From the Desk of Joe Rollins
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| Ava and Josh are all “spruced up” for the holidays! |
It is hard to explain how good the month of November 2024 has been. Not only did the financial markets hit all-time highs, but there was also a new and better perception by the public that we are entering a growth cycle in the coming years as compared to the previous years. I have so many topics I would like to cover but will try to keep it limited to the most important ones.
I also want to do something particularly unusual for this posting. I want to give you the history of a 40-year client who recently passed away. I also want to discuss in detail DOGE (Department of Government Efficiency) and the importance that this agency will have for our future. I also want to get back to the explanation of wealth and the transfer of wealth to the next generation. And just to wrap up all those issues, I will have to discuss taxes, tariffs, and the difficult situation the current administration has left us.
Yes, I understand that this is a long laundry list of items, but there are things that I feel need to be said. Before I can get to those terribly interesting topics, I want to report on the excellent month of November. The Standard and Poor’s Index of 500 stocks had a great month during November, up 5.9%. This Index for the year is up 28.1% through November 30th, and its one-year return is an unbelievable 33.9%. The NASDAQ Composite was up 6.3% in November and is up 28.9% for the year 2024. Its one-year total return is 36.1%. The Dow Jones Industrial Average was up 7.7% in November and is up 21.2% for the year 2024 so far. The one-year return on this Index is 27.2%.
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No Musciano-Howard tree decorating is complete
without the help of Muzzy and Jennie! |
I always like to give you the Bond Index since it so vividly contrasts the return on equities. The Bloomberg Barclay’s Aggregate Index was up 1.1% for November and is up 3% for the year 2024. The one-year performance on this Index is 6.9%. Also, I want to point out that over the last 10 years, the Bond Index has had an average return of 1.5%. As you can see from above, the Equity Index is at or near 30% are greater for the one-year return, and the Bond Index is barely positive. Those who advised you that you should have a heavy concentration in bonds over the last decade have not provided you with a very positive service. Equity investing has been so much more profitable than bond indexing over the last decade, and we expect that trend to continue.
It was reported on Friday that the number of new jobs created by the U.S. economy was up 227,000 forthe month of November. This is a sharp rebound for the depressed numbers in the month of October, which was affected by the hurricanes and various strikes around the country. The only negative news in this otherwise positive report was that unemployment had slipped and had gone up from 4.1% previously to 4.2% now. The good news far exceeded the bad news in this report. Average hourly earnings were actually up 4% year over year from the previous year. For the first time, it is clear that earnings now are gaining faster than inflation. For many of the months in the previous year, inflation was running at 5% to 6% while the average earnings growth was only growing at 3%. Finally, that trend is starting to reverse, which allows the average family to enjoy greater discretionary cash flow.
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JD, Josh, Carter and Ava ready to cheer on Atlanta.
Fly Falcons, Fly! |
It does not look like the economy is slipping into a decline. The Federal Reserve of Atlanta is now forecasting the GDP growth in the fourth quarter of 2024 at 3.3%. Since we are already in the third month of the quarter, much of the information necessary to develop this forecast is now available. If, in fact, the economy does have this strong performance of 3.3%, it will indicate that the economy over the last few quarters has been growing, not declining.
With a new administration that is focused on growth, that is a good omen going into the year 2025. Also, we are seeing the broadening of investing away from the magnificent seven tech stocks into a broader return of a more balanced portfolio. As you can tell from the numbers above, the S&P 500 Index and the Dow Jones Industrial Index are now catching up with the tech-heavy NASDAQ Composite for the year. You cannot help but be excited about the potential for growth in 2025 and reflect on the excellent year we enjoyed in 2024.
If you think I am the only one who is positive about next year’s financial market performance, you would be incorrect. I looked up the projections of the major brokerage houses to see what they think 2025 would bring to the financial markets. JP Morgan Chase, Morgan Stanley, and Goldman Sachs project the S&P 500 will reach 6,500 by the end of next year. Today, that index is at 6,034, which would imply a gain of 7.7% over the next one-year period. However, it also does not include the dividend yield of almost 2%, making that total return in excess of 9%.
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| Reid and Caroline roasting on an open fire |
Other banks have even higher expectations. Barclays recently increased their price target to 6,600, while Bank of America and Deutsch Bank expect the benchmark index to hit 6,666 and 7,000, respectively. If these major brokerage houses are even close to correct, then 2025 looks like an excellent year. I am on board with these projections, and I think the indexes will close 2025 at roughly 6,600, plus the dividend yield for a total gain of roughly 12%. I guess I am not that great of a forecaster since I have forecasted the 2024 year to be up 10%, and it looks like it will close the year closer to 30%. I am very thankful for my very poor call on the ’24 performance.
In many of the postings, I have indicated that something is going on with the invested public that has never occurred before. You are seeing a buildup of wealth and a transfer of wealth, unlike any time in the financial past of the U.S. The substantial buildup of wealth and the subsequent passing down of that wealth to the next generation will forever change how investing is done in the future. How could you really compare what took place a decade ago with the results of today? With such a large concentration of money invested, it would take a substantial economic event to actually affect the markets. Every day, more and more money flows into retirement accounts, building up a larger base that would be very difficult to move in a negative reversal.
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| Joe enjoying dinner with his favorite people - Dakota, Ava, Carter and Josh |
You may think I made up this information, but it is based on hard facts. Fidelity Investments just recently announced that the average 401(k) that they manage was up 9.5% in the third quarter of 2024. Further, they indicated that they have 544,000 401(k) accounts that exceed $1 million out of the 24 million account balances they manage. It is assumed by most that there are roughly 100 million 401(k) balances currently active in the United States. If the Fidelity numbers are representative of the total, that means that there are currently over two million 401(k) accounts with balances over $1 million.
These numbers do not even come close to calculating the number of IRA balances exceeding $1 million. It is reported by Fidelity Investment that they have over 400,000 IRAs in excess of $1 million, and once again, assuming that they only have ¼ of all the assets, that is another 1.6 million IRAs with $1 million or greater in investments.
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| Evan and Alexis getting into the holiday spirit(s) at East Lake Golf Club! |
I give you all these boring numbers to point out the fact that never in American finance have so many investors invested this much money in the future of the American economy. Most of this money will never be consumed by the current contributor but is likely to be passed down to the next generation or maybe even the third generation. Never before in American finance has there been such an extraordinary transfer of wealth like the one that will occur over the next decade. This transfer of wealth to the younger generation will change everything about consumer spending and retirement savings. I do not know how anyone could see this as a negative, as it creates a stable economic environment for generations to come.
As I pointed out in the last posting, all of us should be concerned about the huge deficits run up by the current administration. When you look at the numbers, it is hard to believe that since 2020, the amount of National debt in the United States has increased by $13 trillion. In 2020, the U.S. debt was $23 trillion, and now it is $36 trillion. It is hard to fathom that the government would spend $13 trillion in only a four-year period and increase the national debt by 56% over such a short period of time.
As I pointed out in that posting, all is not lost in making this deficit whole. It is true we cannot cut spending enough to reduce this deficit, but we certainly could grow out of it. If the economy continues to grow, by its very nature, taxes will increase and maybe this growth will allow the deficit to be reduced. Hopefully, we now have an administration that is willing to take on the debt, try to balance the budget and reverse the negative trend that has gone on for the last decade.
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| Carter and Josh looking Merry + Bright! |
Frankly, I do not know how anyone could be anything other than excited about the new Department of Government Efficiency (DOGE). First off, you have two basic billionaires running this agency. It is their job to cut out expenses, and they have already identified over $500 billion of expenses that could be eliminated almost immediately. In addition, they will finally attack the ever-growing governmental employment and evaluate which employees need to stay and which need to go. It is even hard to believe that for the month of November, the government has hired over 30,000 new employees. It is time now for Federal employees to be ordered back to their offices, and those who are not contributing need to be eliminated. In my opinion, every American should encourage and desire the success of this brand-new governmental agency.
I read so much negative criticism about Elon Musk and I often wonder why people are so negative. I think we will one day look back on Elon and put him in the same category as Thomas Edison. Here is a man who invented essentially new industries that no one even considered. None of the major car manufacturers can make a profit on electric vehicles, but Tesla can. His companies have essentially put NASA completely out of business and have bankrupted the space division of Boeing. He is the wealthiest man in the world by a long shot, and how anyone questions his intellect is inconceivable to me. If he and Vivek Ramaswamy can make it anywhere close to the cost-cutting they are now projecting, they will have done a great service for Americans.
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| DeNay in Wonderland (Atlanta Botanical Gardens) |
There are so many negative things that the current administration has left us with. One of the weirdest items is that the mandates on electric vehicles have forced the major car manufacturers to produce electric vehicles at staggering losses. It has also forced these companies to lay-off employees due to the lack of profitability in selling electric cars. Only Tesla has succeeded in being profitable in its production. However, the mandates coming out of Washington have affected the private sector by imposing limitations on the cars they built and, therefore, the number of employees they have.
As pointed out above, during the last five years the Federal deficit has soared by $13 trillion. This trend cannot continue, and it must be satisfied. The combination of a growth policy and constrained spending could get the current budget under control but would do little to satisfy the accumulated debt. For reasons unbeknownst to economists, much of this debt has been financed as short-term debts. As everyone knows, the inverted bond yield has produced much higher rates for short-term debt than long-term debt. However, most of this debt has been financed with short-term debt, which has the highest interest rates. Once again, it is a bad omen for the future in that the cost of carrying this debt will be at higher, not lower, rates.
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| Mia and family making fun memories at Lake Arrowhead in Waleska, GA |
In addition, the current administration has drawn down the strategic petroleum reserve by roughly one-half. Part of this was designed to flood the U.S. market with oil and reduce the price of gasoline, affecting the cost of inflation. When the current administration took office in 2021, there were 638 million barrels of oil in the strategic petroleum reserve. Today, that number is 392 barrels. While the US now is the largest producer of oil in the world, this lack of a petroleum reserve could be important if a worldwide crisis were to occur, and we did not have the reserve to back up the war effort.
To the credit of the current administration, it has reduced undocumented immigration on the southern border substantially since the summer. For the month of October, there were 106,344 crossings. Contrast that with the previous October when there were 240,927 crossings. Why did they not do this three years ago? The number of crossings has gone down by one-half over that one-year period due to better supervision of the border crossings. I cannot imagine any American being satisfied with 106,000 crossings in only one month. If annualized, that means over 1.2 million undocumented crossings a year, and that must end in order to maintain any type of law and order in the United States.
I read so much about tariffs, and I wonder whether people view them just as vanilla increases in price. There is no question that tariffs increase prices since if you increase the cost of the product, the selling price to the public must go up. But there are many reasons why tariffs are imposed. The most important issue is the government's illegal subsidies for its products so that they are cheaper in the world market. There would be no question that China subsidizes their industries, making for an unfair advantage and a disadvantage for American workers and manufacturers. It would seem that no one should argue with tariffs on Chinese goods since they have been basically in place for the last seven years. Already the threat of tariffs to Mexico and Canada has resulted in a positive movement by these countries to improve immigration and the shipment of drugs. The question would be whether these tariffs ever go into existence or whether they are just a negotiating point. I think the latter.
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| Mal is making a list and chewing it twice… |
One of the things that never seems to be in these articles regarding tariffs is whether, in fact, the offending countries might come to the United States and establish manufacturing in the United States to overcome the tariffs. That would be very much a positive factor for U.S. employment since it would increase jobs and taxes and bring international operations to the employment of the U.S. This would be very much a positive thing for the U.S. economy.
I guess all of us got a little bit tired of hearing about taxes in the election and paying our fair share. It seemed like every other word out of politicians' mouths was to make the rich pay their fair share, and everything in America would be good. Basically, what they were saying is to give the Federal government more money, and we will distribute that money to whomever we so elect without any oversight by the public while spending this money. In fact, do the rich not pay their fair share today? The IRS documentation proves they do.
For 2022, the top one percent of the population, defined as anyone who makes greater than $663,000, pays 40.4% of every tax dollar in America. Even the smaller taxpayers between the top 1% and 5% pay a substantial portion in income taxes. There were about 6.2 million returns above $262,000 but below $663,000 in adjusted gross income. These people had 15.9% of the total earnings on all tax returns filed, but they contributed 20.6% of all income tax revenue. Their average tax rate was 18.5% on the first dollar and not on the first incremental dollar.
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| Some special ornaments we’ve received over the years |
All this sums up to the fact that the top 25% of all earners in the United States reported 69.9% of all income in 2022 but paid 87.2% of all income taxes. I am not sure what you define as being the fair share, but clearly the top 25% is paying virtually all the income taxes. It has been pointed out that if you confiscated every dollar earned by the top 25% of the highest-paid people in the U.S., it still would be an inadequate amount to fully fund the Federal deficit. Therefore, the solution to the deficit is not increasing tax rates but rather increasing the economy so tax revenues go up and reducing the substantial amount of wasted money that the Federal government now spends.
I want to give a short history about my client, Bill Battle. When I was playing basketball in Tennessee, the most important person in the state of Tennessee was the head football coach of the Tennessee Volunteers. Many say that he was much more influential than the Governor, which I would say was not even close. At the time when I went to college, the head football coach at Tennessee was Doug Dickey, but he resigned in 1970 to take the job at the University of Florida, and they promoted a little unknown assistant coach by the name of Bill Battle, who was 28 years old at the time. Bill has told me many times that his first salary as head coach at Tennessee was $37,000 annually which compares to current head coaches of major institutions making $10 million or more.
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| Two Greats - Paul “Bear” Bryant alongside Bill Battle |
Obviously, I knew Bill's name and had run across him several times in the athletic dorm, but he neither knew me nor did I really know him. As you know, Bill had a successful career in coaching the Volunteers, but his career ended when Bobby Majors was hired to replace him in 1976. You may have heard the famous story of the moving vans being sent to Bill's house unbeknownst to him and his wife, to encourage him to leave town. In fact, he did shortly leave Knoxville and moved to Selma, Alabama, to work for a window manufacturer there.
The story goes that Coach Bear Bryant (who Bill played for in the 1960s) wanted Bill to help him with his licensing and to organize the licensing prospects at the University of Alabama. Bill quickly learned that no one in Alabama knew anything about licensing, and currently, no one had any legal documents to prevent people from infringing on the trademarks. Bill saw this as an opportunity and quickly moved into licensing for all major universities over the next decade. Basically, the major universities were receiving no royalty income prior to Bill Battle’s involvement, and today, that is a substantial portion of their athletic budget. Bill moved his operation for licensing to Atlanta in 1982, and I first met him in 1985. At that time, only he and the family were running the business, and it had little financial impact. Bill went on to grow that company and sell it for over $100 million (public information). If you thought he would retire and disappear into the sunset, you were wrong.
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| Bear and Bill sharing a laugh |
When the athletic director of the University of Alabama suddenly died, they called on Bill to replace him – to which he obliged. He moved on to a remarkably successful career, winning multiple National Championships while he was there.
Bill recently passed away, and I look back on the 40-year relationship we had as a client and a friend. He was one of the most honest and respected businessmen you could ever run across. He recently finished his book before his death titled “The Master’s Plan.” Much of the book contains information regarding Tennessee football, but much of it is personal and important. I highly recommend it to those who have an interest in reading it. I guess we could all say that we are coming to the end of an era when clients have been around for 40 years. You could not have asked for a more enjoyable and impactful client than Bill Battle over the last four decades.
I keep reading in the paper all the negative implications of the appointee for the Department of Defense. Pete Hegseth. I had never heard of Mr. Hegseth until all this controversy came up. I read his resume, which indicated he had a lengthy military background and was a commentator on Fox News. I had never seen any of his Fox reports since they ran on Saturdays, and I really knew nothing about his military experience. So, when all the controversy came up, I decided to educate myself on the subject.
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| Client Steve Thompson came by to visit and hit the Buckhead Club with Joe |
In the last several weeks, I have read three of his books. I am extraordinarily impressed with his insight and his intellectual ability. I also cannot believe how candid he is in these books, and with the information that is so readily pointed out, there is a need to cut this spending in defense. One of the items that got my attention was the extraordinarily high level of the military. As he pointed out today, there are 44 four-star generals in the United States with absolutely no wars going on. With only a standing army of roughly 1.7 million people, the number of four-star generals has never been this high. If you compared it to World War II, when almost 5 million Americans were in the war effort, there were only six four-star generals for the entire conflict. You have to ask yourself why we would have so many four-star generals in the military today when there is not even a current conflict ongoing. Time for them to move on.
As pointed out in his books, there are so many cost savings that could occur in the military. All of us have heard about the exorbitant cost of things in the military process. It is now time to attack the budget of the military, cut back the top-heavy personnel no longer needed and make the military once again efficient for the future. There had been a major drawdown of military armaments sent to Ukraine for the war effort. It is now viewed by many that the military is underequipped, undertrained, and with too many leaders and not enough followers.
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| The love of family is the true magic of Christmas! |
I do not know how you feel about tackling the military and trying to bring efficiency to it, but the time is right. I am not sure he is the man for the job, but he is the only one that I have heard of who has expressed the interest, the desire, or shown the intellectual capacity to make this reduction. Now that we have an administration that is focused on growth, cutting expenses, and making the government more reflective of its people, Mr. Hegseth might just succeed, and I am going to give him a chance.
I recognize that this posting kind of rambles around on many subjects, and frankly, there are more topics I would like to cover, but due to its length, I will postpone those to a future posting. In summary, it has been a fabulous financial year, and I feel sorry for those investors who still have their money in cash. Also, I am aware that in January, virtually everyone could make an IRA or Roth contribution for that current year and should do so. 401(k) limits have gone up for 2025, and I fully expect to see Americans contributing more to their 401(k) and the wealth effect passing down from generation to generation. If you are not feeling good about how well your investments have performed over the last several years, then you just have not reviewed them recently. We highly encourage you to visit us and go over your investments and discuss your goals so that we can help you achieve those goals in the coming 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.
