The “Goldilocks Economy” Has Finally Arrived

From the Desk of Joe Rollins

For the last two years, I have been expressing my opinion in these postings that the economy needed to slow down in order for us to realize future stock gains. That is precisely what is taking place at the current time and that is a very good thing. The Federal Reserve has increased interest rates numerous times over the last several years, thinking that higher interest rates would slow the economy dramatically and therefore would reduce inflation. While the economy has slowed down for sure, it is also true that the economy continues to be strong, with employment and earnings continuing to be excellent.

This week, it was announced that the economy during the month of November added 199,000 jobs and the unemployment rate fell from 3.9% to 3.7%. These substantial employment numbers seem to shock these so-called experts since they have for years forecasted the country would go into recession almost immediately after the Federal Reserve began increasing interest rates. It is clear now that they were very wrong and my opinion that recession would not occur was clearly evident in my postings.

Penny’s first Christmas!

But what is most interesting about the employment report is that suddenly, the number of employed people in the United States is going up. Year over year, the number of employed has gone up 2.17% over the last year in an economy that was forecasted to be going down. As I have pointed out on numerous postings, the more people working, the better for the economy. When you have more people contributing to the economy by paying taxes and using their salaries to promote their own family’s well-being, it is better for the economy for everyone.

In this posting, I would like to cover some topics that are interesting to me and, hopefully, will interest you. One of the things that I would like to cover is the high likelihood that the Federal Reserve has now engineered a “soft-landing” and that this soft-landing would not result in a recession. Also, I would like to discuss the upcoming GDP going forward and what to expect in 2024. I would also like to review the Supreme Court's recent ruling indicating that the commissions on real estate houses were anti-competitive and, therefore illegal.

Caroline and Reid know how to pose for a photo -
especially when Christmas is right around the corner.

I would also like to cover all these truly interesting items, but first, I have to give you the results for November, which was an excellent month for both stocks and bonds. As I indicated to you, we were “locked and loaded” going into November, which is historically the strongest time of the year for equity investments. I could not have been more correct in forecasting a strong November since it was quite a spectacular performance during this month.

For the month of November, the Standard and Poor’s Index of 500 stocks was up 9.1% and its year-to-date performance is 20.8% for this year so far. Once again, it emphasizes the ten-year record of this index, which is at 11.8%. The NASDAQ Composite was up 10.8% for the month of November and year-to-date is up 37%. The 10-year average on this index is 14.5%. The Dow Jones Industrial Average was up 9.1% for the month of November and is up 10.7% for the year 2023. The 10-year average on this index is 10.9% annually.

Once again, for the month of November, the Bloomberg Barclay’s Aggregate Bond Index was up at a very satisfying rate at 4.5%. To date, this index was up 1.7%. For the 10-year period, this index averages 1.4% annually. As you can tell, the three stock indexes above reported double-digit returns, while the bond index over the last 10 years has come nowhere close to covering inflation. Therefore, holding bonds you are losing wealth to inflation.

Ava and friends all dressed up and ready to go!

There is so much on the financial news that is either misleading or downright incorrect. The one news item they continually report is how bad the real estate market is. Rightly so, they indicate that the market is terrible because sales are down 50% year over year. However, to assume that the statement means the real estate market is bad is not only absurd, but it is also incorrect.

One of the reasons home sales are down is that during the pandemic, many homeowners refinanced and are now sitting on mortgages that are 3% or lower. Why would they be willing to upgrade their housing to go to a mortgage that is closer to 7% from 3%? Therefore, there is basically a seller strike on selling their homes, which is creating adverse numbers. But correspondingly, there is also a shortage of houses for people to purchase, meaning that in many cases here in Atlanta, people are paying above asking prices just to get into the doors. The real estate market is as strong as ever today, but there are just not as many houses selling, therefore leading to the misplaced perception that the real estate market is bad.

Harper and Lucy standin’ on the dock of the bay in Tampa

It was recently ruled that the real estate commission of 6% was anti-competitive and therefore illegal. For many years, I have personally questioned this 6% rate, where it came from and why it was not price fixing among the real estate agents. To give you an example, the thought pattern is if you found your own buyer for a real estate transaction on your home and therefore there was no buyer commission, you would still pay the 6% rate. This means that the agent would get the entire 6%. In many cases, the commission rate really has no correlation to the amount of work the agent puts into actually selling your home. As indicated, I recently had a client sell a home where they had 10 bidders over the listing price. This had nothing to do with the talent of the agent, but more with the nature of the real estate market today.

There is no question that the trial attorneys will now sue every real estate agent in America to recover prior commissions. How successful they will be is a mystery. What is good for the economy and good for home ownership is that going forward, real estate commissions will be fully negotiable and there will be no fundamental 6% rate. This is good for consumers and good for real estate, but not so good for realtors.

Robby’s first hole-in-one! At Pelican Hill Golf Club in California

The reason that the stock market was so bad in 2022 had little to do with the performance of the stocks, but instead had everything to do with the public's perception that the economy was going into recession. These so-called experts in the field predicted that there would be a long downturn recession in 2022 due to the inverted bond yield and the increase in interest rates by the Federal Reserve. As we now know, two years later, they were incorrect. You would think that they would now revise their projections to a more reasonable projection of the economy.

Just this week, the Wall Street Journal did a survey of economists and the survey indicated that 48% of those so-called experts predicted a recession within the next one year. What is fascinating about this projection is that it is the first time they put the number below 50% since mid-2022. It seems that these economists just will not concede the fact that they were incorrect in projecting a recession. They are going to hold on to their projection so that maybe they could be redeemed by a downturn in the economy. As the old saying goes, “Even a broken clock is right twice a day.” What do we know about the economy based on the information that is readily available? As you are aware, for the third quarter of 2023, the GDP was recently revised up from 4.9% to 5.2%. That was an incredibly sterling report on the economy, but quite frankly, too high going forward. As I indicated numerous times in these postings, we needed to moderate the economy and slow it down.

Penny and Cecilia enjoying the spooky spirit of Halloween… in Joe’s office!

For the fourth quarter of 2023, the Atlanta Federal Reserve is forecasting GDP growth at 1.2%, which is almost perfect. Also, as we know, inflation is falling and is now at 3.2%, which is moving quickly towards the Federal Reserve’s target of 2% inflation growth. Therefore, we have an unusual situation where we have extremely low unemployment, moderating job gains and easing inflation. All of those are extraordinarily positive things for the economy and clearly should lead to a “soft-landing” in 2024. The definition of a “soft-landing” is the time when inflation cools, but the economy does not fall into recession. I really do not see any potential for a recession coming up in 2024.

There is also an interesting set of projections going on regarding the 2024 economy. Even the Federal Reserve is now forecasting that there will be two interest rate decreases during the 2024 year. The so-called experts on Wall Street are taking that even one step further. They are forecasting that there will be a total of four rate increases during the 2024 year. My personal opinion is that I would lean more toward the former than the latter as a moderate projection. These experts are rarely correct.

Rise up, Falcons! Lauren and Jeff enjoying the game

As you know, if interest rates start to fall, it is particularly good for both stocks and bonds. It looks like 2024 could also be another positive year for equity investing. Now, we are seeing forecasts that earnings by corporations will grow by 10% in the year 2024. Put all of this in perspective; we are talking about a year when the economy moderates and does not fall into recession, yet corporate earnings grow and interest rates fall. You could not ask for a better combination for setting equity growth higher.

The reason that the markets climbed so high during the month of November was the realization that the Federal Reserve would not be increasing interest rates any further. As pointed out above, it was the good news of moderating inflation, the economy slowing on its own, yet employment stands high and unemployment stands low. The Federal Reserve has a dual mandate in control in the economy. The first is price stability, which means no inflation and low unemployment. Since they have always had low unemployment over the last three years, they basically had a free hand in increasing interest rates whenever they wanted to accomplish the goal of reducing inflation.

Clients Andree Ljutica and Robin Thurau-Ljutica, along with their son, Julian, and friends. Leaving a little sparkle wherever they go…

As has now been proven, they were successful in reducing inflation and since the unemployment rate today is the same as it was a year ago, they have not increased unemployment. There were so many experts who predicted that we would see job layoffs in the 500,000 to 600,000 number per month back at the beginning of 2022. In fact, over the last two years, we have not had a single month where we had negative job gains. For the year 2023, the stock market has been extraordinarily volatile. We had a major run-up in January and February and then a major pullback in August, September and October. It just seems like a roller coaster going up and down based on every speech given by the Federal Reserve or any reference to higher interest rates.

But November was completely different. We had a period of time in November for 16 straight trading days where the market did not move greater than 1%. We should all like such boring stock markets. Over that 16-day trading period, the index was actually up 1.8%. Even during the start of December, volatility has gone down dramatically and the market has moved up marginally.

Ava and the girls having fun at their Christmas party.
“The sky is full of stars and there is room for them all to shine.”

There are many out there that are forecasting that the market is grossly overvalued and, therefore, is due to a pullback. I guess maybe they do not keep up with current financial information. Currently, analysts are projecting a call for growth in earnings next year in 2024 of 10% to 12 %. While that number seems aggressive, it clearly is obtainable. Remember, going into 2024 many corporations have right-size their employment and with lower interest rates in the economy, the consumer should be again holding the economy to a higher level. But with this increase in earnings, you also have right size the valuation of the markets.

The most important consideration in valuing the stock market is what earnings are going forward, not what earnings were in the past. As of November 15th, the S&P Index was trading at 19.7 times forward earnings. While that may seem high, that is exactly near the average over the last seven years. As I have indicated before, this is the “Goldilocks” where you could not argue that stocks are cheap, but they also do not appear to be overvalued.

Evan and Alexis dressed to the nines for a holiday party!

There is no question that the economy has been helped over the last several years after the pandemic with the extraordinary spending by the U.S. government. The deficits incurred over the last four years are staggering in their proportion to the GDP of the U.S. economy. There is no question that the economy has benefited from all this money being spent by the U.S. government to support the economy. But it also is true that there will be a day of reckoning to come. The U.S. cannot continue to spend money in such a reckless fashion as they have done recently. It would be easy to argue that the government is justified in spending this money to support the economy after the downturn of Covid. However, it cannot continue to be so extravagant with its spending; otherwise, we will be a net debtor country and that is just not sustainable.

A recent parallel appeared in the papers over the weekend regarding this same matter. The state of California, due to the stock market increases of new technology companies two years ago, had a $100 billion surplus in its budget. This weekend, they are forecasting the current budget would have a deficit of $68 billion and they are projecting a four-year deficit in their budget of $155 billion. Basically, what California did was that during the good times, they expanded their budget to waste a lot of money on social causes and when the financial crutch came, they had overspent and therefore could never catch up. Just to give you an example of the difference, they are forecasting a $68 billion deficit for this year, while the entire budget for the state of Florida is only $46.1 billion. As you can see, the spending differential is enormous and will not be easily covered by future tax revenues.

Reid and Caroline just discovered that
the actual movie came out over 30 years ago!

California has recently decided that the way they could balance their budget would be to tax the rich at a higher level than everyone else to cover their deficits. By enacting a super high tax rate for the wealthy, they have basically run the wealthy out of the state. Two years ago, everyone was fascinated by the fact that Elon Musk decided to sell all of his principal residences in the state of California. At that time, he owned four homes that had a valuation of close to $30 million. Everyone was perplexed as to why Elon Musk would be selling all of his principal residences since everyone has to have somewhere to live.

After selling all of these homes, Elon Musk ended up living in Austin, Texas. As you may know, Austin, Texas is a zero-income tax state as compared to California, which has the highest individual tax rate. In order for Elon Musk to change his residency from the state of California to the state of Texas, he had to sever all financial ties to California, which meant selling all of his principal residences. Shortly after establishing residency in Texas, Elon sold $15 billion in stock, which in California would have cost him $2 billion in income tax. Since he was currently living in Texas, he was able to save that $2 billion that he would have owed.

Still a kid at heart… Happy 51st, Robby!

That is what is happening to many wealthy taxpayers in the state of California. They are severing all ties with that state and moving to a tax-free state in close proximity. You may have heard recently that Mark Wahlberg moved his entire family from Los Angeles to Las Vegas. When you consider the amount of income he earns as an actor and the fact that he can reduce his tax rate by 12.3% since Nevada is a zero-income tax state, you would have to be somewhat illiterate not to make a similar move. So, it can be said that the U.S. economy has clearly moved into the “Goldilocks” economy that we so desired. Inflation is down from 9% to roughly 3.2%. Unemployment has stayed steady below 4% and in fact, we have more people working in America today than we did one year ago. Job openings have fallen roughly 20% over the last year, which is a good thing since employers are finding people to actually do the work.

GDP has fallen from 5.2% in the third quarter of 2023 to a projected 1.2% in the fourth quarter of 2023. This moderating economy will help significantly reduce inflation rates. They are forecasting now that earnings growth is no longer falling but will increase by 10%-12% in 2024. The most important consideration in the economy is that even the Federal Reserve is projecting for 2024 two rate cuts by them, which will stimulate more consumer spending, such as car purchases and new home purchases.

Overall, you could not forecast a more moderate or favorable economy going forward. As I have said many times in these postings, while we all enjoy a strong economy, it is not in the best interest for equity investing to have an economy that is too hot. We are much better off with the “Goldilocks” economy, “Not too hot and not too cold.”

Bobby trying to convert dog years into days
for the countdown to Christmas!

As we start the holiday season, I just want to emphasize again the strength of the equity cycles during the November through May investing period. We started out with an extraordinary month in November and this year has proven to be an extraordinarily good year for investing. I do not anticipate a falloff in the coming months. I would not expect the growing increase in November but rather a gradual move that would push the indexes higher during the coming months.

The title on last month’s posting was "Locked and Loaded." Well, it is time to reload in anticipation of the 2024 year. Roughly two weeks from now, you will be allowed to make a new IRA contribution for the 2024 year. If you are under the age of 50, that amount will be $7,000. Over the age of 50, your amount will be $8,000. Anyone reading this post who has earned income should make an IRA contribution as early as January, if possible. This is a particularly good financial vehicle for children. If your child has any type of earned income, you should make a Roth contribution on their behalf. The earlier you contribute within the year, the more your account will build up to assist you financially in your retirement years.

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.

Locked and Loaded…

From the Desk of Joe Rollins

I have many issues I would like to cover within this posting, which will give you some insight into why I titled this “Locked and Loaded.” First, I would like to discuss the economy and why the slowing of the job market is extraordinarily positive for the U. S. economy. I would also like to explain to you why an index used by the Federal Reserve is more than likely incorrect. The CPI is used for many things in the U.S. economy, but I analyzed it this week, and I decided that it is flawed beyond repair. The most important issues I would like to discuss are the earnings of major corporations and how they held up during the third quarter. While certainly, the economy is the most crucial component of future stock prices, earnings are very much related. If the economy is strong, you would expect earnings to be strong, and that is precisely what we found out in the third quarter.

Penny putting a cute spell on anyone and
everyone who crosses her path!

After nearly two years of arguing, I finally convinced the world that there will be no recession in 2023 and likely none in 2024. It was already confirmed that there was no recession in 2022, although virtually all the so-called experts predicted that recession was most certainly a reality. I argued over the last 20 months that there cannot be a recession when there is full employment. As long as there is full employment, you have people spending and therefore holding the economy higher. I guess everyone else missed that not-so-trivial point.

It is interesting to note that the Federal Reserve has been wrong so often that it needs to gain credibility; I will give you a couple of examples. Going into 2023, the Federal Reserve predicted that by the summer of 2023, we would have a recession. They also projected that unemployment would be 5.5% by mid-2023 and reaching close to 6% in 2025. I guess their predictors could have been better.

Jedi Reid and Princess Leia (Caroline) feeling the Force!

I want to cover many other interesting items, but I must report on the relatively slow month of October. The reason that I highlighted the title of this posting is that we are going into the best time of the year for stock gains. We are already seeing a higher move, which I will refer to later. For October, the Standard and Poor’s Index of 500 stocks was down 2.1% but continues to be up 10.1% for the one-year period then ended. The NASDAQ Composite was down 2.7% but is still up 18% for the one-year period then ended. The Dow Jones Industrials Average was down 1.3% in October and is up 3.2% for the one-year period then ended.

I always like to compare bonds to stocks; the Bloomberg Barclays Aggregate Bond Index was down 1.7% in October and is up a miniscule 0.3% for the one-year period then ended. It was terrific that Barron’s weekly publication came out last week, and the title in large letters indicated that it was “Time To Buy Bonds.” At the time, the 10-year treasury was hovering at 4.9%, and therefore, if that interest rate did not move, you would earn that rate of return over the one-year period. Interestingly, towards the beginning of November, the S&P 500 generated a total return of 5.9% in one week. Therefore, in one week, you would have earned essentially the exact amount that you would have made in one year holding the bonds.

Our newest CPA – not sure he has the stomach
for tax season, but we’ll see…

Much has happened in the first week of November that is highly favorable for the stock market. First, the 10-year treasury has fallen from roughly 5% to 4.52%. Such a significant drop in a 10-year treasury in such a short period is very unusual. Also, as you know, the lower the interest rates are, the better it is for stocks. The reason the bond interest rate dropped so much over such a short period had to do with several factors. First, the Federal Reserve indicated, to no one's surprise, that they would not increase interest rates at their most recent meeting. In addition, it was announced that the Treasury would borrow less money to cover the deficits on a seasonally adjusted basis. Most importantly, it was announced that for October, only 150,000 new jobs were created, which was below estimates and indicated that there would be a softening in the upcoming labor market. More importantly, the soft number for October was coupled with revisions of the prior two robust employment reports, and 101,000 previously reported new jobs were eliminated from those calculations.

As reported last month, the GDP in the third quarter of 2023 was announced at 4.9%. With GDP that is close to 5%, how can anyone say we are close to recession? The unemployment report most recently announced at 3.9%, well below the projected amount by the Federal Reserve and historically close to full employment.

Ava and her friend rockin’ their Mario and Luigi costumes!

Those three factors are enormous and increase the outlook for the economy as we advance. Even though the third quarter GDP was at 4.9%, all learned forecasters now indicate that GDP in the fourth quarter will be 1.2%. The average economy reader would be startled to think that a reduction in GDP from 4.9% to 1.2% would be a good thing. However, that is precisely what I have been arguing for some time. We need to reduce economic growth to reduce the pressures to increase interest rates further. As the economy slows down, there will be a natural reduction of inflation due to less competitive pressures on prices and wages.

We are now entering the optimal time when the economy will grow somewhat, but employment will stay high, and earnings will stay even higher. That is the “Goldilocks Economy” that I expect for most of 2024. Many will argue that it is a negative that the economy is slow, but I would say that a slowdown is a good thing. Also, remember that the Federal Reserve is a political animal, and next year is a political presidential election. I would not be shocked, and in fact, I expect that sometime during 2024, you will see the Federal Reserve cut interest rates twice before the presidential election in 2024. Historically, election years are almost always positive for stocks just due to the ability of a sitting president to impact the economy and, therefore, increase prices. In 2020, the S&P 500 was up 18.4%.

Chris and Noelle Barg’s beautiful daughter –
she’ll be graduating in the Spring! Congrats, Lily!

Employment is a funny thing since it is so transitory. Few jobs were added during October, but you can expect an avalanche of new jobs going into the Christmas season. Many argue that one of the reasons the labor market was soft during October was that there were 30,000 UAW workers out due to a strike in the automobile industry. Since those employees were not working, they were deemed unemployed, reducing the number of new employees added. However, large employers have already indicated that they will add more than five million new part-time workers during the holiday season. Amazon alone has forecasted the hiring of 250,000 new employees to handle the Christmas crunch. Even though the unemployment rate has ticked up to 3.9%, I would not expect the upward trend to continue as we go forward. I would be surprised in 2024 if unemployment ever gets above the 4% level.

I have been arguing for a long time that the CPI indicator was incorrect. As you know, the CPI indicator is used for many things throughout the economy. It is, however, the most critical indicator of inflation. During the summer of 2021, inflation reached an unsustainable 9.6%. That rate has dropped dramatically, where the inflation rate is now deemed to be 3.5%, which is a considerable decline over the intervening 20 months. However, my assessment is the CPI is miscalculated, and maybe the Federal Reserve is making a big mistake relying upon the CPI as they did in forecasting a recession in the summer of 2023.

Alexis doing what she loves, while standing next to the reason
she doesn’t get to do it as much as she’d like!

A significant indicator of the CPI is the cost of housing. This index looks at the increase in rents as being a component of the CPI, and therefore, as rents go up, so does the CPI ratio and, hence, inflation. However, reviewing the data leading to the calculation, you will note that the index used for the CPI housing is over one year old. We all know that when inflation was at its worst in 2021, rents, along with everything else, were going up virtually every month. However, that trend has stopped. Rents are now flat, and the cost of housing should be constant. However, when calculating the CPI, the Federal Reserve uses that index, which is outdated and incorrect. The inflation rate is already at 2%, in my opinion. Therefore, it meets the Federal Reserve’s requirements to be at 2% or lower.

I mention this because it is essential to understand the future moves of the Federal Reserve. While they may increase interest rates one more time at the end of 2023, it will be the last increase. However, as indicated above, they will note the reduction of inflation and likely cut interest rates during 2024. I know it sounds counterintuitive, but they have to increase rates high enough so they have the comfort to cut them next year. Even though Federal Reserve Chairman Powell now indicates that we will “have higher interest rates for longer,” he has clearly shown that he and the people in the Federal Reserve who forecast the economy are rarely accurate. They are so inaccurate it makes you wonder about the competence of the staff on the Board. Remember, the tea leaves are apparent for an economy that is slowing in 2024 and will likely need a boost in confidence by a rate cut. Given that 2024 is a presidential election year, the Federal Reserve will be accommodating and, therefore, likely to follow through with some rate cuts.

The Weiss Family – only needs one more to field a team!

As mentioned previously, the number one factor that affects the value of the stock market is the economy. The second most important indicator is the earnings of the corporations. I guess you could argue that they are linked hand-in-hand when it comes to stating that if the economy is good, profits will be good and vice versa. So, the secret of investing in stocks is knowing when earnings will be reasonable compared to the opposite.

I picked up The Wall Street Journal the other day, and the bold headlines read as follows, “Exxon, Chevron Profits Surge As Mega Deals Bind Them To Oil.” I was a little taken aback by that article because, as we all know, oil is an industry whose future is not very bright. During the quarter, announcements were made by Ford and GM that they were abandoning their aggressive plans for the production of electric cars since they could not be produced efficiently and profitably. As we all know, EV cars are the wave of the future and have been mandated by the state of California as exclusive beginning in 2030. The world is attempting to move away from oil, and you would think that these vast oil companies would respond by reducing their exposure to oil, but that is not the case. They are buying more oil companies and becoming more significant in the industry.

The main thing I want to illustrate here is that so many people investing in stocks get so tied up in the whirlwind minutia that they do not look at the facts. For example, this headline from The Wall Street Journal appears most favorable to the oil companies. Therefore, if you look at the underlying numbers, you will see that Exxon for the third quarter of 2023 made $9.1 billion and Chevron made $6.5 billion; excellent numbers for sure, but are they earthshaking, as this article would lead you to believe?

Former co-worker and current client, Nadine Hooks,
stopped by to reminisce with Mia and Joe.

Something that has happened is there continues to be a massive shortage of labor. Without adequate workers, companies are forced to produce more with fewer people or to improve their technology to increase profits. Most recently, it has been announced that productivity in the United States increased to 3.5% in the second quarter of 2023 and made a considerable increase of only 1.4% annually going back to 2008. This substantial increase in productivity allows companies to be more profitable with fewer employees.

One of the biggest misnomers these so-called stock market experts keep throwing out is that the consumer is tapped out. I’ve never really understood what they’re talking about in this regard. As long as people have a job, they have income to spend. Everyone has to buy food, clothing, and other necessities of life. The only time they do without these necessities is if they don’t have a job. With unemployment at 3.9% and close to 10 million job openings, everybody in the U.S. who wants a job has a job. As long as these people are working, they will continue to earn money to buy necessities. Of course, this should relate to buying things that they consider to be important, like technology. We are seeing a revolution in technology that is unprecedented.

Ava is all “set” for a great volleyball season!

Even though the experts keep saying that the economy is slow and that it would be impossible to continue to increase sales, the third quarter of 2023 proved them incorrect. For example, take the tech companies and their increase in sales in the third quarter. Tesla’s revenue is up 9%, Alphabet (Google) grew 11%, Microsoft and Amazon expanded 13%, and Meta Platforms increased 23%. Of course, Nvidia stood out, improving its revenue by a staggering 88% during the quarter. Do those numbers give you any idea of the economy's strength since virtually all those companies sell consumer discretionary items? That means they are discretionary for the consumer to buy, but the consumer continues to purchase these items, or the revenue would not increase.

I mentioned that the real reason stocks go higher is profits. Did you look at the earnings in the third quarter for the major tech companies? For the third quarter of 2023, Apple showed a profit of $24 billion, Microsoft’s profit was $22.3 billion, and Google profited $19.7 billion. Even Meta (Facebook) delivered a profit of $11.6 billion for the quarter. Above, I mentioned that Exxon made $9.1 billion for the quarter, and Chevron made $6.5 billion. Each one of those tech companies far exceeded the profits of the so-called blue-chip oil companies.

Evan and Alexis all dressed up and enjoying a Fall wedding in Alabama. Looking good, guys!

Another example I would like to quote is that if you want to consider true blue-chip stocks, you would have to consider IBM in that category. It is the bluest of the blue stocks and the original tech giant. During the most recent ending quarter, IBM had gross sales of $14.8 billion and a net profit of $1.7 billion. Impressive numbers indeed, but minuscule as compared to the tech companies. For example, IBM’s gross sales of $14.8 billion for the quarter were substantially less than Google’s net profits at $19.7 billion. Therefore, Google made more profits than IBM even had sales.

Here is another example I thought might clarify the magnitude of the earnings of these corporations. Apple recently announced that they earned net profits for the quarter of $23 billion. To put that in perspective, I will do the arithmetic for you. There were 90 days in the quarter, meaning Apple earned a net profit of $256 million daily. I often think to myself how discouraging it would be to try and invest in cash at Apple when, if you took a long weekend off, you would have to deal with close to $1 billion in new money when you came back to work the next day. Apple also reported that they have on hand cash over $100 billion, meaning it is doubtful that they would need to borrow money in the future.

You let go first. No, you let go! Joe and his buddy, Babar!

It was also announced on Friday that Berkshire Hathaway had accumulated $157 billion in excess cash. Because they can earn money market rates close to 5% on short-term treasury bills, their earnings increase substantially on the interest income only. Assuming they can continue to get close to 5% short-term rates, they will earn close to $8 billion annually in interest income alone. What I am trying to emphasize is these profits are beyond anything anyone has ever seen in America and world finance. These profits are so extraordinary as to illustrate how strong the economy is. For all those so-called experts that forecasted recession, the downturn in corporate profits, and, therefore, significantly lower net income, I think this illustrates they were just wrong.

And yes, it is for tech companies, but how does it affect everyone else? At this point, of the 500 large companies in the S&P 500, 250 have published their reports so far this reporting season. As I am currently writing this posting, the reported earnings are 7.7% above their estimated earnings. This is the best over-percentage of the last ten years. If the economy were poor and consumers were cutting back, how can you possibly justify the GDP growth during the third quarter of 4.9% and earnings above estimates of 7.1%? I think it is pretty clear that these earnings and the increase in sales support the economic concept that the economy is just fine. Not too hot, not too cold, but just right, a beautiful “Goldilocks” economy.

Handsome little guy that Lindsay and her friend encountered
while hiking last weekend.

For decades, everyone has been bashing Amazon since they do not make large profits, and everyone seems to disagree with the company. I love Amazon, and if we do not get a box delivered a day from them, I feel ignored. During the third quarter of 2023, Amazon generated a net profit of $9.9 billion. Remember, this company makes most of its earnings in the fourth quarter, and the third quarter is historically a down quarter. As you can see, they turned out pretty well for a down quarter.

To many, Tesla is still considered to be a startup. Many people dislike Elon Musk for personal reasons that are unclear to me since the guy is brilliant beyond belief, in my opinion. A man who has accomplished all he has accomplished by 52 is quite extraordinary. I am convinced that one day, history will look back on Elon Musk and consider him the Thomas Edison of our generation. But what about the company itself? In the third quarter of 2023, Tesla showed a net profit of $1.9 billion. They admitted it was a weak quarter since they cut prices to increase market share. To point out, Tesla made more profits than IBM. You are seeing a transformation in the automobile industry. Tesla is now the most valuable car company in the world. They will produce two million electric vehicles in 2024, and there is a high likelihood that both Ford and GM combined will produce less than one million.

Did someone say my name?

I give you all these facts and figures for only one reason. I want you to evaluate profitability on headlines. As we go into the most profitable period of the year in stocks, you need to be fully invested in good stocks. With interest rates falling, the economy moderating, and earnings accelerating, there is a high likelihood that we could see a bonified Santa rally. Therefore, if you are not “locked and loaded” and fully invested, you should be moving to that level of investment as we speak.

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.

“Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble.” - Warren Buffett

From the Desk of Joe Rollins

Josh and Carter saying their goodbyes to Wrigley Field

As we roll into October, we are happy to have survived the downturn of August and September. Historically, those two months are the slowest of the year for investing and the fact that we only shed a few percentage points during that period was quite positive. We are now moving into the superlative time of the year for stocks, and the best time of year for your investments. As Warren Buffett says in the title of this posting, invest now.

There are many reasons why the months of August and September are slow for stock market investing. Many of them center around the fact that people are vacationing with their families and are not paying as much attention to what is happening on Wall Street. There is also the low volume that is present during this time of the year which makes the market easier to manipulate and move by the large hedge fund type investors. We saw greater volatility during August and September but fortunately, the large sell-off that so many were predicting did not come to fruition.

Is this a dream? Penelope celebrating 6 months

One of my favorite Warren Buffett phrases is when he talks about people who forecast the valuation of stocks. It goes something like, “The only value of stock forecasters is to make fortune-tellers look good.” Boy, this year has proven that statement to be so true. This quote illustrates one of the items I wanted to cover in this posting. How could the forecasters be so wrong and continue to be wrong even today? I also want to discuss why corporate profits are likely to be higher than anticipated, which is a huge support for the anticipated stock increases. I must also cover the current state of the economy, the misinformation about the housing market, and of course, touch on our dysfunctional government that continues to be a laughingstock to the rest of our world.

Before I cover all those terribly interesting topics, I need to report on the returns for the month of September. The Standard & Poor’s Index of 500 Stocks was down 4.8% during September but is up 13.1% for the year and up 21.6% for the one-year period ended in September. The NASDAQ composite was down 5.7% in September but was up 27.1% for the year 2023 and for the one-year period ended in September up 26.1%. The DOW Jones Industrial Average was down 3.4% in September but is up 2.7% for the year 2023 and up 19.2% for the one-year period that ended.

Family Bonding - Tom Fowler, Sherie and Steve Foster,
Betty Florence and Paula Fowler on their way to Normandy

Just for a basis of comparison, the Bloomberg Barclays Aggregate Bond Index was down 2.5% for September and is down 1% for the year 2023. For the one-year period ended September, it is up 0.6% for that one year. As you can tell, investing in bonds has been a losing proposition all year long, and for those who believe that bond investing is safer than stock investment, you can see the difference between the double-digit returns of the market indexes and the virtually flat returns on bonds for the one-year period ended September 30, 2023.

One of the most amazing things about all this is how wrong the so-called forecasters have been about the economy going all the way back to the beginning of 2022. As you recall, the major market sell-off in 2022 was principally a reflection of every major forecaster indicating that the U.S. was quickly going into recession and there would be a severe downturn in the economy, thus the number of workers unemployed would be staggering and U.S. profits would plummet accordingly. As we now know, 20 months later, there was no recession and we still do not have a recession even today.

Nadine (above) and Steve Hooks (below) celebrating “His and Hers”
holes-in-one, while Steve reminds her this isn’t his first!

What is most amazing is that the GDP growth in the first quarter of 2023 was a very satisfactory 2% and in the second quarter of 2023 the GDP growth was 2.4%. It is now projected by the Atlanta Federal Reserve that the GDP would grow in the third quarter of 2023 to 4.9% based on their posting on October 5, 2023. I am now reading numerous postings indicating that the fourth quarter of 2023 will have GDP growth of roughly 4%. What is interesting is most recently the Federal Reserve actually revised its projections and increased its forecast for GDP growth in the U.S. to 2.1% for the year 2023. Their previous projection would have been 1% annual growth.

Although the evidence of robust GDP growth in 2023 is quite evident, the Federal Reserve does not agree with those assumptions. They believed we must surely be turning the corner for the U.S. economy to go into recession. I guess the labor report on Friday blew up that bad prediction on their part as well. On Friday, the job report stated a shocking increase in employment of new hires reached 336,000 of non-farm payrolls in September. What was amazing about this number was that it was roughly double the consensus of the economist’s estimates.

To add further shame to the projections, the month of August employment report was revised to include an additional 119,000 employees. It is amazing that this economy, as strong as it is, continues to put even more people to work. Although the unemployment report remains steady at 3.8% unemployed, the number of people actively seeking work increased and therefore the entire labor report on Friday was overwhelmingly positive.

Rosemary Church and Patrick O’Byrne
enjoying the sunset in beautiful Tuscany!

As mentioned so many times before, there are currently 9,610,000 job postings and the current unemployed are 6,360,000. As is evident, there is more than enough work for anyone who wants a job. Recall the forecasters indicated going into 2022 we would have a massive number of people unemployed during 2022 and 2023 which would lead to substantially lower profits by major corporations since people could no longer afford nonessential consumer goods. As the last 20 months have illustrated, those forecasts could not have been more wrong. You read in my previous postings that I just did not see how a recession could be possible with less than 4% unemployed, which fortunately ended up being an accurate call.

As we go into the last Federal Reserve meeting of 2023, this strong employment report will most likely lead to the Federal Reserve increasing interest rates one last time at a quarter point. I am not sure exactly why the traders on Wall Street fear this increase so dramatically. The Federal Reserve has increased interest rates aggressively over the last two years, and to this point there has been little or no effect on the economy. More importantly, there has been little or no effect on employment. The projections of mass unemployment, even with higher interest rates, have not had much effect whatsoever on the consumers’ ability to spend.

Lloyd King and son Michael in town for the playoffs.
At least someone is happy (womp womp)…

So, as we go forward into the end of 2023 and the beginning of 2024, what can we expect? If it is true that the third and fourth quarter GDP is 4% as illustrated above, there is a high likelihood that the economy will slow in 2024 as 4% GDP growth is not sustainable over the long term. It would be much better for all of us if the economy would cool down to the 2.5% range, which would allow inflation to continue to drift down, which would have a positive effect going forward.

So even though I believe the Federal Reserve will increase interest rates one more time on November 1, 2023, I believe that will be the last time. Since it has been proven that the Federal Reserve’s one and only perceived function these days is to put people out of work, I cannot help but think that the only conclusion they will draw at the next meeting is, “How can we run more jobs out of the U.S. so we can meet the artificial goal we have established of inflation being 2%”?

We see you - Alexis and friend made it on the Jumbotron!

We are currently at an inflation rate of roughly 3.5%, but there is much evidence that it is falling quickly. Even the most recent labor report indicated wages have only increased slightly when compared to prior reports. We are also moving into a time when we will see a dramatic decline in the price of oil going into winter. The effect from the reduced cost of oil affects virtually everything we use in our everyday lives, anything that must be transported from manufacturers to consumers, which in turn should decrease the cost of goods if precedent is to be trusted.

It looks likely that by the first quarter of 2024, the Federal Reserve will have reached its target of roughly 2% month-over-month inflation and can call an end to their continuous desire for more unemployment in America. Do you realize that what has happened with inflation has allowed corporations to be more profitable?

Think about it for a second, last summer everyone dramatically increased the prices of virtually everything. The price of food went up dramatically overnight when we were at a 9% inflation cycle. You heard the public complaining about the price of everything going up, and the price of groceries increasing dramatically over a short time. Have you noticed that even though those prices went up and the commodity prices are going down, there has been no change in pricing?

Lauren and her beau arriving at a wedding in style!

Suddenly corporate America is enjoying the benefits of higher prices but lower commodity costs to pass the products along to the public. I think once again the forecasters will be surprised when the third quarter corporate profits come out and people realize that corporate margins have improved over the last six months not because of higher prices but because of lower commodity prices.

You have seen moves that truly defy reasonable economic understanding. We have a large-scale strike going on in the union-based automobile industry. Twenty years ago, virtually every car in America was built by a unionized company. Today it is estimated that only one in five cars built and sold in the U.S. is built by unionized companies as all imported cars have no union representation. So, though the union automobile companies are on strike, and even when the President of the United States is walking the picket lines, they are losing their market share to those who are not on strike.

Being a mom is exhausting!

One of the major manufacturers in the United States of cars is Tesla. Usually, everyone thinks of Tesla as a smaller operator compared to the likes of GM or Ford, which of course would be correct. However, last quarter Tesla was more profitable than both GM and Ford combined. The manufacturing workers are now campaigning for substantially higher wages and a shorter work week. This will only damage the companies they work for and at the end of the day will lose a substantial amount of wages while the strike goes forward. All in all, their actions actually help inflation since with reduced wages they are not likely to consume as much, and at the end of the strike whatever is decided will take them years to catch up with what they lost while on strike.

I remember back when the so-called forecasters were predicting that these dramatic increases in interest rates would create absolute chaos in the real estate markets. One I recall most dramatically was that the price of housing would fall 25% almost overnight due to the actions of the Federal Reserve. Here we are 20 months later, and what do we know?

First, the truth of the matter is that there is a huge shortage of housing in the U.S. The combination of higher interest rates, inflation, and greater scrutiny by banks has led to fewer houses being built and a much more difficult situation for young people trying to buy houses. In my opinion, the main reason there is a shortage of housing is that people are just not willing to sell their houses and incur higher interest rates. If you are sitting on a mortgage with a 3% interest rate, why would you be willing to sell and incur a mortgage of 7% to buy a new house? This leads to fewer homes being sold thus creating a shortage of houses that are within the new buyers' price range.

DeNay channeling her inner Lorax - I speak for the trees!

If it were true that the housing market was in severe decline, why are virtually all homes in Atlanta sold at or above listing price? Something extraordinarily unusual is happening. For the first time in my professional career, not only is there a shortage of homes for sale, but the homes that do sell are sold at much higher prices than listed. Of course, this leads to properties becoming overpriced which will continue for the foreseeable future as those buyers eventually sell the properties that they paid entirely too much for. This keeps us in an endless cycle of selling the home for too much, buying an overpriced home and the value of property continues to go up. Those forecasters that indicated housing prices were going to fall by 25% were correct, they were just facing the wrong direction.

Last week the biggest headline was when the Speaker of the House was voted out by our Congress. The news commentators were almost foaming at the mouth in their explanation of their reasons. Out of curiosity, I watched some of the reporting on this subject, and I realized that no one really cares what is going on in Washington at the current time. Washington is so dysfunctional that it is almost the laughingstock throughout the rest of the world. Throughout all the silliness due to removing the House’s Speaker, they are not legislating, which is their one and most important job.

Ava unsure about this” trust game” with her back turned
to the wildlife in the heart of Africa!

Now we are going to have two candidates for the presidency that are each close to age 80. There are no new ideas coming out of Washington, there is no innovation. Obviously, you cannot make progress when every decision is made based on your political affiliations, regardless of the integrity of the action. Everyone is deeply divided including the Republican party, which is split between the conservatives and the ultra-conservatives. I guess this can be compared to the famous acts of Nero, who played the lyre as Rome burned.

Congress does not seem to get the point that we have $32 trillion in debt and the cost of borrowing that debt is double what it was only a year ago. The increase in interest expense to service a national debt is going to be a staggering amount going forward. It looks like the current deficits are going to be close to $2 trillion for as long as the eye can see and yet our government is so dysfunctional that all they want to do is spend more money rather than less.

"Happy Fall, y'all"

I do not want to pretend that this is a current issue, because it is not. Any time you can print money, cash flow issues can be solved immediately. However, there will be a day when this issue will become paramount. The amount of interest to service the Federal debt will soon be a major driving force in the budget and if some politicians do not begin to take this into consideration, we will have issues much more serious than they are today.

Congress should also be embarrassed by how they are handling the southern border debacle going on now. The illegal immigration issue has become paramount, and Congress cannot even have a civil conversation on the subject. We cannot fiscally continue to allow thousands of illegal immigrants into the country daily and support them while they are here in limbo awaiting immigration proceedings. Any other legislative body would get together, recognize the issue at hand, and come together for a solution to this issue. I personally think the current administration believes the immigrants will come in and eventually vote to support their causes. As we all know illegal immigrants do not have the right to vote at the current time. If Congress were truly concerned about doing something to help America, they would spend less time worrying about who will become Speaker of the House, and more time worrying about how to deal with the immigration issue on the southern border.

We could not be more excited about the upcoming six or seven months of investing. The economy is in excellent shape and corporate profits are continuing to rise. You are seeing an opportunity now to put new money to work, notwithstanding the negative projections of the forecasters who have been so very wrong. After 20 months, many of the so-called experts are no longer calling for the recession they predicted, but rather just a slowdown. What is most amazing is that during this entire time from the beginning of 2022 to now, the economy has not slowed, but accelerated. As you recall the first two quarters of 2022 were marginally negative and the GDP has gone up every quarter since that time.

"Pose for the tourists, they said.
We’ll throw in a wildebeest, they said."

If you have not made your IRA or maximum 401(k) contributions, you should do so immediately. The time for investing is beginning November 1st through May 1st and if you are not invested you may lose the opportunity for a nice acceleration. Consider meeting with us, giving us the opportunity to spend time with you and discuss anything about investing or your portfolio. We would be happy to meet with you at any point and discuss your goals and opportunities going forward. What we know with some precision is that you have been misled by the media over the last 20 months, and we are hopefully headed into a period of positive financial results that will once again prove the critics were never giving you accurate information.

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.