From the Desk of Joe Rollins
Hopefully, Charles Dickens will forgive my use above of his famous quote from A Tale of Two Cities, although written in 1859 it seems to readily apply to today’s feeling in the U.S. As we move quickly into the, supposedly, “merry” holiday season, I began wondering why so many people have such a bad attitude nowadays. We have so much to be thankful for this year, even with all its problems and concerns. In my opinion, the list of things that are just great far exceed the things that are just bad. However, for reasons unclear to me, the public seems to have such a bad attitude about virtually everything. You have to think that from a stock market perspective, this lack of optimism is a true indicator of better things to come.
I decided to write this blog and try to remind you of all the good things that are going on, as compared to the bad. I sat down and made a list of the things I could quickly think of as positives and the negatives hardly create even a list. This has been nothing short of a fabulous investment year, yet all we hear about are the negatives in the media about things for which we had no control. So, I decided since no one else will do it, I will give you the list of positives I see in the current economy.
Dakota and Ava looking at a wonderful Christmas light
display
Additionally, I visited the Pro Football Hall of Fame in Canton, Ohio recently and I thought I would share my thoughts on that famous building. Also, just to point out, much of the memorabilia we have here in our office is sports related, but we have other pieces that I think you would find of interest as well. I could not write about all of these things without also commenting on the progress with COVID-19 and the incredible successes made by the government in trying to control this terrible virus. I know it is a lot to cover in four short pages, but I thought I would at least give it a try. Always seems like plenty to discuss.
Before I jump into those more interesting topics, I must reflect upon what was just a fabulous investment period during the month of November. I wish I could even quantify the number of clients that told me they did not want to be invested during the election month. I tried to explain that regardless of who wins the election, economics would win, and the economy was strong and getting stronger, and the earnings were high and getting higher. This almost assuredly would outweigh the political influence of who wins the election. The results for November soundly supported my conclusion and led to record gains in the month of November.
The Standard & Poor’s Index of 500 stocks was up 10.9% during the month of November. Year-to-date in 2020, it is up double digits at 14%. The increase in this index is 17.5% for one year and, on average, 14.2% over the 10-year period. The Dow Jones Industrial Average was up 12.1% in November and is up 6.1% for the year 2020. The increase for this index is 8.1% for one year and 13.5% for the 10-year average. The NASDAQ Composite was up 11.9% for the month of November and up a sterling 37.1% for the year 2020. The one-year total return is 42.1% and the 10-year average is 18.5%.
Just for purposes of comparison, the Bloomberg Barclays Aggregate Bond Index was up 1.1% in November, up 7.8% in the year 2020, the one-year total return is 7.4% and the 10-year average return in the bond index is 3.7%. As you can see, any three of the major market indexes is three to four times higher than the bond index over the last 10-year period. Even as I dictate these returns, I think it is important that you realize that the year 2020 has been a stock-pickers paradise. Even though the S&P 500 Index is up double digits through November, virtually all the best managed mutual funds are up two to three times higher than the S&P 500 Index. It is years like this where highly qualified stock-pickers can vastly beat the index returns. This year virtually all well-run mutual funds with qualified managers have returns far in excess of the indexes noted above.
I thought I would just make a list of all the things that are going well in 2020 as you may not get this information anywhere but here. We have enjoyed a fabulous stock market in 2020, which has turned out to be one of the best total return markets of all time. The United States led the world in developing a vaccine for COVID-19 in a period of a little over six months and now this vaccine is rolling out in the United Kingdom and the U.S. beginning this week. Not only was this vaccine developed in record time and with a new and novel approach, but its efficiency level is also at a historic high, believed to be greater than 95%. I will comment further on the current state of the virus later in these writings.
Corporate earnings have recovered and for the third quarter of 2020, were actually higher than they were in the third quarter of 2019. Who would have thought, given the depth of the recession that we suffered due to governmental shutdowns, corporate earnings would recover and even be higher than the previous year? We have record low interest rates, fueling a huge increase in home values and making refinancing available to everyone. Not only are interest rates low, but the Federal Reserve has promised to keep interest rates low for another 2-4 years.
A beautiful Florida sunset
We have an inept Congress that is split totally on an ideological basis, which can be nothing but good for investors. The less Congress does, the better it will be for investing. If it were not for a split Congress, the newly elected administration most assuredly would try to increase tax rates, making profits lower and, by definition, the stock market would be less robust. We are thankful to have the inept and mixed Congress, so as they are not likely to do that much harm.
We have a great economy in the U.S. that has rebounded completely from a recession back to a booming economy. Corporate profits are increasing, and entrepreneurs are able to issue stock on new and exciting ideas at record prices. As the stock market goes up, citizen’s 401(k)s are increased, increasing the likelihood of strong retirement years. GDP for all of 2021 is forecasted at 4.2%, excellent.
In just a few short years we have seen the conversion from internal combustion engines to electric cars. Even a decade ago, it was a wild dream to think that someone could produce an electric car that was efficient and have a daily mileage limit that would be useful. These cars now exist, and every major car manufacturer is falling over themselves to produce them. As more electric cars are on the road, we solve one of the great problems of America; air quality and the very destructive production of fossil fuels to create gasoline for automobiles. You do not have to look too far in the future to see that electric vehicles will be prominent in the decades to come. Notwithstanding their inability to do anything useful, there is a high likelihood that Congress will pass an additional stimulus bill which will help many small businesses get back on their feet and open for business.
If you go back and read the blogs I wrote in March and April of 2020, I implored you to avoid all the headlines and, as is often quoted from Jerry Maguire, “Show me the money”. Since I have studied basic economics all my life, the one thing that we absolutely know for sure is that if you inject cash into the economy, eventually that cash will show up as commerce that will eventually find its way to investing. During March and April of 2020, the Federal Reserve, along with the CARES Act and its buying bond program, ejected roughly $3 trillion into the U.S. economy. If you understand the velocity of money, which argues that money is spent seven times before it is saved, that would imply an injection of capital of $21 trillion over a 90 day period. Just to put that into perspective, that amount of GDP is greater than the annual GDP of China, which is the second largest GDP country in the world.
Treasure Island, FL, a view that never gets old
I argued at that time that there is no way that $21 trillion worth of stimulus would not create a better economy. Almost immediately we saw businesses employing people and retail opening to the public. As the economy strengthened due to the governmental money the stock market came roaring back and recently the Dow has passed the 30,000 level and all major market indexes have hit all time highs early in December 2020. You might ask how I felt so confident about that turn around. It has nothing to do with politics, but it has everything to do with money. If you put money in the economy, people will spend it to create commerce and eventually they will save it to create higher stock prices. It is estimated still that there is $4 trillion in cash sitting on the sidelines waiting to be invested. If you knew no other number other than that one fact, you have to feel good about the stock market going forward.
I am often asked what my projections for the future are regarding the market and what would be the driving forces of the market’s advances. It is pretty simple to look up the expected earnings of the S&P 500 stocks. It is estimated that the earnings for 2020 will be $156/share. In 2021, that number is supposed to be $182/share, a 16% increase and in 2022, $200/share for another 10% increase. A couple of those excellent numbers, with the pledge of the Federal Reserve not to increase interest rates for the next two years, and you can see that the potential gains on the market could be substantial over the coming two years. Given that interest-sensitive investments (bonds and CDs) at the current time appear to be a loss leader, higher interest rates will not draw money out of the stock market, but rather low interest rates will force money into it. Given that scenario, it is highly likely that stock prices will continue to go up over the next two years.
So, while we sit around for all of 2020 feeling sorry for ourselves and bemoaning the fact that we cannot go on vacation, eat in restaurants, or go to movie theaters, what has happened to the net worth of Americans? Due to the strong effects of the stock market and the housing market, the effects have been electric for household wealth. During the 3rd quarter of 2020, household wealth went up by a cool $3.8 trillion. If you say it did not happen to you, you just have not thought about it recently. With the strong gains in the stock market, your 401(k) went up significantly and the value of your house increased due to the strong housing market.
It is now estimated that the net worth of the households in the United States is $123.52 trillion, as estimated by the Federal Reserve last week. Roll that number around in your mind awhile and realize we are talking about trillions of dollars that is spread through the 338 million residents of the United States. It is estimated that residential real estate went up by a cool $30 billion in the latest quarter alone, and that over the course of this year in 2020 due to the abnormally low interest rates and strong housing market, the net equity in real estate by all Americans will have gone up by $1 trillion by the end of the year. So, I guess it could be said that while you were sitting around feeling sorry for yourself in 2020, your net worth went up substantially without you working too hard to increase it. Are you starting to feel wealthier now?
Carter and Ava enjoying a day at the park
I really get irritated sometimes when I read the talking points about how the stock market only affects the wealthy and not the average American. It is now estimated that over 100 million Americans save in a 401(k) plan. Back in 1990, that number was 19 million, so it has gone up five times over the intervening 30 years. In addition to 401(k) plans, there are many savers in IRAs, 403(b)s and 529 college savings plans. Before, it could be said that roughly one out of every three Americans have a direct link to the stock market and the success of the stock market but I see this changing in kids coming out of college today. They all understand the value of saving early and often, unlike their parents who waited until later in life. Considering a large portion of the population are minors, if you broke it down into households, it is more likely one out of every two households were directly invested in one of these investment vehicles, which would be their primary form of income once they reach retirement age. When President Trump took office on election day in 2016, the S&P 500 stood at 2140. Right before the market plunged due to the coronavirus shutdown, the market had increased close to 60% during the intervening three and a half years. As I write this, the S&P 500 is at 3700, a 73% increase.
Think about the wealth that was created during this time period due to the increase in the stock market valuations. Also understand that this increase will lead directly to better retirement years for senior citizens and a better way of life for Americans in retirement. Those that argue that stock markets are only related to the rich clearly do not understand the broad appeal of 401(k) plans today. Any plan to increase taxes to the detriment of stock prices would have a detrimental effect on 50% of Americans and clearly would have a detrimental effect on their potential retirement.
You cannot help but read the articles everyday regarding the current impact that COVID-19 is having on Americans. Of course, I am a skeptic of these articles because I really cannot understand what their motivation is. For instance, as of today, there are 16.5 million cases of coronavirus in the United States, according to the famous website on the subject. How exactly does the fact that 16 million cases, many occurring back in March, April, and May, provide us any additional information now that these people are well. What is a more important consideration is how many active cases are there today and where we stand in connection with protecting the public’s health. Based on this website, there are roughly 6.6 million active coronavirus cases today. You have to keep in perspective that that is only 2% of the population in the United States. Therefore, if you had a room with 100 people, only two of those 100 people, on average, are likely to be infected.
Pro Football Hall of Fame in Canton, Ohio
What we also know now is that the governmental actions to limit the spread of the virus were totally ineffective. I look back over this time period and wonder exactly what someone could have done to help the matter. I hear so many outspoken critics say that the U.S. completely mishandled the virus to the detriment of Americans. I do not hear any of these critics saying what they would do differently. It seems to be a common trend that these critics argue that the only way to snuff out the virus would have been to have a complete and total shutdown of the U.S. for a prolonged period until the virus was gone. Economically, that is complete and total nonsense.
Economically, you could never have shut down the American economy for that period without severe economic consequences. And it does not appear to have even worked anyway. If you look at California and New York, which suffered through very long government-enforced shutdowns, it really has not helped their situation. California has banned indoor dining, sporting events, theme parks, or any type of public gathering however, their number of virus cases continue to grow at the highest level of any state in the United States. New York once again has shut down indoor dining, creating devastating effects on millions of hospitality workers, yet their virus numbers continue to grow. How well did that work?
So, if we agree that shutdowns are ineffective, what exactly could we have done to stop the virus in America? It seems to me that what we did was exactly the right thing. We used the government’s money to fund the creation of a vaccine in record time in order to vaccinate the public. When I was growing up, we used to have what was termed “polio days.” We would have an outbreak of polio in the community and people would stay home from school to avoid polio. Vaccinations have eliminated polio in the United States. Vaccinations are the answer for many diseases such as the elimination of smallpox, chickenpox and the measles as well.
The issue was how do we get vaccinations to the public as quick as possible, and the government did an excellent job in providing the money necessary to make that happen. What went wrong in this process is that local governmental officials thinking they knew more about public health than they obviously did and forced absolutely crazy rules on businesses, creating economic strife for families and industries. In retrospect, I doubt very seriously that the results of this virus would have been much different if we had not shut down at all.
A concert ticket, song list and book of
The Beatles
from their show in Atlanta
I hear people all the time saying, “let’s follow the scientists and determine what they say.” If we had followed the scientists that forecasted over two million deaths in America, think about how bad of economic consequences we would have today. It is true today after almost nine months of the coronavirus that if you are under the age of 40, you have a statistical zero chance of dying from this virus. Yet, to this day we still have shut down our colleges and public school systems to accommodate a fear of death that absolutely does not exist. I am not arguing that this is not a terrible disease that many people have died from. All I argue is that it was such an unknown that I really doubt anyone could have done any better to prevent the consequences that we see today. But with the hope of vaccinations, we will lead to normalcy by spring.
I happened to be in Cleveland, Ohio recently and decided to go by the Pro Football Hall of Fame in Canton, Ohio. I guess I have heard about the Hall of Fame my entire life and I have never been in the area or never wanted to make a special trip to see it. First off, Canton is pretty much out of the way and the area where the Hall of Fame sits is not a booming economic metropolis. After paying my $25 to get in, I walked through the exhibits for several hours. What I found was that, for the most part, their idea of “exhibits” was jerseys of famous players during their eras. I think I have more signed jerseys in my office than they do in the Hall of Fame.
For the most part, these jerseys that are on exhibit at the Hall of Fame can be purchased from virtually any source. They do not even have a Joe Namath signed picture, but I do, several in fact. Sometime when you are in the area, maybe you could take a tour of our offices. We have other pieces other than sports memorabilia. In 1965, The Beatles actually played in Atlanta at the old Fulton County stadium. They played 11 songs that night and were on the stage for 21 total minutes. I actually have the program from that concert, the original ticket from the concert, and the playlist posted in my office. You could have bought that ticket to see that concert in 1965 for $5.50. See above.
The Beatles right after their famous Pan Am flight
In 1963, The Beatles came to the United States for the first time. Their famous landing at LaGuardia Airport on a Pan Am flight was legendary. One of my clients was the original beat reporter for Life Magazine on the tour of The Beatles when they first toured the United States in 1963. I have a picture posted in my office that was in the original Life Magazine of The Beatles in the Pan Am plane that was taken by her. I also have the trademark of Life Magazine that indicated the picture belonged to them. We have many other interesting memorabilia pieces that you are welcome to view on your next visit, including a picture of the Enola Gay signed by the captain, Paul Tibbets.
In summary, as bad as 2020 has been for all the reasons above, it has been a quite spectacular year financially. Virtually all Americans have increased their net worth, even with the hardships imposed upon them by ill-informed governments. I am very excited about 2021 and 2022 economically. If we can avoid governmental intervention and an ill-informed Congress, there is a high likelihood that we will set additional stock market records in both 2021 and 2022. You will not set any records sitting in cash.
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
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