Welcome to the April 2024 Newsletter. This month, we’re discussing the economy, employment, financial terminology, and more.
Summary
The Federal Reserve’s most watched inflation indicator, Core PCE, took another small step lower in February to 2.8%. The Fed’s conclusion is that they have not yet seen enough evidence that inflation will continue to drop to their 2% goal. Therefore, they have decided to continue to wait before cutting interest rates.
Congress and the President continue to spend money we do not have as their “fiscal policy” is running contrary to the Fed’s “monetary policy”. In the meantime, 30-year mortgages are at 6.9% and the stock market keeps going up so far.
Our expectation for 2024 remains the same: there will be no recession this year, inflation will continue to slowly drop towards 2%, and unemployment will stay low. We should have a decent year in the 2024 stock market so long as corporate earnings come in as expected.
Quote of the Day
Harry Truman
Harry S. Truman (May 1884 – December 1972) was the 33rd President of the United States serving from 1945 to 1953. Truman was elected vice president in the 1944 presidential election and assumed the presidency upon Roosevelt’s death in April 1945. Truman authorized the first use of nuclear weapons in World War II against the Japanese. After the war, Truman implemented the Marshall Plan to rebuild Western Europe.
Truman said, “Show me a man that gets rich by being a politician, and I’ll show you a crook!”
Pop Quiz
What are the federal income tax brackets for singles and married couples in 2024?
The answer is at the bottom of the newsletter.
The Economy
Employment
Total U.S. nonfarm payroll employment rose in February by 275,000. The official unemployment rate, U-3, increased to 3.9%. The December 2023 and January 2024 combined employment numbers were revised lower by 167,000 than previously reported.
Chart 1 below is based on the Bureau of Labor Statistics official unemployment rate, U-3.
In chart 2 below, even though the two-year trend of employment growth has slowed, the economy is still able to maintain good employment growth.
The Job Openings & Labor Turnover Survey (JOLTS) showed little change with 8.9 million open jobs across the country as of the last business day in January. The 10-year chart below shows the recent downward trend in open jobs.
The seasonally adjusted Total U.S. Unemployment Rate, U-6, increased in February to 7.3% vs 7.2% last month. There were 6.9 million people unemployed in February, age 16 and older. Last month it was 6.8 million people unemployed.
February Unemployment Rates by Education Level
| Less Than High School Diploma | 6.1% |
| High School Graduate, No College | 4.2% |
| Some College, Associate's Degree, or Skilled Trade Degree | 3.1% |
| Bachelor's Degree or Higher | 2.2% |
Average hourly earnings of all employees on private nonfarm payrolls were up 4.3% in February compared to a year ago. This was 0.2% lower than last month.
Leading Economic Indicators (LEI) sponsored by The Conference Board
The LEI for February increased by 0.1%! This was the first increase since February 2022! The Conference Board’s spokesperson said, “Strength in weekly hours worked in manufacturing and strong residential construction drove the LEI’s first monthly increase in two years. Despite February’s increase, the index still suggests some headwinds to growth going forward.”
Gross Domestic Product (GDP)
The Bureau of Economic Analysis said the third and final estimate for GDP in the fourth quarter of 2023 rose at an annual rate of 3.4%. GDP for the first quarter 2023 was 2.2%, 2.1% in the second quarter and 4.9% in the third quarter.
The increase in real GDP reflected increases in consumer spending and government spending.
Labor Productivity
Nonfarm business labor productivity increased 3.2% in the fourth quarter of 2023 as reported by the Bureau of Labor Statistics. In the same quarter a year ago, the increase was a revised 2.6%.
Third quarter 2023 data was revised down to 4.7% from 4.9%. Artificial intelligence over the next 10 years will tend to increase productivity going forward.
Inflation
Annual inflation increased slightly to 2.5% as measured by the Personal Consumption Expenditures (PCE) index in February. Core PCE index, which excludes food and energy, dropped to 2.8% in February from a revised 2.9% the previous month. It was 3.4% in October 2023.
The peak Core PCE inflation this cycle was 5.4% in February 2022. Lower inflation is reason for optimism for the economy as a whole and for the Federal Reserve to begin lowering interest rates later this year.
Mortgage Rates and Existing Home Prices
As of March 28, 2024, the average 30-year fixed-rate mortgage had an interest rate of 6.91%, compared to 7.15% last month. Also, the average 15-year fixed-rate mortgage had an interest rate of 6.47%, compared to 6.64% last month.
The median existing home sale price in February rose to $384,500. That is a 5.7% increase from February 2023 according to the National Association of Realtors. The inventory of existing homes for sale remains low with only a 2.9-month supply.
The U.S. Public Debt as Issued by the Treasury Department as of February 29, 2024, was:
$34,609,000,000,000.
Last month it was $34,414,000,000,000.
Important Dates in April
April 1 – April Fools’ Day
April 4, 1968 – Dr. Martin Luther King Jr. was assassinated in Memphis, Tennessee.
April 9 – General Lee surrendered to General Grant ending the Civil War. This was Palm Sunday in 1865.
April 11 to 14 – The Masters Tournament in Augusta, GA
April 13 – Thomas Jefferson’s birthday.
April 14, 1865 – It was Good Friday in 1865. Abraham Lincoln, the 16th US President, was assassinated in Washington, DC. He died the next morning on Saturday. The next day was Easter which became known as Black Easter. Lincoln was the first US President to be assassinated in office.
April 15, 1947 – Jackie Robinson first stepped onto Ebbets Field and played first base for the Brooklyn Dodgers, breaking the color barrier in Major League Baseball.
April 15 – Patriots Day, celebrated on the third Monday in April. This day commemorates the Battle of Lexington and Concord which took place on April 19, 1775, and were the first battles fought in the American Revolutionary War.
April 15 – Federal Tax Day is the last day to submit a 2024 federal income tax return or submit an extension that delays filing until October 15. In either case, any money due to the IRS must be paid by April 15, 2024, to avoid a penalty and interest.
April 22 – Earth Day
April 22 to April 30 – Passover
April 30 & May 1 – The third Federal Open Market Committee (FOMC) meeting of 2024.
April 30, 1945 – Hitler commits suicide.
The Stock Market
Commentary
No one is talking about the 10% stock market correction we had from the end of July 2023 to the end of October 2023. But since then, the S&P 500 has ripped about 24% higher closing Thursday, March 28 at another all-time record high. This new high has brought out the stock market bears (those who are predicting a downward market trend).
Mike Wilson of Morgan Stanley said in late February, he “still expects the S&P 500 to retest the October 2022 lows of 3,580 and could potentially trade down to the 3,000 level.”
Also in February, Jeremy Grantham “rang the alarm on a sprawling US real estate bubble, warned US stocks are heavily overvalued and could disappoint for the next decade, and declared the booming American economy is divorced from reality.”
At Lorenz Financial, our expectations are:
1. There will always be the next recession, so why worry about exactly when it will come? We have no fear as we stand on our financial foundation of eliminating our debts, building our emergency fund, fully protecting our families from a catastrophic event with adequate insurance products, and saving 15% of our take-home pay for retirement.
2. The S&P 500 is at an all-time high; but remember, the all-time high reached on January 3, 2022, took us two years to climb above. Today we are only 9.4% above the January 3, 2022, stock market high. Wow, that is almost 5% growth per year! Is that really a bubble?
3. Inflation is coming down, almost every month. Unemployment is very low, and it is likely the Fed will begin to slowly reduce short-term interest rates later this year.
4. Corporate profits are expected to grow this year between 5% and 9%.
5. Yes, real estate prices are high; but additional supply will cut short future runaway real estate inflation. U.S. home builders are building as fast as they can.
6. As long as we continue to educate our youth with 4-year degrees, or 2-year degrees or trade schools, we will have a successful workforce for decades to come as compared to the rest of the world.
Stock Market Valuation
Oppenheimer raised their S&P 500 year-end target to 5500 from 5200.
HSBC raised their S&P 500 year-end target to 5400 from 5000.
Monthly Performance of the S&P 500 Index
The S&P 500 Index closed on March 28 (the last trading day of March) at 5,254.35 – another all-time closing high.
2023 Annual Performance of the S&P 500 Index
VOO, the market cap-weighted S&P 500 Index ETF, was up 26.3%.
RSP, the equal-weighted S&P 500 Index ETF, was up 13.7%.
Recommended Action for Your Stock Portfolio
The US stock market is at an all-time high. There are two paths to take assuming there will be another market correction this year, perhaps 5% to 10% down over the next three to six months. For investors who have been through this many times, just hold on by using your patience and courage. No one knows if this correction might last two months or eight months. But when the correction ends and the market goes back up, it is likely to go up quickly.
For those who lose sleep just thinking about a stock market correction, then this is a good time to sell. No don’t sell everything, but perhaps 10% to 25% of a stock market portfolio. There is no guarantee a correction will occur this year.
Here is something to think about. If an investor sells, what is the purpose of this new cash? Is it stock market reserves to be used to buy back in when the market is lower? Should this be considered a permanent change in the investor’s risk tolerance? Please do not sell without a plan for what comes next.
For investors who have their financial objectives as maintaining a high level of diversification, low cost, and tax efficiency, Lorenz Financial recommends these two exchange-traded funds:
VOO – Vanguard S&P 500 Index
VYI – Vanguard Total US Stock Market Index
·Not FDIC Insured ·No Bank Guarantee ·May Lose Value
Financial Markets Vocabulary
What did the Sarbanes–Oxley Act do?
This act, created by Congress in 2002, regulates certain corporate financial activities and improves the accuracy of financial statements. Among other things, the act prohibits personal company loans to directors and company officers, requires certification of financial statements by a firm’s Chief Executive Officer (CEO) and Chief Financial Officer (CFO), protects employee whistle-blowers, increases criminal penalties for securities law violations, requires disclosure of off-balance-sheet financing, and calls for improvement in the accuracy of pro forma financial statements.
The Budget and Economic Outlook for 2024
A report from the Congressional Budget Office.
Note this is not President Biden’s $7.2 trillion budget proposal, but the current estimate from the Congressional Budget Office in early March 2024 for fiscal year 2024.
OK, Now What Do I Do?
For seniors, in what year do they need to take their first Required Minimum Distribution (RMD)?
A holder of a qualified retirement plan, such as a 401K, 403B, 457, a state’s employee retirement plan (in Indiana it is PERF), or the federal government’s Thrift Savings Plan, or a rollover IRA, must take their first RMD as per:
1. The first RMD will be in the year the individual turns 73 for those who attain the age of 72 after December 31, 2022, or
2. The first RMD will be in the year the individual turns 72 for those who attain the age of 701/2 after December 31, 2019, or
3. The first RMD will be in the year the individual turns 701/2 for those who attain the age of 701/2 on or before December 31, 2019.
One item to note, if a person plans on taking out more money from their account beyond the RMD amount, for example, to pay for living expenses or to convert to a Roth IRA, the first withdrawal from the retirement account each year must be the RMD amount. Then additional withdrawals can occur during the year as needed.
Our Financial Bad Boys This Month
The U.S. Department of Education
Financial Aid Application is Botched–Again!
The Wall Street Journal, March 23–24, 2024, page A5
The disastrous rollout of this year’s federal financial aid application hit a new snag, with the Education Department saying roughly 200,000 applications will need to be recalculated.
The department, which administers the Free Application for Federal Student Aid (FAFSA), said it had miscalculated the financial needs of students who reported their owned financial assets in the application.
So, this error involves two mistakes: the miscalculation and the strong likelihood that no one will be held accountable for a botched job. When no one is held accountable, why would employees ever feel a sense of, “we need to and can do better”?
The Department of Education has approximately 4,400 employees with an annual budget of $68 billion. Remember, this department does not directly educate one student with their $68 billion.
The Bond Market
Commentary
Mohamed El-Erian
Mr. El-Erian is an Egyptian American economist and businessman. He currently is the President of Queens College, Cambridge, and chief economic adviser at Allianz. Mr. El-Erian has worked for The International Monetary Fund, Citigroup, and PIMCO, and has served as a member of the faculty of Harvard Business School.
After the Federal Reserve Chairman’s press conference on March 20, 2024, Mohamed spoke on CNBC on March 21 saying, “The Fed has realized two things:
1. The economy is weakening, and
2. We are living in a world where the supply side is the problem.”
“We therefore need to tolerate slightly higher inflation unless we want to sacrifice the economy.”
Mr. El-Erian was asked, “Why is the supply side the problem?”
He said, “There are four reasons:
1. Geo-politics and so many wars.” (The next war appears to be much closer to us—Haiti.)
2. We are re-designing our supply chains. Companies are emphasizing their supply chains for resiliency as much as for efficiency.
3. The labor market is not as flexible as we would like it to be.
4. We are looking at a very uncertain energy transition, and unfortunately, we are starting with a somewhat fragile electrical grid.” (Think of the massive utility-line-caused fires in California and Hawaii and frozen gas lines in Texas—all within the past few years).
“Put all this together and our supply chains will not be flexible enough and the Federal Reserve will have a choice to make:
a) Either they accept slightly higher inflation (than their 2% target), or
b) The Fed will unnecessarily drag the economy into a recession as they fight inflation with higher interest rates.”
Recommended Action for Your Safe Money
Our recommendations for an investor’s safest money are unchanged from last month. Our recommendations, in no particular order, are:
- Ultra-Short-Term U.S. Investment-Grade Corporate or Securitized bond funds
- Short-Term U.S. Investment-Grade Corporate or Securitized bond funds
- Intermediate-Term U.S. Investment-Grade Corporate or Securitized bond funds
- Short-term high-yield bond funds
- Short and intermediate-term U.S. Treasury bond funds
- Cash (in a money market mutual fund paying 4.5% to 5.0% per year.)
- Bank or Credit Union Certificates of Deposit (only if FDIC or NCUA insured!)
- U.S. Savings I-Bonds (max savings is $10,000 per account per year.)
Due to the relatively low return of these investment products, investors should not put 100% or anything close to that in these products. These products are for an investor’s safest money or perhaps 5% to 25% of their total portfolio. These products are safe, but they will not provide the growth needed to stay ahead of inflation and taxes.
PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS.
Pop Quiz Answer
What are the federal income tax brackets for singles and married couples in 2024?
Answer:
These relatively low tax rates are set to expire on December 31, 2025. By current law, tax rates will be higher in 2026 and beyond unless Congress and the President can agree on lowering the pending higher tax rates.