Welcome to the December 2023 Newsletter. This month, we’re discussing the economy, employment, financial terminology, and more.
Summary
First, the economy. The economy was ripping higher in the third quarter of 2023 with real gross domestic production (GDP) having increased at 5.2%. But we see the economy becoming sluggish, especially in retail (Costco, Walmart, clothing stores, drug stores, home improvement warehouses, etc.) Even existing home sales are starting to slow down due to mortgage rates over 7% for a 30-year mortgage.
But likely it is “all clear” on the inflation front as core Personal Consumption Expenditure (PCE) has dropped from its peak of 5.4% to 3.0% annual inflation in October. We are well on our way to the Fed’s 2% target. We believe the next move by the Federal Reserve will be to cut interest rates with the first cut by mid-2024. Employment is strong, which is a big help to the economy.
Now the stock market. What a nice ride we had in the stock market from 2009 through 2021. On average over those 13 years, the S&P 500 Index was up 16.8% per year! But what goes up eventually takes a breather. In 2022, the S&P 500 was down 18% while the NASDAQ 100 was down 32%. Ouch! Last month we said the 2022 bear market (a down market) was painful but a typical bear market. Even so, the 13 years of up markets easily beat out the one bad year.
So far in 2023, the market has partially recovered. As per VOO, the market cap-weighted S&P 500 Index, the market is up 20.4% but that outstanding growth is due primarily to the very high performance of seven of the index’s largest stocks (Apple, Microsoft, Amazon, Nvidia, Alphabet, Meta, and Tesla). If we look at RSP, the equal-weighted S&P 500 Index, the market is up only 5.1%. This simply means seven stocks knocked it out of the park and the remaining 493 stocks only did so-so.
We expect the breadth of the market will expand in 2024 to include nearly all stocks. But we also expect 2024 market returns to be positive but less than 10%.
We recommend employees continue to save every pay period in their employer’s retirement plan and in a Roth IRA to the maximum contribution limits for their spouse and themself. Everyone should confirm they are at a minimum capturing 100% of their employer’s match. The maximum Roth IRA contribution in 2023 is $6,500 per person ($7,500 for those 50 or older). And most importantly of all, everyone should be spending less than they make and reducing debt.
Big Picture—What is investing all about?
Investing is first all about staying within the limits of the investor’s risk tolerance. Then the emphasis becomes: being highly diversified, keeping product and advisor costs low, and staying tax efficient—all so as to achieve long-term returns greater than the rates of inflation plus taxes plus advisor fees.
Quote of the Day
Borman, Lovell, and Anders
Apollo 8, the first manned mission to the Moon, entered lunar orbit on December 24, 1968. That evening, the astronauts: Commander Frank Borman, Command Module Pilot Jim Lovell, and Lunar Module Pilot William Anders, did a live television broadcast from Lunar orbit. During the broadcast, they showed pictures of the Earth and Moon as seen from Apollo 8, including the first earthrise over the lunar horizon.
At the end of the broadcast each crew member read from the book of Genesis. Pilot Anders began with:
“In the beginning, God created the heaven and the earth. And the earth was without form and void, and darkness was upon the face of the deep. And the Spirit of God moved upon the face of the waters. And God said, let there be light; and there was light. And God saw the light, that it was good; and God divided the light from the darkness.”
After each astronaut read from the Bible, Commander Borman closed with, “And from the crew of Apollo 8, we close with good night, good luck, a Merry Christmas, and God bless all of you – all of you on the good earth.”
Frank F. Borman II died on November 7, 2023, at the age of 95. He was born in 1928 in Gary, Indiana. He graduated from the U.S. Military Academy at West Point, entered the Air Force, flew fighter jets, and became a test pilot. Before Apollo 8, Borman was the commander of Gemini 7.
Pop Quiz
Big picture, what are the four major categories of owners of stocks that are a part of the U.S. stock market?
The answer is at the bottom of the newsletter.
The Economy
Employment
Total U.S. nonfarm payroll employment rose in October by 150,000. The official unemployment rate, U-3, increased to 3.9% from 3.8% last month. The August 2023 and September 2023 combined employment numbers were revised down by 101,000.
Chart 1 below is based on the Bureau of Labor Statistics official unemployment rate, U-3.
In chart 2 below, the two-year trend of lower employment growth continues. This is a good path suggesting high inflation will continue to decrease towards the 2% goal.
The Job Openings & Labor Turnover Survey (JOLTS) showed 9.6 million open jobs across the country as of the last business day in September. This has been unchanged since last month. 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 October to 7.2% vs 7.0% last month. There were 6.1 million people unemployed in October, aged 16 and older. Last month it was 6.0 million people unemployed.
October Unemployment Rates by Education Level
| Less Than High School Diploma | 5.8% |
| High School Graduate, No College | 4.0% |
| Some College, Associate's Degree, or Skilled Trade Degree | 3.1% |
| Bachelor's Degree or Higher | 2.1% |
Average hourly earnings of all employees on private nonfarm payrolls were up 4.1% in October compared to a year ago. This was 0.1% lower than last month.
Leading Economic Indicators (LEI) sponsored by The Conference Board
The LEI for October continued its decline with another 0.8% drop.
With 19 consecutive monthly readings negative, the LEI continues to signal a recession in the near term. The Conference Board’s spokesperson said, “The Conference Board expects elevated inflation, high-interest rates, and contracting consumer spending – due to depleting pandemic savings and mandatory student loan repayments – to tip the US economy into a very short recession. We forecast real GDP will expand by just 0.8% in 2024.”
Gross Domestic Product (GDP)
The Bureau of Economic Analysis said the second estimate for GDP in the third quarter of 2023 rose at an annual rate of 5.2%. GDP for the first quarter of 2023 was 2.2% and 2.1% in the second quarter.
GDP saw a huge increase in the third quarter due to increases in consumer spending, increases in inventory, exports, and government spending at local, state and the federal levels.
Inflation
Annual inflation dropped significantly to 3.0% as measured by the Personal Consumption Expenditures (PCE) index in October. The previous three months were at 3.4%. Core PCE index, which excludes food and energy, dropped to 3.5% in October from 3.7% the previous month.
The peak Core PCE inflation this cycle was 5.4% in February 2022. Lower inflation is the reason for optimism for the economy as a whole and for near-term interest rates to drop.
Mortgage Rates and Existing Home Prices
On November 29, 2023, the average 30-year fixed-rate mortgage had an interest rate of 7.35%, compared to 7.92% last month. The average 15-year fixed-rate mortgage had an interest rate of 6.72%, compared to 7.27% last month.
The median existing home sale price in November dropped to $391,800 from $394,300 in October according to the National Association of Realtors.
The U.S. Public Debt as Issued by the Treasury Department as of November 29, 2023, was:
$33,835,000,000,000.
Last month it was $33,688,000,000,000.
Important Dates in November
October 15 through December 7 – Open enrollment for Medicare insurance to begin January 1, 2024.
December 7, 1941 – Pearl Harbor Day.
December 12 & 13 – The eighth and final Federal Open Market Committee (FOMC) meeting of 2023.
December 14 – The U.S. House will begin their Christmas break at the end of today. They are scheduled to return at noon on January 3, 2024.
December 15 – Quad Witching Day when individual stock options, stock index options, stock index futures, and options on stock index futures all expire.
December 21 – The first day of winter, the winter solstice, and the shortest day of the year.
December 24 – Christmas Eve.
December 25 – Christmas Day.
December 25 – The stock and bond markets will be closed on Monday in observance of Christmas.
December 29 – The last day of the year for buying or selling a security. The stock and bond market exchanges might close early on December 29, so do any trading early in the day.
December 31 – New Year’s Eve.
The Stock Market
Commentary
Big tech stocks led much of this year’s rally. Now the rest of the market is beginning to show signs of life. Several beaten-down corners of the stock market are rebounding to help drive a surge that has lifted the S&P 500 by 19% for the year. Among the biggest gainers: sectors that had been bruised by higher interest rates and fears of a recession. The stock market advances reflect growing optimism that the Federal Reserve is set to pull off a soft landing – a rare feat!
Stocks had sold off from late July 2023 to October 2023 as investors expected the Fed would hold interest rates higher for longer. Now the expectation is the Fed is done raising interest rates and will start to cut rates by mid-2024. The stock market does not wait for definitive action but starts moving about six months before positive news is announced.
A survey of purchasing managers released on November 24 found that businesses cut jobs in November because of softer demand and cost pressures, the latest sign that the economy is cooling. That is what the Fed is hoping for – an economy cooling off but not an economy that falls off a cliff into a recession.
The big “if” is, will inflation continue to come down and by year-end of 2024 approach the Fed’s target of 2%? If so, the stock market will continue to go up moderately. If inflation turns back up, there will be no interest rate cut and the Fed will again talk about raising interest rates. If that happens, the market will go back down.
Stock Market Valuation
Dr. Siegel
Dr. Siegel is a Professor of Finance at the Wharton School in Philadelphia.
On November 20, Professor Siegel said, “Our base case remains for the S&P 500 Index to gain an additional 5% to reach 4750 to 4800 by year end.”
Brian Belski
Belski is the Chief Investment Strategist for BMO Capital Markets.
Belski said on CNBC on November 27, 2023, “We are once again enthusiastic about the stock market potential heading into 2024. We continue to believe U.S. stocks are in a bull market that is about to enter its second year (2024). For 2024, our S&P 500 Index base-case price target is 5,100. Our best-case price target is 5,400.”
(Brian did not mention a timeframe to reach these targets. 5,100 is 11.9% above the November 24 close.)
Ed Yardeni
Yardeni is the President of Yardeni Research based in New York.
Yardeni said on CNBC on November 27, 2023, “We expect the Santa Claus rally in stock prices that started on October 27 will continue over the rest of this year (2023). We expect the S&P 500 Index will be making a new high early next year.” (Previous all-time closing high was 4,796.56).
“Our 2024 year-end target is still 5,400.”
Monthly Performance of the S&P 500 Index
VOO, the market cap weighted S&P 500 Index, through 11 months is up 20.4%.
RSP, the equal-weighted S&P 500 Index, through 11 months is up 5.1%.
Recommended Action for Your Stock Portfolio
We believe American investors should have nearly all their stock market money invested in the United States. International stock markets are still frothy with interest rates just now starting to settle down, two active wars, and the very large China economy remains in the doldrums.
Broadly the U.S. stock market is:
- 70% of the S&P 500, large-cap stocks
- 20% mid-cap stocks
- 10% small-cap stocks
Please stay diversified!
But eventually it will be appropriate to put some money into the international stock market. Here are two funds to keep an eye on:
PWJZX, PGIM Jennison International Opportunity, international large cap growth.
HILDX, Hartford International Value, international large cap value.
The latest inflation data says inflation is pretty well whipped, except for housing (individual homes and rental apartments). We just don’t have enough housing in the U.S! For this reason, we believe ITB, iShares U.S. Home Construction exchange traded fund will continue to be a good long-term investment. Its PE ratio is a very low 10.
- Not FDIC Insured ·No Bank Guarantee ·May Lose Value
Financial Markets Vocabulary
This month let’s take a look at Treasury Bills, Treasury Notes, and Treasury Bonds.
The federal government borrows money every month. So far, they have accumulated $33,835,000,000,000 of debt. That’s $33 million, million! The government gets its money just like public and private corporations, banks, and non-profits: by selling bonds. The primary difference between Treasury Bills, Notes, and Bonds is the time until maturity.
Treasury Bonds are offered with maturities of 20 or 30 years. Generally, they offer the highest interest rates compared to other Treasuries with interest payments bi-annually.
Treasury Notes are offered at 2-, 3-, 5-, 7- and 10-year maturities with bi-annual interest payments.
Treasury Bills or T-bills are offered at 4-, 8-, 13-, 17-, 25-, and 52-week maturities. They do not pay interest but instead are offered at prices below their face value. For example, a $10,000 T-bill, might be priced at $9,500. The face value is $10,000 but the investor only paid $9,500 for the bond in this example. The $500 difference is considered interest.
Interest on Treasuries is subject to federal income taxes but is exempt from state and local income taxes. Therefore, Treasuries are sought after more so by people in high-income tax states such as California, Hawaii, New Jersey, Oregon, Minnesota, New York, and Vermont.
What are the risks of owning a Treasury? Like all bonds, there are three risks:
Default Risk: It is widely considered Treasuries have no risk of default. This means the interest will be paid in full and on time. Also at maturity, the investor will get all their money back.
Interest Rate Risk: All bonds have interest rate risk. This means as interest rates increase, the price of existing bonds decreases. If interest rates are decreasing, the price of existing bonds are increasing. The longer the term until maturity, the more intense bond prices will move up and down due to changes in interest rates. This means a 30-year Treasury has much more interest rate risk than a 1-year Treasury.
But if a bond is held until maturity, there is no longer any interest rate risk. The price of the bond is its face value.
Income Risk: Of all types of bonds, Treasuries typically offer the lowest interest rates. CDs tend to have slightly higher interest rates. Investment-grade corporate bonds will pay more, and junk bonds will pay the highest. Generally, bond issuers who pay a higher interest rate will have a higher default risk.
So, the question is, will Treasuries pay an investor enough income during 30 to 40 years in retirement? On a long-term basis, for most people, the answer is no. But every investor has money they consider their “safest” money. One option is to put your safest money into an exchange-traded fund that only owns treasuries. See below:
- VGSH – Short-term treasuries
- VGIT – Intermediate-term treasuries
- VGLT – Long-term treasuries
The annual expense ratio of these ETFs is only 0.04%.
OK, Now What Do I Do?
It’s time to finalize your savings plan for 2024 because retirement plan saving rates have increased!
For 401k, 403b, 457 retirement plans, the Thrift Saving Plan, and other retirement programs, contribution limits are listed below. Only working spouses are eligible to participate in these retirement plans.
The maximum employee contribution increases from $22,500 in 2023 to $23,000 in 2024.
The maximum contribution combined from employers and employees increases from $66,000 in 2023 to $69,000 in 2024.
For employees turning 50 or older in 2024, the Catch-up Provision remains the same at $7,500. Therefore, the maximum employee contribution for older Americans is $30,500.
For those turning 50 or older in 2024, the maximum contribution combined from employer and employee increases to $76,500 ($69,000 + $7,500).
Rules for IRA contributions permit all employees to have an IRA and allow only one spouse to be working for both spouses to have an IRA.
The maximum employee or spouse contribution increases from $6,500 in 2023 to $7,000 in 2024.
Unfortunately, Congress has not allowed the IRA Catch-Up Provision to be adjusted for inflation, so it remains at $1,000 per person. Therefore, the maximum contribution for those turning 50 or ordering in 2024 is $8,000.
As many Americans are now living past 100, employees should plan on their retirement savings may need to last 40 years.
Some People Have All The Luck
Twelve years ago, Randall Atkins bought an old coal mine sight unseen for $2 million outside Sheridan, Wyoming. Recently he had the mine tested to see if it contains any rare earth minerals. The results showed the sleepy coal mine contains what might be the largest rare-earth deposit in the U.S.! At current market prices, the mine today is worth $37 billion!
What should Mr. Atkins do now? In our opinion, he should sell the mine and diversify his new fortune.
Our First Financial Bad Boy This Month
Realtors Lose Antitrust Suit Over High Fees
The Wall Street Journal, page A1, November 1, 2023
A federal jury in Kansas City, Missouri, found on October 31, 2023, the National Association of Realtors (NAR) and large residential brokerages liable for $1.8 billion in damages after determining they conspired to keep realtor commissions for home sales artificially high.
Under the current system, home sellers pay their agent’s commission – typically 5% to 6% of the home’s selling price. The seller’s agent then pays 50% of the total commission to the buyer’s agent. In most markets, making an offer of compensation to a buyer’s agent is a condition for advertising a home on a multiple-listing service – a vital tool for marketing a home.
The plaintiffs provided compelling evidence that overall commissions have stayed roughly at 5% or 6% for decades, split evenly between the buyer and seller brokers. This is about two to three times as high as in other wealthy countries where such self-serving industry arrangements don’t exist.
Realtor associations’ price-fixing collusion has become harder to defend as fees for stockbrokers, travel agents and sundry other customer services have plunged amid technological disruptions. The plaintiff’s lawyers asked, “Why haven’t realtor broker commissions fallen too?” The Kansas City jury obviously agreed.
An NAR spokesman said, “This matter is not close to being final as we will appeal the jury’s verdict.”
The Bond Market
Commentary
With $33 trillion in debt, the U.S. government has a lot of interest to pay every year. Well, which countries pay the most interest annually? Here is the list for 2023.
- United States $708 billion
- India $196 billion
- China $176 billion
- United Kingdom $138 billion
- Brazil $125 billion
- Italy $ 90 billion
- Canada $ 59 billion
- Japan $ 56 billion
- France $ 56 billion
- Mexico $ 43 billion
- All other countries $541 billion
Perhaps our federal government is spending too much, which causes too much borrowing and then requires paying too much in interest every year!
With interest rates back to normal levels, corporate borrowing costs have increased compared to their borrowing costs over the previous 15 years. Therefore, it should not be assumed the rate of growth of corporate profits will continue in the next 10 years as compared to the previous 10 years. What we are saying is the stock market returns of the past 10-15 years are unlikely to be repeated in the next 10 years.
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 below.
- 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 4.85% to 5.35% 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.)
PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS.
Pop Quiz Answer
Big picture, what are the four major categories of owners of stocks that are a part of the U.S. stock market?
Answer: See the chart below.
Households and non-profit corporations are the blue line.
Mutual funds and exchange-traded funds are the green line.
Institutional investors, insurance companies, and pension funds are the red line.
International investors are the purple line.
This chart was produced by Yardeni Research, Inc.