From the Desk of Joe Rollins
Since announcing my semi-retirement, I have been reminiscing on my 35-years of investing for clients and my 53-year CPA career. In the beginning, we did this job without the “essential” technology needed today. The entire financial world didn’t depend on technology the way the industry does now. In this post, I would like to cover some events in the industry that have changed investing policies since the beginning of 1990.
This week, the financial markets weathered a significant sell-off; a familiar sight that often triggers panic. However, by the end of the week the indexes had rebounded, showcasing the remarkable resilience of the market. I want to delve into a significant sell-off in 1987 and 1929 and the lessons we learned, shaping our approach to such issues since then. I also want to discuss why the sell-off happened last Monday and why it is unlikely to be repeated.
At the beginning of 2022, Wall Street's so-called experts were abuzz with talk of an impending recession due to the inverted bond yield. I want to bring you up to speed with that thinking and, after two years, illustrate that there is still no sign of a recession. This long-term perspective, a crucial pillar of our industry, guides us through market fluctuations, and I am excited to delve into it further. But first, let us review what transpired in July.
The Standard & Poor's Index of 500 Stocks ended up being 1.2% for the month. Its year-to-date returns are 16.7%, and its one-year return is 22.2%. The Nasdaq composite was down marginally 0.7%, but it is up 17.7% year-to-date, and its one-year return was 23.7%. The Dow Jones Industrial Average is up 4.5%, bringing the year-to-date up to 9.5%, and the one-year return is 17.2%. The Bloomberg Barclay’s Aggregate bond index is up 2.2% in July, its year-to-date return is 1.7%, and its one-year return is 5%. As you can see, all the major market indexes are up double digits, and the bond index drags very far behind.
The financial markets sold off dramatically this past Monday, with the Dow Industrial Average down over 1,000 points. As expected, there was major panic and many phone calls from concerned clients who expressed outrage. The single question that kept coming up was – Why don’t we just get out now and get back in when it is lower? This is what we call “market timing”, and it is a strategy that no one has been able to successfully master in the history of financial investing. It is important to remember that getting out is simple, but getting back in is hard. The critical question is - when do you know the market has bottomed out, and when do you know it is safe to return? Based on my history of investing, I would argue that it does not matter, and market timing is a fool's game that no one is qualified to master. Let me illustrate:
When I began to think about opening my own investment company, I studied long and hard to prepare for that opening. Unfortunately, in 1987, we had the infamous Black Monday. On that terrible Monday, the Dow Jones industrial average dropped from 2,300 to roughly 1,700, a 508-point decline in one day. That market sell-off of 22.6% was achieved in a single day. The market sell-off that recently occurred was 3% and was hardly a bump in the long road compared to the Black Monday incident. What happened after the sell-off in 1987 is very important so I will explain.
The sell-off of 1929 is another example of a severe sell-off in the history of investing. That sell-off was extremely catastrophic due to the misplaced actions of the government in 1929. Rather than loosening financial controls, they tightened them. In 1929, you could leverage 90% of your portfolio. Therefore, you could buy $10,000 of stock with only a $1,000 investment. This highly leveraged atmosphere in buying stock became one of the major causes of the fall. When the market fell over 20% in 1929, you were essentially bankrupt if you had $9,000 in debt on your $10,000 stock, now worth only $8,000.
There were many rumors of people jumping off buildings and committing suicide due to the financial plight this caused. More importantly, this sell-off and ultimate financial downturn in 1929 led to the lengthy decade-plus Depression in the United States. The 1929 crash on the stock market was a severe contraction of the economy, which caused irreparable damage. We all know the history of the 1930s when the unemployment rate was 25% of the working population. It was not until the U.S. entered the fight of World War II in 1941 that the economy turned around as the government was spending money to build military armaments—that action in the economy put an end to the Depression in 1941.
Compare that to the 1987 crash, which was as bad as the previous example. The notable difference is that, even though the crash significantly damaged the net worth of Americans, the government immediately freed up capital and flooded the financial system with cash. I recall even the infamous unqualified Dr. Greenspan assuring the public that there was no need to sell their stocks since he assured them that there was plenty of liquidity in the system. Given the fast actions of the Federal government at that time, 100% of the losses in 1987 were fully recovered within two years due to a rising stock market.
More importantly, this increase in liquidity in the financial system added to a significant boom in the U.S. economy during the 1990s; business was good, inflation was low, and the government was controlling its spending. You may even remember President Bill Clinton was concerned that the U.S. budget would have a surplus during his presidency and how they would save that money for the future assurance of Social Security. Compare that to today, where the deficit will exceed $1 trillion for as far as anyone can see.
As you can see, the difference between the 1929 incident and the selloffs of 1987 were substantially different. This is the lesson I received when I began my investment firm in 1990; it did not make any difference whether you tried to time the market. Recall that the 1987 market fell off to a level of roughly 1,700. Today, that same index is approximately 39,497. So, the question that you would have to ask yourself as an investor is, would it make any sense at any time to get out of the market and later get back in, or were you better off riding out the fluctuation in the market? The answer is crystal clear: trying to time the stock market is a foolish game that even the so-called experts cannot master.
When I launched the investment company in 1990, the world was different from an investment standpoint. I have looked back at some of my writings from that time, and you had to evaluate the most influential companies at the time. People forget companies such as Bethlehem Steel, Eastman Kodak, Goodyear, Sears and Roebuck, IBM, and the most powerful of all, General Electric. These were the “blue chips” of investing at that time. How quickly have these mighty giants fallen?
When I say there is no way to time the market, I do not mean that you should not go out and seek other ways to invest your capital. If you had invested in these companies mentioned above over the last 35 years, likely, your retirement funds would be close to wholly depleted. You must continually evaluate new investments and how those fluctuations affect your long-term goals. Unfortunately, too many people invest in a specific stock or mutual fund and forget it.
I wish I could tell you how often clients come into my office and have no idea what the balance of their 401(k) plan is. In many cases, I ask them to guess their balance, and they cannot even do that. If you are not aware enough to even know your balance, I think that is saying you are not keeping up with your investments.
During my investment career, I have seen unbelievable companies conceptualized and introduced into the market. People forget that Amazon was founded only in 1994 and is now the most powerful retailer in the world. Tesla Motors, the first producer of an all-electric vehicle, was not even on the radar until the turn of the century. Once again, Facebook, now Meta Platforms, was not even a concept in Harvard graduate Mark Zuckerberg’s mind. This idea was not executed until 2004 and is now a multi-national tech conglomerate. The most interesting is NVIDIA, an artificial intelligence leader founded in 1993.
So, where do we stand with the so-called “Magnificent Seven?” If you go back and compare the two things that move stocks, the most important is earnings. During the first quarter, Microsoft earned a $22.2 billion net profit, Google earned a $23 billion net profit, and Apple earned a profit of $21 billion. During this same time, General Electric earned a profit of $1.2 billion, IBM had a profit of $1.8 billion, and the one-time most profitable company of all in our lifetime, Exxon, earned a profit of $9.2 billion. As you can see, the rate of returns brought by the Magnificent Seven is many times higher than the old blue chips, and, of course, deserves a higher rating. Companies are valued based on three essential components: the economy, earnings, and interest rates. If you looked at earnings alone, the Magnificent Seven’s stocks would continue to be valued higher than the old blue chips, which today are literally an afterthought.
Compared to the 1987 and 1929 major market crashes, the sell-off last Monday of 1000 points was virtually immaterial. How do you compare a sell-off of over 20% with a one-day sell-off of only 3%? The most important consideration was that by the end of the week, that 1000-point deficit was eliminated, and the week ended virtually unchanged.
Many of the questions I received this Monday related to what caused the sell-off. One of the principal reasons quoted was that the soft employment report of the previous Friday had scared people into believing we were falling once again into recession. Even though the evidence was overwhelmingly against a recession, you cannot keep the people on Wall Street from discussing this issue. It seems like all the famous Wall Street forecasters always have recession on the tip of their tongue.
One of the reasons why they continue to harp to the public about recession is because the stock market forecasters who correctly predict the direction of the market become instantly famous. Those advisors who were correct in predicting that the market would crash in 1987 became investment superstars. No one mentioned that they may have been wrong multiple times, but they were right this time, and the public praised them. Every time a stock market sell-off occurs, the financial news parades out the same predictors of “gloom and doom” that we always hear.
Often, clients will send me those articles and ask me to comment. In many cases, these people have been predicting recession almost continuously for the last 40 years. Even a broken clock is right twice a day, and eventually, they may get it correct. But where do we stand today regarding recession and the future direction of interest rates? Let me give you the good news later.
One of the principal reasons for the sell-off last Monday related to the “carry trade” with the Japanese yen. Often, investors do not understand the terms Wall Street throws around, but the concept is quite simple. Up until last week, you could borrow money in Japan at virtually zero interest. If you could borrow substantial sums of money at zero interest and invest that money in U.S. equities or treasury bonds, you could make the difference between whatever these investments earned and the basic cost of the interest, which is zero. That is why it is called a “carry trade.”
However, all that changed the previous week when the Bank of Japan decided to increase interest rates. Suddenly, that trade was no longer profitable because you now had to pay interest on the loans in Japan based on your investments in the United States. Therefore, your typical hedge funds began immediately unwinding those transactions by selling stocks and paying off the loans to Japan. By doing so, yes, you are accomplishing the reduction of your debt, but you are also converting U.S. dollars into yen which in turn strengthens the yen and lowers the dollar's value. In any case, it is a bad situation if you borrow yen and pay it back in dollars, so the best action plan is to unwind the trade and get out of the entire transaction. By the end of the week, this trade had been almost reversed, and therefore, the carry trade likely did all the damage it would do.
One of the major reasons I have little concern about the market's future direction is the most crucial component of interest rates, the economy, and earnings. As we finish the earnings reports for the second quarter of 2024, we note that they are higher than they were this time in 2023. There are also projections that earnings may go up as much as 20% over the subsequent 12-month earnings. If interest rates go down, earnings will clearly go higher.
Even though the so-called experts on Wall Street are calling for a recession, the evidence is quite substantial in the other direction. The GDP for the second quarter of 2024 was reported at 2.8%. The Atlanta Federal Reserve Bank is now projecting the GDP for the third quarter of 2024 at 2.9%, and the Federal Reserve projects the GDP in the fourth quarter to be greater than 2.5%. None of the major forecasters are projecting a recession anytime soon.
As I have written numerous times in these postings, we wanted the economy to slow down. As a byproduct of that slowdown, you would almost assuredly see unemployment rise. Interestingly, the unemployment rate went up to 4.3% during July, but the labor force continued to expand, and many believe that this expansion was due to immigration. I guess if you have basic open borders and anyone who wants to can come into the United States and work, you would be surprised if labor participation ever went down. However, we wanted a slower economy and the negative aspects of higher employment because it would force the Federal Reserve to cut interest rates, which are desirable for most businesses.
We now almost have a guarantee from the Federal Reserve that they will cut interest rates at their September meeting, and more likely than not, they will also cut interest rates again before the end of the year. People do not realize the effect that lower interest rates would have. Everyone knows that lower interest rates would positively impact real estate, but many do not realize how vital lower interest rates are to new car sales, credit card payments, and any revolving finance arrangements. The lower the interest rates, the more money is freed for consumers to buy goods, increasing the gross domestic product.
So, we have the absolute trifecta of good news for future stock prices. We have earnings that are growing, interest rates that are falling, and a solid economy. You cannot ask for anything better than higher stock prices. That, of course, does not mean you will not see volatility. As long as the traders continue to pursue their theory of recession, you will have one day of significant selloffs and one day of major gains. It means absolutely nothing when it comes to long-term investing, and it is best to ignore the market's wild fluctuations. I have learned, and this firm has learned over the last 35 years, that you are much better off fully invested times than trying to time the market.
The major sell-off in the markets that occurred in 2022 was related to the Federal Reserve increasing interest rates. At that time, the Federal Reserve announced that it would raise interest rates to slow down inflation, which had reached an extraordinarily high level of 9%. Make no mistake, that inflation was directly attributable to the administration flooding the economy with cash long after it needed no support. However, due to the high inflation and the Federal Reserve’s slow reaction, they needed to increase interest rates, which they did almost monthly.
One of the great axioms of all stock market investing is that if the 10-year treasury bond was inverted from the two-year treasury, that almost always indicated recession. I know it is a complex concept for the average layman to understand, but all that means is that if the two-year treasury is higher than a 10-year treasury, it likely connotes a future recession. The concept is supported by the fact that if interest rates are high in two years but lower ten years out, that likely means that you will have a recession in the short term since rates would normalize ten years out.
The so-called experts screamed from the highest mountain that this inverted bond yield would almost assuredly create a recession in 2022 and 2023, and you would have no choice but to get out of stocks. Unfortunately, 2022 was a terrible year for the stock market due to these projections of the upcoming recessions. But interestingly, after almost two years of the bond yield being inverted, there is no sign of recession even today. Also, this inverted bond yield has come very close to breaking even once again. Today, the two-year treasury is 4.057%, and the 10-year treasury is 3.94%. They are close to once again becoming un-inverted. That indicates that inflation is subsiding since there is no reason to take a 10-year treasury at 3.94% if inflation is truly at 3% or higher.
One of the things I hear on a regular basis is why we should not just invest in money market accounts that pay greater than 5%. You should consider that today, a one-month treasury is paying 5.373%, but a two-year treasury is paying 4.057%. What that means is that interest earned by money market accounts will almost assuredly fall in the future, and that 5% rate is clearly not guaranteed.
I have never really understood why investors do not invest in high-level securities if they are that uncomfortable with investing. Why would you not buy a utility stock that pays as much as a money market account and has the potential for appreciating when your money market assets cannot appreciate and will likely fall?
In Dr. Jeremy Siegel’s most recent edition of “Stocks for the Long Run”, he has reported that over the last 30 years, stocks have had an economic return after inflation of 6.5% - 7%. Remember, this is an after-the-inflation calculation. While you may be able to get a treasury bond on a 10-year basis at 4%, after inflation, that return does not look as attractive.
His explanation is an interesting one. He says, “Although stocks are the most volatile asset class in the short run, they are the most stable asset class in the long run.” He points out in his book that all other asset classes, including bonds, gold, and real estate, cannot even match the actual return of diversified publicly traded equities. Once again, that supports our theory that trying to time the market is a fool’s game, and you are best to stay invested at all times.
This is an excellent time to meet with us between now and the end of the year. It is also a great time to put idle cash to work. We would love to discuss your financial future and your investments going forward.
As always, the foregoing includes my opinions, assumptions, and forecasts. It is perfectly possible that I am wrong.
Best Regards,
Joe Rollins
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| Bill Bewley listening politely as one of the locals proclaims that one day he’s going to be a real boy. |
This week, the financial markets weathered a significant sell-off; a familiar sight that often triggers panic. However, by the end of the week the indexes had rebounded, showcasing the remarkable resilience of the market. I want to delve into a significant sell-off in 1987 and 1929 and the lessons we learned, shaping our approach to such issues since then. I also want to discuss why the sell-off happened last Monday and why it is unlikely to be repeated.
 |
| Interestingly, “al fresco” in Italian slang refers to prison - not dining outdoors. |
The Standard & Poor's Index of 500 Stocks ended up being 1.2% for the month. Its year-to-date returns are 16.7%, and its one-year return is 22.2%. The Nasdaq composite was down marginally 0.7%, but it is up 17.7% year-to-date, and its one-year return was 23.7%. The Dow Jones Industrial Average is up 4.5%, bringing the year-to-date up to 9.5%, and the one-year return is 17.2%. The Bloomberg Barclay’s Aggregate bond index is up 2.2% in July, its year-to-date return is 1.7%, and its one-year return is 5%. As you can see, all the major market indexes are up double digits, and the bond index drags very far behind.
 |
| Caroline Schultz bringing home the gold in the backstroke + butterfly for the Ansley Golf Club. |
When I began to think about opening my own investment company, I studied long and hard to prepare for that opening. Unfortunately, in 1987, we had the infamous Black Monday. On that terrible Monday, the Dow Jones industrial average dropped from 2,300 to roughly 1,700, a 508-point decline in one day. That market sell-off of 22.6% was achieved in a single day. The market sell-off that recently occurred was 3% and was hardly a bump in the long road compared to the Black Monday incident. What happened after the sell-off in 1987 is very important so I will explain.
 |
| Nothing like celebrating your 21st in Tuscany– Happy Birthday, Savvy! |
There were many rumors of people jumping off buildings and committing suicide due to the financial plight this caused. More importantly, this sell-off and ultimate financial downturn in 1929 led to the lengthy decade-plus Depression in the United States. The 1929 crash on the stock market was a severe contraction of the economy, which caused irreparable damage. We all know the history of the 1930s when the unemployment rate was 25% of the working population. It was not until the U.S. entered the fight of World War II in 1941 that the economy turned around as the government was spending money to build military armaments—that action in the economy put an end to the Depression in 1941.
 |
| Artie Macon and Liz Mercure enjoying a moment of bliss in Tuscany. |
More importantly, this increase in liquidity in the financial system added to a significant boom in the U.S. economy during the 1990s; business was good, inflation was low, and the government was controlling its spending. You may even remember President Bill Clinton was concerned that the U.S. budget would have a surplus during his presidency and how they would save that money for the future assurance of Social Security. Compare that to today, where the deficit will exceed $1 trillion for as far as anyone can see.
 |
| Love and laughter in Venice - Kathy and Randy Wittman |
When I launched the investment company in 1990, the world was different from an investment standpoint. I have looked back at some of my writings from that time, and you had to evaluate the most influential companies at the time. People forget companies such as Bethlehem Steel, Eastman Kodak, Goodyear, Sears and Roebuck, IBM, and the most powerful of all, General Electric. These were the “blue chips” of investing at that time. How quickly have these mighty giants fallen?
 |
| Lloyd and Laura King savoring a romantic evening in Tuscany. |
I wish I could tell you how often clients come into my office and have no idea what the balance of their 401(k) plan is. In many cases, I ask them to guess their balance, and they cannot even do that. If you are not aware enough to even know your balance, I think that is saying you are not keeping up with your investments.
 |
| “Three coins in the fountain!” Cousin adventures in Rome at Trevi Fountain - Ava and Savvy |
So, where do we stand with the so-called “Magnificent Seven?” If you go back and compare the two things that move stocks, the most important is earnings. During the first quarter, Microsoft earned a $22.2 billion net profit, Google earned a $23 billion net profit, and Apple earned a profit of $21 billion. During this same time, General Electric earned a profit of $1.2 billion, IBM had a profit of $1.8 billion, and the one-time most profitable company of all in our lifetime, Exxon, earned a profit of $9.2 billion. As you can see, the rate of returns brought by the Magnificent Seven is many times higher than the old blue chips, and, of course, deserves a higher rating. Companies are valued based on three essential components: the economy, earnings, and interest rates. If you looked at earnings alone, the Magnificent Seven’s stocks would continue to be valued higher than the old blue chips, which today are literally an afterthought.
 |
| A tavola non si invecchia – Italian Proverb |
Many of the questions I received this Monday related to what caused the sell-off. One of the principal reasons quoted was that the soft employment report of the previous Friday had scared people into believing we were falling once again into recession. Even though the evidence was overwhelmingly against a recession, you cannot keep the people on Wall Street from discussing this issue. It seems like all the famous Wall Street forecasters always have recession on the tip of their tongue.
One of the reasons why they continue to harp to the public about recession is because the stock market forecasters who correctly predict the direction of the market become instantly famous. Those advisors who were correct in predicting that the market would crash in 1987 became investment superstars. No one mentioned that they may have been wrong multiple times, but they were right this time, and the public praised them. Every time a stock market sell-off occurs, the financial news parades out the same predictors of “gloom and doom” that we always hear.
 |
| Teri, Bill, Savvy, Joe, Randy and Kathy at St. Mark’s Square in Venice |
One of the principal reasons for the sell-off last Monday related to the “carry trade” with the Japanese yen. Often, investors do not understand the terms Wall Street throws around, but the concept is quite simple. Up until last week, you could borrow money in Japan at virtually zero interest. If you could borrow substantial sums of money at zero interest and invest that money in U.S. equities or treasury bonds, you could make the difference between whatever these investments earned and the basic cost of the interest, which is zero. That is why it is called a “carry trade.”
 |
| Just you, me and Venice! - Teri Hipp and Bill Bewley |
One of the major reasons I have little concern about the market's future direction is the most crucial component of interest rates, the economy, and earnings. As we finish the earnings reports for the second quarter of 2024, we note that they are higher than they were this time in 2023. There are also projections that earnings may go up as much as 20% over the subsequent 12-month earnings. If interest rates go down, earnings will clearly go higher.
Even though the so-called experts on Wall Street are calling for a recession, the evidence is quite substantial in the other direction. The GDP for the second quarter of 2024 was reported at 2.8%. The Atlanta Federal Reserve Bank is now projecting the GDP for the third quarter of 2024 at 2.9%, and the Federal Reserve projects the GDP in the fourth quarter to be greater than 2.5%. None of the major forecasters are projecting a recession anytime soon.
 |
| “Partners in Wine” Liz, Randy and Joe conducting a happiness check in Italy |
We now almost have a guarantee from the Federal Reserve that they will cut interest rates at their September meeting, and more likely than not, they will also cut interest rates again before the end of the year. People do not realize the effect that lower interest rates would have. Everyone knows that lower interest rates would positively impact real estate, but many do not realize how vital lower interest rates are to new car sales, credit card payments, and any revolving finance arrangements. The lower the interest rates, the more money is freed for consumers to buy goods, increasing the gross domestic product.
 |
| Road Trip Warriors Ava, Savvy, Kathy, Dakota and Teri, the women of Tuscany |
The major sell-off in the markets that occurred in 2022 was related to the Federal Reserve increasing interest rates. At that time, the Federal Reserve announced that it would raise interest rates to slow down inflation, which had reached an extraordinarily high level of 9%. Make no mistake, that inflation was directly attributable to the administration flooding the economy with cash long after it needed no support. However, due to the high inflation and the Federal Reserve’s slow reaction, they needed to increase interest rates, which they did almost monthly.
 |
| Reid and Caroline cruisin’ around NYC – a city built on dreams and determination! |
The so-called experts screamed from the highest mountain that this inverted bond yield would almost assuredly create a recession in 2022 and 2023, and you would have no choice but to get out of stocks. Unfortunately, 2022 was a terrible year for the stock market due to these projections of the upcoming recessions. But interestingly, after almost two years of the bond yield being inverted, there is no sign of recession even today. Also, this inverted bond yield has come very close to breaking even once again. Today, the two-year treasury is 4.057%, and the 10-year treasury is 3.94%. They are close to once again becoming un-inverted. That indicates that inflation is subsiding since there is no reason to take a 10-year treasury at 3.94% if inflation is truly at 3% or higher.
One of the things I hear on a regular basis is why we should not just invest in money market accounts that pay greater than 5%. You should consider that today, a one-month treasury is paying 5.373%, but a two-year treasury is paying 4.057%. What that means is that interest earned by money market accounts will almost assuredly fall in the future, and that 5% rate is clearly not guaranteed.
 |
| Checking out the beautiful St. Patrick's Cathedral in New York! |
In Dr. Jeremy Siegel’s most recent edition of “Stocks for the Long Run”, he has reported that over the last 30 years, stocks have had an economic return after inflation of 6.5% - 7%. Remember, this is an after-the-inflation calculation. While you may be able to get a treasury bond on a 10-year basis at 4%, after inflation, that return does not look as attractive.
His explanation is an interesting one. He says, “Although stocks are the most volatile asset class in the short run, they are the most stable asset class in the long run.” He points out in his book that all other asset classes, including bonds, gold, and real estate, cannot even match the actual return of diversified publicly traded equities. Once again, that supports our theory that trying to time the market is a fool’s game, and you are best to stay invested at all times.
This is an excellent time to meet with us between now and the end of the year. It is also a great time to put idle cash to work. We would love to discuss your financial future and your investments going forward.
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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