August 2020 Newsletter

Welcome to the August 2020 Newsletter. This month, we’re covering the coronavirus (COVID-19), its effect on the economy and Americans’ well-being, and other news. Please read on for more information.

Summary

Today our most important “public policy” is not our “monetary policy” or “fiscal policy.” Our most important public policy is our health response to COVID-19. Thus far, we are unimpressed with some government leaders and with some of our neighbors’ inability to contain the spread of the COVID-19. Simple steps such as avoiding crowded spaces and wearing a face mask are apparently impossible for too many to endure.

If there is alien life orbiting the earth looking down on us right now, certainly our recent collective actions and inactions have convinced them we are not advanced enough at this time to make contact.

Thankfully, our free enterprise economic system of capitalism has enabled a high degree of medical science innovation and has put us on the verge of significant advancements in therapeutics and vaccine development to fight this pandemic.

Regarding personal finances, our following message remains unchanged: employees should continue to make their weekly, biweekly, or monthly contributions to their employer’s retirement plan and personal and spousal IRAs. At this time, additional money can be added to an investor’s stock market allocation, but only on a dollar-cost-average basis. All portfolios remain fully invested.

The Economy

Employment

U.S. nonfarm payrolls rose in June by 4,800,000, and the unemployment rate decreased by 2.2 points to 11.1%. This is very positive news for employees returning to work.

The May payroll number was revised up to +2.7 million from +2.5 million. The April payroll number was revised down to -20.8 million from -20.7 million. The rolling three-month payroll average improved to -4.4 million this month from -6.5 million last month.

The Federal Open Market Committee (FOMC) predicts at year-end, unemployment will range from 9% to 10%.

Gross Domestic Product (GDP)

The Bureau of Economic Analysis said the first estimate of the 2020 second-quarter GDP decreased by -32.9%. This historic decline reflected the response to the spread of COVID-19 as governments issued “stay-at-home” orders in March.

Inflation

Annual inflation increased in June to 0.8% from May’s adjusted 0.5%, as measured by the Personal Consumption Expenditures (PCE) index. The core PCE index, which excludes food and energy, decreased in June to 0.9% from the adjusted 1.0% in May.

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

Thankfully, the inflation numbers above are 0.2% higher on average compared to last month’s numbers. Higher long-term inflation expectations this month are a good thing, as we must avoid our worst potential economic enemy: deflation.

Stock Market

Commentary

Our model portfolios remain fully invested in anticipation of better times ahead for the economy as we continue to view the COVID-19 pandemic as a temporary event. The health-related aspect of the market environment could lead to an interim buying opportunity. This is especially true given the potential for a second wave of COVID-19 this autumn and winter. If a buying opportunity presents itself, we will make a timely announcement.

Stock Market Valuations

We continue to estimate the S&P 500 Index earnings at $165 in 2021. With near-zero interest rates, we feel safe to assume a PE ratio of 20 times. This means the S&P 500 Index should reach the 3,300s. On July 31, the S&P 500 Index closed at 3,271. When 2020 comes to a close, we should be able to predict an S&P 500 Index high in 2021 with more confidence than we have today.

Recommended Action for Your Stock Portfolio

This has been a difficult year for the stock market, but even with anticipated additional volatility, we might see a small gain in 2020 for nearly everyone. We are looking forward to a favorable 2021.

In the short term, you should only buy on a dollar-cost basis. Keep your stock portfolio diversified and low cost.

COVID-19

The World Health Organization reports there are about 160 vaccines under development worldwide, with 20 that have started human testing.

Specifically, AstraZeneca (a British & Swedish company) and Oxford University were the first to begin Phase 3 trials with 10,000 subjects. The trials are being conducted in the UK, Brazil, and South Africa. A Phase 3 trial with 30,000 U.S. subjects will begin in August. Results of their Phase 1 and 2 studies of 1,077 healthy adults showed their proposed vaccine was tolerated and generated robust immune responses against the coronavirus. At this point, this is the most promising vaccine candidate.

Pfizer and their German partner, BioNTech SE, are pursuing four vaccine candidates. Results of their Phase 1 and 2 trials for all four candidates will have data submitted for peer review and publication in the near term. In the meantime, a Phase 3 study in the U.S. with 30,000 volunteers began on July 27 with their “most promising” vaccine candidate. This vaccine candidate received “fast track” status earlier from the Food and Drug Administration. If the Phase 3 results are positive, Pfizer said they will seek regulatory approval in October and have 100 million doses available in the U.S. by December.

Moderna announced their vaccine candidate completed a study that produced a positive immune response in all 45 patients in an early-stage trial. Moderna announced the start of their Phase 3 testing with 30,000 U.S. volunteers on July 27. Testing will be conducted at nearly 100 different sites to reach a diverse population.

Regeneron Pharmaceuticals has initiated late-stage clinical trials to evaluate its vaccine candidate. Regeneron is working with the National Institute of Health (NIH) to start Phase 3 testing at nearly 100 sites and will enroll 2,000 subjects. Regeneron’s technology is viewed as a highly promising approach to the development of a successful COVID-19 vaccine.

Johnson & Johnson is also working on a vaccine. They expect to begin a Phase 3 trial later this fall.

Not all of these vaccines will prove safe and effective at the conclusion of their Phase 3 trials. But the medical community seems to be optimistic that one or more of these vaccines will be successful and readily available — if not in December, then in early 2021. It’s likely that initial doses will be restricted to first responders, hospital and clinic staff and patients, nursing home staff and residents, school staff and teachers, and those aged 75 years and older. Younger people will be eligible for the vaccine in later weeks and months.

Virus Casualties

Please note that the chart’s vertical axis last month peaked at 50,000. The axis this month peaks at 100,000, so the situation is definitely far worse.

The “Daily Deaths” chart (below) used to show a downward trend, but now it also shows an upward trend.

Medicare Reminder for Caterpillar Retirees and Their Spouses

Some Cat employees might remember a long time ago, Caterpillar medical benefits paid for doctor visits, hospitalizations, and prescription drugs for life for retirees and their spouses. But times have changed, and Cat retirees and spouses now switch to Medicare on the first of the month in which they turn 65. Medicare doesn’t pay for everything, so many people purchase a supplemental insurance plan to help with Medicare Part A and Part B patient-paid expenses and a Part D prescription drug plan.

To help with these retiree expenses, Caterpillar has set up a Health Reimbursement Arrangement (HRA) to cover some medical insurance expenses up to a defined dollar limit per person per year.

Caterpillar has hired Via Benefits to administer the plan. Via will help a retiree select one or both types of plans – a supplement plan and a prescription drug plan. To get the HRA dollars from Cat each year, the employee and spouse MUST purchase one or both plans through Via. But Via marks up the price of a supplement plan by 7 or 8%. Thankfully, they do not mark up the price of a prescription drug plan.

What should a Cat retiree and spouse do? Purchase through Via only a prescription drug plan, receive the HRA dollars each year, and purchase a Medicare Supplemental plan directly from the insurance company.

Need help selecting the best plans beyond the help from Via? Contact Medicare Simplified at (513) 498-4061. They offer free seminars in Ohio, Indiana, and Kentucky. Help for those in other states is offered by phone. They are not affiliated with any insurance company or the government. We highly recommend Medicare Simplified. (We’re not receiving any compensation for this recommendation.)

Home Mortgage Recommendation

During every recession, interest rates drop – but not forever. If you have a home mortgage, now might be the time to refinance. Currently, 30-year mortgages are available below 3%, and 15-year mortgages are available at 2.5%.

We recommend having your mortgage paid off by the time you retire. For example, if you or one of your children are 30 years old, go for the 30-year mortgage. If you are 45 years old, maybe you should apply for the 15-year mortgage, if you can afford the higher payments due to the shorter term.

Just remember, first mortgage debt is okay. All other debt is bad debt.

Who is the corporate bad-boy this month?

Starbucks has approximately 10,000 company-owned stores in the U.S. and Canada and sells great coffee. The stock has a market capitalization of $85 billion. Over the past few years, the stock has paid a dividend for each share of stock as follows:

• 2017 – $1.05 / year
• 2018 – $1.32/ year
• 2019 – $1.49 / year
• 2020 – $0.41 per quarter thru two quarters ($1.64/year expected)

On March 18, 2020, the Starbucks board announced a stock buyback program of 40 million shares. The CEO, Kevin Johnson, said the approval is “nothing above and beyond” its usual share buyback program.

Starbucks is doing great! They have a big market cap, they’re raising the dividend every year, and they’re issuing more stock buybacks. Obviously, Starbucks’ stockholders are very happy!

So, if Starbucks is doing so great, why did they ask the landlords of their 10,000 stores in an email recently for 12 months of rent forgiveness?

The reaction has been total astonishment. The San Clemente, California, Starbucks landlord (Leon Brooks) wrote Starbucks back and said, “I am highly disappointed, disgusted, and angry.”

Bond Market

Commentary

The dismal second-quarter GDP data emphasizes how important it is for our policymakers to provide both fiscal and monetary policy support throughout the COVID-19 pandemic. The U.S. economy is a consumption-driven economy, which means we need to provide temporary relief to workers displaced by job losses caused by the public health crisis. Temporary relief is short term and can be withdrawn once we emerge from the pandemic.

Federal Reserve

The Federal Open Market Committee (FOMC) said they expect to maintain a zero-interest-rate policy until they are confident the economy is in a sustainable recovery. The FOMC stated, “We will increase holdings of Treasury securities and agency residential and commercial mortgage-backed securities at least at the current pace to sustain smooth market function.” This means that unlimited quantitative easing (QE) will continue for the foreseeable future. The Fed has already increased the size of its balance sheet by roughly $3 trillion in 2020.

U.S. Treasury

As we write this newsletter, Congress is negotiating another round of fiscal stimulus. The stimulus is likely to include an extension of the federal supplement to state’s unemployment benefits, as well as another round of one-time checks for qualifying recipients. The goal of the stimulus is to support consumer spending and assist the 30 million workers forced out of work by the COVID-19 pandemic.

Recommended Action for Your Bond Portfolio

The Fed’s zero-interest-rate policy has caused money market accounts to lower their interest rate from 1.7% at the beginning of the year to 0.1% or lower now. Therefore, our bond recommendations have changed, as we no longer recommend holding some excess cash. Below are our four recommended bond categories for an investor’s bond portfolio:

• Short-term U.S. bond funds
• Intermediate-term U.S. bond funds
• Ginnie Mae Bond funds
• TIPS bond funds

**Please note: Everyone should maintain a healthy emergency fund of at least 6 to 9 months of home expenses before investing in a stock or bond portfolio.**

PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.