April 2019 Newsletter

Lorenz Financial can help you plan for your April investments.

Welcome to the April newsletter! Today, we’ll update you on the potential indicators for a bear market, tips for investing in real estate, when to listen to the news about the stock market, and more. Let’s jump in!


As of March 29, the stock market recovery from the December correction continues. Lorenz Financial believes this correction will end sometime in 2019, and an all-time new stock market closing high will be established. With the partial yield curve inversion, keep in mind the San Francisco Fed analysis of past inversions indicate a recession takes seven to 24 months to begin. But first, we must wait for the “inversion” to sustain itself at least 90 days.

Employees should continue to make their weekly or monthly contributions to their employer’s retirement plan or IRAs. The economy continues to grow without runaway inflation. No recession is in sight, and all portfolios remain fully invested.

The Economy

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U.S. nonfarm payrolls rose 20,000 in February – yes, the comma is in the correct position! This number is freakishly low and therefore suspicious. Let’s see how it is adjusted during the next two months before we jump to any conclusions.

The January payroll number of 304,00 was revised up to 311,000, and the December number of 222,000 was revised up to 227,000. The three-month payroll average is now 186,000.

Unemployment decreased to 3.8% as the federal workers temporarily laid off went back to work. Average hourly earnings maintained a 3.4% increase in February compared to a year earlier. All of these numbers are great except the February payroll number of only 20,000.

Gross Domestic Product

The final read of real Gross Domestic Product (GDP) in the fourth quarter of 2018 increased at an annual rate of 2.6%. Real GDP increased by 2.9% in the calendar year 2018 compared to 2.2% in 2017 and 1.6% in 2016.


Annual inflation decreased slightly in January to 1.4% as measured by the Personal Consumption Expenditures (PCE) index. The core PCE index, which excludes food and energy, decreased to 1.8% during the same time period. The Federal Reserve’s target for both is 2.0%.

Long-term inflation expectations can be determined by calculating the differences between Treasury bond yields & TIPS real yields of the same maturities. Results are:

    Bond                             Annual Inflation

Maturities                           Expectations

5 Year                                  1.78%

10 Year                                1.88%

30 Year                                1.92%

Stock Market

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This month, we are updating the five primary causes of a bear market.

Tight Money – The Fed said after their March meeting, “The Committee will be patient as it determines what future adjustments to the federal funds rate are needed.” Conclusion – we do not have tight money.

Rising Interest Rates – Before we have rising rates, we must have strong economic growth and rising inflation. Conclusion – we do not have “rising interest rates.”

High Inflation – The Personal Consumption Expenditures index (PCE) shows only a year-over-year increase of 1.4% in January with the core index increasing only 1.8% over the same time period. Conclusion – we do not have rapid inflation.

Rapid Growth – The Fed’s prediction for GDP growth in 2019 is 1.9% to 2.2%. Conclusion – we have not had, nor is it predicted we will have, rapid growth.

Overvaluation – Based on our estimates of $167 of operating earnings this year, we believe the S&P 500 Index has the potential to challenge the 3000 level with a PE ratio of 17 to 18 times. Conclusion – we do not have an overvalued stock market.

Based on these five economic conditions, we do not believe a bear market is on the six to nine-month horizon.

Will the following two leading indicators predict the next bear market?

1. The U.S. Treasury Yield Curve as of March 29 is below.

There is a noticeable dip in the yield curve at 2yr, 3yr, 5yr, and 7yr. Those yields are below the yields at 1mo, 2mo, 3mo, 6mo, and 1 year. The curve tilts upward nicely from 7 years to 30 years.

It is true the yield curve is the best forecasting tool for identifying recessions early. A yield curve inversion has successfully forecasted the past seven recessions. But is a yield curve inversion foolproof? No. Here is why:

First, the yield curve will on occasion invert with no recession. This happened in 1998 and 1965-66. Both times, the Fed cut rates and economic growth continued.

Second, when we have a yield curve inversion, that signal does not say how far away a recession is. Sometimes it is only months away. The last time (in 2006), it took two years for the recession to begin.

Third, Prof. Campbell Harvey of Duke University has analyzed curve inversions and has concluded the best part of the curve to focus on is “three months to 10 years.” He also concluded the curve needs to be inverted on average for three months, not just a few days, to provide a solid signal that a recession is coming.

So, for now, the “partially inverted yield curve for a few days” is telling us the economy is slowing, but we do not have a recessionary signal yet.

2. The Conference Board said the Leading Economic Index (LEI) increased 0.2% in February for the first time in five months. 

The LEI spokesperson said, “The U.S. LEI growth rate has slowed over the past six months, suggesting that while the economy will continue to expand in the near-term, its pace of growth could decelerate by year end.”

Neither the Treasury yield curve nor the LEI suggest the beginning of a near-term (6 to 9 months) recession.

Stock Market Valuation

We now estimate 2019 S&P 500 operating earnings will approach $167. Our estimated price/earnings ratio range remains at 17 to 18 times operating earnings. Therefore, the higher end for the S&P 500 Index this year is 3006 = 167 x 18.

Recommended Action for Your Stock Portfolio

Lorenz Financial expects the bull market trend to remain intact at least into the second half of 2019. We regard the risk of a recession as low at this time. Our two key pre-recession indicators continue to suggest the economy will continue on a slower growth tract in 2019. Therefore, we recommend investor’s stock market allocation should be fully invested in a low-cost, highly diversified, and tax-efficient portfolio at this time.

Fidelity Investments get snagged again.

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The Labor Department is investigating Fidelity Investments over an obscure and confidential new fee imposed by Fidelity on almost all mutual fund companies. The annual charge, which Fidelity calls an “infrastructure fee,” is aimed at fund companies that sell their funds on Fidelity’s platform.

The issue is whether or not the new fee is properly disclosed to Fidelity platform customers, as well as employees whose retirement plan is administered by Fidelity.

Fidelity applies the fee of 0.15% to ALL assets of a mutual fund company, not just the funds sold on Fidelity’s platform. The Fidelity document that outlines the fee is “not to be distributed to the public as sales material in oral or written form” and “may not be shared with any third party.” Sounds like someone is trying to hide something.

Fidelity spokesperson Vincent Loporchio said in part, “Fidelity is entitled to be compensated.” Lorenz Financial says, “No, Mr. Loporchio, no one is entitled!”

Lorenz Financial does not offer Fidelity mutual funds to clients; we do not use Fidelity as a broker for client trades; and we do not use Fidelity as a custodian of client funds.

So, a stock market investor wants to begin investing in real estate.

Lorenz Financial can help you plan for your April investments.

1. Some Lorenz Financial clients use ETFs or mutual funds for diversified real estate investing. Real estate adds diversification beyond U.S. stocks, international stocks, U.S. bonds, and cash investments. Our recommendation is to not go above 10% to 15% in U.S. real estate and 5% to 10% in International real estate, for a total of 20% maximum.

2. For maximum diversification, Lorenz Financial always recommends no more than 15% in any one mutual fund. If someone is buying a single piece of investment real estate, think of that as less diversification than a single mutual fund. Lorenz Financial’s suggestion is, therefore, put no more than 10% of a portfolio in any one piece of real estate.

3. Millions of people have made millions of dollars in real estate over the years. Some people have 100% of their investments in real estate (let’s say 10 different properties). That is the same level of risk as having 100% of your portfolio in 10 individual stocks. Both examples represent a very high-risk portfolio.

4. Keep in mind real estate is not nearly as liquid as stocks.

5.  Keep in mind real estate is not as transparent as stocks. It’s easy to get the closing price of your stocks or mutual funds on a daily basis. But no one sends you a letter every Friday saying the value of your real estate went up or down by so many $ in the past week.

6. Your real estate return, just like your stock market return, is significantly based on how well you “buy low.”

7. If an investor buys a piece of land with no building on it, it is the same thing as buying a small bag of diamonds, 40 oz. of gold, a $50,000 oil painting, etc., as none of these investments distribute any income.

8. If this will be an investor’s first real estate investment, start small with no more than 5% of their portfolio.

9. Stock and real estate investing both require the investor’s:

  • Time
  • Knowledge and experience
  • Desire to investigate and manage the asset
  • Having a financial plan
  • Courage to last through the downturns without selling
  • Patience and willingness to be a long-term investor

Bond Market

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For all of the calendar year 2018, real GDP increased 2.9%. The incoming data indicates economic growth will be muted in the first quarter. This is attributed to the combination of the partial federal government shutdown and the ongoing trade negotiations. For all of 2019, we are lowering our GDP forecast to 2% to 2.4%. The first-quarter GDP is forecasted to be 1.3% to 1.7% as predicted by the New York Fed and the Atlanta Fed respectively.

Federal Reserve

The Federal Open Market Committee (FOMC) met on March 19 and 20 and voted unanimously to keep the federal funds rate unchanged at 2.25% to 2.5%. The post-meeting statement noted members view sustained expansion of economic activity, strong labor markets conditions, and inflation near the Committee’s 2% target should continue.

The Fed also announced they intend to slow the pace of the balance sheet reduction by reducing the cap on monthly U.S. Treasury redemptions from the current pace of $30B per month to $15B beginning in May 2019. The Fed plans to stop all U.S. Treasury redemptions at the end of September. This will put their balance sheet at $3.5T.

U.S. Treasuries

Treasury Sec. Mnuchin asked Congress to increase the debt ceiling “as soon as possible.” So far, no action from Congress – so what else is new?  In the meantime, the 10 yr Treasury versus the 2 yr and the 30-year vs the 3-month interest rate spreads remain positive but nearing an inversion. But on April 1, the 10 year Treasury increased in yield a whopping 8 basis points from 2.41% to 2.49%. That is a step in the right direction.

Recommended Action for Your Bond Portfolio

Our bond market recommendations have not changed since last month. We are investing only in the following types of bond funds or ETFs:

  • Short-term, investment-grade U.S. bond funds
  • Intermediate-term, investment-grade U.S. bond funds
  • Short-term, high-yield U.S. bond funds
  • High-quality U.S. money market funds
  • Conservatively allocated U.S. balanced funds (50% to 70% in bonds, the rest in stocks)