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Sending a child off to school this fall? Here’s a few legal issues to keep in mind.

by Westray Veasey, J.D.

Do you have a child who has recently turned age 18?  If so, he or she is likely off to college, taking a gap year or working and living outside of your home.  Since you are likely paying your child’s tuition and insurance and claiming your child as a dependent on your tax return, it may surprise you that you no longer have access to your child’s health, financial or educational records.

In North Carolina as in many other states, once a child turns age 18, the child is considered an adult by law.  In addition, under the Health Insurance Portability and Accountability Act (“HIPAA”), the privacy of his or her personal health information is protected.  For you to be able to assist your young adult child with medical and financial decisions, whether he or she is incapacitated or simply needs your help, your child must give you express authority in certain legal documents:

  • A health care power of attorney gives someone the authority to make health care decisions for you and to receive information about your medical condition if you are incapacitated.  Some states may allow parents to consent to their adult child’s medical treatment, and in an emergency situation, a doctor may choose to convey critical information to an adult child’s parents if that is in the child’s best interests.  To be assured that you will be able to make health care decisions for your adult child in an emergency, however, your child should have a health care power of attorney.  North Carolina has a statutory form health care power of attorney, and the Secretary of State’s website has a link to a Word version of the form (health_care_power_of_attorney.pdf (  North Carolina has an online registry through the Secretary of State where you can upload your health care power of attorney.  A child’s registry login credentials can then be shared with parents and medical providers.
  • If it is desirable for you to be granted access to your adult child’s medical records and be given permission to consult with his or her medical providers, your child should also sign a HIPAA medical information release form.  The authority granted under a health care power of attorney to receive an adult child’s medical information only applies if the child is incapacitated.  Note that your child can stipulate which parts of his or her health records remain private.  Be advised that disclosure of a college student’s campus health clinic records may require an additional permission form.
  •  A financial power of attorney appoints someone to make financial and legal decisions for you.  If your adult child is comfortable appointing you as his or her agent under a financial power of attorney, you can assist your child with everyday matters such as paying bills, filing a tax return, signing a lease or managing an investment account, or you can take over all of your child’s financial matters should he or she become incapacitated.  Your child should be aware that a financial power of attorney can be used to allow parents to access education records (read: grades)!  North Carolina has a statutory form financial power of attorney.

While form health and financial powers of attorney and HIPAA authorizations can be found online, it is advisable for your adult child to engage an estate planning attorney to prepare and explain the various options and provisions in these documents, such as organ donation and end of life options in the health care power of attorney.  These documents are easy and relatively inexpensive to prepare.  Most states recognize powers of attorney validly signed in other states.  If your adult child calls North Carolina home but is temporarily residing in another state, your child should only need North Carolina powers of attorney, but your child’s attorney can confirm whether he or she should also have powers of attorney in the state of his or her temporary residence.  Similarly, if your adult child is studying or working abroad, you can consult with an attorney on whether any additional documents are needed to grant you permission to access your child’s financial and health records while in another country.

The next time your adult child comes home for a visit, discuss the importance of having these documents in place so that you can provide assistance when your child wants or needs it, and line up a consultation with an estate planning attorney who can discuss and prepare them.  You can assure your child that he or she retains control of the ongoing validity of these documents and can revoke or change them at any time.  And once you have all the right documents in place, make sure copies are readily accessible to both you and your child.

Monthly Market Dashboard: August

by M. Burke Koonce, III

31 August 2022

Current Conditions

After a buoyant July, markets turned lower in August, spooked by signals from the Federal Reserve that the specter of inflation would justify further monetary tightening. Markets darkened leading up to Fed Chairman Jay Powell’s remarks in Jackson Hole, WY last week, where the chairman made clear that the fight against inflation was far from over and basically acknowledged that Fed tightening was already causing the economy to slow.

While U.S. markets ended the month with just low-single-digit losses, the pain seemed worse because the month has started out strong. While the S&P 500 finished 4 percent lower for the month (total return), it was down 8 percent from its intra-month high on August 16. Bond yields, which move in the opposite direction of bond prices, rose steadily all month.

It would be an easy narrative to write that fears about persistent inflation caused stocks to move lower during the month, but it wouldn’t really be that accurate. While yields moved up, which one might expect as the market’s expectations for additional rate increases rose, the fear in the market seems to be more about the economy, which shows signs of slowing. Powell’s remarks seemed to drive home the reality that the Fed’s actions are already causing the economy to cool, and he sought to convince everyone that the central bank would continue to tighten as warranted, on which he seemed completely credible. But Powell seemed slightly less confident that the Fed is even winning the inflation fight at the moment, which was a little nettlesome, and his speech indicated he was girding for economic trouble. The gist of the message was as follows:

Restoring price stability will take some time and requires using our tools forcefully to bring demand and supply into better balance. Reducing inflation is likely to require a sustained period of below-trend growth. Moreover, there will very likely be some softening of labor market conditions. While higher interest rates, slower growth and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.

Pain? Did someone say pain? The VIX Index, which measures market volatility—a kind of risk proxy—spiked hard in the back half of the month, as traders reassessed risk. Of course, counterintuitively, a more volatile market is a more attractive market for long-term investors, though it can cause a little pain in the near term.

But meanwhile, what does near-term economic pain mean for markets? Well, as always, it’s complicated, and it seems especially complicated at the moment. Many of the world’s most successful hedge funds, staffed by “the best and the brightest,” are experiencing historically bad performance years, as economic signals collide and old models prove insufficient to predict the future amid a backdrop in which central banks are no longer pouring punch into the punch bowl. For years, central banks around the world were tasked to stimulate sufficient demand to meet the seemingly infinite supply curve, as globalization drove input costs further and further down. It’s a different deal entirely for a central bank to tamp down demand to rightsize it for constrained supply.

Globalization appears to be taking a breather at the moment, as companies focus more on building redundant systems and finding strangely scarce workers in the post-pandemic world. Rising rates tend to be a headwind for all asset classes, and a slower economy likely means lower corporate earnings. In equities, slower growth would tend to favor growth-centric strategies over value-centric strategies all else equal. Growth beat value for the third month in a row (Russell 2000 Growth (-0.9%) vs. Russell 2000 Value (-3.1%), but all else isn’t equal. With rates rising and receding liquidity, growth has its own challenges and trails value by almost 1000 basis points year to date. And when growth stocks miss earnings estimates and fall, well, that’s not pretty to watch either.

The thing about inflation is that the longer it lasts, the longer it lasts. Former Fed Chairman Paul Volker rightly observed back in 1979 that “inflation feeds partly on itself.” The Fed is absolutely going to rein inflation in, but the collateral damage on the housing market, corporate earnings and corporate credit is likely to be significant—in fact, that’s really the point. Does that mean long-term investors should sell stocks? No.

Markets are unpredictable in the near-term, even if they are rather predictable in the long-term—they do tend to go up. In an environment with no shortage of crosscurrents, it continues to be a good idea to resist the temptation to react to daily news flow and let the power of compounding continue to work to one’s advantage. That’s a force more persistent than inflation and it only grows stronger over time.

What I Learned At The Grand Canyon About How To Live My Life

by M. Burke Koonce, III

Almost exactly three years ago, I wrote this brief essay about a trip to the Grand Canyon our family had taken while my daughter was being evaluated at the Mayo Clinic in Scottsdale, Arizona. She was born with a chest-wall abnormality that would eventually require surgery.

That “eventually” eventuated three weeks ago, and I am thrilled to report that the procedure went wonderfully, and, so far anyway, she is doing extremely well—so well that it’s difficult for any of us to believe—a long, tall and healthy 16-year-old girl, with even a few smiles thrown in. If you don’t believe in miracles, or if you just want to feel a little humility and gratitude, spend some time around a pediatric hospital. Trust me.

Meantime, there’s a new stripe on the canyon wall of my memory. Special thanks to the physicians and staff at Wake Med Children’s Hospital.

I was in Arizona this week tending to some family business at the Mayo Clinic—it was possible that my daughter would require major surgery, so forgive me in advance for any subconscious del into an overly emotional state. However, I wanted to share with you my thoughts about perhaps the most incredible thing I have ever seen.

It’s the Grand Canyon.

I’d seen it once before, years ago. I drove from Raleigh to the Grand Canyon over a couple of days after graduating from business school. And it was an unforgettable sight even back then, but there’s no doubt in my mind that the more acute sense of human frailty that develops with middle age compounded the impact of seeing it again.

Part of the fun of seeing the Grand Canyon for the first time is that there’s no dramatic build up—there’s no mountain range in the distance or obvious change in the immediate surrounding landscape. It’s hidden by trees until you’re just steps away, because, after all, it’s a hole. And then, it’s as if you’ve suddenly arrived at the edge of the entire world. Edging closer to it, your heartbeat quickens and you sense a primordial command installed by evolution—be careful. Five to fourteen miles across and more than a mile down to the Colorado River. I enjoy imagining what the Spanish conquistador Garcia Lopez de Cardenas must have thought upon encountering it for the first time. What did he say to his boss Coronado about not being able to make it down to the river? “Um, Francisco, all I can tell you is that it’s really big.” It’s also 277 miles long. That’s the distance from Raleigh to Charleston, S.C.

Of course, as you gaze into the Grand Canyon, your eyes are immediately drawn to the rock strata exposed on the canyon walls like layers of a cake. The Colorado River has been cutting away at the Colorado Plateau for about 6 million years. That’s a difficult number for human being to comprehend. As the Nobel-prize winning economist Daniel Kahneman pointed out, we have no environmental reason to be able to really understand how large of number that is. But the fact is, the Colorado River has been seeking sea level for 6,000 centuries.

Now, 6,000 centuries is a long time, but rocks exposed inside the Grand Canyon date back almost 1.8 billion years. Said another way, the rocks exposed in the basement of the Canyon, in a section called the Vishnu Schist, are 300,000 times as old as the Grand Canyon. (You know when a rock formation is named after an ancient Hindu god, it’s old.)

The exposed Vishnu Schist section dates from a collision between a group of volcanic islands and the southwestern coast of North America, which was at the time near present day Utah and southern Wyoming (did everybody know this but me?). About 1.2 billion years went by, and eventually this gigantic rocky crash site had been ground down to sea level. This allowed inland seas to form and fade, with their fortunes painted in the rock strata in the color of rust, because, after all, that’s what water does to iron. Then, a mere 250 million years ago, tectonic activity resumed, drying out the seas and forming the humungous sand dunes that cause the top section of the Grand Canyon to appear white, not red. Finally, in the geological equivalent to fairly recent (a mere 60 million years ago), the subduction of the Pacific plate beneath the North American plate caused the Colorado Plateau to lift up through the earth’s crust, exposing all of this cool stuff. That’s why the topography of Arizona changes so dramatically starting around Sedona, a couple hours south of the Grand Canyon—a huge plateau basically just got raised thousands of feet above the rest of the earth’s surface. Think of the plateau as a tall stack of pancakes and the Colorado River as a knife exposing all that flaky goodness.

So compared 1.8 billion years, 6 million years seems like a hockey season. It’s nothing. And yet it’s as long as the twenty centuries since the time of Christ multiplied by 3,000.

Again, our brains are just not equipped to comprehend how old this planet is. In all that time, so much has happened, both to the earth itself and to the creatures that inhabit it. It’s a shame we cannot really put it into perspective. The indefatigable power of time is relentless, remorseless, and truly invincible.

In contrast, the presence of humanity is like a fraction of a nanosecond in the geological spectrum. Our time here is so brief! Borrowing some financial nomenclature, the time that humans have been present on earth, about 200,000 years, represents less than half of a single basis point vs. the age of the earth.

Our ventures, concerns, and businesses could hardly be more meaningless in the fullness of time. But of course, it is the rarity of life that makes it so precious. The fact that it doesn’t last, that our time here is so fleeting and ephemeral, is what makes every moment so important.

Our family had a scare recently. Our daughter was diagnosed with a condition that could eventually require major surgery around her heart. We received good news at the Mayo Clinic—the doctors determined that we didn’t need to do anything now. But those moments in the clinic waiting on the verdict with a 13-year-old girl, all skinny elbows and knees and long, long hair—those moments will live forever in my mind. Those moments are now a great rust-colored stripe on the canyon wall of my life.
So what does all of this have to do with anything? (I warned you about the emotional state!)

I think the takeaway from my week studying geology and musculoskeletal biology is a lesson in probability and compounding. To achieve even the smallest goal, financial or otherwise, you’ve got to harness the power of time and try to employ it in your favor. Anything else is just folly and dumb luck. You’ve got to allow your successes and good habits to compound and you’ve got to avoid playing near the edge of the abyss. That’s it. We’re all human beings who take uncompensated risks and do dumb things, but you’ve got to keep your eye on the cliff wall. You’ve got to let the seas form and the wind blow. You’ve got to let the pressure build. And you’ve got to remember that 13-year-olds don’t last forever, and neither do 48-year olds. Your life and the lives of your loved ones aren’t special in the sense that they are worth more than somebody else’s but they are rare indeed and if you don’t want the odds in your favor as you try to protect and nourish them, you’re a fool.

As you allocate your time, do so in way that considers the opportunity cost and the power of compounding. As you consider your own health, do so in a way that considers opportunity cost and the power of compounding. Certainly, the same goes for your capital.
And remember the words of Ellis “Red” Redding, Andy Dufresne’s friend in the film The Shawshank Redemption:

“Geology is the study of pressure and time. That’s all it takes, really… pressure… and time.”

Market Quarterly: Q2 2022

by M. Burke Koonce, III

Going Below the Hard Deck

After seven consecutive quarters of positive returns, the markets have now coughed up two quarters in a row of negative returns. The broad market selling that first appeared during the first quarter continued during the second quarter, with the S&P 500 posting a total return of negative 16.1 percent. The other major domestic indices were also negative, with the Dow Jones down 10.8 percent, and the tech-heavy NASDAQ down 22.3 percent. Frankly, the second quarter’s only positive development appears to have been the debut of Top Gun: Maverick.

There were bogeys everywhere throughout the first half of the year, which was the worst performance to start the year since 1970. Just stating for the gloomy record, the S&P 500’s total return for the first half was negative 20 percent, while the Dow was down 14.4 percent and the NASDAQ was down 29.2 percent. The S&P 500 officially entered a bear market on June 13, closing more than 20 percent down from its January peak. While the second quarter did not match the first quarter’s peak volatility, the selling that began in January and February came back with a vengeance in April and then again in June. One could not be blamed for holding on too tight and losing one’s edge.

Just like in the Top Gun films, the second quarter’s villains were Russians (1986 film) and also a mysterious source of hostility (2022 film). That hostile foe was inflation. Inflation and the expectation of higher rates caused a broad revaluing of the market during 2Q. This continued to impact prices of longer-duration assets more than shorter-duration, value-oriented assets. However, the trend reversed somewhat during June, with new probability emerging that rate hikes and tighter monetary conditions might cool the economy sooner and to a greater extent than had been expected. This sentiment appears to be ascendant, with growth stocks staging a bit of a comeback and beating value for the first time this year in June. This has continued into July, which has featured a decent market rally so far.

The Fed appears quite keen to avoid letting inflation take root, though the labor market continues to buzz the tower. Even so, signs are emerging that the Fed’s tightening cycle is closer to the end than it is the beginning. Ten-year treasury yields, which hit almost 3.5 percent on June 14, have fallen almost three-quarters of a percentage point. As one might expect, this has provided some relief to financial markets, with the S&P 500 up more than 11 percent since June 14 and the NASDAQ more than 14 percent.

“Because I Was Inverted”

Maverick’s words to his instructor as he was explaining how he obtained a Polaroid of a then-new MiG fighter, could have just as well described the yield curve this month, with the 10-year plummeting faster than that fabled MiG-28 in a 4G negative dive. Though the difference between the yield on the two-year Treasury and the ten-year went briefly negative in April, it has gone consistently negative this month, suggesting that an economic recession is on the horizon. Inverted yield curves don’t always mean a recession is coming, but no modern U.S. recession has happened without being preceded by one.

Moreover, the more hawkish Fed appeared at a time of historical change in fiscal support for the economy. Last fiscal year, the federal budget deficit clocked in at 12.4 percent of GDP—this coming fiscal year, it is expected to be less than 4 percent—that’s the largest decline as a percentage of GDP since the aftermath of World War II.

So, what would a recession mean for the prices of financial assets? Well, of course, it would depend on the depth of the economic malaise, but it’s worth noting that the market has likely already discounted a significant amount of slower growth. That’s what this year’s re-pricing has been all about. To start the year, the forward P/E ratio on the S&P 500 was around 22.0x—this week it was below 16.5x, which is below the benchmark’s 25-year average. There are ample reasons to conclude that a recession would be mild, given the otherworldly strength of the labor market and the comparative lack of leverage on corporate balance sheets.

“This Is What I Call A Target-Rich Environment”

During the two-year period ending June 30, the S&P 500 returned almost 26 percent. Value outperformed growth by a mile, with the Russell 2000 Value Index returning 44 percent during that period while growth was basically flat. Value tends to outperform during periods of market turbulence, particularly when that turbulence is caused by economic growth in overdrive.

However, circumstances can change in a hurry. With forward rates behaving like they’ve just flown through Iceman’s jet wash, suddenly volatility is falling and prices are rising again. While this particular set of circumstances does not necessarily favor strong relative performance by value vs. growth, it could be constructive for overall markets in the near term. Of course, if inflation persists and the economy powers ahead, value could be expected to outperform, though overall returns might be lower. One thing is for certain, historically it has been easier to markets to rise after they’ve been trading at less than 16.5x forward earnings than when they’ve been north of 22.0x, as the chart below illustrates.

After a first half that stunk worse than Slider, markets are experiencing strong crosswinds. Covid-19 continues to bedevil us, but nothing like before; the virus’s primary effect at the moment is through China’s struggles with full economic re-opening as it pursues a Zero-Covid policy. Inflation may well have crested, as commodity prices have been falling. On the other hand, much tighter fiscal and monetary policy will present real headwinds for the economy going forward, and it would be foolish to count on a Goldilocks scenario in which the Fed gets everything just right. In short, the market is as complicated a beast as ever, and it remains our view that “time in the market” is far more important than “timing the market. As the chart below demonstrates, for the last 71 years, the longer one’s time horizon has been, the more likely one was to experience positive outcomes.

While we are not managing client portfolios by trading in and out of every market decline or rally, you can be assured that we continue to monitor markets with an aviator pilot’s eye. Moreover, while we are not attempting to predict every minute of the future, we can confidently say that equity portfolios are performing as we might expect in this environment, with our value tilt having provided a significant tailwind to performance.

We thank you for your continued trust in our stewardship.

Burke Koonce

Getting Kicked While You’re Down

by Dan Tolomay, CFA

It was an ugly first half of 2022. The value of large US companies declined -20%. Small US companies fell a bit more at -23%. International developed markets shed -19% and international emerging markets dropped -18%. Phew.

Thank goodness for bonds. Except the bond market was down too. Domestic and international. Both were both off -10%. Cash was a relative bright spot in that it didn’t decline in value. But, with inflation numbers still coming in hot, cash’s paltry return won’t be enough for your money to grow fast enough to keep up with rising prices. So, what should be your next steps? It depends on where you’re going.

It’s always good to have an investment plan, but that’s especially true during trying times like these. An investment policy statement (IPS) is a document that spells out a portfolio’s objectives and constraints. Among the key considerations are: What is the return objective? What is the tolerance for risk? When will the funds be needed?

Generally speaking, the longer the time horizon, the greater the ability to tolerate risk/volatility. And, as risk and return are directly related, more volatility should mean a higher expected return. Below, three sample situations are presented and reviewed. As what has occurred in markets so far this year is behind us, decisions should be prospective, not reactive. However, recent events can provide some insight.

A short time horizon does not allow for volatility. That is intuitive as it pertains to stocks and their noisy near-term returns. However, bonds can be volatile, too. Below is a chart comparing year-to-date returns for Vanguard index funds that track different segments of the bond market to a money market fund and to stocks.

As can be seen in the chart, bonds were down across the board. Long bonds were down more than stocks. Many investors also were likely burned by reaching for yield in short- and intermediate-term bonds. Not only would a money market fund have avoided losses, but it would have benefitted from increases in interest rates as the Fed tightened monetary policy.

Principal protection is the goal for funds needed soon. While additional return would be great, the volatility that must be borne can cause more harm than good. If the account is short of its target value, swinging for the fences is not the answer. Delaying the target or adding more funds are the prudent actions.

An intermediate time horizon permits some volatility in a portfolio. It also introduces a new risk – inflation. Not only is the portfolio able to be more volatile, it needs to be in order to target a higher return to keep pace with rising prices over time. Again, stocks are likely to provide too uncertain of an outcome. But what have bond returns looked like over time?

As yields go up, bond prices go down. Investors saw plenty of this in the first six months of 2022, and the cause was concern about inflation. But rising interest rates are a double-edged sword. The other impact on bonds as yields rise is that interest payments also rise. This takes time to play out, but, over time, as coupon payments are received and bonds mature, that new cash is reinvested at new, higher rates.

Consider the Short- and Intermediate-Term bond funds again. Below, the charts show that the driver of bond returns is income, not price changes. Between issuance and maturity, a bond’s price will fluctuate. Absent a default, however, a bond’s value will move to face value at the end of its life.

As higher income continues to offset price declines, the likelihood of having a positive total return goes up over time.

There are a couple other takeaways from the above charts. First, a “term premium” exists. That is – the longer the term of a bond, the more time there is that an investor’s money is at risk and the higher the reward should be. (Note the scale of the line graphs above.) Second, risk and return are related. In the bar graphs, the likelihood of a negative return in intermediate-term bonds is higher than it is in short-term bonds. A higher return is expected; however, negative returns (risk) have been more common than in short-term bonds. It may take longer for intermediate-term bonds to recover from an interest rate spike.

A lengthy time horizon has the greatest ability to tolerate volatility. Longer investment periods provide more opportunities to recover from temporary losses. As more risk can be borne, more return can be sought. A return in excess of inflation can be spent to support a current need (ex. a foundation, endowment, or retiree) or it can provide for portfolio growth (ex. saving for retirement).

Stocks can and do have a role in account with lots of time on the clock. The recent pullback in equities is not uncommon. As the chart below (which we’ve dubbed “The Annual End of the World”) shows, intra-year declines in the S&P 500 are not uncommon. In fact, on average, there has been an intra-year decline of -14%. (This year, so far, it’s been -24% from 1/3 to 6/16.) There has also been, on average, an intra-year advance of +25%. (Did you know that the market was up +11% from 3/8 to 3/29?)

Again, risk and return are related. Just as bonds have returned more than cash with more volatility, so too have stocks returned a higher number than bonds but with a bumpier ride. Mixing bonds in with stocks can make that ride smoother.

Nobody knows what’s next for COVID, Ukraine, Inflation, the Fed, or if we’re headed for a recession. What is known is that these risks are well understood by global investors. Those market participants, motivated by a desire to profit, have positioned their portfolios to reflect their expectations. In aggregate, this collective wisdom drives prices of securities to fair values. The prices, in turn, set expected returns commensurate with the risk of the investment.

Rather than focus on the headlines, which we cannot control, it is more productive to revisit one’s personal situation, which can be managed. Does the asset mix match the time horizon and risk tolerance? From there, a range of returns can be estimated. If the portfolio’s contents do not match one’s situation, changes can be made.

Think of specialized labor. Let markets do what they do best – process information, set prices, and future returns. Investors should do what they do best – ensure the asset allocation matches their needs, not their emotions.

As Chief Investment Officer, Dan is responsible for developing Trust Company’s investment strategy and managing client portfolios.

Monthly Market Dashboard: June

by M. Burke Koonce, III

June 30 2022

“If you are shopping for common stocks, choose them the way you would buy groceries, not the way you would buy perfume.”  — Benjamin Graham

Financial markets just turned in the worst first-half performance in decades, with the S&P 500 now down 20 percent for the year on a total return basis. That’s the worst performance to start the year since 1970. For the month of June, the S&P 500 was down 8.3 percent, the Dow Jones Industrial Average was down 6.5 percent and the growth-heavy NASDAQ fell 8.7 percent.

The six-month report card was grim. Joining the S&P 500 in remedial math this summer will be the Dow, down 14.4 percent, and the NASDAQ, down 29.2 percent. After several flirtations this year, the S&P 500 officially entered a bear market on June 13, closing more than 20 percent down from its January peak, the first time the U.S. stock index closed in bear market territory since the COVID-19 abyss of March 2020.

While markets have long since ceased being fixated by C           OVID-19 cases and death tolls, markets are still very much wrestling with the aftereffects of the pandemic. Supply chains continue to be disrupted by shutdowns in China, while government stimulus around the world, combined with strong employment, has helped keep demand elevated. Finally, the war in Ukraine’s impact on energy prices has been real, contributing to higher price expectations throughout the global economy. Ten-year interest rates in the U.S. have more than doubled since the start of the year.

There’s been a lot of ink spilled about the effect that interest rates have on asset prices, but it’s perhaps worth repeating anyway. As interest rates rise, the biggest price impact is on long duration assets such as long-dated bonds and expensive growth stocks—both are assets that are expected to pay back investors in the distant future. Those future returns are worth relatively less in a higher interest rate environment because they’re discounted back to the present at those higher rates. This is why growth stocks and long bonds have seen such significant price declines in the market this year, far more than short-term bonds and short-duration stocks such as big dividend payers and high earners. (The Russell 2000 Growth Index is now down 29.5 percent year to date, while the Russell 2000 Value is down 17.4 percent.)

However, while market prices continued to slide in June, the nature of the price action seemed to change. Not only had value beaten growth by almost 1600 basis points year to date, but value had outpaced growth every individual month also. That reversed in June, with growth outstripping value by 358 basis points. Of course, one month does not necessarily a trend make, but it did end value’s winning streak. What does this mean? It might be nothing at all, but it might be some evidence that tighter financial conditions are beginning to slow the actual economy, not just the financial markets, which often bodes well for growth stocks, which become more sought-after. Just like that, ten-year yields have come back in from almost 3.5 percent to below 3 percent. Consumer spending actually fell in May, the first time this year, and, according to the Commerce Department, consumer price increases last month were below expectations. Meanwhile, the University of Michigan’s long-running index of consumer sentiment is now at the lowest levels ever recorded. Counterintuitively, these are generally reasons to be bullish.

The market’s decline has been so swift and severe so far this year that one could be forgiven for overlooking how favorable some measures have become. After several years of gaudy valuations, the markets are not even historically expensive anymore. The S&P 500’s price/earnings ratio has fallen below 16.3x—that’s below the 25-year average of 16.9x and a far cry from the low 20s the market was sporting late last year. Granted, earnings numbers could come down as inflation eats away at corporate profits, but the market generally does a pretty good job at discounting information such as that.

We all know the market is quite efficient over the long-term. What’s less obvious sometimes during a period of elevated volatility such as this one is the opportunity it represents to rebalance portfolios to take advantage of favorable short-term price changes. For long-term investors, developments such as rising interest rates are a godsend—as long as one’s time horizon exceeds the duration of a given portfolio, higher rates are going to add to investment returns. That’s because higher rates mean better yields on bonds and lower multiples to pay for stocks.

The market is already pricing in lower rates by the end of 2024 than 2023. In other words, all else equal for long-term investors, these grocery prices might not last.

Mark Twain and the 60/40 Portfolio

by M. Burke Koonce, III

One doesn’t have to be a professional investor to know that markets have been under pressure so far this year. Rising interest rates and troublingly persistent inflation have contributed to a significant re-pricing across both the equity and fixed income markets, and with the S&P 500 in a bear market, bedrock assumptions about investment strategy tend to get called into question. Among the questions percolating through the investment zeitgeist now is the future of the venerated 60/40 portfolio, which has just suffered through its worst first-half performance in 34 years. Is the standard portfolio of 60 percent equities and 40 percent bonds, considered the classic allocation for decades, still an important idea? Or is it, as it seems half the internet would like to proclaim, dead?

For decades, a 60/40 portfolio has been considered if not the cornerstone of diversified investing then certainly a major component. The 60/40 conversation is perhaps the most common starting point for any investor evaluating his or her goals, risk tolerance, and income needs. The portfolio’s usage is perhaps even more common as a baseline for endowments and foundations than it is for individuals, and it is extremely common for individuals.

The attractiveness of 60/40 was that it would capture the majority of equity returns but with the lower volatility and higher income associated with fixed income returns. While an allocation of 100 percent toward equities is theoretically the better way to build long-term wealth, not every investor is positioned to handle the volatility, especially those with shorter time horizons or with income requirements.

Unfortunately, many investors in 60/40 portfolios this year have experienced plenty of volatility in their equity allocations but with minimal protection coming from the fixed income allocation. That’s because rising rates have caused significant price declines not just in the stock market but in the bond market as well. So is now the time to make big changes?

Almost certainly not. It’s not like this is the first time the 60/40 model has come under criticism.

Those of us who are old enough to remember the 2000s recall a decade of disappointing equity returns. “The Lost Decade” in stocks started with the dot-com bust and then as an encore gave us the Great Financial Crisis. The 60/40 portfolio returned just 2.3 percent annual during that time, and market mavens proclaimed that the portfolio was going the way of the dodo. Then, as if on cue, 60/40 proceeded to return 11.1 percent annually from 2011 to 2021.

So this year, as returns are negative across the board, 60/40s critics have returned en masse. This time, it’s not because of equity underperformance but because of either the paltry yields offered up by fixed income or because of fixed income underperformance.

That’s why we think that reports of 60/40’s death are, to paraphrase Mark Twain, greatly exaggerated. First, it’s fair to point out low yields in the bond market, and it’s fair to note that bond returns have been negative this year, but it’s not entirely fair to point to both. That’s because as yields rise, bond prices fall but future returns improve. Barring default, the mark-to-market losses showing up in bond portfolios will reverse over time as bonds accrete and mature and as proceeds get reinvested at higher rates. It’s essential to remember that as long as a bond investor’s time horizon is greater than the duration of the portfolio, rising rates boost returns.

Managing duration is also an important component of equity investing, and it’s mainly accomplished by maintaining a value tilt—avoiding overexposure to stocks with exorbitant earnings multiples that require years of earnings and dividend growth to achieve adequate returns, not just on capital but of capital. Stocks normally have much higher duration than bonds, which is why it’s essential to play the long game and moreover, it’s why having an allocation to bonds, say, a 40 percent allocation, is often so desirable.

There have been many articles written this year about the growing place for alternatives in portfolios. While alternatives such as private equity and private credit are theoretically desirable for well-heeled investors, it’s not really realistic to think that converting a 60/40 portfolio to something like 33/33/33 could have been responsibly allocated within six months’ time, not to mention that moving from public equity and public credit to private equity and private credit is not going to provide a completely different risk/return profile. One of the benefits of alternatives is the forced discipline that comes with a longer time horizon, but alts investing is still going to be, at its core, equity and credit.

Again, as long as one’s time horizon is longer than one’s portfolio duration, rising rates are a godsend—allowing the investor to reinvest at higher rates in the bond market and at lower multiples in the stock market.

Lastly, another significant benefit to a balanced portfolio, it’s 60/40, 70/30 or 80/20, is that it gives the investor two important weapons to use during a significant drawdown. The first is the capability to rebalance in favor of equities during a downturn. The second is that during truly adverse conditions either in the market or during one of life’s emergencies such as a loss of employment, it is generally preferable to liquidate bonds instead of stocks and avoid either losing future gains or paying taxes on capital gains.

So, is 60/40 dead? That sounds like an exaggeration.

A Job Well Done

by William Smith, CFP®

Honoring Two Special Colleagues

Years ago, at least before the Great Resignation, prospective new hires would often comment “I hope this is my last job.”  With the labor market in disarray, such a bold claim rarely comes to pass these days.  However, at Trust Company in the past several months, we’ve had two special colleagues honor that very commitment and finish their distinguished careers with us.

Many Trust Company clients have had the pleasure of working with Lou Nunn during the past five years.  Having held previous posts in client service with regional commercial banks, Lou joined our firm in 2017.  While our role offered a slight departure from her prior commercial bank positions, she confidently embraced the challenge and made an immediate impact.

A consummate player/coach with an ever-positive attitude and servant’s heart, Lou excelled in her role as our client services manager.  Training new hires, implementing new policies and procedures, consolidating our client services function into our Greensboro headquarters, and overcoming obstacles associated with the pandemic, Lou completed each and every assignment with professionalism and grace.  Having stepped down at the end of January, Lou is now busy taking care of her family, especially her two lovely granddaughters!

After an impressive career in financial services of increasing responsibilities with a Big Eight accounting firm, a regional executive benefits organization and a national wealth manager, Mitchell Paul joined Trust Company in 2009 during the depths of the Great Financial Crisis.  In an especially volatile period, Mitchell brought a steady hand and a depth of experience which propelled our firm to new heights.  Whether it was tackling complex systems-related problems, delivering responsive, thoughtful planning advice to our clients, or mentoring younger team members, Mitchell embraced challenges and opportunities with a high attention to detail and established himself as the very essence of what it meant to be a team-player.  With plans to pass the baton at the end of May, Mitchell and his family are excited to have more time to spend with their children and grandchildren.

On behalf of our colleagues and clients, I would like to thank both of these remarkable professionals for their contributions to our organization and wish them many years of joy and happiness in their next adventure!  Both Lou and Mitchell made valuable, lasting marks on our firm, we’re grateful for their service and friendship, and our team at Trust Company is proud to have you as a part of our family.

Monthly Market Dashboard: May

by M. Burke Koonce, III

25 May 2022

Current Conditions

“Rough winds do shake the darling buds of May” — William Shakespeare, Sonnet 18

Shakespeare could have just as well been describing financial markets this month when he wrote his most famous sonnet more than four centuries ago. A more apt description does not readily present itself, let alone one less laden with financial jargon. But alas, Bards are hard to come by these days, so here we are. Elevated volatility, rising interest rates, persistent inflation, and economic uncertainty do shake the darling buds of May… Miss him yet?

The market declines that began almost immediately back in January continue as we near Memorial Day. Through yesterday, the S&P 500 Index was down about 17 percent YTD on a total return basis, while the NASDAQ was down about 28 percent. The Dow Jones Industrial Average has held up somewhat better, off about 11 percent. For the month, the S&P 500 was down about 4.5 percent, the NASDAQ about 8.5 percent and the DJIA about 3 percent. The tech-heavy NASDAQ is well into a bear market (defined by a 20 percent decline from its peak), while the S&P 500 has flirted with bear market territory on numerous occasions.

Interestingly, for all the sturm and drang surrounding markets this year, the DJIA, with its less tech-heavy constituency, has held up remarkably well. That’s because it’s the technology sector that has so far been the primary target of the market’s “slings and arrows of outrageous fortune.” Value has beaten growth in every month this year, and to date, May’s value outperformance is the largest since January. Using the Russell 2000 Value Index and the Russell 2000 Growth Index as proxies, value is now outperforming growth by more than 1600 basis points for the year. Moreover, value is now well ahead of the growth for the trailing one-year period and is now poised to overtake growth on a five-year basis also. It’s a stunning reversal in both scale and speed for financial markets, which have been led higher by technology and growth-oriented issues for years, only to have 100 percent of that outperformance “vanish into air.”

Since the COVID-19 panic and recovery of March 2020, market valuations, particularly in the US, had been elevated, buoyed by oceans of fiscal support, ultra-low interest rates, and of course, an economy that proved far more robust than many thought possible amid the global pandemic. Fully all of that premium valuation has been extinguished during the last five months. As of now, the forward price/earnings ratio of the S&P 500, at 16.7x, has fallen below its 25-year average of 16.9x. Of course, this measure could continue to fall, and as earnings estimates come down due to persistent inflation, the index could continue to drop even if this ratio stabilizes, but this is no longer an expensive market, at least by this one closely-watched yardstick.

The terrible war in Ukraine and COVID-19’s continued burden on the global economy through supply chain disruptions and labor scarcity have dominated headlines, but the true ghost on the platform in Elsinore Castle this year has been rising interest rates. Of course, rates are rising in response to inflationary forces unleashed and exacerbated by Ukraine, COVID-19 and the world’s responses to them, but the receding liquidity that accompanies rising rates is what we are seeing play out in changes in market prices. Ten-year Treasury yields more than doubled between year-end and May 6th, creating a huge repricing in fixed income markets in addition to the equity markets. To the dismay of 60/40 portfolio holders everywhere, bonds did not provide the desired protection from equity market volatility.

“Oh fortune, fortune! All men call thee fickle!” Romeo and Juliet

Then again, if this market has taught us anything this year, it is that circumstances change quickly. On December 31, the market was pricing in just three 25-basis-point rate increases for the year. Fast forward to April 30 and the market was expecting 10 such rate hikes, plus another in February 2023. It is worth noting then that markets have in recent weeks taken on a slightly but distinctly more dovish view, with the current curve pricing in just seven hikes in 2022. Bond markets have stabilized. Five-year inflation expectations, which had jumped to 3.5 percent back in March, are back down to 2.9 percent—not far from where we were at the start of the year. Consumer sentiment is shockingly low, housing starts and building permits have crept lower, and jobless claims have recently been slightly higher than expected. If the economy is cooling a bit, inflation will eventually follow, and interest rates are starting to react.

None of this means we are advocating buying growth stocks with both hands; we never have and almost certainly never will. Markets are fickle, after all. But what we think all of this means is that the areas of the market where the historical evidence suggests that premium returns exist—value, small cap, and international, is where the future premiums do in fact exist.

For the vast majority of investors, bear markets are no fun. Growth is in a bear market at this moment, and it is during bear markets when people rediscover the meaning of margin of safety—the ability to point to an estimated stream of future cash flows generated by a company and say something other than “we are such stuff as dreams are made on.” In a bull market, it’s easy to find someone whose dreams are even more optimistic than your own who will pay you a premium for what you own. In a bear market, stocks return to their rightful owners. And it wasn’t Shakespeare who said that—it was J.P. Morgan.

Not the Same, But Better

by Leah Jane Barnwell, CRPC®

It has been a truly extraordinary couple of years. In the world, in this country, and right here at home in North Carolina. As Americans, we are deeply rooted in the belief that we should always be moving forward – toward progress, toward “more,” toward better.

Two years ago, largely without warning, a global pandemic stopped the world in its tracks, confined whole populations of cities to their homes, and forced us all to sit still for a while. We stayed away from friends and family, masked up, and wondered if life as we knew it would ever be the same.

The idea of going “forward” was now a question of how and when, when it had always seemed to be such a sure thing. Many suffered hardship and loss, some found silver linings; no matter your experience, it’s safe to say we’re all emerging from this time changed.

During a particularly challenging time early in my career, I called a college friend who had recently moved to New York to pursue her dreams in the fashion industry. She listened as I shared all the troubles of my day and expressed doubts about the path I had chosen, and at the end of it all, she offered advice that has stuck with me for many years since that conversation. “Adversity is good for you,” she said, “It forces you to grow in ways you might not have, if there wasn’t something in your way.”

Those words are as true today as they were then. As a firm and like so many other businesses, Trust Company has experienced many challenges in the last two years, and out of that experience, we’ve realized we had the capacity to grow even while others stood still.

We grew as players on a team, seamlessly picking up the slack when a teammate needed to take time for family or experienced illness. We grew as professionals, quickly adopting remote work technologies and developing new communication protocols to keep the matters of daily business on track. We grew as a community, finding creative ways to maintain meaningful communication with our colleagues and clients from afar.

When faced with adversity, we confirmed that we can and will rise to the occasion for clients who depend on us, even if it means getting through one day at a time and wearing as many hats as it takes to “get it done.”

Thanks to the tireless efforts of leadership and our HR department, we came to know and appreciate our coworkers in new ways. Through one of many initiatives (dubbed “TCTS Cribs”, a reboot of the MTV classic), we got a tour of the favorite features of their homes and met their pets, through another we learned about the charitable causes close to their hearts, and we found ways to work better together by understanding the personality types that make each of us tick. A most unexpected silver lining, indeed — our firm culture deepened during our time at home and apart.

As we put the worst of the Covid-19 pandemic behind us, we find new ways to move forward together.

We learned that while there’s no substitute for face-to-face interaction, we can come pretty close to that experience with a great webcam – shortening the distance between us and our clients, between staff from different offices, and giving us the ability to work with vendors across the country as if we are sitting on two sides of the same table.

Out of necessity and under pressure, our successful adoption of innovative technologies allowed us to streamline many of our day-to-day procedures and reduce our dependence on manual and paper-based processes. We’ll use this newfound tech momentum to onboard and adopt two significant new platforms this year – both of which will further enhance our client experience. Pre-pandemic, we may have split these initiatives across multiple years to avoid over-taxing staff – we now understand that our team is ready and willing to tackle whatever comes.

We’ve enjoyed substantial growth in our relationships, welcoming new employees and new clients, and expanding into new spaces in Greensboro, Raleigh and Charlotte. In 2022, Trust Company will celebrate 30 years of exemplary wealth management and fiduciary service to our clients and communities in the southeast and beyond. We go into this next chapter not the same as we were, but better – more nimble, more appreciative, more committed to our shared mission than ever before.

As Trust Company’s Project Manager, Leah Jane works across the firm to support strategic goals through the implementation of marketing, technology and process development initiatives.

Market Quarterly: Q1 2022

by M. Burke Koonce, III

There’s Lots of Bad News. That’s Good News.

After seven consecutive quarters of positive returns, the S&P 500 finally turned in a clunker in the first quarter of 2022, posting a negative total return of 4.6 percent. The other major domestic indices were negative also, with the Dow Jones down 4.1 percent, and the tech-oriented NASDAQ down 8.9 percent on a total return basis.

There was no shortage of gloom and doom on which to blame the market’s downturn. From the first week of the year, just as the Omicron variant was entering a hopefully final blow-off stage, markets turned their collective concern away from COVID-19 and onto inflation, the byproduct of massive fiscal and monetary stimulus, supply chain disruptions, and a post-pandemic hiring bonanza. While a certain amount of inflation was to be expected, these historically large year-over-year price increases have proven stickier than many economists predicted. Then of course, the coup de grace was the horrific Russian invasion of Ukraine, which served to not only exacerbate surging energy prices but to cast a pall over global growth projections as well. Rising inflation was already poised to erode strong annual real economic gains—but war in Ukraine threatens to dampen those gains further and cause the economy to teeter into a recession next year.

The U.S Treasury yield curve, a generally reliable predictor of future recessions, went negative on the first day of the second quarter and financial markets took notice, with broad market indices continuing their decline. While the move was brief and the curve has since steepened again, rising interest rates have had a severe impact on financial markets this year, especially on the more speculative areas.

Markets are now pricing in 50-basis-point interest rate increases at each of the next three Fed meetings, expectations that in January would have seemed completely fantastical. During the teeth of the Covid lockdown, the Federal Reserve abandoned its primary mandate of price stability in favor of promoting maximum employment, indicating it would allow inflation to “run a little hot.” Well, it would appear the Fed achieved that objective, with the U.S. unemployment rate at 3.5 percent, a level last seen in 1969, and the highest headline inflation since 1981. Now the Fed finds itself in the unenviable position of having to quash inflation without choking off the U.S. economy, and there is increasing momentum behind a plan to “front-end load” the interest rate increases it will use to tighten monetary conditions. There’s little doubt the Fed will eventually douse the flames of inflation, but the prices of financial assets will react in perhaps some unpleasant ways in the near term, especially in the more speculative areas of the market.

Rising interest rates tend to make for volatile markets, and these rate increases have differing effects on different assets. Broadly speaking, the rising price of money has the greatest impact on assets with the longest duration—assets that require the longest “payback” period, often called “long duration” assets, see their prices change the most when rates are changing. Examples of these assets are long -dated bonds and expensive growth stocks—stocks that investors have bid up in hopes of a substantial payback in the distant future. The problem is that when rates are at rock-bottom, it’s a lot easier to make the case to wait years to get paid back than it is when rates are shooting up and investors can earn money elsewhere instead of waiting.

This is being borne out in real time in markets right now. During the first quarter, as rates were rising, the Russell 2000 Value Index lost about 2.5 percent while the Russell 2000 Growth Index fell 12.7 percent. So far in April, the trend has continued, with value outperforming growth by about 1300 basis points for the year at the time of this writing. Some of the best performing stocks over the last several years have been caught in brutal sell-offs, with names such as Facebook (now known as Meta) and Netflix down 46 percent and 67 percent, respectively.

Value strongholds such as energy and materials have not been completely immune either. With recent reports of new Covid lockdowns in China and lower global growth expectations, these sectors have tumbled also.

Rising interest rates and inflation also tend to have an outsized impact on small cap stocks. Intuitively, this makes sense, with smaller companies more likely to feel the impact of these factors in the real world, but there’s also the reality that as interest rates rise and liquidity recedes from financial markets, small cap stocks react more negatively, just as they react more positively when liquidity increases at the margin.

Market volatility has spiked, which is unsettling, but it’s also worth maintaining a little perspective. The S&P 500 is now down about 10 percent for the year on a total return basis. Going back to 1980, the market averages a 14 percent intra-year drawdown every year, despite an average annual return of 9.4 percent and positive returns for more than 75 percent of those years. What the broad market is experiencing may seem extreme, but it’s only extreme in comparison to extremely recent experience. It’s also worth pointing out that for the two years ending with the first quarter, the S&P 500 returned more than 89 percent. The Dow Jones returned almost 75 percent and the NASDAQ almost doubled.

So while the bears are having their day, our contrarian impulses are quickening a little. Market volatility is well-above long-term averages, which suggests better times might not be too far ahead. Lastly, consumer confidence is as low as it has been in more than a decade, understandably driven down by stubbornly high inflation. This, counterintuitively, is also good news, as such dismal expectations are often followed by powerful rallies.

While we are not managing client portfolios by trading in and out of every market spike or downturn, you can be assured we continue to monitor markets with a gimlet eye. Moreover, while we are not attempting to predict the future, we can confidently say that equity portfolios are performing as we might expect in this environment, with our value tilt providing a significant tailwind to performance along with our international tilt while our small-cap tilt is a headwind. In a nutshell, diversification is paying dividends, as it does over the long term.

We thank you for you continued trust in our stewardship.

Burke Koonce

On The Eve of the Apocalypse

by M. Burke Koonce, III

It was inevitable, I suppose, the same way good dogs get old, Polaroids fade and rock drummers spontaneously combust. For decades, it looked like the ultimate clash of civilizations might never actually occur. The basketball gods seemed to have deigned that the world was just not ready; that the earth’s crust might crack, freeing some kind of noxious gas or that the atmosphere would be blown away into space. The world was just not ready, and would likely never be ready, for a Final Four matchup between Duke University and the University of North Carolina at Chapel Hill.

But sometime prior to last weekend, the gods changed their minds, or at least the NCAA selection committee and the good people in the advertising department at CBS. For years, the committee was careful never to place Duke and Carolina where they might play each other before the final game. This year, with the Twelve Month Parade of Coach K’s Farewell Tour coming to a close, I assume somebody did the math and determined that manipulating the brackets so that the two schools could face each other in the semi-finals was a maneuver worth taking. It would raise the odds of the apocalypse from extraordinarily low to just plain low. And like they say, a butterfly flaps its wings in Indianapolis and soon enough Roy Williams spits in the Mississippi River.

Of course, Roy Williams is no longer the coach at North Carolina. Neither is Matt Doherty, Bill Guthridge, or the legendary Dean Smith. It’s first-year coach Hubert Davis, a former UNC player and assistant coach (and, full disclosure, my classmate at Carolina). Duke’s coach, as has been the case since March 18, 1980, is Mike Krzyzewski, now the winningest men’s basketball coach of all time, as much as it pains me to say. For perspective, Dean would coach almost exactly half his 36-year career at UNC against Krzyzewski, who has now gone on to coach Duke for another 25 years since Smith retired in 1997.

I suppose over the course of 41 years, during which time Duke vs. Carolina became one of the greatest, if not the greatest rivalry in sports, this could have been expected to happen. And now, on the eve of K’s retirement, which will either be tomorrow night, inshallah, or Monday night at the latest, it has come to pass.

By midnight tomorrow night, as many have written, one side will have eternal bragging rights, and the other will be forced to walk the earth like Jacob Marley’s ghost.

It’s a wager that few of us here on Tobacco Road would ever make; it’s a bit like Russian Roulette. The risk/reward payoff is highly asymmetric and skews sharply negative. For those of us who grew up or attended school between the Haw River to the west and the Neuse River to the east, this is the basketball equivalent of the Ghostbusters crossing the beams, or putting Mentos in Coca-Cola, or making an alopecia joke in front of Will Smith.

But as renowned social psychologist and North Carolina product Ric Flair used to say, “whether you like it or not, learn to love it.” We must summon the wisdom of the ages to come to terms with this.

But how?

This rivalry covers more ground than the taproot of a Carolina pine and is woven into the fabric of my own family’s history like perhaps no other strand. My mother went to Duke and was a passionate basketball fan and my father went to UNC and played football there. So we had the incredible good fortune to have season basketball tickets in both Cameron Indoor Stadium and Carmichael Auditorium, and, later, the Dean Dome. I was on hand with my mom and dad, sitting in Section 16 in Cameron, when Coach K won for the first time against the Tar Heels. He has since won 49 more against Carolina.

As a Carolina graduate and fan, I suppose I should feel pretty good that despite Duke’s (and Coach K’s) wild success that the Blue Devils have only averaged 1.2 wins per year against the Heels in the four decades since, but then again each one felt like someone kicked my dog, some more than others. There was the Austin Rivers shot, the Duhon layup, a half dozen doses of J.J. Reddick, and then of course, Laettner. Duke finally reached the apex of the sport when they knocked off UNLV in the national semi-final in Indianapolis in 1991, the last time Duke and Carolina were both in the Final Four. Duke went on to beat Roy Williams’ Kansas team to win its first national championship. I even pulled for Duke—I was there in Indianapolis sitting next to my mom, of course, but that was the last time. As soon as Duke won, the “Go To Hell Carolina” cheer went up, and I abandoned my dual citizenship on the spot. After all, I was a UNC student at the time.

Fortunately for me, the gods would soon again look favorably on Chapel Hill. Duke would win it again in 1992, but Carolina would win it again for Dean Smith in 1993, in New Orleans, where Michael had given Dean his first championship in 1982, and would go to the Final Four five times in the 1990s. I mean, the Stackhouse/Wallace/Jamison/Carter era was an embarrassment of riches.

Since the famous Jordan shot in 1982, Carolina has won five national championships, and so has Duke. Twice, the two programs have won the title in succession, which exemplifies what has made this rivalry so great—it’s obvious the two programs have made each other better. When K arrived, Dean Smith ran the ACC. It was up to Coach K and the late great Jim Valvano to challenge him. Then the crown went to K. Even though Carolina was neck and neck with Duke, the game was changing in Duke’s favor.

Dean Smith famously lobbied for Krzyzewski to take the reins of USA Basketball, and K did a masterful job with the Olympic team. Unfortunately for the Tar Heels, this, and an academic scandal in Chapel Hill, led to a slight but definite recruiting edge that made Duke perhaps the top collegiate launching pad for future NBA superstars. Ironically, Carolina’s inability to attract the “diaper dandies” helped Roy Williams build veteran teams that could make deep tournament runs for years, but K’s talent edge was persistent.

Unfortunately for Duke and for college basketball in general, the Duke teams, among others, became something of a revolving door for NBA talent, and soon enough, the only Blue Devil I could identify well enough to scream at was Coach K himself.
Which brings us back to the apocalypse. After his year-long farewell tour, K will be exorcised one way or another within about 72 hours. There is another young coach in the league, on the trail of the undisputed king. Will the old lion roar once more, or will the young lion have his own day?

In a sense, this is a game we have seen before. No matter who wins, we are witnessing the changing of the guard in a tradition that has forged the finest that college basketball has had to offer for four decades. And whether you’re a Duke fan or a Carolina fan or just a college basketball fan, your life has been enriched by it. Think of the countless hours of joy and anguish and passion we’ve all felt over the years, and then consider how many hours of practice and preparation the coaches and players put into it. It’s astonishing and humbling.

I hope like hell that Hubert Davis, my old geology lab partner, leads the Heels to victory tomorrow. But no matter what, I am grateful to have been able to watch this extraordinary geyser of human achievement and competition-fueled passion that has erupted virtually every year since I was a child. I thank Mike Krzyzewski for continuing to make both Duke and Carolina better.

For making my life better.

Now, please, Hubert, make him go away! And Go Heels!