Tuesday, November 24, 2020

Happy Thanksgiving!

In observance of Thanksgiving, the offices of Rollins Financial and Rollins & Van Lear will be closed on Thursday, November 26th and Friday, November 27th. We will re-open for business on Monday, November 30th at 8:30 a.m.


If you have any pressing matters that require immediate attention on Thursday or Friday, please do not hesitate to contact any of our staff.

Please be safe, and enjoy the holiday! 

Best Regards,
Rollins Financial, Inc.

Wednesday, November 18, 2020

“Don’t Gamble; Take All Your Savings and Buy Some Good Stock and Hold It Till It Goes Up, Then Sell It. If It Don’t Go Up, Don’t Buy It.” – Will Rogers

From the Desk of Joe Rollins

You may have noticed that I took a couple months off from writing my monthly blog.  During the highly debated election season, I opted to just take some time off rather than create any unrest due to the friction of the election process.   Now that it is over and we are ready to move forward, I can get back to discussing some of the things that I find of interest without any political overtones. 

In this blog I want to reemphasize again the strength of the American economy which I have been discussing all year.  Contrary to what you hear in the media, the economy is strong and is getting stronger.  No question about it, there are weak spots and there will continue to be weak spots for months to come.   But clearly, there is light at the end of the tunnel, and it is time to position our portfolios for bigger and better gains.

Ava, Age 9, as a magician 
for Halloween this year

I also would like to discuss some of the impressions I have regarding the change in the environment of investing over the last decade.  Things have shifted so quickly the past ten years it is hard to believe that some of the companies that were once leaders are now laggers.  I will try to cover some of those events for you.  

Much has been said regarding the economy due to the election and what would happen if we had a “blue wave” in the Presidential election.  That clearly did not happen and in fact there is much positive news from the election whether you want to believe it or not.  I will try to point some of those items out for you, as well. 

Before I do all that, I must explain the month of October.  It was basically a down month, but mainly due to the final week of October leading into the election.  For that week, the market was down 5%, basically wiping out all profits for the month.  The real positive news came in November.  

The Standard & Poor’s Index 500 stock was down 2.7% for the month of October, but is higher for the year 2020 by 2.8%.  The NASDAQ Composite was down 2.2% for the month of October but is up a very satisfying 22.5% for the year 2020.  The Dow Jones Industrials was down 4.5% for the month of October and is down 5.4% for the year 2020.  And just for comparison, the Bloomberg Barclays US Aggregate Bond Index was down 0.5% for the month of October, but is up 6.4% for the year 2020.

Harper Wilcox, Age 11, as an Arctic huntress
 and Lucy Wilcox, Age 9, as Harry Potter  

While certainly October was a disappointing month from an investment standpoint, there is clearly strength in the financial markets; albeit it is difficult to identify given the avalanche of negative news related to the pandemic and election.  Just as an example, the one-year total return for the S&P 500 is 9.7%.  The NASDAQ Composite is up 32.9%.  Even the Dow Jones Industrial Average is up a little bit at 0.3% for the one-year period there ended.    

If you go back and read the blogs I have written for all of 2020, you will notice that I have consistently advocated that you stay invested at all times.  The unfortunate truth is that the only people that lost money during the pandemic sell-off of March and April 2020 are the people that actually sold.  I do not know how many ways we can say, never try to time the market, but yet there is always some investor that believes they have the absolute answer to market timing.  They could not be more wrong.  

The numbers above reflect the returns of the S&P 500 Index.  Quite frankly, for this year, actively traded mutual funds are significantly higher than the S&P 500 Index.  In many cases, the better managed funds have rates of return that are more than double the Broad-Based 500 Index.  It is all about stock picking.  The nest mutual funds have the best fund managers and we pick the best of the best.  It is often said only 10% of the mutual funds outperform the S&P 500 Index.  Yes, that may be true, but 10% of 6,000 available funds is over 600.  We invest in less than 50 mutual funds throughout our entire portfolio.  

For this entire year I have been emphasizing to you that the economy was much stronger than you realized and much stronger than is represented by the media. It has become a national embarrassment that so much of the media is now tainted by its own political bias and reporting of the news has become as obsolete as the buggy whip.  I long for the days when Walter Cronkite would just read the news to me.  I had no idea of the political leanings of Walter Cronkite until long after he retired.  Who would have ever suspected that Walter Cronkite was very much a liberal-leaning person? You would have never known it from hearing his news reports.  He should be the model for how all news reports should be handled today.

Reid Schultz, Age 5, working 
for NASA this Halloween   

For those of you who thought I was delusional for thinking that the economy was better, the news this month documented that reality.  For the 3rd quarter the GDP was up 33.1% on an annualized basis.  If you break it down to a quarterly basis that is roughly a 7.4% increase.  That is the highest increase in one quarter ever in the history of American finance.  Yes, I fully recognize that on an annualized basis the GDP is still down, but it is working its way back to zero.  As I write this, the Atlanta Federal Reserve is forecasting an increase in GDP for the final quarter at 3.2%.  If that quarterly increase becomes true, we will be at a very near breakeven for 2020.

Evidence of the increase in the economy is everywhere, but you don’t hear it in the news.  The Institute for Supply Management has said its manufacturing index rose 59.3% last month.  Incidentally, that was the highest since 2018.  How could manufacturing be so strong in the face of such negative financial news?  In addition, the forward-looking component of new orders for manufacturing was the highest it has been in over 17 years.  This is extraordinarily good news for the economy going forward.

The unemployment picture is improving.  Even with many states continuing to restrict their workers from their jobs, the unemployment rate fell to 6.9% during the month of October.  While certainly it is a high rate by recent standards in the U.S, it is a vast improvement over just four months ago and the components of unemployment were extraordinarily encouraging.  Much of the improvement in unemployment is related to hospitality and restaurants, which are just starting back to work.  

Finally, businesses are going back to work and putting their employees back on the job.  I forecast as we move forward, we will see greater improvements in these labor reports.   What is very surprising to most people is that the U.S. consumer is strong.  Retail sales have now risen in five straight months - the highest they have been even prior to pre-pandemic level.  Credit card spending is actually up, while credit card balances are down.  The average consumer credit score is at the highest level in the history of the U.S. Don’t you find it astonishing that the media is forecasting the demise of the average consumer, yet the economic facts are completely different?

The news on the vaccine is nothing short of remarkable. Pfizer reported their preliminary results of the vaccine with an over 90% effective rate.  The FDA had forecasted an effective rate of 50% to 60% on these proposed vaccines, but a 90% rate is beyond anyone’s anticipation.  When you get a 90% effective rate on a vaccine, you are talking about an effective rate similar to that of measles, smallpox and chicken pox.  Those particular viruses have a vaccine rate in excess of 90% and this vaccine holds the same promise of success.  As we roll out the vaccines over the next 12 months, you will see America return to normal.  People will no longer be in fear of crowds, travel, staying in hotels or even eating at their favorite restaurants.  I forecast that by this time next year, this will all be a bad dream. 
 
Caroline Schultz, Age 6, as
 a colorful butterfly    

The government has done an extraordinary job of funding and expediting the technology for these vaccines.  They have pre-funded roughly two billion doses for the vaccine, not only for the U.S but for the rest of the world.  Four to five vaccines could be fully authorized for emergency use prior to the end of 2020.  As these vaccines work through the population, you will see corporate America gear back up to its pre-pandemic strongest economy ever.  Remember we only need 50% of the population to get vaccines to reach mass immunity – very exciting.  

The year 2020 will be looked at as an extraordinary year in many regards.  But one thing that I think will clearly be proven is that the shutdown of the American economy was a serious mistake.  Admittedly none of us knew exactly what might happen and what the effect would be.  What we are finding out though is that as the economies that were shut down have begun to reopen, the virus is spreading through areas where it had not been before.  We are now seeing a serious rise of cases in the Midwest, which previously had avoided any major virus spread.  The state of Georgia was one of the first states to reopen and to this point the pandemic has been under control.  The economy continues to strengthen in Georgia as we move forward with virtually all segments of industry now open.  

The reason I think we will look back on this time period with regret of shutting down the economy relates to the $3.5 trillion the Federal Reserve had to borrow to stimulate the economy.  It will take generations to pay off this much debt, which will be a drain on future Federal budgets.  I fully recognize that without this deficit spending the economy could have been much worse, and the outcome could have been different. However, the economy was shut down by governmental agencies as businesses that could have and wanted to work were prevented from doing so.  Even to this day many states are not open for their economy.  While there is some evidence that their infection rates are lower, I wonder whether anyone can justify the economic cost of these shutdowns.  The issue for school closings is complete nonsense – I will not go there this month.    

Erik Kramschuster’s dog, Knox,
 as a mighty lion

While certainly it is a tragedy that people continue to die of the virus, I personally think that the deaths of this virus is well overstated.  While certainly it is true that deaths recently are averaging at about a thousand a day, many of the experts contend that these deaths are mainly older people at the end of their life.  There is very little evidence that younger people are dying; the closing of schools is doing much more harm to the kids than the exposure of the virus. You do not hear about it too much in the press, but even before the pandemic roughly 7,000 people/day die in the U.S., and that is always a tragedy.  Whether the pandemic increased these numbers dramatically is debatable.  What is not debatable is that the shutdown had dire financial circumstances to the people prevented from working which may take generations to overcome.

It is now time for us to move forward and put industry back to work with the anticipation of a vaccine in the very near future.  It is forecasted that 20 million Americans will get vaccinated each month going forward.  There is light to be seen at the end of the tunnel.  

As a commentary of the election, those who forecasted a “blue wave” throughout the United States were clearly wrong.  There is a great deal of positivity in these election results that the average person does not even consider.  All the polls showed the Democratic party winning vast majorities in virtually every state.  However, that was not the case, and, in fact, they lost ground in many regards.  Even though the Democratic party won the White House, they did not win the Senate and they lost ground in the House.  

A divided Congress is truly great for stock market investing.  The biggest shock in this election was that the majority party in the House actually lost ground.  How could the polls have been so wrong when it came to the election results?  By losing six seats in Congress, it appears that the voting public is becoming more conservative rather than more progressive.  The wild forecast of the defunding of the police and lawlessness in some states led to a backlash of conservative voting.  

The face of education in America today   

How could you possibly explain how the state of Florida, with its elderly population, could have possibly voted for a President that the media solely blamed for the pandemic?  Throughout the voting in the United States it was clear that conservatism outweighed progressive causes.  That is very much a positive for the financial markets.  A Congress without any ability to increase taxes, increase regulations or slow the growth of business with progressive actions is very much pro-stock market.  Therefore, all the dire projections of a negative regulatory environment under a “blue wave” government will not happen for another two years at least.  

I was sitting around thinking about the changes that have occurred over the last decade and how extraordinary some of those have been.  When I first started in the business, the two giants of the American industry were General Electric and ExxonMobil.  If you have followed their stock prices, you would notice that they are no longer dominant.  GE is barely above survival and Exxon is cutting back while trying to protect what was once the most profitable company in the world.  No longer do the oil companies control the price of oil and, therefore, while the consumption of oil is down, the price of oil has plummeted.  Additionally, there have been so many other changes that you have to look at from a bigger perspective.  

Who would have ever thought that Netflix, which was a company that used to rent DVDs by mail, could now be bigger than all the broadcast networks combined?  Who would have ever thought that we would see CBS, NBC and ABC overtaken by a total streaming company? 

Who would have ever thought we would see the cab industry basically eliminated?  Uber and Lyft now control the ridesharing business and are putting many of the cab companies completely out of business.  Here in Atlanta, virtually no cab companies are profitable.  

Rollins & Van Lear, P.C.’s Morgan Miner
 enjoying a sunset on the coast   

Over the last decade, we have seen the explosion of Google.  They built the better browsing service and now are hugely profitable.  Would anyone prefer to own Proctor & Gamble with a 25 multiple as compared to Google with a 29 multiple?  That would be an easy selection for me.  Who had ever heard of the company Facebook 10+ years ago?  Can you even fathom that 1.8 billion people log on to Facebook daily around the world?  If it is true that there are over 7 billion people on this planet, then more than 20% of those people log on daily to this simple software application.  When you consider that a large portion of that population does not even have computer applications, that makes that number even more stunning.

There is so much criticism of Amazon today by people that really do not understand the significance of that company.  They have singlehandedly created a third-party manufacturing platform for small businesses to sell their goods.  Yes, they are a dominant company, but they provide an extraordinary service that has taken the place of shopping at brick-and-mortar.  I would never even consider driving to a mall to buy something when I could buy it from Amazon and have it delivered within a couple days.  

Oftentimes, when you go to the store, they do not even have what you want.  That would not be the case on Amazon since they have virtually everything.  The people that criticize Amazon truly do not understand the positive economic benefits it brings to the economy.  I was reading an article last night that forecasted that both Amazon and Apple would have sales in excess of $100 billion during the fourth quarter of 2020.  Here is Amazon, which was hardly a company at all 10 years ago, and Apple 10 years ago that was virtually bankrupt.  The past decade has been nothing short of breathtaking.  

Those who expressed concern regarding the government interfering with Big Tech really do not understand how ineffective any challenge would be.  First, technology is forever changing and you only have to look at IBM to understand that.  At one time IBM was the most powerful tech company of them all.  Today, it is an afterthought of a shrinking market taken over by entrepreneur-type companies.  Who would have ever thought a company like Apple, making consumer goods, could become, by far, the most profitable company in the United States?  If challenged by the Justice Department, it would take decades through the court system; you only have to look at Microsoft’s history to understand the impact.  

My bird friend visiting my deck in Florida 

Even though the Justice Department challenged Microsoft on antitrust, anticompetitive grounds, for over 10 years during that same time period Microsoft stock increased over 10 times the price that it started.  However, none of these tech companies are immune from new technology.  As new companies develop better and more technology, the names we know today as Tech Barons are likely to pass by the wayside.  

There is no question that the last 10 years have been an extraordinary time in American finance.  Things have happened that no one could have ever forecasted or believed.  I also believe that these are the types of changes in technology that will keep the American economy strong.  We have the best technology in the world and there is no one even close to second.  As long as we channel that American Spirit and increase the economy by creating new jobs with new technologies, no amount of governmental interference or regulation will slow that down.  We now have an opportunity for the next several years to build the economy back to where it was and growing again.  I think we are only a short time away from that happening.  If you want to be part of growing your retirement dollars for retirement years, you need to be fully invested in the American growth economy, which today is so clearly represented by technology.  

On that note, come visit with us and discuss your goals and financial plans. If you are interested in discussing your specific financial situation, please feel free to call or email.

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

Best Regards,
Joe Rollins 

Friday, October 16, 2020

3rd Quarter Update – 2020 The Longest Year

What’s influencing markets:

  •  Market Update – Stocks up significantly in 3rd Quarter
  • Economic Rebound since March – Household net worth at a new record
  • Supportive Monetary and Fiscal Policy - Low interest rates, QE and lots of spending
  • Election risk diminished  
  • Planning Opportunities for 2020

It was the evening of March 12th and we were having what turned out to be the final soccer practice of the season. I have been coaching my daughter’s soccer team for years albeit with little knowledge of the intricacies of soccer. We missed the memo that the soccer league was cancelling activities, so we were the only team on the pitch that evening. 

Schools were closing and spring break was on the horizon so we thought maybe the kids would be home for a month before heading back to school to finish up the school year. I also thought soccer leagues might be suspended and then resume after the pandemic wrapped up in a month or so. That was a little na├»ve!  

Many adults continue to work remotely, and many kids are still homeschooling. And while there are still many people and businesses suffering right now, the overall economy has been able to recover much of what was lost early on in COVID. An upside-down world has evolved its everyday functions as a health crisis turned into an economic crisis. While government response cannot solve every problem, the policy responses to rescue the health and economy of citizens worldwide have been powerful and unprecedented. 

Market Update

During the third quarter of 2020, the equity markets continued to recover from the drawdown earlier in the year. Remarkably, and as the chart below indicates, large technology stocks did the heavy lifting for the markets, yet again, as indicated by the Nasdaq 100 outperformance during the quarter. While we do not expect the large cap U.S. growth stocks to outperform every quarter and every calendar year, the momentum and investment performance by that category has been striking.

The S&P 500 value of 3363 on September 30th is currently trading at 26 times estimated 2020 earnings of $130 and roughly 20 times projected earnings of $166 for 2021. Those valuations are a bit lofty, but not unreasonable when compared to a 10-year Treasury bond paying 0.68% annual interest. The returns generated by stocks and bonds might have exceeded expectations given the challenges faced by the economy this year.   


 

Economy

A robust economic rebound from the 2nd quarter when we saw a historic GDP drop is helping stocks continue to recover. The latest estimate from the Atlanta Fed is that GDP growth will increase 35% for the 3rd quarter 2020. This follows a 31.4% drop in real GDP during the second quarter. These are annualized figures so the actual change in economic activity is less than a 10% drop of roughly $2 trillion in economic activity for an economic base lever of $22 trillion. Depending on how the 4th quarter 2020 develops, the U.S. economy may only see a slight decrease on total economic output for the year of 2020. That would be an enormous success compared to what seemed possible in March and April of this year.

Of course, millions of workers remain without jobs. As the pandemic emerged and the shutdown began about 20 million jobs were lost, and at this point the economy has only recovered about 50% of those lost jobs. The unemployment rate, after spiking to 14.7%, declined to 7.9% in September.


 

An indication of American ingenuity and the resilience of the economy is the fact that new business applications and permits are rising faster than in recent years.  The stay at home economy is fundamentally changing the way we live our lives, so while some businesses may have difficulty sustaining, a whole new collection of business opportunities are presenting themselves. This is especially true in this unusual economy as new opportunities to serve a void are abundant as evidenced by the surge in new business permits.  

 

 

The improvement from the bottom instructs what is happening with asset prices like homes and stocks. Trillions already spent in government transfers are also helping families weather this economic storm and contribute to the rise in asset prices. Low mortgage rates and overall robust demand for homes has pushed housing prices higher by nearly 5% year over year. Household net worth reached a new high during the 3rd quarter of 2020, sustained by rising stock and home prices.  

 


Monetary and Fiscal Policy

While there are some positive economic trends that we have outlined above, there can be no questioning the role monetary and fiscal policy has had in supporting the economy as the country and the world continue to navigate this economy. The Federal Reserve extended several lending programs through the end of 2020 that were originally set to expire in September. The Fed is also likely to keep rates near zero for months or years to come until inflation exceeds its target of 2 percent. Below you can see the mind-boggling expansion of the Fed balance sheet increasing by $3 trillion this year.  

 


 Meanwhile, there seems to be agreement by the President, Senate and House that there should be some additional fiscal support as the virus cases persist. Federal Reserve Chairman Powell has also encouraged the President and Congress to move forward with additional fiscal spending programs, but they haven’t yet reached an agreement on the scope of an additional spending package and may not do so until after the election. In any case, the prospect of additional fiscal support either later this year or early next year is likely having a positive effect on asset prices – all of this despite booking what will be a record $3 trillion plus budget deficit for fiscal year 2020. We are watching to see signs that the increased liquidity around the world will finally lead to inflation.     

Election Risk

I suspect that for many of us, November 3rd cannot come soon enough. In some ways, it seems the election risk has receded in recent weeks. Perhaps the market sees a more decisive outcome at least referencing recent polling data and prediction markets. Or perhaps the market sees one scenario with lower taxes and the other with greater stimulus. With every Presidential Election comes questions about whether the investment strategy should be adjusted based on the various outcomes. It is generally advisable to keep politics out of your investment portfolio. For example, it would have been a mistake if you had sold investments or adjusted your investment strategy in the wake of a Trump or Obama victory. 

As investment advisors, it is our responsibility to position our client accounts appropriately based on a wide array of conditions affecting investments. There is a “consequential” election every two years, and that is likely too often to consider deviating from your long-term objectives by trying to guess which sectors or companies are positioned best for each candidate. Conventional wisdom would have argued that a Trump win in 2016 would likely have benefited energy and financial stocks, because of potential friendly regulations for those sectors. Tilting your portfolio overly aggressively towards the conventional wisdom in this case, solely because of politics, likely would have left your portfolio underperforming. 

Planning Opportunities for 2020

2020 has been a year like no other in history for many reasons, but it’s also providing some unique financial planning opportunities before the end of the year. The uneven economy this year has created a great disparity in personal economies. Some ideas are going to be appropriate if you’ve had a relatively positive economic experience, while some options would be more fitting if your economic situation has been more of a challenge.

1.  Consider a Roth Conversion – There are no required minimum distributions from IRA accounts this year, so a Roth Conversion might make good financial sense. In fact, if your income is artificially low or you think you will be paying higher tax rates in the future a Roth Conversion may be worth considering.

2.  Refinance your mortgage – Mortgage refinancing is about to get more expensive starting in December. Mortgage rates are at historic lows as many are getting loans well below 3%. We continue to advocate refinancing into shorter term lower cost loans.

3.  Fund your retirement accounts – Another anomaly of 2020 are the super high savings rates. If you have extra cash on hand and have not fully funded your employer sponsored retirement account (401k, 403b, etc.) you still have time to increase your contributions. And of course, everyone with taxable income can contribute to a tax advantaged IRA or Roth IRA.

4.  Consider extra charitable gifts – The CARES act allows a cash charitable contribution deduction of up to 100% of your AGI this year, rather than the standard 60% maximum deduction. Coupling the Roth conversion with charitable contributions is a worthy strategy to consider.  

5.   Take an IRA Distribution – The CARES act also allows up to $100,000 distributions from retirement accounts if with special provisions for paying the tax and returning funds if you have been affected by COVID 19. We don’t ever recommend raiding retirement accounts, but if there is an emergency there are special provisions which make early distributions from retirement accounts less punitive than normal.

These are a few of the issues we are watching into the end of the year. We remain encouraged about the future, especially witnessing how our resilient economy has evolved this year. As always please contact us if you would like to discuss your investments or review your financial plans. 

While 2020 has been a challenging year like no other, it’s thus far been a satisfying year from an investment perspective. We hope you all are staying safe, healthy, and calm as we close out 2020.

Best regards,

Edward J. Wilcox, CFA, CFP

Thursday, September 3, 2020

Happy Labor Day!

In observance of Labor Day, the offices of Rollins Financial and Rollins & Van Lear will be closed on Monday, September 7th. Please note that all major U.S. stock exchanges and banks will also be closed due to the Labor Day holiday.




Our offices will reopen for business on Tuesday, September 8th at 8:30 a.m. If you require immediate assistance on Monday, please do not hesitate to contact our staff via email:

Joe Rollins at jrollins@rollinsfinancial.com
Robby Schultz at rschultz@rollinsfinancial.com
Eddie Wilcox at ewilcox@rollinsfinancial.com

Please be safe, and have a great holiday weekend!

Best regards,
Rollins Financial, Inc.

Wednesday, August 12, 2020

The Economy Continues To Improve, Not Withstanding The Media's Attempt To Talk It Down

From the Desk of Joe Rollins

The month of July 2020 will clearly be one to look back on in financial history as an important month. After an avalanche of negative publicity regarding the economy and the prospects for the U.S. to pull out of the pandemic, the economy continued to strengthen and the stock market reflected that strength. It has been absolutely amazing that for all of the negative headlines we have read regarding the economy and the spread of the virus, that the stock market has dramatically improved over four straight months. July was an extremely strong month for all financial assets.

I have a lot I want to discuss in this posting and some of it is quite valuable information. I want to explain why the stock market is not likely to have a major downturn due to negative real rates of return. I also want to rebut the so-called “pundits” that argue that the rise in the stock market is a bias against the working class and mainstream. Obviously, they do not understand, as do I, the Wealth Effect which I will explain later in this posting.

Partner Eddie Wilcox and his wife, 
Jennifer, walking the beach
 
Most of the general public has completely missed the implication of Zero-Sum economics. They just do not understand that if one segment of the economy suffers, by the effect of Zero-Sum, some other segment of the market must be strong. That has proven so clearly true in these very difficult times. The most important real-world example I can give you is from the famous comedian, George Carlin, as he described why this country became so fixated on germs. Even though this famous comical dialogue was recorded 20 years ago, it is so very true in today’s economy. I will give you his thoughts.

Before I launch into those fairly interesting subjects, I need to cover the markets for July which were excellent. The Standard & Poor’s Index of 500 Stocks was up a sterling 5.6%, during the month of July. Year-to-date this index broke into the positive 2.4% and for the one-year then ended in July, it is up 12%. In the first couple trading days of August, this index is now less than 1% below its all-time high level. The NASDAQ Composite continues to be the forerunner in all the indexes, up 6.9% during July and year-to-date is up 20.4%. The one-year return on this index is an almost unbelievable 32.8%. This index has outperformed mainly because it is where so many of the young tech companies reside. If you think this is just a flash in the pan, the ten-year return on this index is an excellent 18.2% annually.

The Dow Jones Industrial Average was up 2.5% during July but continues to be down 6.1% for the year. The one-year return on these 30 largest stocks is, however, positive at 0.8%. Just for purposes of comparison, the Bloomberg Barclays Aggregate Bond Index was up 1.4% for the month of July, up 8% for the year 2020 and for the one-year period up 10.2% for the period ending July 2020. While this was an excellent year so far for the bond index, a couple things are truly interesting.

Ava and her mask social distancing

Most times the stock market and the bond market move in opposite directions. If stocks are up, bonds are down and if bonds are up, then stocks are down. However, this year those stocks and bonds have rallied significantly so far. That is not normally the case, in that the ten-year annual returns for all the stock market indexes are double digits. The ten-year return on the bond index is a meager 3.8%. I will explain later in this posting why one of the major reasons the stock market continues to go up in an otherwise negative economy has much to do with the real-world effect of negative normalized rates of returns.

Almost every day I am confronted by an investor asking with great anger and disbelief, “How can we continue to be invested in stocks when the valuation is absolutely crazy at the current time? As of the end of July, the 12-month trailing P/E for the S&P is 26.8 versus 18 at the end of March.” They give me this example with the conviction that this level of P/E earnings is unsustainable and is at a historic height. I am always confused why investors always look at the past and never the future, which is much more important.

There is absolutely no questions that based on the disappointing earnings for 2020, that stocks are historically high. However, history will always rate 2020 as an outlier. What good information do we have in valuing stocks at a 26 multiple when we know that earnings are depressed - but earnings are likely to improve. It is now the current projection of the S&P, that earnings over the next 12 months should improve by over 48%. If earnings are to improve, as suggested, at 48% should you evaluate the market based on the trailing price earnings or evaluate it on its prospects? Clearly, anyone who has been investing for any period of time knows that whatever has happened in the past is in the rearview mirror, but what we should all be considering is not the past, but the future. Based on future earnings, the market is more closely valued at its March levels than its July levels. Some segments will see greater than 48% – think airlines and hotels.

The Schultz family at Sea Island

The evidence that the economy is improving is virtually everywhere, but you just have a hard time evaluating it because the media is so negative on the economy. In reading the news over the last couple of weeks I picked out items that were clearly positive for the economy, yet seemed to be ignored by the public. The State of Georgia recently announced that their collections of income tax and sales tax for the month of July was 17% higher than the month of July 2019. Take into perspective that analysis. All of us will acknowledge that in July 2019 the economy was very strong and the population was almost fully employed. However, during the month of July 2020 unemployment was high and the economy sputtering. But the reason should be fairly clear.

Retail sales have taken a major move up since the lockdown. Part of this, of course, is pent-up demand, but yet retail sales have come back a lot quicker than anyone expected. I will explain this phenomenon later on based on Zero-Sum economics. Also, even though there were huge amounts of the population not working in July, that doesn’t mean that they weren’t being paid. Due to the massive Federal Reserve influx of money, most of these unemployed were making similar amounts of compensation unemployed as they were making employed. People forget that unemployment benefits are taxable and withholding is required. Once again, even though the media would like you to believe the economy is completely in a state of disaster, the facts belie such headlines.

There seems to be a general lack of knowledge of Zero-Sum Economics. I have clients come in all the time and complain to me that it is impossible for the market to go up because all we have to do is look at the restaurants, airlines, cruise industry and retail to know that the economy is in shambles. Yes, no question, those statements are true, but where did the dollars that would have been spent on those industries actually end up?

Harper Wilcox, age 10, getting
some fresh air at the beach

In a Zero-Sum Economy, if money is not spent on one item, but gets spent on another item, then the economy is at zero. If a family does not spend money on going out to restaurants, going on cruises, flying in airplanes or taking vacations, that is clearly a loss to those industries. If, however, that money is spent somewhere else, the economy does not suffer or, just as good, a family saved more. That is exactly what we are seeing today. Do you believe that there are not shortages in certain aspects of the economy? There clearly are, you see them every day, but you just do not realize it.

Why do you think the grocery stores cannot keep up with toilet paper and paper towels? Those industries are clearly booming as others fail. New car sales have been at historic highs recently. Does that not mean that the manufacturing industry of cars is working overtime to meet the demand? It is my understanding now that golf courses are overwhelmed with people wanting to play and golf equipment and golf clothes reached all-time highs during the month of July. Once again, those dollars are being shifted from one segment of the market to another. One client reported to me that they had ordered a brand-new golf cart for their vacation home but there is such a backlog of orders that delivery has been postponed. Everywhere in the economy you see a negative, you need to look at the other industries in the economy that show strength. While certainly restaurant sales are down, pizza deliveries are skyrocketing. It is everywhere, but due to the negative influence of the media you just cannot see it. What is so clear to me has been largely ignored by the media, is there a reason the media emphasizes the negative and not the positives?

As mentioned in previous postings, the Federal Reserve and Federal Government have dumped over $3 trillion of money into the economy. If anyone understands the velocity of money, then you understand what $3 trillion dumped into the economy over 90 days does. The acceleration of spending must occur or there would be a huge savings component. In real dollar terms, that means if you received this money you had two options. If you elected to spend it, the velocity of money being at 7, would generate $21 trillion of economic growth. However, in times of great uncertainty with the unknown future of your job and family security, the other possibly was that you just saved the money for a so-called “rainy day”.

It is now reported that the American economy has over $5 trillion in cash sitting in checking accounts in banks and other places. Given that this savings rate would be deteriorating daily with the level of inflation, it is a pretty good bet that this money will either be spent or invested over the next 12 months. If spent, then the economy will continue to grow and if saved the financial markets will continue to go up.

As stability occurs in the economy, a greater percentage of this money will be spent creating a higher economy. Rather, if invested it will create a higher stock market going forward. One of the reasons that the stock market held up in this recent crazy time is the argument that there is really just nowhere else to put the money. Already the 10-year Treasury Bond is trading at 0.5% and is at a negative real interest rate. If you calculate the cost of inflation, the rate of return on that bond is likely negative at 1% per year. That means that every day that you hold that bond, you lose money after the cost of inflation. It is the same if you hold money with cash. You are losing money every day against inflation.

Lucy Wilcox, age 8, playing in the sand

Cash may give you a warm and cuddly feeling by having it on hand but the fact that every day you hold that cash you are losing the value of purchasing assets since the rate of return is now negative. So, the argument must be that I will hold bonds because I believe they will appreciate it the future because I know that they do not pay any rate of return. Remember that a $100,000 bond generates roughly $500 a year in income and every year that income is less than the cost of inflation.

But now we have come to the point where bonds have actually run out of basis points to decline. The ten-year treasury is at 0.5%, it does not have much further it could fall. Couple that with the fact that the Federal Reserve is in an all-out war to create inflation. By virtue of the Federal Reserve, flooding the economy with money is a clear reason to try to increase inflation to increase the economy. Nothing could be clearer than recently the price of the U.S. dollar has fallen as the price of gold has gone up. Gold moves inversely to the U.S. dollar since most of the gold is held outside of the United States. But these are clear signs that the Federal Reserve’s effort to increase inflation is working. With a very low return on bonds and a very real possibility of increased inflation, you are locking in real-value losses by holding either cash or bonds. This is one of the reasons why the market continues to be held up, notwithstanding the avalanche of negative publicity.

Three or four times a day, I am approached by investors saying “What if the Democrats were to win the election in November. Won’t the stock market suffer a major decline?” While certainly no one knows how the election will turn out, you must be prepared on all fronts. If the Democrats do win the election, and certainly if they win the Presidency and both bodies of Congress, I expect the market would decline, but not appreciably. The reason why it will not decline appreciably is for the reasons above - what are your alternatives? You may be in cash temporarily, but you will eventually migrate back to stocks. Will that period be a week, a month? Certainly, no one knows. However, it will not be long-term and certainly the period of time when the correction occurs would certainly not be worth the effort to trade around it.

I get so very tired of hearing the pundits criticizing the stock market as being only for the wealthy. Their argument is that the average person’s life is not improved by the value of the stock market and, therefore, any attempt to make it go higher is only focused for the rich and not the middle class. Obviously, those people are not very well educated in economics or the wealth effect.

First off, the general public is very much invested in the stock market. It is believed now that $2 billion per day flows into 401(k), 403(b) and 457 Plans which flow directly into the stock market. Fidelity Investments, the largest holder of 401(k) money, reported that during the March 2020 selloff, the 401(k) investors made little or no changes to their asset mix. This is the way it should be. Long-term investors should never react to short-term market fluctuations. It seems that 401(k) investors are becoming better educated on how to deal with huge market fluctuations that are principally controlled by market manipulators.

However, these pundits do not really understand the wealth effect. The wealth effect happens when the market goes up and money is withdrawn from those profits and spent on other things. Almost every day we have a client withdrawing money from their account to buy or construct something. It may be to buy a new car, it may be to go on vacation, but more times than not it relates to improving their home.

Reid and Caroline Schultz watching 
the sunset on the water - ages 4 and 6

When money is withdrawn from the stock market and used to add an addition to your house, suddenly that money employs people. It employs people from the Main Street economy for both the construction workers and the people who build the materials. If a client takes money out of the stock market to buy a car, does that not put money in the pockets of the people who manufactured that car? There are so many examples of money coming out of the market to create liquidity to Main Street, for those pundits to argue that it is immoral to advocate stock market performance have, by the definition of the wealth effect, been proven incorrect.

Every day we see the effect of low interest rates improving the economy. Housing sales are booming, and construction workers are working at maximum levels. As clients take money out of the stock market and benefit from lower interest rates to refinance their mortgage or add additions to their house, they create wealth, as almost assuredly inflation will positively impact the value of their home ownership. Every day we see the wealth effect taking place as the market moves up.

The exact opposite happens as the market moves down. What you see are people who are invested that are less likely to take profits since the profits are lower and, therefore, there is negative wealth effect. It is not that investors use their excess cash to invest, but it is rather that they do not withdraw from their investments in a period of a down stock market. Over the last four months we have seen extraordinary gains in the stock market, and we are seeing extraordinary withdrawals to buy consumer goods. I do not understand how you could argue that this is anything but good for the economy.

Since there is virtually nothing to watch on T.V. nowadays except for Major League Baseball, in my case, I often drift into old YouTube comedy routines. During my era, one of the most famous was the comedian George Carlin. I ran across a couple of his concerts over the last few weeks and enjoyed his complete “off the wall” look at his neighbors and the American economy. One that I found terribly interesting was his analysis of the fear of germs. In his way of thinking, this country has become completely neurotic, with the population in the U.S. obsessed with security, safety, crime, drugs, cleanliness, hygiene, and germs. His words, not mine. But clearly, he has a point since we have, in my opinion, so grossly overreacted to this pandemic that it warrants further discussion. My favorite example is how we have become so neurotic with germs that even in prisons they swab the prisoner’s arm with alcohol before giving him a lethal injection! Think about that for just a second. For a person that they are clearly trying to put to death, they are concerned that he might get an infection. Overreaction – no question.

Each time I read the statistics of the pandemic, I wonder whether it is political in nature. Why are some states more restrictive than others when it comes to allowing the population to go back to work? In New York, as an example, they have still not even reopened their indoor dining rooms, yet they have announced that schools will be open in the fall. So, how does that even break down in economic terms?

The famous comedian George Carlin

If you analyze the various states for joblessness claims and those that are receiving benefits, it should be clear which states are abusing those rights and those that are not. In the most recent employment report dated July 18, 2020, 18.1% of all workers in the state of California are receiving unemployment benefits. In New York, that ratio is 16.3% and in Connecticut it is 15.2%. If, however, you compare it to other states, 3.6% of the workers in Iowa are receiving benefits, 4.5% in Utah, and 4.9% in Alabama. You do not have to be a mathematical wizard to see the contrast between those states that would prefer a change in administration as compared to those states that are likely not to want a change. Political – who knows?

The evidence is everywhere that the economy is improving, notwithstanding the horrific headlines you read daily. It is also fairly clear that earnings next year will rebound to normalized levels and, therefore, the value of the stock market is not overvalued, but is at a reasonable level. I do not expect a major downturn, but if there is, it will quickly recover and your long-term investment goals should be reached. This virus is a terrible plague on the economy, but it is time that all of us recognize what the risks are and move forward. We turned loose the American spirit and put Americans back to work at home, now we need to turn loose the American spirit and have the public eat in restaurants, fly on planes, stay in hotels, and move on with the rest of their lives.

The month of July also brought another recognition for Rollins Financial, Inc. It is a very humbling thought that for three years in a row we have been selected as one of the Top 300 Registered Investment Firms in the United States. That is really hard to contemplate given the scope of that recognition. To put it into perspective, there are probably 300 companies in the Greater Atlanta area alone that classify themselves as Registered Investment Advisors and we were in those that were selected out of all of the firms in the United States. I guess you can always say that it wasn’t an overnight success, since it took us 30 years to get here. When we received the recognition back in 2015 by CNBC TV as being the 20th best Registered Investment Advisors in the United States, we had $272 million under management. Today we manage for clients’ roughly ¾ of a billion in assets. Obviously much of our success is from the willingness of our clients to let us help them in planning for their retirement, but all of us should acknowledge the fact that we continue to grow and get referrals when clients make money. No other attribute is more important in the growth of a firm like ours. If we have not said so recently, we certainly appreciate all our clients that we help to reach their goals.

On that note, come visit with us and discuss your goals and financial plans. If you are interested in discussing your specific financial situation, please feel free to call or email.

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

Best Regards,
Rollins Financial, Inc.

Friday, August 7, 2020

The Number One Lesson (Re)learned from the COVID Correction/Recession

Discipline might be the most important and most difficult principle for investors to follow. While the coronavirus pandemic progressed, financial markets experienced unparalleled volatility as the world faced economic shutdowns designed to keep the virus from spreading. A natural and justified human reaction to the uncertainty is to protect and preserve the resources you have. While this might be the right strategy in some respects, staying disciplined and invested is consistently the most productive solution for long-term savings like retirement accounts which are designed to provide decades long retirement income stream.

The S&P 500 experienced the best 50 trading days in history as markets recovered from the March 2020 swoon. The S&P 500 increased by a historic 37% from late March into June. This was immediately preceded by the sharpest correction ever, falling 35% late February into March. Missing out on those 50 best days ever, or even a few of the really powerfully positive days, could have put your long-term retirement plans in jeopardy.

The chart below illustrates the intra-year declines experienced during each of the past 20 full calendar years. In 11 out of 20 years, the markets fell by at least 10% at some point during the year.



Source: Morningstar Direct, as of 12/31/2019. Indexes are unmanaged, do not incur management fees, costs, or expenses, and cannot be invested in directly. Past performance does not guarantee future results

Financial markets are nearly impossible to time exactly right because investor psychology is unpredictable. Additionally, the financial markets typically recover from a shock or economic setback before the data suggests the worst is over. For instance, stock markets bottomed in March of 2009 in the wake of the housing crisis before recovering over 60% by the end of 2009 – even as job losses continued, foreclosures accelerated, and real estate prices continued lower.

During a severe correction or crisis, it’s not uncommon for us to receive client requests to sell investments and then wait for the situation to stabilize and reinvest. There are a few problems with this strategy: First, when we get this request, the markets have almost assuredly already reflected at least some of the uncertainty, so we are selling after some or most of the decline has already been suffered. Second, if you are lucky enough to not be selling at the bottom, there is little chance investors are going to be courageous enough to reinvest as markets continue falling. There is, however, a good chance that by the time the environment has stabilized, stock prices will be higher – possibly significantly higher. We often ask our clients, “Do you think market prices will be higher or lower when you feel comfortable investing again?”

The data below illustrates the unpredictable duration of past corrections. In some ways, the stock market recovery this year also feels premature as the virus persists and layoffs continue. So, to those who wonder if there’s a playbook that works for all corrections, we would say probably not; the irregular durations of prior corrections and the difficulty timing them reflect otherwise.


In the wake of the pandemic there was a remarkably swift policy response, which served to reduce the magnitude and shorten the duration of the stock market correction. No question, markets have benefited from government stimulus in the form of loans to companies, extra unemployment payments, stimulus checks and the like. These government transfers helped bridge the economy through the economic shutdown much of the country experienced the past several months.

The fiscal actions of Congress and money policy responses by the Federal Reserve and how markets react to these policy responses are also challenging to forecast ahead of time. Financial markets have reacted incredibly favorably to the government financed response to the economic damage across the globe since March. While we don’t know exactly how the pandemic will progress over the following weeks and months, we believe focusing on a disciplined investment strategy while taking advantage of some of the evolving investible themes is likely to produce a winning result.

On that note, come visit with us and discuss your goals and financial plans. If you are interested in discussing your specific financial situation, please feel free to call or email.

Best Regards,
Edward J. Wilcox, CFA, CFP
Rollins Financial, Inc.