I Are a Capitalist

A headline in the Wall Street Journal this week read: "401(k)s Are Minting Millionaires." The article explained that rising stock market prices over the past three years have created hundreds and thousands of "moderate millionaires." Money manager Fidelity, for example, reported that 654,000 of their 401k clients had balances over 1 Million. Benefits manager Alright reported that 3.2% of more than three million accounts tracked had balances over 1 Million. T. Rowe Price reported that the number of  retirement accounts over 1 Million had doubled from 2022 to 2023. Finally, investment giant Vanguard reported that of the millions of plans it administers, a record 88% were invested in the stock market.

A table in the article indicated that even the staid Dow Jones Industrial Average (DJIA) had grown over 40% in the past three years. It is not hard to imagine that the number of plans with balances in the 500,000 to 1,000,000 range have grown accordingly, and that these younger people will also be millionaires by the time they retire.

In an encyclical letter written shortly after he became Pope. the late Pope 

Francis bemoaned income inequality and 'trickle down economic theories," but still said:  

“It is not the task of the Pope to offer a detailed and complete analysis of contemporary reality, but I do exhort all the communities to an “ever watchful scrutiny of the signs of the times.”

As an ordinary Catholic I would like to offer an anecdotal and incomplete analysis of the signs of the times based on my own lifetime experience. 

I have to confess that I am a Capitalist. I even remember the year I became a Capitalist. In 1965 I was hired, right out of graduate school, as an Instructor to teach History at Sacred Heart University, a small, recently opened institution of higher learning in Fairfield, Connecticut. 

Sacred Heart could hardly be called a university in those days. It was a small liberal arts college with the distinction of being the only Catholic college in the country staffed and run entirely by laymen and women. When I arrived the school was only in its third year of existence and the faculty was still in the process of formation.

Anyway, a few weeks after classes started the Business Manager of the school approached me to ask if I wanted to sign up for the fledgling school’s retirement plan. He explained that if I agreed to allocate a small percentage of my pay toward retirement, the university would match my contribution. 

My starting salary back in 1965 was about $6000 and I had a wife and one small child. Retirement was the last thing on my mind. Nevertheless, it seemed like a good deal especially since the university would match it. If I reduced my pay by 6% or $30 per month, the university would add that much to my account. Because it was a pre-tax contribution, the reduction in take home pay would only be about $25 per month.

After I agreed to sign up, the Business Manager told me that I would have a choice of where my small contributions would be invested. Sacred Heart University had joined with the great majority of colleges and universities in the country to utilize the services of the Teachers’ Retirement and Annuity Association (TIAA) to administer and manage its retirement plan. The university would deduct the contribution and send it along with their matching contribution to TIAA where it would be invested as I chose. 

At that time, there were only two investment choices. The first was a fixed or guaranteed account like a bank account. The principal in the account was guaranteed by the insurance company and it would earn a fixed rate of interest. The second option was a variable account where my contributions would be invested in a diversified portfolio of common stock. In this account, there were no guarantees. The principal value would fluctuate according to the vagaries of the stock market, and there could be no predicting what the actual rate of return would be.

Like the majority of teachers I elected to split my retirement equally between the fixed and variable account. I was not a student of finance or the stock market, and just decided to do what most others seemed to be doing. I had no idea that in electing to put half in the variable account that I was becoming a Capitalist.

The variable account was a relatively new creation. It was a mutual fund but since it was run by an insurance company, it was called a variable annuity. After years of lobbying TIAA had finally convinced the Government to allow insurance companies to get into the booming mutual fund business. TIAA’s variable annuity fund was called the College Retirement Equity Fund (CREF), and it would in time become one of the largest pools of investment dollars in the world.

When my little contribution went into CREF each month, I became a part, although very small, owner of practically every major company in the USA. Whatever their political feelings or philosophy, thousands and thousands of other college teachers throughout the country were also becoming Capitalists. We all were becoming owners of a slice of the American pie. Moreover, the government agreed not to tax our contributions or their earnings until we retired.  

Over the ensuing years the features of this type of retirement plan would be extended to a larger and larger segment of American workers. Self-employed individuals were allowed to use so-called Keogh plans. Corporations were allowed to set up tax favored 401k plans for their employees. Finally, the creation of IRAs enabled practically every American to have a stake in the American economy.

It’s true that few of us will have the income or assets of Rock stars like Taylor Swift, TV personalities like Oprah, or athletes like LeBron James. But more than anywhere else in the world, we do have the opportunity to acquire and keep property. We can even buy and sell shares in the companies we work for.

 

Trickle down economics may be an odious theory but I don’t call what has gone on in America in the past sixty years trickle down economics. It is something else and whatever you call it, it has worked to raise the standard of living in this country to the highest that has ever been seen in the world. Other countries have an emigration problem. Only we seem to have an immigration problem.

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Note: After seven years I left Sacred Heart University in 1972 at the age of 33. At the time, my retirement balance was about $10,000, but the only way I could get my hands on the money was to take a lifetime monthly income. Fifty three years later I am still receiving checks. The annual payout from the fixed account is about $500, and the payout from the variable account is now over $2000.

Stock Market 2025

 

    

 

 

I write this post over the weekend after two days of alarming declines in the stock market apparently due to President Trump’s imposition of new tariffs. I do not know whether the market will continue to sink on Monday or rebound. But I thought it might be a good idea to look at recent market performance and perhaps draw some conclusions. Let’s take a look at some specific examples of what has happened over the past five days, over the past 12 months, and over the past five years.

 

Here are the figures for the three most popular market averages over the past five days, the past 12 months, and over the past five years. 

 

The Dow Jones Industrial Average is down about 8% over the past 5 days, and down 1% over the past year. Despite the recent decline, it is up 82% over the past 5 years, an average of about 16% per year. Not bad! The broader Standard and Poor 500 index is down about 9% over the past 5 days, and down 1% over the past year. Despite the recent decline, it is up 103% over the past 5 years, an average of over 20% per year. The tech heavy NASDAQ index is down about 10% over the past 5 days, and down 3% over the past year. However, it is still up 111% over the past 5 years, even better than the other averages.

 

Here are performance figures of some individual stocks.

 

Apple is down about 14% over the past 5 days, but still up 14% over the past year. Over the past 5 years it is up 212%, an average of over 40% per year.

 

Retailer Costco is down only 1% over the past 5 days, but still up 30% over the past year. Over the past 5 years it is up 218%, an average of over 40% per year. Retailer Walmart is down only 2% over the past 5 days, but still up 40% over the past year. Over the past 5 years it is up 109%, an average of about 20% per year.

 

Tech giant NVIDIA is down 14% over the past 5 days, but still up 10% over the past year. Over the past 5 years it is up a whopping 1447%, an average of almost 300% per year. Tesla, despite the systematic campaign against Elon Musk, is down only 9% over the past 5 days, but still up 40% over the past year. Over the past 5 years it is up 648%, an average of over 120% per year.

 

Major utility Southern Company is down 2% over the past 5 days, but still up 27% over the past year. Over the past 5 years it is up a respectable 77% an average of about 15% per year, not bad for a utility. ATT (T) is down only 5% over the past 5 days, but still up 52% over the past year. However, it is only up 28% in the past five years, an average of about 5% per year. In the past year “T” has made a remarkable comeback.

 

It would appear that ordinary people whose 401k or IRA is invested in index funds or individual stocks are still way ahead of the game whether they are approaching retirement or not. The biggest mistake that people can make is to change their investment strategy as they approach retirement. These days most people’s retirement years will be longer than their working years. Investments for retirement should be long term since you will need the income for decades. 

 

For those worried about tariffs and inflation, at least the price of stocks has gone down in the past week. As I said at the outset of this post, I do not know what will happen next week in the market, but sooner or later the computers programmed to buy and sell at certain levels will start buying as prices decline, just as they have been selling and taking profits after five years of gains.

 

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I Lose My Job

Many people today are worried about losing their jobs, especially those with government jobs. In his recent speech to Congress, President Trump read a long list of wasteful and unnecessary spending on the part of the federal government and promised significant cuts. Even state and local government employees are worried since the loss of Federal grants might cause them to lose their jobs.

I know from experience that it is a hard thing to lose your job. Back in 1972 I lost my job as an Assistant Professor of History at a small Catholic college in Connecticut. The college had only come into existence ten years earlier as an experiment in Catholic higher education. It was to be run entirely by lay people although the local bishop would still head the Board of Directors. In addition, there would be no dorms, and the students would all be commuters or day hops. 

Initially, the school flourished as students and parents took advantage of the low cost. Also, during the Vietnam war many young men enrolled to avoid the draft. However, by 1972 the war was winding down and enrollment was dropping. As a result, administration decided to cut costs by trimming the faculty and did so by declining to grant tenure to anyone eligible that year.

Seven of us were denied tenure that year. Tenure is an unfamiliar concept to most people. For academics, it meant that once you receive tenure, it was almost impossible to lose your position thereafter. You have a job for life. In effect, the seven years I had been teaching there were a probationary period. 

I did have some paranoia about my dismissal. I thought that the administration had decided to terminate seven people just to get rid of me since I was the elected head of the faculty association. In academe it was not called a union, but it had some resemblance although there was no collective bargaining. I had also been overwhelmingly elected to the Faculty Senate during the years of student unrest that accompanied the increasingly unpopular war in Vietnam. 

Looking back now, I can see that while administrators might have been glad to see me go, I did not have a strong case for tenure. I was not a popular teacher since I had a reputation of being a hard grader. As an academic, it took seven years for me to complete my doctoral dissertation, and I had no publications to my credit. Coincidentally, I received my doctorate on the same day my tenure appeal was denied. 

So, in the Spring of 1972, I was thirty-three years old and out of a job. Complicating things was the fact that my wife and I had five small children ranging in age from 8 to 2. We had bought a small house in Fairfield with help from my father who provided the $2000 down payment. We lived from paycheck to paycheck and had only meager savings. Teaching jobs were nonexistent in the area, and we did not want to relocate our family.

I had to find work out of academe, but my doctorate made me virtually unemployable. Prospective employers would only laugh and say that someone with your education would not be happy or useful working for them. Eventually, the only employers interested in me were insurance companies always on the lookout for new agents who basically worked on a commission basis. No sales meant no pay. 

At that time, most academics looked down their noses at people engaged in business. Today, practically everyone goes to college to study business, but back in 1972 the business department at our school had only a few majors. Just as today, people in higher education tended to frown on those who worked for profit. Insurance agents were regarded as the lowest of the low in the business world, maybe just a notch above used car salesmen.

Nevertheless, I had no choice. I interviewed with a couple of companies but one seemed to have a novel approach. It was then among the leaders in the nascent mutual fund industry and offered low-cost life insurance as a supplement to mutual fund investing. I did fail their aptitude test that showed that I was an academic with no aptitude for sales. The office manager, whose contempt for academics matched mine for salesmen, informed me that he would not be able to take me on, but when I asked if I could borrow the study materials he had given me, he admired my persistence and immediately changed his mind. It was no skin off his nose since it was a commission only job. So, I became a salesman, a peddler of life insurance and mutual funds.

Needless to say, it was extremely difficult. Most new agents flunked out in weeks or months. The aptitude analysis was correct, but it only measured what I was and not what I could become. Only with the help and unflagging support of my wife, who went back to nursing, was I able to survive the first year and develop the knowledge, skills, and experience needed for success in this very competitive field. As the years went by, successful sales agents would morph into financial planners no longer dependent on commissions. Over the next 35 years I was able to build a very successful financial planning practice with hundreds of contented clients. 

In my case, losing my job was one of the best things that ever happened to me and my family.

 

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Stock Market Gains 2017

     

Kelly Evans on CNBC

Twice a week I go to a gym in a nearby Senior residential facility for a light workout. Most of the residents take exercise classes in the morning so when I go in the afternoon, I am virtually alone. I like to turn on the TV and watch the business news on CNBC for an hour. I like CNBC because it is much less political than Fox News, CNN, or MSNBC. Also, during the commercials the stock ticker keeps streaming at the bottom of the screen.

I usually watch “The Closing Bell” jointly anchored by Kelly Evans and Bill Griffith. It is a real plus that Evans and the other women on the show, while as attractive as those on the other cable news networks, do not have to expose their legs or show excessive décolletage. They are free to report the news and interview their guests without appearing as bimbos.

Usually the pace is rapid fire with guest panelists going back and forth in the limited time available. Evans and Griffith are intelligent and curious questioners who do a good job of keeping their guests to the point. Often, the panelists will disagree and it is apparent that no one has the proverbial crystal ball. Even when they marshal impressive statistics, it is obvious that these can be interpreted in different ways. One guest recently argued that the improved earnings of a company would likely cause its stock to drop in price.

Once in a while, a breath of truth will come through the torrent of words. Just the other day a panel was discussing how the proposed cut in the corporate tax rate would affect the airlines. One commentator suggested that the airline companies might use the tax savings to buy back their own stock to the benefit of stockholders. But the other panelist pointed out that the cut in the corporate tax rate will have little effect on the airlines because they don’t pay tax anyway. What! Even the anchors gasped. He went on to explain that the airlines had such large loss carryovers that they would not have any tax liability for years no matter what the rate.

I thought this observation was right on the money. It should be obvious that rather than give up 35% of their profits corporations have found ways to shelter those profits from high tax rates. One of those ways was to shift operations overseas to lower tax countries, a tactic that the lower rate is designed to make less attractive.

I think most of the opposition to tax reform comes from people who just hate President Trump and do not want anything he supports to be successful. The well to do progressives who hate Trump should ask themselves how Trump has actually hurt them. Has the country really gone to Hell since his election over a year ago?

So far this year the major stock indexes have gone up dramatically. The Dow Jones Industrial Average (DJIA) closed yesterday at 24504 up 24% so far this year. The tech heavy NASDAQ average has lagged the DJIA but still is up 17.64% this year, and the broad Standard and Poor’s stock average is up 19%.

I do not want to give President Trump credit for these gains although his critics will be quick to blame him if the market goes down next year. I suspect that the increase in stock prices has little to do with politics. The dramatic rise in the stock market began during the Obama administration and nothing that Trump or the Federal Reserve have done has impeded it.

In the first place, with returns on other investment being so low, where else have people been able to go to gain a decent return? Secondly, it would appear that the number of public companies is shrinking. We have high demand for stocks but the supply of eligible companies is getting lower. Whatever the cause, those who invest in the stock market do not seem to believe that the country is in bad shape after a year of Trump.

These stock gains have benefitted not just the rich but everyone. This year has seen record inflows of money into stock index and hedge funds. A large share of this money comes from pension funds. In effect, a pension fund that needs to average 8% a year has made two or three times that amount this year. Theoretically, it could just cash in and not make anything for another year or two.

People whose retirement savings are in 401k plans or IRAs have seen similar results. Anyone looking at their quarterly statement will see significant gains this year. The only problem is that their new contributions will buy fewer shares in their funds.

It could be argued that the poor do not share in these stock market gains but the poor paid very little tax under the present tax code, and will pay even less under the new. But business profits and stock market gains will allow well to do individuals to pay the taxes that shore up this country’s social service safety net.

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Tax Reform and Advertising

     

For most of my 36 years in the investment and insurance business it was my practice to send out little desk top calendars to my clients during the holiday season. As my financial planning practice grew the number of calendars increased to the point where I was sending out more than 500. The calendars were practically my only form of advertising.

Before the advent of the internet and cell phones, the calendars were a way to keep my name and contact information before my clients throughout the upcoming year. I suppose some clients just tossed them but many seemed to love them and even claimed they anxiously awaited the arrival of their calendars each year. Some even wanted more than one.

I was a self-employed financial advisor who had to pay for the calendars and the ever increasing postage out of my own pocket. However, the cost of the calendars and the postage was considered a legitimate business expense that could be deducted from my business income before taxes. Actually, the cost was lumped together with other business expenses like office rent, staffing costs, travel costs, and utility bills and then subtracted from my total income for income tax purposes.

So, if the calendars cost $1000 and I was in a 35% tax bracket, they would reduce my income tax bill by $350. If I was only in a 15% bracket, the calendars would only have reduced my tax bill by $150. From another perspective we could say that the calendars cost me $650 and that the rest was paid by the Federal government. Of course, the government never actually pays anything. Taxpayers actually subsidized my advertising.

This little example should give some insight into the potential impact that tax reform might have on the incredible amount of advertising that we are subjected to in the world of the media. It is impossible to open your computer or look at your phone without being subject to a barrage of ads. Every so-called “news” headline is just a come-on to view an ad and increase ad revenues. Even though we pay a subscription fee to watch TV on cable, a large percentage of what we see will be commercials.  

The ultimate is reached every year during professional football’s annual Super Bowl when advertisers will spend millions for a half-minute commercial. In last year’s game a 30 second commercial cost $5 Million dollars just for ad time. That expense does not include what must have been the incredible cost of making the commercial.

However, just like my calendars, the cost of these ads is a legitimate business expense. If a car or beer company wants to pay $5 Million for a Super Bowl ad, it can deduct that cost from its corporate income before paying corporate income taxes. If a corporation is in a 35% tax bracket, it will save $1.75 Million in taxes, a huge subsidy from taxpayers. Not only do we have to watch these ads as they pop up on our screens, we have to pay part of the cost.

Tax reform that reduces the corporate tax rate to 20% will actually reduce the subsidy paid by taxpayers for advertising and other business expenses. Former GE CEO Jeff Immelt always took an extra corporate jet with him on his travels just in case. I suspect that the expenses of both jets were considered legitimate business expenses by GE accountants.

Most large corporations have huge accounting and tax planning staffs that work hard to find expenses to offset income. Reducing the corporate income tax will not only make American businesses more competitive with the rest of the world, but it will also make them warier of foolish spending practices that are designed to just provide tax write-offs.

I don’t like to make predictions, but I will predict that if the corporate tax rate is reduced to 20%, there will be a major shake-up in the world of advertising, especially in the case of ad giants like Goggle and Facebook.

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