Welcome! We have a lot to discuss, including information on signing up for Medicare and some interesting news on brokerage trades.
The Fed’s monetary policy remains accommodative, but the Federal Funds’ rate is set to increase in December to 1.25 to 1.5%. The Fed is also proceeding with Quantitative Tightening, which should slowly raise long-term interest rates. Inflation is low, which allows the stock market to achieve all-time new highs. Home prices have increased 6.2% in September year over year. There are no signs of a pending recession. All portfolios remain fully invested.
Signing Up for Medicare Is Challenging
So, you are turning 65 in a year or so and are beginning to think about signing up for Medicare. Good for you, but you will have to pick one of ten different plans. Then, once you pick a plan, you need to pick from half a dozen to a dozen different insurance companies that offer that plan in your county. Then, do it all over again for prescription drugs – Part D.
Once you have your Medicare plans, you’ll need to decide if you need or want a supplemental plan from an independent insurance company. Careful now. If you make a mistake in picking the best plan for you, it could cost you a lot of money. Hey, retirement is supposed to be easy—so how can this be made easier?
If you live in Indiana, Ohio, or northern Kentucky, you are in luck. The company, Medicare Simplified, puts on free seminars explaining everything. They make money only by giving clients one-on-one advice as to which plan is best for them. Medicare Simplified can be contacted at (513) 498-4061 or email at firstname.lastname@example.org to find when a free seminar is close to you.
This is the most valuable free seminar Lorenz Financial has ever attended. If you live in a different state, there are likely free seminars put on by other companies.
Lets review the five primary causes of a bear market:
- Tight Money – The Federal Reserve has raised short-term interest rates four times since December 2015. Quantitative Tightening began in October 2017 and continues. Even so, the Fed’s monetary policy is rated “accommodative.”
- Rising Rates – The yield of the 10-year Treasury will continue to increase and could reach 2.5 to 3.0%. Will this be a headwind to stock prices? Likely no, unless inflation and GDP growth begin to increase rapidly.
- High Inflation – The core PCE inflation index stands at 1.4%. The Fed’s target is a minimum of 2%. Therefore, high inflation is not foreseeable in the near future.
- Rapid Growth – We predict 2018 economic growth will be 2.5 to 3.0%. This growth rate will not upset the apple cart and not bring about a recession.
- Over Valuation – It can be argued the stock market is in an “over valued” condition. But, if the tax plan passes Congress and is signed by the President, operating profits could exceed $149 next year for the S&P 500 companies. Note in 1999, PE ratios hit 30 and we are nowhere near that level today.
Therefore, there are no signs of a recession going forward.
S&P 500 Index Operating Earnings & Potential Going Forward
We are maintaining our S&P 500 Index operating earnings estimate of $142 in 2018 with no federal corporate tax reductions. Combining our estimate with our price/earnings ratio range of 17 to 18 times, we expect the S&P 500 Index can trade into the 2700s going forward. The stock market has history of trading into “over-valued” territory during extended bull markets.
Recommended Action for Your Stock Portfolio
There are no changes to Lorenz Financial’s stock market portfolios. All portfolios are fully invested. We are suggesting a correction, either above or below 10%, will occur in 2018. A downturn during an off-presidential election year is a stock market pattern that has developed since 1962. When the next downturn occurs, Lorenz Financial recommends riding it out without trying to pick a sell and re-entry date unless our analysis tells us to notify you of a change to our portfolios.
The third quarter GDP was revised upward to 3.3% due to business investment increasing 4.7% and a decrease in imports, which is a subtraction in the calculation. We expect the economic expansion to continue in 2018 at a pace slightly stronger than the pace we have seen in recent years.
Home prices accelerated in September by 6.2% year over year as the strong economy boosted demand for homes and the supply has failed to keep pace. Inventory of homes for sale is especially constrained in the bottom third of the market, where prices are growing twice as quickly as the top third.
The Consumer Confidence Index takes into account American’s view of current economic conditions and their expectations for the next six months. Economists pay close attention to this number because consumer spending accounts for 70% of the US economic activity. The November number was expected to drop to 124, but obviously, it has exceeded most economists’ expectations by reaching 129.5.
President Trump has nominated Jerome Powell to be the next Chair of the Federal Reserve. Strong economic growth, advancing home price, and increasing consumer confidence will strongly encourage the Federal Reserve to raise the short-term Federal Funds rate a quarter of a percent during its meeting on December 12 & 13.
The first $20B has rolled off the Fed’s balance sheet during October and November. Another $10B will roll off in December. In January the target roll off will be $20B per month. The Fed’s balance sheet currently exceeds $4.5 trillion.
The yield on US Treasury’s are inching up. As of November 30, US Treasuries are paying per year:
- 2 Year @ 1.78%
- 5 Year @ 2.14%
- 10 Year @ 2.42%
- 30 Year @ 2.83%
Remember as interest rates go up, existing bond prices go down. Do not buy Treasuries in an IRA, as Treasuries are state and local tax-free.
The Fed’s preferred inflation gauge is the Personal Consumption Expenditure (PCE) price index. In October, the headline PCE index dropped to 1.6% year over year. The core PCE index, which excludes the volatile food and energy categories, was 1.4% year over year. The Fed’s long-term target for price inflation is 2%.
The Treasury market shows the following long-term annual inflation expectations.
- 5 Year at 1.73%
- 10 Year at 1.86%
- 30 Year at 1.95%
Recommended Action for Your Bond Portfolio
Our bond market investments remain unchanged. We are investing only in short-term investment-grade corporate bond funds, intermediate-term investment-grade corporate bond funds, and short-term high-yield corporate bond funds. We are not recommending any long-term bonds or long-term bond funds. Municipal bond funds are not recommended at this time due to the risk of some US cities going bankrupt. The most recent big city to be on the edge of bankruptcy is Dallas, TX!
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
Need help with your portfolio?
Lorenz Financial is ready to help you! Check out our resources page on our website for great finance tips and information, and contact us today to get started on planning your financial future!
Lorenz Financial Services, LLC is a West Lafayette, Indiana fiduciary who offers financial planning and portfolio management services. If you have questions about who we are or our services, please contact us at (765) 532-3295 or email us.