Wednesday, July 17, 2024

“Save Like a Pessimist, Invest Like an Optimist” - Bill Gates

From the Desk of Joe Rollins
Artie, Liz, Randy, Kathy, Carter, Josh, Laura, Lloyd, Savvy, Ava, Dakota, Joe, Teri, and Bill enjoying the views of Civita di Bagnoregio in Italy

The month of June was an extraordinarily good month for our investments since they grew unexpectedly to mid-year heights. It is hard to imagine that for the first six months of 2024, the S&P 500 Index was up an almost unbelievable 15.3%. With all the pessimists discussing the negative things that could happen in the economy, it was certainly a pleasure to see the indexes grow so much for the first half of 2024.

While indexes did extraordinarily well in the first half of 2024, actively managed mutual funds outperformed them. In some cases, the mutual funds even outperformed by a large percentage over the return of the 500 index. I would like to discuss some of this in this post.
The whole famiglia in Tuscany -
Joe, Dakota, niece Savvy, Ava, Josh and Carter

Since there is not a lot of fiscal news going on now, I thought I would go back and cover basic economics and some issues I found interesting. Also, I would like to discuss topics I normally do not discuss, like oil, life events, and the wealth effect. Before I get into these interesting topics, I need to address the actual returns of the indexes for the month of June. The Standard and Poor’s 500 was up 3.6% for the month of June and is up 15.3% for the year 2024. For the one-year period ended June 30, 2024, that index is up 24.5%. The NASDAQ Composite rose even more, gaining 6% in June, bringing its year-to-date increase for 2024 to 18.6%, and making a 29.6% rise over the past year. The Dow Jones Industrial Average was up 1.2% in June and was up 4.8% for the year 2024 so far. For the one-year period, the Dow is up 16%.

I always like to give you the corresponding returns of bonds since, generally, they are marginal and certainly insignificant as the relates to equities. The Bloomberg Barkley Aggregate Bond Index was up by 1.1% in June. For the year 2024, that Index is down 0.6%. That index was up 2.7% for the one-year period as of June 30, 2024. As you can see, all the major market indexes were up double digits for the one-year period ended June 30, 2024, while the Bond Index was returning roughly 25% of the returns of the equity indexes.
When in Rome…Joe and Ava at the Colosseum
(almost 2,000 years old, wow)

With such an outstanding first six months of 2024, I feel sorry for my clients and others who are uninvested. So many potential investors are sitting in cash thinking they are avoiding the next great market crash. They do nothing to assess the economy, earnings, or any other major stimulus of the stock market. I had a client this quarter who informed me that they were taking out all their money from their IRA and investing it in a CD. The logic of a move like that defies any type of explanation. You can earn in one month in the equity markets what it would take an entire year to earn in a CD. Additionally, you are locking up your money for a period of time, and you have no opportunity to react to current financial events. The worst part about that move and why I feel sorry for clients sitting in cash, they are giving up the opportunity for large gains that can help them build for retirement.

Much has been said recently regarding the Federal Reserve’s attempt to cut interest rates. With the softening labor market, it looks like the Federal Reserve will cut interest rates very soon. Going back all the way to 2021, it was assumed that inflation was “transitory” and would not have much effect on the economy. Clearly, the Federal Reserve was incorrect in that assessment. What we found out was that the Federal Reserve was late to the party and did nothing to counter the inflation that we went through in 2021, which was 9%.
Muzzy and Jennie Musciano, with daughters Lisa and Mia,
celebrating 71 years of marriage! Amazing!

If the Federal Reserve had started increasing interest rates during that time of high inflation, the dramatic market swings probably would not have occurred. However, the Federal Reserve has recently dramatically lowered the inflation rate from 9% to roughly 3% this month. They are well along on their goal to get inflation down to 2% annualized, which they say is their target.

Do not assume for a second that I am blaming the increase in inflation on the Federal Reserve. In my opinion, inflation can be directly attributable to spending by the Federal government. When the new administration came into office in 2021, they immediately approved another massive refund to Americans. As has been demonstrated, that was a severe mistake, by not only running up the deficit but also by creating the inflation we suffered through! You may remember the so-called phase of supply disruptions. There was no supply disruption; there was just a huge increase in demand over supply.
Clients Robbie and Susi Hensley enjoying a Braves game with friends

Basic economics indicates that when demand exceeds supply, prices go up. During COVID-19, we had a period where people were not spending money, and therefore, supply exceeded demand. However, just as soon as the Federal government funded their massive refunds, demand suddenly increased exponentially. This increase in demand created supply issues which obviously increased prices and increased inflation. The Federal Reserve was not responsible for inflation, but certainly, it could have helped relieve the issue by increasing interest rates earlier.

As we go forward, the Federal government continues to be the major culprit in creating inflation. It is projected this year that the Federal deficit will exceed $1.2 trillion. The Federal government is spending money like “drunk sailors,” and I think that a great deal of this was designed to buy votes. We are just now starting with the spending on infrastructure projects. It is anticipated that roughly 40,000 projects will be started with Federal money during the year 2024. Wow!
Client Michael King and his beautiful new bride Clare!
Here’s to a long and happy marriage!!

The main reason that the Federal deficit is out of control is that politicians can secure votes by sending Federal money in their own districts. They just cannot control themselves and so they continue to run huge deficits.

A client told me the other day that he thought deficits would go on forever and have been a constant part of government spending. I reminded him that we had a surplus budget period as recently as the Clinton administration in the 90’s. Even though that was not that long ago, it has quickly left people’s memory.

I like it when famous people quote and criticize the deficit. The most famous is Warren Buffett, a known finance expert. The deficit issue is extraordinary, but he has a simple solution. As he told CNBC, “I could end the deficit in five minutes; you just pass a law that says that any time there is a deficit of more than 3% of GDP, all sitting members of Congress are ineligible for re-election.” It is a simple concept that could easily be solved by politicians.
Ava and friends catching a ballgame before the new school year begins!

Back at the end of 2023, all these so-called Wall Street experts forecasted that during the year 2024, we would have four or five interest rate decreases. They projected that the economy would slow to a recession, unemployment would skyrocket, and the Federal Reserve would have no option but to decrease interest rates. I do not know whether you have finally gotten the hint that you cannot rely on the Wall Street experts for advice, but I will continue to point out how wrong they really are.

So, what we found out in 2024 was that there was no recession, employment has remained strong so far in 2024, and the Federal Reserve has not cut interest rates even once. In fact, the odds of four or five rate cuts in 2024 is virtually zero. I would not be surprised to find the Federal Reserve cut interest rates twice in 2024, but more likely than not, they will only cut interest rates once after the Presidential election.

Even though people think the stock market is high, it depends upon analyzing the numbers to determine whether that is the case. As I have written many times in these postings, the stock market's value is based on earnings and interest rates more than any other single factor. It is true that year after year, earnings growth in 2023 was a meager 1%, and yet the Standard and Poor’s Index 500 stocks were up an unbelievable 26% in 2023. A good deal of that rise was related to the expected decrease in inflation, not so much an increase in earnings.
The Frank family knows that no baseball game is
complete without Cracker Jacks!

We have clearly turned that corner as we finish up 2024. It is now estimated by FactSet analysts that earnings will grow in 2024 at a rate of 11.3%. Even better than that, they project earnings will increase in 2025 at 14.4%. If it is true that earnings are going to grow 25% over the next 18 months, would you truly assume that stock prices are too high, or maybe, due to the increase in earnings, they are more moderately priced?

Clearly, the economic situation today is positive. Regardless of when they start, it is almost 100% sure that the Federal Reserve will have to cut interest rates in the last part of 2024 and into 2025. Couple that with the higher earnings projected above, this should lead to higher stock prices going forward. Obviously, no one knows exactly what the future will bring, but the economic tea leaves indicate a further rise in stock prices.

The month of June also had an interesting wrinkle that almost no one realized. Even though I have discussed above how great the month of June was for equity investing, interestingly, virtually all the value funds were negative in the month of June. Basically, those clients who thought they were being conservatively invested in value funds saw their accounts actually go down for the month of June. For the year-to-date in 2024, these value funds have returns significantly smaller than the growth funds, making up most of the indexes. For the first time in some time, it looks like the international stock funds are starting to gain some traction and hopefully will support the U.S. market going forward. We have begun allocating some resources to international stocks to offer a balance to the U.S. equity markets.

I read an article recently that indicated one of the major reasons investors are disenfranchised with the financial service industry is that they believe advisors are not investing to their personal goals. I recently had a client notify me that he had been married for over a year and we had no knowledge of that marriage. It is very difficult to keep up with people’s desires for investing if we do not know what is going on in their lives.
View from the villa. Leonardo da Vinci said it best,
“Tuscany is the ultimate canvas, painted with the hues of history and culture.”

We need to meet more often so we have a better understanding of your goals. Oftentimes, it could be as simple as an email or notification so that we at least know what is going on and if there have been any changes or events in your life. It is very important that we know major changes so we can invest accordingly. Frequently, we do not know until after the fact that people have gotten married, purchased new homes or are making plans for retirement.

You can also tell that the stock market is perceived high by its investors at the current time because we are going through what I classify as the “wealth effect.” The “wealth effect” is where people, realizing the market is perceived high, decide to take some of their investments and buy something they have desired. This could be a new car, a new boat, a new house or an expensive vacation. It is sort of a psychological way to hedge the stock market. If I take the money from the stock market and buy a new car, if the market goes down, I have already purchased a new car.

As the famous investor Peter Lynch commented, “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.” That is exactly what is happening here. Even though clients enjoy whatever they purchased, those funds are no longer working for their retirement.

One of the biggest mistakes clients make is that they only invest on a periodic basis. I guess the mentality is that you wait until you accumulate a certain amount of money and then invest. The problem with that investment philosophy is that you may hit the market at exactly the wrong ¬¬¬time. If instead, you invest on a regular basis, either by financial draft or otherwise, you are much more likely to enjoy market success. We can electronically draw money out of your checking account every month and have it go directly towards your investment.
The Wittman’s, Rollins’ and Dufresne’s in front of Michelangelo’s Statue of David

One of the biggest mistakes investors make is that they are sitting on a large sum of cash completely uninvested. When you realize that the market was up 15.3% in the first six months of this year, the returns on a 5% money market account appear to be minuscule. Over the last many years, I have encouraged people to invest in their IRAs in advance. That would mean that you should have already made your IRA investment for 2024. Unfortunately, my comments encouraging early investment have fallen on deaf ears. I wish I could go back and demonstrate to investors how much more money they would be worth today if they had invested their IRAs in advance.

I can tell it is a political season because the Federal government is spending money that it does not have and doing things that make no sense. We have basically suffered from an open border system between the U.S. and Mexico, allowing people to come into this country without any investigation on our part, and in fact, we have not only brought them to the country but have supported them with housing, food, and other benefits. How anyone does not see this as negative for the U.S. defies imagination. So, after three years of basically open borders right before the election, we vowed to close borders again. How could that be anything other than political motivation?

Even though the vast majority of Americans are against canceling school debts for the obvious reason, it benefits the people in debt and not the people who have already paid theirs. In fact, the U.S. Supreme Court has recently ruled that this cancellation of student debts is illegal. Notwithstanding the Supreme Court ruling, this administration continues to promote the cancellation of school debts and the cancellation of liabilities related to school. I am not sure I completely understand the whole concept, but it certainly appears to be vote-buying to me.
“Amici e vini sono meglio vecchi.” Randy Wittman, Joe and Bill Bewley

All of a sudden, the administration, by executive order, has paused all permits for new LNG plants. No one can explain why this move was made other than it was designed to appease the environmentalists and prove that the current administration was against fossil fuels. A court has recently overturned that ban as not approved by Congress, but clearly that was a case of attempting to buy votes from the conservation lobby.

I do not write much about oil since I find the subject confusing and the investments not very enticing. But the United States has done an extraordinary job producing new oil over the last few years. In fact, the U.S. is the number one producer of oil in the world, even today. During the month of June, Russia’s crude production was 9.2 million barrels a day. Saudi Arabia produced 8.9 million barrels daily, but the U.S. produced 13.2 million barrels, far exceeding both.

The U.S. is ahead of the rest of the world, and all this excess oil should be available for export to supplement the country's need to buy Russian oil. There is no more effective way to limit Russia's ability to execute war than to put financial risk on them from people not buying their oil. To this point, most of Europe buys no oil from Russia, but Russia continues to sell oil to China and India to make up their principal revenue source. If the U.S. can continue to produce oil, and the current administration will allow them to export that oil, it would bring great financial distress to Russia, which so depends upon oil production.
Proud client Paula Herraiz at her son’s Master’s graduation at Clemson. Way to go, Mason!

During the month of June, my family and friends and I spent two weeks in the beautiful expanse of Tuscany, Italy. While I have been to Italy many times, I have not spent much time in the heartland of the country where most of the vineyards are located for the famous Chianti wine. We prearranged multiple excursions into Rome, Venice, Florence and other historical sights. We rented this beautiful villa which overlooked the beautiful Tuscany countryside and had an amazing time visiting the sights and enjoying the wine.

Also, I need to report that you need not worry about the recession in Italy. The country is overrun with tourists and from all visible signs, they are doing very well economically. You very rarely see poor people in Italy. It seems to be a country of the middle class. But to give you an example of the tourist, the day we were at the Vatican, according to the guide, there were over 80,000 people there that day. I tried to text the Pope to tell him we were there, but I guess he was busy and did not respond. You will see many pictures in this posting from our trip overseas. It was a great, once-in-a-lifetime vacation where we were able to get together with friends and family and enjoy the beautiful countryside in Italy.

I expect that for the remainder of 2024, there will be a high level of volatility in investing, particularly as it relates to the Presidential election. Remember the most important components that make the stock market grow are interest rates and earnings. The lower the interest rates are, the better it is for stock prices. We now know that interest rates will start to fall and that the so-called experts are correct, earnings are about to go up. You can hardly think of a situation that is more favorably contributing to higher stock prices in 2025.

The aptly named Grand Canal in Venice

*** P E R S O N A L    N O T E ***


After 54 years in the business of public accounting, I have decided it is time to slowly phase back my participation in the industry. I began this firm 44 years ago and have run it every day since then. It is time for me to start taking more time off and turn the responsibility of running the firm over to the other very capable long-standing partners who most of you are familiar with since we have worked side by side for over 20 years (Robby Schultz, Danielle Van Lear and Eddie Wilcox).

Most people do not know the history of the practice, but I thought I would give you a brief overview. I began working out of my house in Fairburn, Georgia in 1980 and had exactly one client. I did not have my first employee until 1981, when I moved the practice to midtown Atlanta. We have fortunately grown the business substantially since that time, and I have enjoyed having many long-term employees working for the firm.

In 1990, I began this investment company with basically two clients. I never anticipated that the investment company would grow at the rate it has, but I certainly appreciate the confidence the clients have in our firm. Today, we manage clients basically all around the country and even the world. We have many international clients, and we manage roughly $1.3 billion for all our clients. We have enjoyed a great expansion of our business, and we appreciate the many referrals that clients have given us throughout the years.

My goal is that I will work fewer hours beginning immediately and slowly transition my financial clients over to Eddie and Robby. I will not be in the office every day but can be reached at any time if there is an emergency. I have no intention of leaving Atlanta permanently and there is nothing physically wrong with me that would prevent me from working, I just think it is time that maybe I take more time off for myself and my family and enjoy the things that I once wanted to do.

Therefore, when one of the partners contacts you, hopefully you will treat them with the same respect you have given me all these years and know that you are in good hands. When tax season rolls around, I will not be having personal meetings with clients related to tax returns, but Danielle, Robby or Eddie will sit in for those conferences. As will always be the case, I am available to discuss emergencies or specific needs you may have, but hopefully, the routine and normal conversation we have can be held by others. If anyone would like to discuss this decision, please give me a call.

If you would like to visit with us in the coming months, we look forward to seeing you. We always enjoy learning about our clients and exactly what their financial needs are and how we can better serve them.

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

Best Regards,
Joe Rollins

All investments carry a risk of loss, including the possible loss of principal.  There is no assurance that any investment will be profitable.

This commentary contains forward-looking statements, which are provided to allow clients and potential clients the opportunity to understand our beliefs and opinions in respect of the future.  These statements are not guarantees, and undue reliance should not be placed on them.  Forward-looking statements necessarily involve known and unknown risks and uncertainties, which may cause actual results in future periods to differ materially from our expectations.  There can be no assurance that forward-looking statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements.

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