Welcome to the August 2024 Newsletter. This month, we’re discussing the economy, employment, financial terminology, and more.
Summary
We suggest there are three data points to consider when deciding whether or not to invest in the U.S. stock market from now through 2025:
1. Stock analysts are now predicting all 11 sectors of the S&P 500 Index are expected to show positive earnings growth in 2025.
2. Bank of America research shows their client dollar flows into the stock market during early July were the largest since 2008.
3. Interest rates will be lower in 2025 as compared to where they are right now.
We believe these are the most important things to consider when evaluating the backdrop for future stock market performance through 2025. These are not guarantees and no one has eliminated the possibility of a market correction (a short-term downward trend of -10% or more), but our expectation remains optimistic for the remainder of 2024 through year-end 2025.
Quote of the Day
Dave Ramsey
Ramsey is an American radio personality who offers financial advice in a three-hour daily program.
“Do not accumulate more than 50% of your family’s gross income in motorized vehicles (with or without a loan). This includes cars, trucks, motorcycles, boats, snowmobiles, jet skis and RVs – anything with a motor – because these vehicles depreciate very fast. Excess money in depreciating assets will limit a family’s ability to successfully build wealth.”
Pop Quiz
According to the IRS, what is the most common mistake filers make on their federal income tax return?
The answer is at the bottom of the newsletter.
The Economy
Employment
Total U.S. nonfarm payroll employment rose in June by 206,000. The official unemployment rate, U-3, increased to 4.1%. The April and May 2024 combined employment numbers were revised lower by a significant 111,000 than previously reported.
Chart 1 below is based on the Bureau of Labor Statistics official unemployment rate, U-3.
Chart 2 below shows the two-year trend of employment growth has slowed. Slowing employment is exactly what the Fed wants to see prior to cutting interest rates.
The Job Openings & Labor Turnover Survey (JOLTS) was unchanged at 8.2 million open jobs across the country as of the last business day in June. The 10-year chart below shows the recent downward trend in open jobs.
The seasonally adjusted Total U.S. Unemployment Rate, U-6, remained the same at 7.4% in June. There were 7.2 million people unemployed in June, age 16 and older. Last month it was 6.2 million people unemployed.
June Unemployment Rates by Education Level
| Less Than High School Diploma | 5.9% |
| High School Graduate, No College | 4.2% |
| Some College, Associate's Degree, or Skilled Trade Degree | 3.4% |
| Bachelor's Degree or Higher | 2.4% |
Average hourly earnings of all employees on private nonfarm payrolls were up 3.9% in June compared to a year ago. This was 0.2% less than last month.
Leading Economic Indicators (LEI) sponsored by The Conference Board
The LEI decreased by 0.2% in June. The Conference Board’s spokesperson said, “The decline continued to be fueled by gloomy consumer expectations, weak new orders, negative interest rate spread, and an increased number of initial claims for unemployment. However, due to the smaller month-on-month rate of decline, the LEI’s long-term growth has become less negative, pointing to a slow recovery. Taken together, June’s data suggest economic activity is likely to continue to lose momentum in the months ahead. We forecast cooling consumer spending will push US GDP growth down to 1% in the third quarter of 2024.”
Gross Domestic Product (GDP)
The Bureau of Economic Analysis said the advance estimate for GDP in the second quarter of 2024 rose at an annual rate of 2.8%. GDP for the first quarter 2024 was 1.4%.
The increase in real GDP reflected an increase in consumer spending and inventory investment.
Quarterly Labor Productivity - Updated numbers will be available in the September newsletter
Seasonally adjusted nonfarm business labor productivity increased 0.3% at an annualized rate in the first quarter of 2024 as reported by the Bureau of Labor Statistics. With this number so low, we hope the rest of the year will show a dramatic increase in productivity. In the same quarter a year ago, the increase was a revised 2.9%.
Fourth quarter 2023 data was revised up to 3.5% from 3.2%. Artificial intelligence over the next 10 years will tend to increase productivity going forward.
Inflation
Annual inflation dropped slightly to 2.5% as measured by the Personal Consumption Expenditures (PCE) index in June. Core PCE index, which excludes food and energy, remained the same at 2.6% in June.
The peak Core PCE inflation this cycle was 5.6% 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 July 31, 2024, the average 30-year fixed-rate mortgage had an interest rate of 6.82%, compared to 7.06% last month. The average 15-year fixed-rate mortgage had an interest rate of 6.32%, compared to 6.47% last month.
The median existing home sale price rose to another record high in June to $426,900. That is a 4.1% increase from June 2023 according to the National Association of Realtors. The inventory of existing homes for sale remains low but increased to a 4.1-month supply in June. In May it was 3.7 months. The supply target is 6 months
The U.S. Public Debt as Issued by the Treasury Department as of July 31, 2024, was:
$35,009,000,000,000.
Last month it was $34,855,000,000,000.
Important Dates in August
August 2024 – Voyager 1, launched on September 5, 1977, became the first man-made object to leave our solar system and pass into interstellar space. It is now approximately 15 billion miles from our sun. Pluto, a dwarf planet, is approximately 6 billion miles from the sun and the earth is 0.093 billion miles from the sun.
August 4 – U.S. Coast Guard Day. In 1790, The U.S. Congress authorized the construction of ten cutters. These ships were built to enforce U.S. tariff Laws. The Revenue Cutter Service was the predecessor of the U.S. Coast Guard.
This black leopard, Panthera Pardus, is taking a hearty drink after his beef and salmon dinner.
August 6, 1945 – Uranium gun-type (Little Boy) bomb was dropped on Hiroshima.
August 9, 1945 – Plutonium implosion-type (Fat Man) bomb was dropped on Nagasaki.
August 14, 1945 – VJ Day or World War II’s Victory over Japan Day (August 14 in the US, August 15 in Japan)
August 17 – National Black Cat Appreciation Day
August 22 to 24 – The Federal Reserve Bank of Kansas City hosts the Jackson Hole Wyoming Economic Symposium.
August 28, 1963 – Martin Luther King Jr. gave his “I have a dream” speech during the ‘March on Washington for Jobs and Freedom’. Dr. King had a written text, but he only finished the first seven paragraphs when Mahalia Jackson, a renowned gospel singer, yelled out from sitting nearby, “Tell them about your dream Martin, tell them about your dream!”
Dr. King pushed aside his prepared notes and began what history now records as one of the greatest spontaneous and inspirational speeches ever delivered.
The Stock Market
Commentary
Dan Greenhaus
Greenhaus is the Chief Strategist and Economist for Solus Alternative Asset Management in Summit, New Jersey.
Greenhaus said on CNBC on July 10, “We can not declare an economic soft landing (meaning no recession) until the Federal Reserve has reduced interest rates by some amount without having caused a recession or a recession occurring simultaneously.”
“Yes, things have gone better than I expected and predicted 18 months ago but the idea the Fed can cut rates by 1% to 1.5% and glide the economy into a soft landing is effectively what the stock market is betting on. The Fed’s ability to do so is an open question.”
“I think the odds are the Fed is going to succeed; but until they have done it, no one can declare victory.”
From Mark, cutting interest rates alone does not cause a recession. The question is with consumer spending decreasing and unemployment increasing, are we already accelerating towards a recession and cutting interest rates perhaps in September is just too late to forestall the next economic and stock market downturn? Or will starting to lower interest rates this year be ‘just in time’ to prevent an economic decline?
Keep in mind there is no point agonizing about this dilemma. There will always be the next stock market correction and the next recession which initiates a bear (down) market. The stock market goes up more than it goes down. So, use your courage and patience to push through and enjoy the ride to higher stock market highs over the long term.
Stock Market Valuation
Brian Belski
Belski is the Chief Investment Strategist for BMO Capital Markets in Chicago, Illinois.
On July 18, Belski said on CNBC, “What is happening in the market today is very normal.” (This week the S&P 500 Index was down 2%). “We said eight months ago in print, we are in the second year of a cyclical bull market within a 25-year secular bull market that began in 2009.”
“Our expectations for the S&P 500 Index at year end have been published as follows:
5,600 is our base case
6,000 is our bull case”
“The average correction since 1949 has been -9.4%. In April this year the S&P 500 Index dropped 5.5% so that is not enough. We believe we need to see another 4 to 5% drop yet this year. So, we think our base case target of 5,600 looks pretty good, though it probably could be higher. We are very comfortable that stock prices will be higher at year end than they are right now”
The S&P 500 Index closed on July 31 at 5,522.30
Monthly Performance of the S&P 500 Index
Recommended Action for Your Stock Portfolio
Josh Brown
Brown is the CEO of Ritholtz Wealth Management in New York City.
Brown said on July 18 on CNBC, “I want to add one thing – there is a tendency among traders and investors – people love turning points or a new narrative. But frequently when you see these bursts of different activity (such as small caps stocks outperforming almost everything) a lot of times there is a letdown as we realize, oh wait a minute, that was just a countertrend rally (vs the original trend of large cap growth outperforming everything). Maybe this is it – a major change in the pricing trend of stocks – but probably it isn’t.”
“Yes, this is exciting as Apple (and others) are being sold off and money is flowing into the bottom 3,000 stocks. I’m not saying this cannot continue for a while, I just wouldn’t bet this is the new trend.”
We at Lorenz Financial believe Mr. Brown is saying, “Have some patience as this rotation will not last and the hugely profitable mega cap companies as well as the whole market will return to higher stock prices.
·Not FDIC Insured ·No Bank Guarantee ·May Lose Value
A Brief Discussion on Risk
We have heard more than one investor say, “I don’t want to take any risk with my money.” To gain more insight into this statement, Mark always respectfully asks, “Risk from what?” Frequently the investor seems perplexed with this question as they have assumed all risks are just ‘one big’ risk. However, there are many different types of risk. Frequently the risk people want to minimize is the “risk of default” – also described as “I am more interested in return of my principal than the return on my principal”.
An extreme asset allocation for a no ‘risk of default’ investor would be bank CDs and cash. We agree the risk of losing capital is very low with this portfolio so long as all the CDs are FDIC or NACU fully insured.
“But Mark, are you saying CDs have risk? No way! What are you talking about?”
Yes, CDs have risk! CDs with their historically low long-term returns will not provide the income needed by a retiree after considering future inflation and income taxes. This is called “income risk” and CDs have income risk. Therefore, we feel even the most conservative investor should have 40% of their retirement money invested long-term in the stock market.
Financial Markets Vocabulary
What is Artificial Intelligence?
Artificial intelligence (AI) is intelligence exhibited by a computer system. AI is the field of research in computer science that studies methods and develops software that enables computers to perceive their environment and uses learning to suggest action that maximizes the chances of achieving a defined goal.
Some high-profile applications of AI include:
- Web search engines
- Software engines that make recommendations
- Recognizing and responding to human speech
- Piloting autonomous vehicles
- Developing creative tools
- Exhibiting strategy in games or business
Generative AI is artificial intelligence capable of generating text, images, videos, or other data. Generative AI has uses across a wide range of industries, including software development, healthcare, finance, entertainment, customer service, marketing, art, writing, fashion, and product design. However, concerns have been raised about the potential misuse of generative AI such as cybercrime, the use of fake news to deceive or manipulate people, and the mass replacement of human jobs.
A large language model (LLM) is an AI model notable for its ability to achieve general-purpose language generation to answer an input query. These models acquire knowledge about syntax and semantics through machine learning of extremely large data sets such as the contents of every written book.
A generative AI model can be open or closed. What does that mean?
An open generative AI model will search the entire internet to develop its response. This means the answer might take a few seconds. Also, as the entire internet will always contain some misleading or false information, the answer provided by an open system must be at least a little suspect.
A closed generative AI model will only search a specific database. For example, a large corporation might develop a closed AI model of just their current and prior suppliers. A closed AI model will give a very quick answer, with a very low chance of containing any misleading information. As any closed system contains limited data, its response will also be limited.
Two example questions that AI cannot answer today are, “What is 123.0 x 17.5 = ?” and “What time is it right now?” Non-AI computer routines can answer these questions of course, but not AI.
Special Guest Comment
Dave Ramsey
Over the years Dave has said, “Never listen to a broke guy.” In other words, Dave says never take financial advice from someone who is broke. On July 11, a caller asked Dave, “When is someone considered ‘broke?’”
Dave’s characteristics of a broke guy are:
- Lives paycheck to paycheck – spends everything he makes
- Has no emergency fund
- Has credit card and other debts
- Lives in an apartment (no problem with that) but has a $60,000 pickup in the parking lot with a 7-year loan.
OK, Now What Do I Do?
Shannon Saccocia
Saccocia is the Chief Investment Officer of Neuberger Berman Private Wealth in New York City.
Saccocia said on CNBC on July 18, “From a long-term perspective, there are three sustainable trends in software that companies will be looking at to invest. Those are cloud, cybersecurity, and AI.
65% of the worldwide cloud computing is managed by Amazon Web Services, Microsoft Azure, and Google Cloud Platform. A large ETF in this sector is SKYY.
The four largest cyber security companies are:
- Palo Alto Networks (PANW)
- Crowdstrike Holdings (CRWD)
- Fortinet Inc. (FTNT)
- Zscaler Inc. (ZS)
A large ETF in this space is: BUG
The five largest companies in AI are: GOOGL, MSFT, NVDA, IBM, and META
Other sector-specific technology ETFs to consider are:
- VanEck Semiconductor ETF (SMH)
- iShares Expanded Tech Software Sector ETF (IGV)
ETFs that cover the whole U.S. technology universe are:
- Invesco QQQ Trust (QQQ)
- Vanguard Information Technology Sector (VGT)
The above discussion is solely regarding the technology sector of the S&P 500 Index. Warning! Do not put all your eggs in the technology basket!
- Not FDIC Insured · No Bank Guarantee · May Lose Value
Our Financial Bad Boys This Month
AT&T Says Hacker Stole Wireless User Data
The Wall Street Journal, page B9, July 13-14, 2024
AT&T said a hacker downloaded their call and text logs covering almost all of its 90 million wireless subscribers. The cellphone carrier said in a securities filing that the data mostly from 2022, was downloaded in April 2024. This data had been saved on a third-party cloud platform. Fortunately, the stolen records did not include personal subscriber information such as names, credit-card data or Social Security numbers.
The FBI and FCC said they have launched an investigation into the breach. John Scott-Railton, a senior researcher at the University of Toronto called the hack a “mega breach”, emphasizing the scale of the stolen data to be a major national security threat.
Senator Ron Wyden, D-Ore., said, “This is not the first data breach revealed by a major phone company and it won’t be the last. These hacks, which are almost always the result of inadequate cybersecurity, won’t end until the FCC starts holding wireless carriers accountable for their negligence.”
AT&T said it was cooperating with law enforcement and that at least one person was already apprehended.
Mark says to Senator Wyden, “Perhaps members of Congress need to actually work 8 hours a day, five days a week and pass the appropriate legislation that protects wireless subscribers instead of passing the buck to an unelected regulatory commission!”
A Brief Update on Electric Vehicle Repair Costs
The average U.S. repairable auto insurance claim after a vehicular accident with an internal combustion engine (ICE) is $4,500. The average repair claim with an EV is $6,000. Why are EVs more expensive to repair (and therefore to insure)? Because EV parts tend to be in short supply and more expensive, and the average amount of labor hours to repair an EV is higher than a damaged ICE vehicle.
The Bond Market
Commentary
Jerome Powell
Powell was nominated to the Federal Reserve Board of Governors in December 2011 to fill the unexpired term of Frederic Mishkin. In January 2014 Powell was nominated for full term of 14 years, as a Fed Governor, and became its chairman in 2018 (a 4-year term). In May 2022, Powell was sworn in for a second 4-year term as chairman.
Twice the Senate Banking Committee voted 22-1 to approve Powell’s nomination as Federal Reserve Chair. The only senator to vote against Powell both times was Elizabeth Warren.
On July 31, at the Federal Reserve’s Press Conference, Chair Powell said, “My colleagues and I remain squarely focused on achieving our dual mandate goals of maximum employment and stable prices for the benefit of the American people. Our economy has made considerable progress towards both goals over the past two years. The labor market has come into better balance and the unemployment rate remains low. Inflation has eased substantially from a peak of 7.0% to 2.5% (CPI data). We are strongly committed to returning inflation to our 2% goal in support of a strong economy that benefits everyone. Today the Federal Open Market Committee (FOMC) decided to leave our policy interest rate (the Federal Funds Rate) unchanged and to reduce our securities holdings. We are attentive to the risks on both sides of our dual mandate.”
Recommended Action for Your Safe Money
Our recommendations for an investor’s safest money have not changed from last month. Our recommendations, in no particular order, are:
- 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
- Intermediate-term U.S. Treasury bond funds
- U.S. Savings I-Bonds which have a max savings of $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 an investor’s total portfolio. These products are mostly credit-safe, but they will not provide the growth or income needed to stay ahead or even keep up with taxes and inflation.
PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS.
Pop Quiz Answer
According to the IRS, what is the most common mistake filers make on their federal income tax return?
Answer: The most common mistake is filers record the wrong Social Security number on their return. This makes it impossible for the IRS to process the return until the Social Security number is corrected.