Over the last several years, the profession of an economist has fallen to new lows. And quite frankly, they deserve the demotion they have received. Going back to 2022, the economists were adamant that the economy would shrink and recession was inevitable in the coming years. They could not have been more wrong. The most recent economic data has even further elevated the U.S. economy and projects a more robust economy for 2024.
Breathtaking! Client Caroline Matton enjoying the view after hiking up Mount Batur in Bali. |
I also want to discuss the recent demise of the Chinese economy and many problems with China that have not reached the media yet. The stock markets in China and Hong Kong have been dismal, and until China changes, they will continue to be dismal.
Client Cindy Craft enjoying time with her handsome boys and their beautiful families in Charleston, SC. |
Before I discuss all these incredibly exciting topics, I need to update you on the January trading period. For the month of January 2024, The Standard and Poor’s Index 500 stocks were up 1.7% for the month. This index would have been up much more except for a significant sell-off of 1.6% on the last trading day of the month. Federal Reserve chairman Jerome Powell made a speech that day indicating that no interest rate decrease would be in the cards for March 2024. The stock and bond markets sold off dramatically based on these statements. Theis interesting to note that both of those markets recovered and even went higher as the week progressed. But in any case, even a 1.7% increase in January is immensely satisfying. Remember that if each month this year has a similar return, the index would have an annual gain of over 20%.
Clients Wyatt and Beverly Foster doing a little sightseeing in Singapore (try saying that 10 times) |
As a comparison, Barclay’s Aggregate Bond Index was down .1% for the month of January, and for the one-year period, it is up 2.2%. I always try to give you a bond equivalent so that you can understand the difference in returns between stocks and bonds. The long-term performance of stocks versus bonds is dramatic. The S&P over the last 10 years is up 12.6%, the NASDAQ Composite over 10 years is up 15.1%, and the Dow Jones Industrial Average is up 11.8% annually over the 10 years. Compare that with the Bond Index, which has averaged 1.6% for the last 10 years. I speak about this often in these postings, but if you had been invested in bonds over the last decade, your investments would not have generated even enough return to exceed the rate of inflation. I do not see bonds contributing significantly going forward, even though they may have a small gain in 2024.
Ava and her friend off to the Fox to see Hamilton. |
Not only was that number good, but they also increased the number of employments in December. Therefore, for two straight months, you have increased employment of more than 300,000 new employees, which is very strong. Unbelievably, the unemployment report was once again reported at 3.7%, which is a low level of unemployment, and it leads back to a sub-4% jobless rate, which goes back to December of 2021. Take into consideration that for all the months of 2021 and 2022 and the first month of January 2024, unemployment has been less than 4%.
DeNay enjoying the snow and sandstone at Red Rocks over the holiday. |
The good news continues to roll in with this employment report. It was announced that the average hourly earnings over the last year had risen 4.5%. An exceptionally large increase in earnings by employees. This increase will obviously flow into consumer dollars, as I will reflect later in this posting. As you recall, the so-called economists forecasted a recession in 2022, but here we are in 2024, and certainly, the recession is nowhere in sight.
Lauren and Jeff treating Henry to a day out at Fetch! |
Ava posing next to her artwork – maybe the next Frida Kahlo?! |
What is going on here is that the bond market, which is many times larger than the stock market, is trying to influence the Chairman and embarrass him on national television. There is no mistake about what the desire of the bond market is. To them, a good recession is extraordinarily profitable to them. If we have a recession, then clearly, interest rates would come down, and they would profit. I know it is a twisted philosophy that this segment of the invested public would really prefer mass unemployment so they would benefit. They must be terribly disappointed that the economy continues to do very well.
Client Sheryl Matton with daughter Caroline all dressed up for a night out at Sunset Point in Bali. |
I thought maybe you might be interested in a look at earnings for the fourth quarter of 2023 and see what we could learn from those earnings. Let us compare some old-line companies that have been blue chips for our entire lifetime as compared to the new tech companies that have risen to prominence in recent years. For the fourth quarter of 2024, Exxon made a $9 billion profit and Chevron made a profit of $6.5 billion. If you compare the two, General Motors made a profit of $2.2 billion and General Electric had a profit of a measly $348,000 for the quarter. All these are old line blue chip companies that have been around for generations.
Holy Moly! Sheryl taking a dive with her new friend at the site of the USS Liberty in Amed, Bali. |
You really do not need to be a rocket scientist to understand the magnitude of these numbers. The earnings by these tech companies are extraordinary by any definition and, as an investor, cannot be ignored. It is interesting that after the massive sell-off in 2022, the so-called Wall Street experts project that it would be 2025 or 2026 until we got back to all-time highs. Interestingly, the Standard and Poor’s Index 500 Stocks and the Dow Jones Industrials both reached all-time highs in January 2024. Therefore, it only took less than 13 months for the market to recover all its losses and go to all-time highs. Much of this gain has been led by these tech companies, and rightly, their gain is based upon their extraordinary earnings. There is nothing in the evidence that indicates these earnings will do nothing but increase as the economy strengthens into 2024.
DeNay relaxing, recharging, and reflecting at the Red Rocks. |
You must understand now that the Federal deficit budget in 2023 is already forecasted to be more than $2 trillion. That is 7.5% of GDP, which is roughly double what the average has been in the economy from 2016 to 2019. What this means is that the deficit has run at roughly 3% of GDP in the years prior to COVID-19. Since COVID-19, the Federal deficit has not been lower than $2 trillion annually and continues to grow. I give you this information so that you can see that there could not be a worse time to propose a decrease in income tax rates. With Federal deficits running at extraordinarily high rates, why would you contribute to those deficits by cutting income taxes, unless you wanted to pour money into the hands of consumers? Buy votes?
Ava catching a few waves down in Florida. |
Even though Congress has previously funded these programs, it is pretty obvious what is going on with the money flowing out of Washington directly into the hands of companies that will spend it, which will then improve the economy. You would not be terribly concerned by all of this since this is standard politics if the deficit were not so high.
At some point we need to start making progress on reducing the deficit. I know that I have written in my previous postings that deficits are not really a problem. As long as you can print your own money, you can overcome the problems with deficit. However, in so doing, you create inflation, which is a negative for all consumers.
“Live life with no excuses. Travel with no regret.” |
I do not intend to make a direct reference to compare the German economy to the American economy, but only to point out that continuing deficits will eventually create inflation. At some point we need to get serious about balancing the budget with the revenue, but it now seems that at this point, Washington is only focused on spending more and more money regardless of the financial outcome.
Not many people are focused on China these days, but they should be. China is, of course, the second largest economic power in the world and controls an enormous amount of financial influence in the worldwide economy. A few years ago, they decided that they would attack private industries within China and bring them back under the control of the Communist Party. The result of that has been that many American companies are pulling out and moving their operations to other Southeastern Asian countries.
“Traveling – it leaves you speechless, then turns you into a storyteller.” – Ibn Battuta |
For many decades, the Chinese government promoted the one-child per couple limit. The idea was that the limit would slow down the growth of the population by limiting the number of babies being born. The data shows that there is a significant imbalance in the ratio of men to women. Last year, employment in China fell, and the population is increasingly getting too old. As the population continues to age, the cost of healthcare and maintaining a reasonable lifestyle for the elderly will grow and that will create a major deficit to the national economy. At the current time, along with Japan, China has one of the oldest average of its citizens in the world. This, along with their anti-private enterprise and huge debts that are owed to China, has forced many industries out of the country and caused them to move to other parts of the world to create commerce.
What is interesting is that this major shift in philosophy has dramatically reduced the desirability of investing in that country. It is hard to believe that the stock market in China was down in 2023 and that it was the third straight year of decline in that market. Even more importantly, Hong Kong’s Hang Seng Index dropped for the fourth consecutive year. As you can see, your money is not treated well in China, which is a direct reflection of how they treat private enterprises in their country. As has been proven so often in the history of the world, when a communist government starts to privatize businesses, everything goes down. It happened in Cuba, it happened in Russia, it happened in Venezuela, and it is currently happening in China.
It is unlikely that China will turn the corner back to prosperity until they adopt a more pro-business mentality than what they are currently exhibiting. It is currently the policy in China that they would like to increase their population. They are encouraging couples to have more babies and even giving them financial incentives. The way China has maintained control over the population is that they have kept them busy by building and working in manufacturing plants. It is believed that in many cases that China has built entire cities with no one in them, just to keep workers busy. But the end result is that China is extraordinarily indebted. With the debt they owe, the only way that they can maintain the lifestyle of the population is by increasing their own GDP. They know as does the rest of the world, that if a major unemployment period strikes China, in all likelihood, the communist government will fail. I fully expect to see China change their philosophy regarding private industry before it is too late, and they suffer political negative ramifications.
As I mentioned earlier, Peter Lynch says that all you have to do is go to the mall and see what the flow is like. I had to run an errand on Saturday to a city outside of Atlanta, which was a 45-minute drive from my house. I was absolutely blown when I saw what was going on. Along the way I passed not less than 10 major buildings under construction. I passed a Golden Corral, and not only was the parking lot full but there was a line wrapped around the building of people waiting to get in. At 10 o’clock on Saturday morning, you would not expect such a show of consumer support. There is no question that the cost of eating out in restaurants has gone up dramatically, but that is for good reason due to the high cost of food and service in the industry. Even though the cost of eating out is high, restaurants are enjoying record participation.
I mean, who doesn’t love seeing a picture of a giraffe? |
I recognize that this is a very limited anecdote evidence of the economy, but it should illustrate a point. Consumer spending is currently very strong, and 60% of the GDP is consumer spending. If you assume that the consumer is strong and fully employed, and inflation is down and interest rates will fall, you cannot project anything other than an increase in equity prices in 2024.
I get up every morning and watch the news, both financially and otherwise. I read about the Ukrainian War in more detail than most people do. I am also very aware of the conflict in Israel and the issues with Iran, Iraq and our soldiers. I recognize that the world is a tinder box that can blow up almost anytime. It might be possible that Russia will win the war in Ukraine, but what on earth would they have won? They get to take over a bankrupt country that would have no place for the population to live. No industry, no utilities and certainly no desire to be Russian. I would hardly call that a victory under any circumstances.
Happy Birthday, Sweet Caroline – double digits and loving it!! |
Yes, all of these areas are of concern and if any one of those were to blow up, it would massively affect the stock market. However, hopefully, by now, you have learned that you cannot invest due to geopolitical events. If one of these events occurred, you would react to that, but you cannot invest in anticipating one of these events will occur.
The other day, I had a client say that he would not invest until after the Presidential Election. I thought to myself, “You had an outstanding 2023 and are likely to have an outstanding 2024, and you are going to wait for an event that quite frankly has no economic effect on the markets whatsoever.” If you start to invest emotionally without analyzing the financial and economic effects of the market, you are more likely than not to fail in your investment future. The best philosophy is to be always invested, regardless of geopolitical and economic circumstances.
Little Penny laughing it up as usual! |
If you invest early in the year, you earn tax-free returns that will benefit you for a lifetime. There is absolutely no better investment than earning tax-free returns.
If you would like to discuss any of these matters in further detail, please let me know.
As always, the foregoing includes my opinions, assumptions, and forecasts. It is perfectly possible that I am wrong.
Best Regards,
Joe Rollins
All investments carry a risk of loss, including the possible loss of principal. There is no assurance that any investment will be profitable.
This commentary contains forward-looking statements, which are provided to allow clients and potential clients the opportunity to understand our beliefs and opinions in respect of the future. These statements are not guarantees, and undue reliance should not be placed on them. Forward-looking statements necessarily involve known and unknown risks and uncertainties, which may cause actual results in future periods to differ materially from our expectations. There can be no assurance that forward-looking statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements.
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