not their 401(k) accounts. The evidence is clear that America is getting richer by the day, and they are getting richer by investing in stocks.

One of the reasons that short-term dips in the market do not concern me is because of the potential buying power of the money coming into the market daily. I always laugh when you see Apple stock go down after their earnings report. The principal buyer of Apple stock is Apple itself. They use their corporate profits to buy back their stocks, and every time it goes down, they benefit by buying more. The same is happening throughout the investing world. There are literally billions of dollars every day flowing into the stock market from 401(k) accounts. These 401(k) accounts tend to be more aggressive than ever, and therefore grow at a faster pace. Wealth is being created throughout the economy, and yet so many investors elect not to participate. We are moving into the best months of the year for the stock market, and there could not be a better time to invest for future profits.

We all know that the best months for investing are November through May. This time we have an even more powerful stimulus, which is the cutting of interest rates by the Federal Reserve. Once again, we have the trifecta of strong investing stimulus. We have a very sound if slowing economy, we have almost assuredly lower interest rates coming up and corporate earnings continue to expand and get better. We have the three most powerful positive attributes working in our favor at the current time. We do have many potential issues as well, such as the federal deficit, and a major U.S. discord with one-half of the population disliking the other half of the population.

However, I think the positive attributes of the economy clearly outweigh the negatives at the current time. If there has ever been a major opportunity to prove your potential to be wealthy, it is currently investing. I have never really understood why people like to invest in cash when they have the potential to earn many times that by investing in equities. All I can give you advice on at the current time is going into the best months of the year, it is now time to get fully invested.

Dream big! Train hard! Play volleyball! ✔✔✔

We have had a fabulous year so far through August which followed another fabulous year in 2023. Over the last 20 months, the markets have been up substantially, and you have benefited from it enormously. It is a good time to reevaluate your investment philosophy and sit down and discuss with us issues that bother you regarding investing. There is no question that the markets will be higher 10 years from now than they are today. What happens over the next 90 days? No one has any idea, nor should you care.

When I first got into investing, the Dow was at 1,700. As of Friday, the Dow ended up 41,563. Stocks will be higher in the future because corporate profits continue to expand. That is not likely to change, and therefore the likelihood of recession is low. I think it would be a great time to sit down and review your investment philosophy and discuss with us how we can help you going forward.

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

Best Regards,
Joe Rollins

All investments carry a risk of loss, including the possible loss of principal.  There is no assurance that any investment will be profitable.

This commentary contains forward-looking statements, which are provided to allow clients and potential clients the opportunity to understand our beliefs and opinions in respect of the future.  These statements are not guarantees, and undue reliance should not be placed on them.  Forward-looking statements necessarily involve known and unknown risks and uncertainties, which may cause actual results in future periods to differ materially from our expectations.  There can be no assurance that forward-looking statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements.

Slow your roll, don’t overthink - the cavalry is on the way!

From the Desk of Joe Rollins

Bill Bewley listening politely as one of the locals
proclaims that one day he’s going to be a real boy.

Since announcing my semi-retirement, I have been reminiscing on my 35-years of investing for clients and my 53-year CPA career. In the beginning, we did this job without the “essential” technology needed today. The entire financial world didn’t depend on technology the way the industry does now. In this post, I would like to cover some events in the industry that have changed investing policies since the beginning of 1990.

This week, the financial markets weathered a significant sell-off; a familiar sight that often triggers panic. However, by the end of the week the indexes had rebounded, showcasing the remarkable resilience of the market. I want to delve into a significant sell-off in 1987 and 1929 and the lessons we learned, shaping our approach to such issues since then. I also want to discuss why the sell-off happened last Monday and why it is unlikely to be repeated.

Interestingly, “al fresco” in Italian slang refers to prison
- not dining outdoors.

At the beginning of 2022, Wall Street's so-called experts were abuzz with talk of an impending recession due to the inverted bond yield. I want to bring you up to speed with that thinking and, after two years, illustrate that there is still no sign of a recession. This long-term perspective, a crucial pillar of our industry, guides us through market fluctuations, and I am excited to delve into it further. But first, let us review what transpired in July.

The Standard & Poor's Index of 500 Stocks ended up being 1.2% for the month. Its year-to-date returns are 16.7%, and its one-year return is 22.2%. The Nasdaq composite was down marginally 0.7%, but it is up 17.7% year-to-date, and its one-year return was 23.7%. The Dow Jones Industrial Average is up 4.5%, bringing the year-to-date up to 9.5%, and the one-year return is 17.2%. The Bloomberg Barclay’s Aggregate bond index is up 2.2% in July, its year-to-date return is 1.7%, and its one-year return is 5%. As you can see, all the major market indexes are up double digits, and the bond index drags very far behind.

Caroline Schultz bringing home the gold in the
backstroke + butterfly for the Ansley Golf Club.

The financial markets sold off dramatically this past Monday, with the Dow Industrial Average down over 1,000 points. As expected, there was major panic and many phone calls from concerned clients who expressed outrage. The single question that kept coming up was – Why don’t we just get out now and get back in when it is lower? This is what we call “market timing”, and it is a strategy that no one has been able to successfully master in the history of financial investing. It is important to remember that getting out is simple, but getting back in is hard. The critical question is - when do you know the market has bottomed out, and when do you know it is safe to return? Based on my history of investing, I would argue that it does not matter, and market timing is a fool's game that no one is qualified to master. Let me illustrate:

When I began to think about opening my own investment company, I studied long and hard to prepare for that opening. Unfortunately, in 1987, we had the infamous Black Monday. On that terrible Monday, the Dow Jones industrial average dropped from 2,300 to roughly 1,700, a 508-point decline in one day. That market sell-off of 22.6% was achieved in a single day. The market sell-off that recently occurred was 3% and was hardly a bump in the long road compared to the Black Monday incident. What happened after the sell-off in 1987 is very important so I will explain.

Nothing like celebrating your 21st in Tuscany– Happy Birthday, Savvy!

The sell-off of 1929 is another example of a severe sell-off in the history of investing. That sell-off was extremely catastrophic due to the misplaced actions of the government in 1929. Rather than loosening financial controls, they tightened them. In 1929, you could leverage 90% of your portfolio. Therefore, you could buy $10,000 of stock with only a $1,000 investment. This highly leveraged atmosphere in buying stock became one of the major causes of the fall. When the market fell over 20% in 1929, you were essentially bankrupt if you had $9,000 in debt on your $10,000 stock, now worth only $8,000.

There were many rumors of people jumping off buildings and committing suicide due to the financial plight this caused. More importantly, this sell-off and ultimate financial downturn in 1929 led to the lengthy decade-plus Depression in the United States. The 1929 crash on the stock market was a severe contraction of the economy, which caused irreparable damage. We all know the history of the 1930s when the unemployment rate was 25% of the working population. It was not until the U.S. entered the fight of World War II in 1941 that the economy turned around as the government was spending money to build military armaments—that action in the economy put an end to the Depression in 1941.

Artie Macon and Liz Mercure enjoying a moment of bliss in Tuscany.

Compare that to the 1987 crash, which was as bad as the previous example. The notable difference is that, even though the crash significantly damaged the net worth of Americans, the government immediately freed up capital and flooded the financial system with cash. I recall even the infamous unqualified Dr. Greenspan assuring the public that there was no need to sell their stocks since he assured them that there was plenty of liquidity in the system. Given the fast actions of the Federal government at that time, 100% of the losses in 1987 were fully recovered within two years due to a rising stock market.

More importantly, this increase in liquidity in the financial system added to a significant boom in the U.S. economy during the 1990s; business was good, inflation was low, and the government was controlling its spending. You may even remember President Bill Clinton was concerned that the U.S. budget would have a surplus during his presidency and how they would save that money for the future assurance of Social Security. Compare that to today, where the deficit will exceed $1 trillion for as far as anyone can see.

Love and laughter in Venice - Kathy and Randy Wittman

As you can see, the difference between the 1929 incident and the selloffs of 1987 were substantially different. This is the lesson I received when I began my investment firm in 1990; it did not make any difference whether you tried to time the market. Recall that the 1987 market fell off to a level of roughly 1,700. Today, that same index is approximately 39,497. So, the question that you would have to ask yourself as an investor is, would it make any sense at any time to get out of the market and later get back in, or were you better off riding out the fluctuation in the market? The answer is crystal clear: trying to time the stock market is a foolish game that even the so-called experts cannot master.

When I launched the investment company in 1990, the world was different from an investment standpoint. I have looked back at some of my writings from that time, and you had to evaluate the most influential companies at the time. People forget companies such as Bethlehem Steel, Eastman Kodak, Goodyear, Sears and Roebuck, IBM, and the most powerful of all, General Electric. These were the “blue chips” of investing at that time. How quickly have these mighty giants fallen?

Lloyd and Laura King savoring a romantic evening in Tuscany.

When I say there is no way to time the market, I do not mean that you should not go out and seek other ways to invest your capital. If you had invested in these companies mentioned above over the last 35 years, likely, your retirement funds would be close to wholly depleted. You must continually evaluate new investments and how those fluctuations affect your long-term goals. Unfortunately, too many people invest in a specific stock or mutual fund and forget it.

I wish I could tell you how often clients come into my office and have no idea what the balance of their 401(k) plan is. In many cases, I ask them to guess their balance, and they cannot even do that. If you are not aware enough to even know your balance, I think that is saying you are not keeping up with your investments.

“Three coins in the fountain!”
Cousin adventures in Rome at Trevi Fountain - Ava and Savvy

During my investment career, I have seen unbelievable companies conceptualized and introduced into the market. People forget that Amazon was founded only in 1994 and is now the most powerful retailer in the world. Tesla Motors, the first producer of an all-electric vehicle, was not even on the radar until the turn of the century. Once again, Facebook, now Meta Platforms, was not even a concept in Harvard graduate Mark Zuckerberg’s mind. This idea was not executed until 2004 and is now a multi-national tech conglomerate. The most interesting is NVIDIA, an artificial intelligence leader founded in 1993.

So, where do we stand with the so-called “Magnificent Seven?” If you go back and compare the two things that move stocks, the most important is earnings. During the first quarter, Microsoft earned a $22.2 billion net profit, Google earned a $23 billion net profit, and Apple earned a profit of $21 billion. During this same time, General Electric earned a profit of $1.2 billion, IBM had a profit of $1.8 billion, and the one-time most profitable company of all in our lifetime, Exxon, earned a profit of $9.2 billion. As you can see, the rate of returns brought by the Magnificent Seven is many times higher than the old blue chips, and, of course, deserves a higher rating. Companies are valued based on three essential components: the economy, earnings, and interest rates. If you looked at earnings alone, the Magnificent Seven’s stocks would continue to be valued higher than the old blue chips, which today are literally an afterthought.

A tavola non si invecchia – Italian Proverb

Compared to the 1987 and 1929 major market crashes, the sell-off last Monday of 1000 points was virtually immaterial. How do you compare a sell-off of over 20% with a one-day sell-off of only 3%? The most important consideration was that by the end of the week, that 1000-point deficit was eliminated, and the week ended virtually unchanged.

Many of the questions I received this Monday related to what caused the sell-off. One of the principal reasons quoted was that the soft employment report of the previous Friday had scared people into believing we were falling once again into recession. Even though the evidence was overwhelmingly against a recession, you cannot keep the people on Wall Street from discussing this issue. It seems like all the famous Wall Street forecasters always have recession on the tip of their tongue.

One of the reasons why they continue to harp to the public about recession is because the stock market forecasters who correctly predict the direction of the market become instantly famous. Those advisors who were correct in predicting that the market would crash in 1987 became investment superstars. No one mentioned that they may have been wrong multiple times, but they were right this time, and the public praised them. Every time a stock market sell-off occurs, the financial news parades out the same predictors of “gloom and doom” that we always hear.

Teri, Bill, Savvy, Joe, Randy and Kathy at St. Mark’s Square in Venice

Often, clients will send me those articles and ask me to comment. In many cases, these people have been predicting recession almost continuously for the last 40 years. Even a broken clock is right twice a day, and eventually, they may get it correct. But where do we stand today regarding recession and the future direction of interest rates? Let me give you the good news later.

One of the principal reasons for the sell-off last Monday related to the “carry trade” with the Japanese yen. Often, investors do not understand the terms Wall Street throws around, but the concept is quite simple. Up until last week, you could borrow money in Japan at virtually zero interest. If you could borrow substantial sums of money at zero interest and invest that money in U.S. equities or treasury bonds, you could make the difference between whatever these investments earned and the basic cost of the interest, which is zero. That is why it is called a “carry trade.”

Just you, me and Venice! - Teri Hipp and Bill Bewley

However, all that changed the previous week when the Bank of Japan decided to increase interest rates. Suddenly, that trade was no longer profitable because you now had to pay interest on the loans in Japan based on your investments in the United States. Therefore, your typical hedge funds began immediately unwinding those transactions by selling stocks and paying off the loans to Japan. By doing so, yes, you are accomplishing the reduction of your debt, but you are also converting U.S. dollars into yen which in turn strengthens the yen and lowers the dollar's value. In any case, it is a bad situation if you borrow yen and pay it back in dollars, so the best action plan is to unwind the trade and get out of the entire transaction. By the end of the week, this trade had been almost reversed, and therefore, the carry trade likely did all the damage it would do.

One of the major reasons I have little concern about the market's future direction is the most crucial component of interest rates, the economy, and earnings. As we finish the earnings reports for the second quarter of 2024, we note that they are higher than they were this time in 2023. There are also projections that earnings may go up as much as 20% over the subsequent 12-month earnings. If interest rates go down, earnings will clearly go higher.

Even though the so-called experts on Wall Street are calling for a recession, the evidence is quite substantial in the other direction. The GDP for the second quarter of 2024 was reported at 2.8%. The Atlanta Federal Reserve Bank is now projecting the GDP for the third quarter of 2024 at 2.9%, and the Federal Reserve projects the GDP in the fourth quarter to be greater than 2.5%. None of the major forecasters are projecting a recession anytime soon.

“Partners in Wine”
Liz, Randy and Joe conducting a happiness check in Italy

As I have written numerous times in these postings, we wanted the economy to slow down. As a byproduct of that slowdown, you would almost assuredly see unemployment rise. Interestingly, the unemployment rate went up to 4.3% during July, but the labor force continued to expand, and many believe that this expansion was due to immigration. I guess if you have basic open borders and anyone who wants to can come into the United States and work, you would be surprised if labor participation ever went down. However, we wanted a slower economy and the negative aspects of higher employment because it would force the Federal Reserve to cut interest rates, which are desirable for most businesses.

We now almost have a guarantee from the Federal Reserve that they will cut interest rates at their September meeting, and more likely than not, they will also cut interest rates again before the end of the year. People do not realize the effect that lower interest rates would have. Everyone knows that lower interest rates would positively impact real estate, but many do not realize how vital lower interest rates are to new car sales, credit card payments, and any revolving finance arrangements. The lower the interest rates, the more money is freed for consumers to buy goods, increasing the gross domestic product.

Road Trip Warriors
Ava, Savvy, Kathy, Dakota and Teri, the women of Tuscany

So, we have the absolute trifecta of good news for future stock prices. We have earnings that are growing, interest rates that are falling, and a solid economy. You cannot ask for anything better than higher stock prices. That, of course, does not mean you will not see volatility. As long as the traders continue to pursue their theory of recession, you will have one day of significant selloffs and one day of major gains. It means absolutely nothing when it comes to long-term investing, and it is best to ignore the market's wild fluctuations. I have learned, and this firm has learned over the last 35 years, that you are much better off fully invested times than trying to time the market.

The major sell-off in the markets that occurred in 2022 was related to the Federal Reserve increasing interest rates. At that time, the Federal Reserve announced that it would raise interest rates to slow down inflation, which had reached an extraordinarily high level of 9%. Make no mistake, that inflation was directly attributable to the administration flooding the economy with cash long after it needed no support. However, due to the high inflation and the Federal Reserve’s slow reaction, they needed to increase interest rates, which they did almost monthly.

Reid and Caroline cruisin’ around NYC –
a city built on dreams and determination!

One of the great axioms of all stock market investing is that if the 10-year treasury bond was inverted from the two-year treasury, that almost always indicated recession. I know it is a complex concept for the average layman to understand, but all that means is that if the two-year treasury is higher than a 10-year treasury, it likely connotes a future recession. The concept is supported by the fact that if interest rates are high in two years but lower ten years out, that likely means that you will have a recession in the short term since rates would normalize ten years out.

The so-called experts screamed from the highest mountain that this inverted bond yield would almost assuredly create a recession in 2022 and 2023, and you would have no choice but to get out of stocks. Unfortunately, 2022 was a terrible year for the stock market due to these projections of the upcoming recessions. But interestingly, after almost two years of the bond yield being inverted, there is no sign of recession even today. Also, this inverted bond yield has come very close to breaking even once again. Today, the two-year treasury is 4.057%, and the 10-year treasury is 3.94%. They are close to once again becoming un-inverted. That indicates that inflation is subsiding since there is no reason to take a 10-year treasury at 3.94% if inflation is truly at 3% or higher.

One of the things I hear on a regular basis is why we should not just invest in money market accounts that pay greater than 5%. You should consider that today, a one-month treasury is paying 5.373%, but a two-year treasury is paying 4.057%. What that means is that interest earned by money market accounts will almost assuredly fall in the future, and that 5% rate is clearly not guaranteed.

Checking out the beautiful St. Patrick's Cathedral in New York!

I have never really understood why investors do not invest in high-level securities if they are that uncomfortable with investing. Why would you not buy a utility stock that pays as much as a money market account and has the potential for appreciating when your money market assets cannot appreciate and will likely fall?

In Dr. Jeremy Siegel’s most recent edition of “Stocks for the Long Run”, he has reported that over the last 30 years, stocks have had an economic return after inflation of 6.5% - 7%. Remember, this is an after-the-inflation calculation. While you may be able to get a treasury bond on a 10-year basis at 4%, after inflation, that return does not look as attractive.

His explanation is an interesting one. He says, “Although stocks are the most volatile asset class in the short run, they are the most stable asset class in the long run.” He points out in his book that all other asset classes, including bonds, gold, and real estate, cannot even match the actual return of diversified publicly traded equities. Once again, that supports our theory that trying to time the market is a fool’s game, and you are best to stay invested at all times.

This is an excellent time to meet with us between now and the end of the year. It is also a great time to put idle cash to work. We would love to discuss your financial future and your investments going forward.

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

Best Regards,
Joe Rollins

All investments carry a risk of loss, including the possible loss of principal.  There is no assurance that any investment will be profitable.

This commentary contains forward-looking statements, which are provided to allow clients and potential clients the opportunity to understand our beliefs and opinions in respect of the future.  These statements are not guarantees, and undue reliance should not be placed on them.  Forward-looking statements necessarily involve known and unknown risks and uncertainties, which may cause actual results in future periods to differ materially from our expectations.  There can be no assurance that forward-looking statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements.