Wednesday, May 8, 2024

“Generational Wealth Transfers”

From the Desk of Joe Rollins

No subject that I have written about in these postings has garnered more attention than my last, regarding generational wealth. Everyone has that subject on their mind, but they really do not know how to address it. We are entering into a period where the transfer of wealth from the Baby Boomer’s generation to their children is unprecedented and will change the value of investments in the future for all. It is possible that the United States will become the second wealthiest country in the world over the next 25 years.
Pretty sneaky! Mia and the entire Musciano clan surprised
her wonderful parents (40-year clients of RF) with
a vacation to their old condo at the beach!

The stock market pulled back modestly in April, but that certainly was no surprise. I guess you would have to say that it was a humble pullback, given that the market was ahead 26% for all of 2023 and was up a full 10.6% for the first quarter of 2024. Given that extraordinarily hot increase in the markets, a modest pullback should not have been unexpected by anyone. In this post, I will discuss what is likely to happen during the rest of 2024, given the incredibly positive presidential cycle trends from the past. People seem to forget that this is a presidential year and what you see in presidential years is positive stock market performance.

For this posting, I will discuss a great deal about generational wealth, the economy in general and, of course, what I expect for the rest of the year. I will also comment on the extraordinarily negative sentiment regarding stock market performance and the remarkable performance contrary to the negative editorial comments out of Wall Street. Before I discuss all those interesting subjects, I must reflect on the performance of the stock market during the month of April.

The Standard & Poor’s Index 500 stocks were down 4.1% for the month of April but continues to be up 6% for the year 2024. For the one-year period, that Index is up a very satisfying 22.7%. The NASDAQ Composite was down 4.4% during April and is up 4.5% in the year 2024. The one-year performance of that Index is 29.1%. I do not think anyone could argue with that positive performance. The Dow Jones Industrial Average was down 4.9% in April and is only up 0.9% year-to-date in 2024. That Index is up 13.3% for the one-year period ending April 30, 2024.
Cameron thinking maybe he was meant for the tux life, after all…

I always like to add in the Bond Index so that you can have a comparison between equity investing and bond investing. For the month of April, the Bloomberg Barclays Aggregate Bond Index was down 2.5%. For the year-to-date during 2024, that index is down 3.2 % and the one-year performance of that index is down 1.4%. As you can clearly see, all three major equity indexes are up double digits for the one-year period ending April 30th, but the Aggregate Bond Index is negative for that one-year period. If you are investing all your retirement money in bonds expecting to fund your lifestyle in retirement, you are clearly making a mistake given these performance results.

Something very interesting happened during the month of April. The Indexes were performing very well through most of April, but towards the end of the month there was a major sell-off. In fact, on the last day of April, the NASDAQ Composite was down a full 2% in one day. It was clear that during this time, the market traders were trying to embarrass the Federal Reserve Chairman, Jerome Powell. Many believed on Wall Street, a combination of a negative stock market and a major increase in interest rates in bonds could force the Chairman to immediately reduce interest rates on the Federal Funds Rate.
Good friends Lloyd King and Scott Zakheim enjoying
great seats at the Predators game.

I have seen this many times in the past where traders team up and do everything within their power to embarrass the Chairman, hoping they can force his hand. As you know, even though he is appointed by the sitting President, the Chairman of the Federal Reserve is not political. Fortunately, this Chairman has not yielded to the whims of Wall Street and continues to do his job based upon current events.

It has received very little publicity, but I thought the Chairman’s comments after his last news conference were very telling. He basically promised that they would not increase interest rates. If you look at his actual statement, what he said was, “I think it's unlikely that the next policy rate move will be a hike.” You can get no more emphatic than that statement. Basically, what he is saying is that he is guaranteeing that the next move by the Federal Reserve almost assuredly will be a downward movement.
Sweet little Penny with what might be the only Easter Bunny
we’ve ever seen that doesn’t look terrifying!

The job numbers for the month of April were not spectacular, but they were very encouraging. The month of April reported an increase in employment of 167,000 jobs. That is certainly below the hot number we have had for the last several months. However, a moderate increase in jobs is very welcome. As we well know, the labor market has been extremely tight for the last several years, and any easing of that pressure in the job market will almost assuredly result in a reduction of interest rates going forward.

Wall Street has proclaimed that due to inflation, which has partly failed to respond to the Federal Reserve tightening, there will be no rate increases during 2024. I am in the opposite camp. It is fairly clear that the pressure that higher interest rates are putting on the economy is slowing the expansion of the economy and, therefore, is hurting future growth. In my opinion, I think that the Federal Reserve will cut interest rates prior to the end of the year, most likely after the Presidential election.

No Federal Reserve Chairman would ever want to be deemed political, and to impact a Presidential election would be a disaster. People forget that Jerome Powell was appointed by then President Donald Trump, but he has made it very clear that any monetary policy decisions would be made based on what’s right for the economy, without regard to politics or any outside considerations.
Amazing! Josh and Carter in front of the beautiful red rock walls of Sedona.

There is another reason rate decreases are going to occur. Suddenly, we are seeing a strengthening dollar around the world. This is not unusual when interest rates are as high as they are here in the United States. But we have recently seen in Japan that the yen has exceeded 150 to the U.S. dollar. That is the weakest it has been in generations. Also, we are seeing that the dollar's strength is impacting the ability of China to control and keep their currency level with the U.S. dollar. There is so much negative that would go on with a strong dollar that it is most likely that the Federal Reserve will have to cut interest rates regardless of inflation to slow down the gains in the U.S. dollar against the rest of the currencies in the world.

As I mentioned in my last post, I discussed the transfer of wealth in the United States to the next generation, creating generational wealth. Probably no subject I have ever written about has received more comments from the people reading my newsletter so I thought maybe I would go back and discuss it in greater detail. Whatever you believe in the way of transferring wealth that may occur in the U.S., you will not believe the actual numbers.

Economists now estimate that something like $84 trillion will be expected to pass from the older generations between now and the year 2045. Even more interesting is that roughly $16 trillion will take place over the next 10 years. Many things lead to this transfer of wealth. Obviously, the rapid increase in real estate values and the historically long bull market have led to substantial assets that will be passed down to the younger generation. However, one of the largest and most significant contributors to this wealth has been the transfer from defined benefit pension plans to the so-called 401(k) and IRA retirement accounts.
Joe (age 5) doing his best James Dean impression

When I was growing up, the Cadillac of investing was the pension you would receive from large companies like General Motors and the government retirement pensions that would go on for the rest of your life. The unfortunate part of these pensions is that when you died, the amount stopped and there was no money to transfer to your children. Basically, it provided a guaranteed income during your lifetime, but nothing was leftover to pass on to the younger generation.

I vividly remember, as a child, when the insurance agent would come by our house once a month to pick up a check for my father’s life insurance. He would often show up during a family meal, and either my father or mother would write a check to cover the insurance premiums. Being an impressionable child and not having any idea of the reality, I just assumed that my father had millions of dollars of life insurance in the case of his death.

In fact, when my father died, we found that he had three $1,000 whole-life policies. It was the standard during his lifetime that you would pay into life insurance your entire lifetime and then when the time came to retire, you would annuitize the cash value of those life insurance policies to create a retirement income stream for you. That is where the term to annuitize came from, and now it relates to all retirement income streams. It was certainly sad to all of us to see that he had paid for his entire lifetime just for a cash value of $3,000 to support my mother.
Huldah Bewley with her sweet granddaughter, Baby Georgia.
Congrats to Katherine – she’s adorable!

I was already practicing accounting when they first introduced the IRA law in the 1970’s. Everyone was skeptical at that time that these would work, and that the government would not get involved or try to intervene on the IRA’s. Over time, it has proven that they are highly successful, and it is now viewed today to be enormously utilized by the younger generation.

The success of advantage savings accounts and IRA’s can be demonstrated by the growth in these values. In 1995, it was estimated that the entire retirement market was $7 trillion. In 2023, it is estimated that the value of the retirement market is $38.4 trillion. As you can see, the growth in this market has provided a substantial number of assets that will be transferred to the younger generation over time.

As we see in our business, many investors have substantial 401(k) plans that they have no need to touch since they have other income. The vast majority of these 401(k) plans will be passed down to their second generation, and hopefully, that generation will pass it on to the third generation. What I am trying to emphasize is there will be such a huge transfer of wealth to the next generation that it will significantly improve the standard of living for most Americans due to the spending opportunity that the substantial wealth will offer to the economy in the future.
Cameron + friends looking stylish at the pre-prom picture party
while counting down the hours until the after-party.

People do not understand or fail to realize that there is a substantial issue producing Estate tax over the next several years. Currently, the Estate tax exemption is roughly $13.8 million for each person alive. For a married couple, that is roughly $28 million. Given that enormous Estate tax exclusion, virtually no one qualifies for Estate taxes at the current time. In fact, in all of 2023, only 4,000 estate tax returns were filed in the United States, and only 2,000 of those owed Estate taxes. Rest assured that those who owed Estate taxes were taxpayers who did not receive tax advice since there are so many ways to avoid this. What is interesting is that if you assume that only 4,000 Estate tax returns are filed and divided by the attorneys practicing Estate and Gift law, you can see the issue of that overcapacity.

If the current administration is re-elected, they have assured everyone they have no intention of continuing to allow the income and Estate tax laws that President Trump passed which will expire at the end of 2025. If they do not allow these Estate tax limits to move forward, the exemption will drop from $13.8 million to approximately $7 million. Therefore, for a married couple, the exemption falls from $28 million to roughly $14 million. Suddenly, many people who thought they were outside of the Estate tax will fall within it. For more than any other reason, this emphasizes the importance of transferring wealth during your lifetime to a younger generation to avoid Estate tax.

Many of my clients express a desire to understand and participate in generational wealth, but they often feel unsure about how to do so. The good news is that you do not need to do much to achieve this goal. As I often advise my clients, it is quite straightforward to fund your child’s Roth account, even though they have meager earnings from a summer job. If you were to calculate a Roth account for an 18-year-old child, accumulating from age 18 to 65, you would be amazed at the significant wealth transfer you could initiate with minimal contributions.
Joe, age 7- all he’s missing is his briefcase and Sharpie
(which, fun fact, wasn’t invented until 1964)

Upon reaching age 73, many of my clients are reluctant to take their Required Minimum Distribution payments. They often feel they have no need for money at that stage of their lives. One effective strategy could be to take the required minimum distributions and gift them to your children or grandchildren. There are numerous ways to transfer wealth while maintaining control over your money. For instance, consider placing a vacation home in an LLC and transferring the minority interest to your children. This way, wealth can be transferred to the second generation without relinquishing control of the money. I strongly advocate for helping your children prepare for their own retirement. Contributions to an IRA or Roth to those children are substantial ways of moving wealth to the second generation. This helps your children build wealth while not hurting your pockets.

Another significant transfer of wealth is through charitable contributions. Through a donor-advised fund, you can contribute money annually even though you have no specific charitable entity in mind for the transfer. I encourage people to contribute over five to 10 years to a donor-advised fund and accumulate a relatively large amount of money that can contribute in the future to a charitable cause. This is a way to move substantial assets from your name into a charitable cause that does worthwhile activities. The fact that you can move substantially appreciated securities without paying income taxes on those securities is another reason to make these transfers.

As these numbers indicate, there is going to be a significant transfer of wealth over the next 20 years. To give you an example, it is now believed that $84 trillion in real estate, stocks, cash and other assets in the United States alone will be transferred. Of this amount, roughly $6.6 trillion sits in 401(k) plans that will need to be transferred over the next few years. This transfer of wealth will forever change the U.S. economy due to the spending power of the people who receive this money. It is highly likely that over the next couple of decades, the U.S. will become the second wealthiest country in the world, second only to the oil cartel in the Middle East. One of the last things you want to do is hold on to your wealth without attempting to transfer it to the next generation as you sit back and allow the Estate tax exclusion to catch you after 2025.
Josh and girlfriend, Kasten, celebrating the end of
tax season with a Braves game!

After they reported the GDP for the March-ending quarter of 2024, there was much handwringing by economists and Wall Street. That report indicates the GDP is 1.6% for the 1st quarter of 2024, well below the anticipated percentage. I have studied this number and compared it with earlier projections, and almost assuredly, this amount will increase. It does not look like they had the full and complete inventory totals on the first read, and when the final numbers come in, I expect that percentage to be closer to 2% rather than 1.6%. Regardless of the actual numbers, 1.6% was still a satisfying number and a welcome amount given that we wanted to see a less hot economy, so that we might get lowered interest rates in the future.

If you actually believe that the economy was weak, you are not currently reading all the information available. The Federal Reserve of Atlanta projects that the GDP growth of the 2nd quarter of 2024 will be at 3.3%. That would be basically double the reported rate of the 1st quarter of 2024. I saw so many so-called Wall Street experts predicting that the fall in earnings due to a weakening economy would occur in the 1st quarter of 2024 and would bring down the stock market. Just so you understand the magnitude of the numbers, I thought I would give you the earnings of the five major tech-like stocks.

For the first quarter of 2024, Microsoft reported net after-tax earnings of $22 billion; Apple reported $24 billion; Alphabet (Google) reported $25 billion; Amazon reported $10 billion; and Meta, the old Facebook reported $12 billion. It does not seem like the earnings were diminished in the first quarter since all these companies’ earnings reports are near the all-time best in their history. In addition to the earnings, Apple announced they would buy back $160 billion of their own stock. That is the largest announced buyback ever in the history of American finance.
Ava’s long-time love of horses “mounted” after meeting
these beautiful Icelandic ponies

The numbers we are talking about are so large, they border on science fiction. To give you an example of how large they are, Warren Buffett announced his company, Berkshire Hathaway, is currently sitting on $169 billion in cash. If you can believe those numbers, the interest income earned by that cash investing in treasury bills yields interest income to the company of over $8.5 billion per year. Just think of the earning power generated by $8.5 billion of idle cash attributable to that company.

It is clear that the economy continues to be on solid ground, and corporate earnings continue to be extraordinarily good. Even though the market pulled back in April, I would anticipate that the rest of 2024 will be good. Typically, during the Presidential election year, the markets bounce around through June and, from July to November, tend to be positive. This, unfortunately, leads to what happens with incumbent Presidents. If you want to enhance your ability to be reelected, you will use the massive spending power of the government to enhance the possibility of being reelected. In order to have the best opportunity to be reelected, you want the economy to be good and everyone to have a job so that all outward appearances during your Presidency were positive. However, you do not want to do anything that will be detrimental to the economy beyond your term.
Never too young for a bucket list - Ava and her classmate
enjoying the Northern Lights in Iceland!

Unfortunately, that is exactly what is happening now. It appears now that the government is going crazy spending taxpayers’ money that will, in the long term, be a detriment to the U.S. economy. If you think I am exaggerating, read the exact numbers. Over the last year, there has been an increase in manufacturing jobs in the U.S. of a mere 20,000 jobs. Manufacturing jobs lead to a higher and better economy and prove that the industrial backbone of America is strong. That number is only a fraction of the number of jobs created in healthcare, which is a whopping 765,000. The worst number is the number of governmental jobs created in the last year of 618,000. Another number is the social assistance number of 267,000, which includes household healthcare workers often supported by government programs such as Obamacare and Medicare. As you can see, the current administration has loaded up the economy and government with jobs to keep unemployment low and improve their reelection chances. The sad part of these numbers is that, unfortunately, all of us will be stuck with the number of government workers that are hard to get rid of and a drain on the real economy, and taxes to pay for these jobs that are probably unnecessary. At a time when we need to cut government jobs to reduce the out-of-control Federal budget, why on earth would we be increasing the number of government employees? This year, we are anticipating a Federal deficit of $2 trillion, and yet we have added 618,000 new employees to the payrolls and jobs that provide substantial benefits in positions that are nearly impossible to terminate.

There is not much anyone can do to control the Federal deficit other than elect officials who would be more responsible with taxpayer dollars. It just does not seem that the average taxpayer knows the facts and, therefore, misinterprets the readily available information.

I just wanted to revert back to generational wealth to point out something obvious to everyone. The Federal Reserve data shows that the average net worth in 2022 of people between the ages of 65 and 74 was $1.8 million. That number clearly is exaggerated by the wealth of a few people as compared to the average. The average wealth of those people is only $410,000. While it sounds like a relatively small amount, when rolled down to the next generation, it provides a good starting point in life and a substantial increase in assets they have as compared to the assets inherited by their parents. Like most people in the boomer generation, I received no assets from inheritance, but I will pass down assets to the next generation. I suspect most of the people reading this posting will be in a similar situation. This passing down of assets will change your children's lives and, hopefully, their children in the generations to follow. My one piece of advice here is do not make your children wait until your death to share some of your successes with them.

Bows and bling, it’s a cheer thing!! Go Caroline!!
I was taken aback when I read the headlines that the unemployment report went from 3.8% in March to 3.9% in the month of April. A 1/10th increase in unemployment seemed highly unlikely, given the shortage of employees available to be hired everywhere. So, I looked up where these figures were coming from and determined what was correct. April’s jobless rate was 3.86%, while the jobless rate in March was 3.83%. Therefore, the March unemployment rate was downgraded to 3.8%, and the April amount rounded up to 3.9%. As you can see, statistically the numbers were almost identical, but the headlines assumed something negative because the unemployment rate increased. I hope that if you get nothing else from reading my postings, you will learn to take what the mainstream media and Wall Street give you and better understand what the numbers mean and how easy it is to misconstrue them.

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.

Thursday, March 14, 2024

You Can Create Generational Wealth – Why Are You Waiting?

From the Desk of Joe Rollins

I know I write endlessly about the importance of investing early and often, yet most people do not realize how important this is in creating generational wealth. I am positive that most people reading this posting never thought they could even consider creating generational wealth for their children and grandchildren. However, it is within the reach of most investors, but so many are just not taking advantage of that opportunity. I want to discuss this in detail in this posting and give you some numbers to support those calculations.
Frank Thomas feeling the well-deserved love while surrounded by his son Don, daughter-in-law Sana, and grandsons Walker and Evan
I also want to discuss the current state of the economy and the general employment numbers that we recently received. Additionally, I want to address the pessimistic view of so many investors and how they have been proven wrong since the stock market hit all-time highs just last week.

Moreover, I want to delve into why China is having so many financial problems and why it is unlikely that China will be the financial success it has been in previous generations. I will also share my prediction on interest rate cuts, which are clearly expected to occur this year. Furthermore, I must discuss the immense financial reach of big tech and why it is crucial that you be invested in tech.

Before discussing those intriguing topics, I must report on the month of February 2024, which turned out to be quite a successful month. Year-to-date, we are enjoying an excellent run and we are all thankful for it. I think back to 2022 when the so-called experts on Wall Street predicted that with a downturn in the S&P and the 11-interest rate increases by the Federal Reserve, the U.S. would likely suffer a decade of nominal returns. I remember so many of these experts on financial news explaining that investors should be out of the markets and in cash rather than suffer the declines that would clearly be coming over the next decade.
Speaking of feeling the love – everyone wanted to wish the
wonderful Fran Gordenker a very happy 90th birthday!
Even though the major averages on the stock market in 2022 went down 20%, as of the month of January 2024 we have fully recovered from that downturn and more. Therefore, in a period of only 14 months, we now have set all-time records in almost all the major indexes. If you ever need a more prominent reason to always be fully invested, it is the quick recovery of a major downturn. Only those individuals who elected not to be invested suffered significant loss while the market roared back from a downturn.

For the month of February, the Standard & Poor’s Index of 500 Stock was up 5.3% and is up 7.1% for the two-month period ended February 29, 2024. Once again, the 10-year average on this index is 12.7%. The Dow Jones Industrial Average was up 2.5% for the month of February and is up 3.8% for the year 2024. The 10-year average on this index is 11.6%. The NASDAQ composite was up a very healthy 6.2% in February and is up 7.3% for the year 2024. The 10-year average on this index is up 15.2% per year.
Eddie and Jennifer enjoying the family ski trip
with daughters Harper + Lucy!
As a basis of comparison, the Bloomberg Barclays Aggregate Bond Index was down 1.5% in February and down 1.6% in 2024. The 10-year average on this index is 1.4%. Every day, I watch a lot of financial news, and one after another I see so-called experts praising the positive attributes of owning bonds in your portfolio. I am just one who thinks, why would you ever invest in an asset class that, over the last decade, cannot even produce returns greater than the inflation rate? From a more straightforward standpoint, if you have owned bonds over the last 10 years as compared to inflation, you have lost money.

When I talk about creating generational wealth, I do so with the understanding that everyone has their limitations, but virtually everyone reading this posting can create generational wealth. I do not know how many times I have written on the subject that you should set up and fund a Roth for your children. If a child makes a small salary during a summer job, you should fund a Roth investment for them. Think about the economics of investing in a Roth account in each of their teen years, and what wealth that will create by the time they need retirement 40 years from now. You are creating generational wealth for your children, and hopefully, your children will pass that along to their children.
Eddie trying not to be “extra” while enjoying time
on the slopes with his girls!
The same goes for IRA’s for yourself and your children. I write endlessly about the importance of funding your IRA early in the year, yet so many investors do not invest early in the year and, in fact, do not even fund their IRA’s on a regular basis. It seems that so many investors can find so many useless needs for their money that they forget the importance of investing for their future while they are still young enough to create generational wealth for themselves.

If you think I am exaggerating the benefits of investing, you just have not read the current data. Try this fact pattern and see if I might be closer to convincing you. Based on data released by the Federal Reserve, investors in the United States created $5 trillion worth of wealth for their households during the fourth quarter of 2023 alone. Think about how much money $5 trillion is. Also, remember that if you were not investing or if you were holding your money in cash, you did not participate anywhere close to this level. Generational wealth has been accumulated in investors' accounts, but if you are not invested, you will not participate.

If you think this is an isolated case, let us look at the rest of the data the Federal Reserve provided. Let’s go back to 2019, which takes out the COVID years, which were economically confusing and not representative of long-term trends. But from 2019 to the end of 2023, American households have added a staggering $39.3 trillion worth of wealth to their households. This amount of money will be passed on to your children and grandchildren for decades to come. This should serve as a clear example of how important it is to invest regularly and to remain invested even during difficult times.
Miller + Penny = 2 pretty cute couch potatoes
Remember that this period from 2019 through 2023 included the down year of 2022. I often quote Peter Lynch, one of the most famous stock investors of all time. He famously stated that “Far more money has been lost by investors in preparing for corrections, or anticipating corrections, than has been lost in the corrections themselves.”

This period is an excellent example of that. Those who tried to avoid the market downturn in 2022 clearly lost out in the very satisfying year 2023. Also, remember that even today there is $5 trillion in cash that is not invested.

We received the unemployment report this week for the month of February, and once again, it was an excellent employment month. Employment went up 275,000 from the previous month, which far exceeded the so-called forecast of an increase of only 200,000. Also, within these numbers, they significantly adjusted the prior employment numbers to more reasonable levels during the month of January. What is essential in this employment report is that the unemployment rate went from 3.7% to 3.9%. Even though both of those numbers are great numbers, the trend to increase unemployment is very important to reduce the robust nature of the economy and to encourage the Federal Reserve to reduce rates to increase employment.

Historically, the 3.9% unemployment is still a many-decades record, but the trend to put more Americans out of work, while unfortunate for them, is actually good for the economy as a whole. As I have pointed out in prior postings, we need a slower growth economy in order to encourage more investment and lower interest rates. Also, do not forget that even though the unemployment numbers have gone up, there are still way more job openings than unemployed in America. There is a job for everyone who wants to work. The reality is that many people do not want to take on a job.
Mia giving her handsome nephew a squeeze before he heads off
to Tim Tebow’s Night to Shine! Keep shining, Michael!
I am one of the few people who read the details of the employment report, but something earth-shattering, in my opinion, came out of this report. The report for February was quite excellent, but it was interesting that if you read the underlying data, it is surprising to see how much the employment makeup in the United States becomes. For the last 12 months in the United States, the number of “native-born” Americans with a job fell by 881,000 workers. The question is, where did those workers go? However, more importantly, in the labor force in the United States, the number of foreign-born workers with a job rose by 1.5 million to 31 million.

Can you see the trend that is developing here? The United States-based jobs are being replaced by non-United States people doing those jobs. Of course, these aren’t the only workers on the payroll that caused this number to rise. None of us actually know how many millions of workers that are here that are working illegally are being counted. I rather suspect that the percentage of foreign-born workers is much higher than the 31 million reported by the Department of Labor.

The issue with the southern border in the United States has gone from silly to severe. Now we are receiving reports that not only are Latin Americans crossing the border, but we are having a large percentage of Chinese citizens working their way into the United States. Do not get me wrong, both houses of Congress and both political parties are equally responsible. There was a very positive immigration bill approved by the House Democrats, but the House Republicans rose to have it defeated.

But there is no question that the flood of undocumented immigrants in the United States is going to have lasting and long-term negative financial issues. We are certainly welcome to have them as workers in the United States, but we cannot be an entirely lawless country. We must have laws to control people entering the country we do not want. I get so tired of hearing that we cannot control these borders. We currently have a standing United States Army of over 2 million soldiers. They are not doing anything right now. They clearly could control the border, but they are not. It is unfortunate that, politically, we cannot get this matter under control, but we clearly need to.
Sparkle and Shine, it’s 1st Birthday Party Time!
I am often amazed when someone gives me answers to why they do want to invest in a specific stock. Often times, this opinion is based on something that is not economic. Do not ever forget that earnings are what makes stocks go up and earnings control the valuation of the stock. Whether you like the company or the product the company sells is irrelevant to the value of the stock since earnings actually control that amount. Let me give you an example of the absurdity that you will often hear on television regarding the valuation of stocks.

Several weeks ago, the Super Bowl was watched by an average audience of 125 million people in America. The next day in the media it was explained how extraordinary the advertisers were able to get 125 million people eyeing their commercials during a three-hour period. It is reported that these advertisers spent an average of $14 million per minute for the time on the Super Bowl. Obviously, the $14 million did not cover the actual cost of the production of the commercial and therefore the cost is likely much greater than the $14 million. Certainly, that is a resounding success but quite frankly, that is peanuts compared to other media outlets.

It is currently reported that in the entire world there are approximately 8.1 billion people living on this planet. At the current time, it is believed that only 63.5% have internet access, which is roughly five billion people. The five billion people are located around the entire world and in some cases in very isolated areas. Take into consideration that Facebook has a daily average usage in its website of 2.6 billion people. Therefore, one half of the world basically logs on to Facebook daily. When you consider the advertising potential of that usage as compared to the 125 million people that watched the Super Bowl, you can see that the Super Bowl was totally a rounding error. You may not like Facebook or you may not like its owners, but you have to respect its earnings, which are extraordinary. If anyone thinks the major tech stocks are going to have a downturn, all they have to do is consider the potential reach of something as simple as Facebook.
Middle School class trips have come a long way –
Ava and her friend living it up in Jamaica!
I often write about China because I do not think people really understand its economy. I wish I could tell you how many times I have read that by 2030, the Chinese economy will overtake the United States economy. Those that write those articles have clearly not done much research on the subject. In recent years, the Chinese communist party has decided that they will not be friendly to private enterprise. This failure to work with private enterprise has run many companies out of China, and they are relocating on a regular basis to southeast Asia, such as Vietnam, and more recently to India. This lack of foreign investment in China will have a material long-term effect. Just as an example, foreign investment in China has increased every quarter since 1998. However, in the third quarter of 2023, foreign investment in China actually fell as companies moved their operation elsewhere.

The biggest misnomer about China is that people believe its economy is so robust, that itself generates its own revenue. Nothing could be further from the truth. China currently has debts that are greater than 300% of its gross domestic product. Even though the United States is embarrassingly deep in debt, their debt is only a fraction of the debt owed by the Chinese. As we all know with higher interest rates and a slowing economy, it will be harder and harder for the Chinese to fund this massive debt loan in the future.

One of the major concerns in China is that its population is aging. In 2023, the population of China fell for the first time in generations. Everyone recalls the one-baby rule the Chinese government imposed and the lack of new babies is creating problems with the population. At the current time in China, the number of citizens over the age of 65 in the year 2000 was 6.9%. In the year 2023, the percentage of the population over age 65 is 14.2%. The population is getting much older, and this is happening very quickly.

There are major concerns when the population starts to age at this accelerated rate. First and most importantly, since the government is responsible for healthcare and we all know older generations require more healthcare, it is a drain on the central budget. In addition, the care of the elderly is quite important. Oftentimes, family members must take time off from work to care for the elderly, creating a void in manufacturing and production. This aging population is extremely hard to turn around. If you think about it for a second, due to the 40 years of the one-child rule, there were more males created than females and, therefore, a lack of couples to create more babies. With the economy slowing in China and the government’s inability to fund future growth, I fully anticipate seeing China slow down for years to come.
Megan hitching a ride with My Neighbor Totoro’s Catbus
One of the ways China has kept peace among its employees is by keeping them working. The Chinese government borrowed heavily to finance and build entire cities with no one to live in them. Do not forget that still over 50% of the population in China lives in poverty. We all see pictures and newsreels of the prosperity of the cities, but the rural areas continue to suffer financially. With the anti-capitalist mentality of the government, now we are seeing businesses leave China and move to other countries, taking their jobs with them.. China would like to continue manufacturing and exporting to other countries, but the United States is fighting back. If the United States refuses to accept imports from China, China’s economy will grind to a halt.

I continue to read about the one worry that many investors have about China overtaking Taiwan in the near future. It is clear that the United States supports Taiwan and that under no circumstances would the United States stand idly by if China invaded. Think about the financial implications of China overtaking Taiwan. If the United States put a total halt on the imports of Chinese goods, the Chinese economy would grind to an almost immediate halt. Why would any government in China take the risk of destroying its economy to take over a relatively small country?

The current state of the U.S. economy continues to be quite good. Over the last several years, I made a lot of fun of the Wall Street forecasters predicting the dire financial circumstances that actually never occurred. One of the most famous in that group is Jamie Dimon, who is by many considered to be the most respected executive in all of America. Jamie Dimon is the CEO of JPMorgan Chase banking empire. In mid-2022, Jamie Dimon warned that a “hurricane” was coming to the United States economy, and “you better brace yourself.” Of course, as we now know, no hurricane did come to the economy in 2022, even though the stock market went down in reflection of that potential risk.
Penny and Miller looking to escape and soak up some rays!
In early 2023, the “experts” on Wall Street predicted that there would be a 61% chance of recession in 2023. We now know that in 2023, the economy actually grew at 3.1%, which is a long way from a recession predicted by the so-called experts.

You would think that these experts would eventually give in and admit they were wrong in predicting the recession when no recession occurred. However, like the proverbial broken clock that is right twice a day, they are doubling up on those predictions. At the current time, economists now predict that the recession within 2024 is down to 39%, which, of course, is down from 61% a year ago. They were wrong then, and they are wrong now; it is just a matter of when they might get around to predicting it.

If you look at the Atlanta Federal Reserve’s prediction of economic growth for the first quarter of 2024, it is predicting a gain of 2.5% as of today. As we look forward into the remainder of 2024, it is hard to imagine that recession would be anywhere in the future. One of the most important aspects of valuing stock is looking at earnings. At the current time Wall Street analysists are forecasting an 11% increase in earnings for the S&P 500 companies in 2024. That is a major increase from the amount of 2023 when the gain was 2%. But what is even more important is that these analysts are projecting that the growth in earnings in 2025 will be a robust 13%. If you analyze the numbers, it is projecting net income to be up 11% in 2024 and 13% in 2025. How anyone with any objective analysis of these numbers could predict recession is a little bit of a mystery to me.

Going into 2022, the Federal Reserve moved to increase interest rates, and since March of 2022 they have increased them 11 times. Now, these interest rates stand at a 23-year high. The economists projected that these 11 increases would destroy the housing market and would create mass unemployment and bankruptcies in business. There is no question that mortgage interest rates are dramatically higher than before, but still not anywhere close to historic highs. Those who think the housing market is not robust have just not tried to buy or sell a house. Housing numbers are down because so many homeowners have such low interest rates and are reluctant to sell their houses and take on higher interest rates. The house building industry just cannot keep up supplying the number of houses needed in the economy. Contrary to what you hear on the financial news, the housing market is quite strong and there is no downturn forecast in that industry.
Megan’s spectacular view of the Garden of the Gods
There has been so much talk in the financial news that the financial markets will improve as interest rates begin to drop. Quite frankly, the economy is quite good, and inflation has dropped dramatically, so there is not a lot of urgency for the Federal Reserve to cut interest rates. Also, 2024 being a political election year, being deemed as being political by cutting interest rates to affect the ultimate election would be the last thing the Federal Reserve would want. Going into this year, the so-called experts on Wall Street predicted six interest rate cuts during 2024. I said then and say today, that is ridiculous. Most importantly, I think that the Federal Reserve will not cut interest rates around the election just to prove it is outside politics. So, the actual question will be when will rates actually go down?

I project that the Federal Reserve will cut interest rates one-quarter point in the June meeting and will also cut interest rates at one-quarter point in November and December of 2024, which both dates will be after the election. Everyone is predicting that these decreases in interest rates will power the economy higher, but that is not the case. Just as the higher interest rates have not really hurt the economy, I think lower interest rates will do little. The economy has survived during these high interest rate cycles because corporate America was so flush with cash that it did not need to borrow money and therefore did not affect earnings. Only the small companies actually use bank financing now, and the larger companies self-finance their own operations. It is fairly clear that the economy is in an exceptionally good pattern and with a slowing economy and inflation coming down, it is fully anticipated that the rest of 2024 and 2025 would be economically strong. If you want to create generational wealth for your children and grandchildren, now is the time to be invested.

We would love the opportunity to sit down with you and discuss your portfolios or any other matters that you find of interest from a financial standpoint. We can help you with Estate planning, gifting programs, and how to invest money for your children and grandchildren. We would love to have the opportunity to get you invested, even with small amounts, for future generations. In order to build financial wealth, money needs to be invested long-term. You cannot start building that financial wealth until you get invested. I hope that the readers of this posting will take my advice and do what is best for their families beginning today.

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.

Wednesday, February 7, 2024

Weather Forecasters Are More Trusted Than Economists

From the Desk of Joe Rollins

Over the last several years, the profession of an economist has fallen to new lows. And quite frankly, they deserve the demotion they have received. Going back to 2022, the economists were adamant that the economy would shrink and recession was inevitable in the coming years. They could not have been more wrong. The most recent economic data has even further elevated the U.S. economy and projects a more robust economy for 2024.
Breathtaking! Client Caroline Matton enjoying the view
after hiking up Mount Batur in Bali.
I want to discuss the economy in greater detail in this posting since it is extremely important. I also want to reflect on earnings in the fourth quarter of 2023 and how they should impact stock prices going forward. Since 2024 is an election year, I have to report on the shenanigans going on in Washington to boost the economy and improve the chances that one politician or another might win the election. From an economic standpoint, these decisions are very damaging, but from an investor in the stock market, they are extremely helpful.

I also want to discuss the recent demise of the Chinese economy and many problems with China that have not reached the media yet. The stock markets in China and Hong Kong have been dismal, and until China changes, they will continue to be dismal.
Client Cindy Craft enjoying time with her handsome boys
and their beautiful families in Charleston, SC.
The most famous fund manager of all time is Peter Lynch, who successfully managed the Fidelity Magellan Fund for many years. Peter Lynch had a famous saying that you did not need to read economic statistics; all you needed to do was go to the mall and check out the people flow to determine how good the economy really was. I took a trip on Saturday, and I want to give you my impressions of the economy as I saw it while I was on the road.

Before I discuss all these incredibly exciting topics, I need to update you on the January trading period. For the month of January 2024, The Standard and Poor’s Index 500 stocks were up 1.7% for the month. This index would have been up much more except for a significant sell-off of 1.6% on the last trading day of the month. Federal Reserve chairman Jerome Powell made a speech that day indicating that no interest rate decrease would be in the cards for March 2024. The stock and bond markets sold off dramatically based on these statements. Theis interesting to note that both of those markets recovered and even went higher as the week progressed. But in any case, even a 1.7% increase in January is immensely satisfying. Remember that if each month this year has a similar return, the index would have an annual gain of over 20%.
Clients Wyatt and Beverly Foster doing a little sightseeing
in Singapore (try saying that 10 times)
With the S&P up 1.7% for the month, that gives it a one-year return of 20.8% for the one year period. The NASDAQ Composite was up 1.1% for January and 32% for the one year period ended. The Dow Jones Industrial Average was up 1.3% for the month of January and is up 14.4% for the one-year period then ended.

As a comparison, Barclay’s Aggregate Bond Index was down .1% for the month of January, and for the one-year period, it is up 2.2%. I always try to give you a bond equivalent so that you can understand the difference in returns between stocks and bonds. The long-term performance of stocks versus bonds is dramatic. The S&P over the last 10 years is up 12.6%, the NASDAQ Composite over 10 years is up 15.1%, and the Dow Jones Industrial Average is up 11.8% annually over the 10 years. Compare that with the Bond Index, which has averaged 1.6% for the last 10 years. I speak about this often in these postings, but if you had been invested in bonds over the last decade, your investments would not have generated even enough return to exceed the rate of inflation. I do not see bonds contributing significantly going forward, even though they may have a small gain in 2024.
Ava and her friend off to the Fox to see Hamilton.
On Friday, they announced the job market for January 2024. The so-called experts were predicting a gain in employment for that month of 187,000 workers. To shock everyone, the payroll numbers increased by 353,000 for the month. It is vital that you understand that for employment, January is one of the worst months of the year. You have the double negative effect that many construction workers are unable to work due to weather in the north, and the retailers are laying off excess employment for the month during Christmas. The reported number that is so dramatically higher than what is expected is extraordinary.

Not only was that number good, but they also increased the number of employments in December. Therefore, for two straight months, you have increased employment of more than 300,000 new employees, which is very strong. Unbelievably, the unemployment report was once again reported at 3.7%, which is a low level of unemployment, and it leads back to a sub-4% jobless rate, which goes back to December of 2021. Take into consideration that for all the months of 2021 and 2022 and the first month of January 2024, unemployment has been less than 4%.
DeNay enjoying the snow and sandstone at Red Rocks over the holiday.
Obviously, this is an extraordinarily strong labor market. I have quoted many times in this newsletter that recession is highly unlikely if employment continues to be full. When I went to college, they taught us in economics class that full employment was 5%. Here we have the last two years where unemployment has been less than 4%. That almost surely means that employment is full.

The good news continues to roll in with this employment report. It was announced that the average hourly earnings over the last year had risen 4.5%. An exceptionally large increase in earnings by employees. This increase will obviously flow into consumer dollars, as I will reflect later in this posting. As you recall, the so-called economists forecasted a recession in 2022, but here we are in 2024, and certainly, the recession is nowhere in sight.
Lauren and Jeff treating Henry to a day out at Fetch!
A year ago, economists saw a recession as highly likely and projected annual economic growth of only .2% for all of 2023. How surprised they must have been recently when it was reported that the GDP for all of 2023 grew at a 3.1% rate. It is hard to imagine that the so-called trained economists could have mis-forecasted the economy in such a dramatic fashion. Fortunately, in these postings, my projections were significantly better. What was interesting is that for the last two quarters of 2023, the GDP went up 4.9% in the third quarter and 3.3% in the fourth quarter. That would indicate that the economy is, in fact, slowing, which is a good thing. In order to slow down the Federal Reserve from increasing interest rates, the economy should moderate and settle in at a GDP growth of roughly 2.5% per quarter. If we were to get to that level with inflation down to 2% annually, I think you would see interest rates fall fairly dramatically by the Federal Reserve.
Ava posing next to her artwork – maybe the next Frida Kahlo?!
Everyone must have been in shock when the Atlanta Federal Reserve put out its most recent posting of the projected GDP for the first quarter of 2024. Their current projection for the GDP is at 4.2%. Can you even imagine the shock of economists seeing that print of 4.2% when you have been calling for a recession for over the last 25 months? People really do not understand what goes on when the chairman of the Federal Reserve comes out every six weeks and makes a projection of the economy. If you have ever watched the speech, you would see the stock market futures and the market itself move 200-300 points in a matter of minutes.

What is going on here is that the bond market, which is many times larger than the stock market, is trying to influence the Chairman and embarrass him on national television. There is no mistake about what the desire of the bond market is. To them, a good recession is extraordinarily profitable to them. If we have a recession, then clearly, interest rates would come down, and they would profit. I know it is a twisted philosophy that this segment of the invested public would really prefer mass unemployment so they would benefit. They must be terribly disappointed that the economy continues to do very well.
Client Sheryl Matton with daughter Caroline all dressed up
for a night out at Sunset Point in Bali.
For years, I have been saying in these postings that you must ignore the noise in the news and look to earnings. A couple of years ago, I had several clients who insisted that I sell the stock Facebook because of whatever philosophical difference they had with the company, they did not want to own it. I argued that at that time, regardless of how you felt about the company, you needed to look at earnings to evaluate it. What drives stock prices are earnings, and the misconception by the public on this subject is quite distressing.

I thought maybe you might be interested in a look at earnings for the fourth quarter of 2023 and see what we could learn from those earnings. Let us compare some old-line companies that have been blue chips for our entire lifetime as compared to the new tech companies that have risen to prominence in recent years. For the fourth quarter of 2024, Exxon made a $9 billion profit and Chevron made a profit of $6.5 billion. If you compare the two, General Motors made a profit of $2.2 billion and General Electric had a profit of a measly $348,000 for the quarter. All these are old line blue chip companies that have been around for generations.
Holy Moly! Sheryl taking a dive with her new friend
at the site of the USS Liberty in Amed, Bali.
If you compare the earnings in the fourth quarter of the tech companies, you can see why tech is profitable and a good investment and those companies are less profitable. For the fourth quarter of 2023, Apple made a cool profit of $34 billion, and for the year, had a profit in excess of $100 billion. The company Google, now called Alphabet, had a profit of $20 billion for the fourth quarter and an annual profit of $73 billion. Microsoft turned in a profit in the fourth quarter of $22 billion and has an annual profit of $82 billion. Even Amazon had a profit in the fourth quarter of 2023 with an income of $10 billion and an annual profit of $30 billion. The so-called Facebook, now called Meta, added a profit of $14 billion in the fourth quarter and an annual profit of $39 billion.

You really do not need to be a rocket scientist to understand the magnitude of these numbers. The earnings by these tech companies are extraordinary by any definition and, as an investor, cannot be ignored. It is interesting that after the massive sell-off in 2022, the so-called Wall Street experts project that it would be 2025 or 2026 until we got back to all-time highs. Interestingly, the Standard and Poor’s Index 500 Stocks and the Dow Jones Industrials both reached all-time highs in January 2024. Therefore, it only took less than 13 months for the market to recover all its losses and go to all-time highs. Much of this gain has been led by these tech companies, and rightly, their gain is based upon their extraordinary earnings. There is nothing in the evidence that indicates these earnings will do nothing but increase as the economy strengthens into 2024.
DeNay relaxing, recharging, and reflecting at the Red Rocks.
Historically, the presidential election year is almost always good for the stock market. There just seems to always be a way that an incumbent president can flood the economy with money and, therefore, increasing the possibility of re-election. That is precisely what is happening now in Washington. Last week, the House passed an income tax reduction bill that would increase the deduction for each dependent a taxpayer has. Interestingly, this reduction would go into effect retroactively on January 1, 2024. Notwithstanding, many people have already filed their tax returns, they want to give larger refunds to taxpayers with the intention of buying more votes in the presidential election.

You must understand now that the Federal deficit budget in 2023 is already forecasted to be more than $2 trillion. That is 7.5% of GDP, which is roughly double what the average has been in the economy from 2016 to 2019. What this means is that the deficit has run at roughly 3% of GDP in the years prior to COVID-19. Since COVID-19, the Federal deficit has not been lower than $2 trillion annually and continues to grow. I give you this information so that you can see that there could not be a worse time to propose a decrease in income tax rates. With Federal deficits running at extraordinarily high rates, why would you contribute to those deficits by cutting income taxes, unless you wanted to pour money into the hands of consumers? Buy votes?
Ava catching a few waves down in Florida.
It has been projected by the San Fransisco Federal Reserve that consumers continue to hold $430 billion in excess savings that came to them by the virtue of the pandemic. It is only a matter of time before these amounts start to go down as consumers start to spend more money. However, that is not good enough for the bureaucrats in Washington. Currently, they are flooding the economy with trillions of dollars from the INFLATION REDUCTION ACT, CHIPS, and the INFRASTRUCTURE BILL. The Administration, almost daily, announces funding from these various acts to companies that will benefit from this outflow of money.

Even though Congress has previously funded these programs, it is pretty obvious what is going on with the money flowing out of Washington directly into the hands of companies that will spend it, which will then improve the economy. You would not be terribly concerned by all of this since this is standard politics if the deficit were not so high.

At some point we need to start making progress on reducing the deficit. I know that I have written in my previous postings that deficits are not really a problem. As long as you can print your own money, you can overcome the problems with deficit. However, in so doing, you create inflation, which is a negative for all consumers.
“Live life with no excuses. Travel with no regret.”
I often quote the reality that, “How could Germany during World War II, launch war against the entire world?” Germany had a relatively small economy and certainly did not have the financial recourses to launch a war on the rest of the world. However, by virtue of them printing money in order to fund their military desires, they created hyperinflation. At the end of the war, it was said that Germany had devalued their currency so far that they had to pay their soldiers on a daily basis since inflation was so bad.

I do not intend to make a direct reference to compare the German economy to the American economy, but only to point out that continuing deficits will eventually create inflation. At some point we need to get serious about balancing the budget with the revenue, but it now seems that at this point, Washington is only focused on spending more and more money regardless of the financial outcome.

Not many people are focused on China these days, but they should be. China is, of course, the second largest economic power in the world and controls an enormous amount of financial influence in the worldwide economy. A few years ago, they decided that they would attack private industries within China and bring them back under the control of the Communist Party. The result of that has been that many American companies are pulling out and moving their operations to other Southeastern Asian countries.
“Traveling – it leaves you speechless, then turns you into a storyteller.”
– Ibn Battuta
Clearly, Vietnam, Indonesia, and Malaysia have benefited from these moves. More importantly now, we have seen a significant shift in manufacturing capacity from China into India. India has a similar number of citizens as does China. However, the population in China is dropping compared to India, where it continues to grow.

For many decades, the Chinese government promoted the one-child per couple limit. The idea was that the limit would slow down the growth of the population by limiting the number of babies being born. The data shows that there is a significant imbalance in the ratio of men to women. Last year, employment in China fell, and the population is increasingly getting too old. As the population continues to age, the cost of healthcare and maintaining a reasonable lifestyle for the elderly will grow and that will create a major deficit to the national economy. At the current time, along with Japan, China has one of the oldest average of its citizens in the world. This, along with their anti-private enterprise and huge debts that are owed to China, has forced many industries out of the country and caused them to move to other parts of the world to create commerce.

What is interesting is that this major shift in philosophy has dramatically reduced the desirability of investing in that country. It is hard to believe that the stock market in China was down in 2023 and that it was the third straight year of decline in that market. Even more importantly, Hong Kong’s Hang Seng Index dropped for the fourth consecutive year. As you can see, your money is not treated well in China, which is a direct reflection of how they treat private enterprises in their country. As has been proven so often in the history of the world, when a communist government starts to privatize businesses, everything goes down. It happened in Cuba, it happened in Russia, it happened in Venezuela, and it is currently happening in China.

It is unlikely that China will turn the corner back to prosperity until they adopt a more pro-business mentality than what they are currently exhibiting. It is currently the policy in China that they would like to increase their population. They are encouraging couples to have more babies and even giving them financial incentives. The way China has maintained control over the population is that they have kept them busy by building and working in manufacturing plants. It is believed that in many cases that China has built entire cities with no one in them, just to keep workers busy. But the end result is that China is extraordinarily indebted. With the debt they owe, the only way that they can maintain the lifestyle of the population is by increasing their own GDP. They know as does the rest of the world, that if a major unemployment period strikes China, in all likelihood, the communist government will fail. I fully expect to see China change their philosophy regarding private industry before it is too late, and they suffer political negative ramifications.

As I mentioned earlier, Peter Lynch says that all you have to do is go to the mall and see what the flow is like. I had to run an errand on Saturday to a city outside of Atlanta, which was a 45-minute drive from my house. I was absolutely blown when I saw what was going on. Along the way I passed not less than 10 major buildings under construction. I passed a Golden Corral, and not only was the parking lot full but there was a line wrapped around the building of people waiting to get in. At 10 o’clock on Saturday morning, you would not expect such a show of consumer support. There is no question that the cost of eating out in restaurants has gone up dramatically, but that is for good reason due to the high cost of food and service in the industry. Even though the cost of eating out is high, restaurants are enjoying record participation.
I mean, who doesn’t love seeing a picture of a giraffe?
You can only draw the conclusion that people would not be eating out in restaurants that are on the more expensive side if they did not have the discretionary income to spend. Coupled with the huge traffic jams on my way to this city and observing the huge turnout in the restaurants, you have to assume that the consumers are in really good shape. Maybe you have read that Christmas sales this year were up from the preceding years even though the projections proposed that they would decrease close to 10%. Virtually everything the consumer does these days is higher than anyone could possibly project.

I recognize that this is a very limited anecdote evidence of the economy, but it should illustrate a point. Consumer spending is currently very strong, and 60% of the GDP is consumer spending. If you assume that the consumer is strong and fully employed, and inflation is down and interest rates will fall, you cannot project anything other than an increase in equity prices in 2024.

I get up every morning and watch the news, both financially and otherwise. I read about the Ukrainian War in more detail than most people do. I am also very aware of the conflict in Israel and the issues with Iran, Iraq and our soldiers. I recognize that the world is a tinder box that can blow up almost anytime. It might be possible that Russia will win the war in Ukraine, but what on earth would they have won? They get to take over a bankrupt country that would have no place for the population to live. No industry, no utilities and certainly no desire to be Russian. I would hardly call that a victory under any circumstances.
Happy Birthday, Sweet Caroline – double digits and loving it!!
The issue with Israel and Palestine will shortly be over one way or the other. Either they will reach a compromise, or Israel will kill enough people to make the conflict go away. This will be short-term. The issue with Iran and Iraq, in my way of thinking, is relatively simple. If we withdrew all of the forces from Iraq, it is likely that this whole issue would also go away.

Yes, all of these areas are of concern and if any one of those were to blow up, it would massively affect the stock market. However, hopefully, by now, you have learned that you cannot invest due to geopolitical events. If one of these events occurred, you would react to that, but you cannot invest in anticipating one of these events will occur.

The other day, I had a client say that he would not invest until after the Presidential Election. I thought to myself, “You had an outstanding 2023 and are likely to have an outstanding 2024, and you are going to wait for an event that quite frankly has no economic effect on the markets whatsoever.” If you start to invest emotionally without analyzing the financial and economic effects of the market, you are more likely than not to fail in your investment future. The best philosophy is to be always invested, regardless of geopolitical and economic circumstances.
Little Penny laughing it up as usual!
In summary, I believe the markets will be as good in 2024 as they were in 2023. I do not anticipate a gain as high as 2023, but I do anticipate a gain that will be satisfying. The economic news starting in 2024 has been good, and I fully expect it to get better as Washington floods the economy with money. I mentioned in my last posting about people who are resisting doing IRAs in 2024. I continue to note that the resistance is a mistake.

If you invest early in the year, you earn tax-free returns that will benefit you for a lifetime. There is absolutely no better investment than earning tax-free returns.

If you would like to discuss any of these matters in further detail, please let me know.

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.