February 2020 Newsletter

Piggy bank on lots of money bound together

Welcome to the February 2020 newsletter! We’ll update you on stock market changes, the Federal Reserve and Treasury, recommended actions for your stock and bond portfolios, and more.


Investors have reacted favorably to the Phase One traded agreement with China. The United States – Mexico – Canada trade agreement has passed the U.S. House and Senate, and President Trump has signed it. Only Canada has yet to pass the agreement.

We continue to project slow to moderate growth for the U.S. economy in 2020. We don’t currently see any significant risk to a recession or bear market this year. But we also do not see the market going up by 30% this year like it did in 2019.

Employees should continue to make their weekly or monthly contributions to their employer’s retirement plan or IRAs. At this time, additional money can be added to an investor’s stock market allocation, but only on a dollar-cost-average basis.

The Economy

lightbulb and staircase of coins - economy and finance concept


U.S. nonfarm payrolls rose in December by 145,000. The November payroll number was revised down from 266,000 to 256,000. The October payroll number was revised down from 156,000 to 152,000. The rolling three-month payroll average decreased from 192,000 last month to 184,000 this month. Most of the employment gains in December came from the retail, health care, and leisure & hospitality sectors.

Over the past 12 months, average hourly earnings increased less in December by 0.2%, from 3.1% in November to 2.9%. There are now more women employed today in the U.S. than men by 109,000!

U-6, the broadest measure of unemployment, includes both discouraged workers and part-time workers who are seeking a full-time job. U-6 dropped 0.2% from 6.9% in November to 6.7% in December. In December 2018, U-6 was 8.1%. Congratulations to all who have found work!

Gross Domestic Product (GDP)

The Bureau of Economic Analysis said the first estimate of GDP of the fourth quarter of 2019 was 2.1%. If this reading remains unchanged, 2019 GDP growth will be 2.35%. We cannot have a recession if the GDP keeps growing.


Annual inflation rose slightly in December to 1.6% from 1.4% as measured by the Personal Consumption Expenditures (PCE) index. The core PCE index, which excludes food and energy, rose to 1.6% from 1.5%. We are slowing approaching the Fed’s inflation target of “plus 2%” annual inflation.

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

Bond MaturitiesAnnual Inflation Expectations
5 Year1.60%
10 Year1.65%
30 Year1.73%

Inflation numbers above are approximately 0.1% lower when compared to last month’s numbers.

Stock Market

stock market highs and lows


This month let us look at our five pre-recession indicators.

1. Accelerating Inflation

Per the inflation numbers above, the Personal Consumption Expenditure (PCE) is showing 1.6% inflation; the Core PCE, excluding food and energy, is also showing 1.6%. The Fed’s target remains at 2% annual inflation. Low inflation allows the Fed to keep interest rates low. As we are enjoying low inflation, we do not expect high inflation to develop in 2020 and push us into a recession.

2. Payroll Growth

We have now seen 10 consecutive years of employment gains, equaling the longest expansion on record. The unemployment rate of 3.5% represents a 50-year low. Employment increases are the engine of the current economic expansion as they provide the fuel for growth in consumer spending. As we are enjoying high payroll growth, we do not expect low payroll growth to develop in 2020 and push us into a recession.

3. Rising Unemployment Claims

The initial unemployment claims trend has been in a highly favorable range for an extended period and currently remains close to its 50-year low. Jobs openings are at 6.8 million as employers struggle to find qualified applicants. The “job quit rate” is relatively high at 2.3% as employees are showing they have the courage to quit their current job and the confidence they will find another and perhaps better job.

4. The U.S. Treasury Yield Curve as of January 31 is below.

February 2020 Yield Curve

The short end of the yield curve remains flat following the Federal Reserve’s three rate cuts in 2019. The yield of the middle of the curve including the 1, 2, 3, 5, and 7-year notes have had their yield drop 0.1 to 0.2% in the last month. We will continue to closely watch this trend. The long end of the curve (the right side) has a very desirable steep slope.

5. The Conference Board said the Leading Economic Index (LEI) declined 0.3% in December.

February 2020 LEI

The LEI spokesperson said, “The U.S. LEI declined slightly in December driven by large negative contributions from rising unemployment insurance claims and a decrease in housing permits. The LEI has now declined in four out of the last five months. However, financial conditions and the consumer’s outlook for the economy remain positive.”

Conclusion: The Treasury yield curve is NOT predicting a recession, and the LEI is suggesting early 2020 economic growth will be about 2%. There are no signs today of a recession beginning in the next 6 to 9 months in any of the five pre-recession indicators above. We will continue to monitor these as we move through the year.

Stock Market Valuation

Our projection for the S&P 500 Index 2020 operating earnings remains at $177 a share.  We also believe the PE ratio for the S&P 500 Index is 17 to 19.  Therefore, the S&P 500 index is likely to reach into the high 3300s or low 3400s when the current pullback ends.

Recommended Action for Your Stock Portfolio

We expect periods of short-term stock market weakness to occur in 2020. When they do, we expect those periods of consolidation to be in the range of -5% to -9% from a recent high. During these short-term stock market pullbacks, we recommend NO SELLING, as within a month or two the market will be back to its recent high. On the other hand, if an investor has stock market cash available, stock market pullbacks have historically been a good time to BUY!

How Utah Has Become a Buzzing Star for Economic Growth

Downtown Salt Lake City skyline Utah in USA

Why Utah? There is a simple answer: The governor and state legislature have done everything right when it comes to encouraging business development and job creation. For example, Utah has a low flat-rate personal income tax of 4.95%, and the corporate income tax rate is 5%. Also, there is no death tax, so wealthy seniors do not have to flee to Florida after they retire. Additionally, Utah is a Right To Work state, so workers cannot be compelled to join unions.

The minimum wage in Salt Lake City and Provo is $7.25 an hour, not the $10 to $15 an hour mandated in many states. This has allowed employers to offer many jobs to teenagers who are seeking a little spending money and a desire to enter the workforce. Overall, Utah’s job growth has ranked second in the nation for the past decade.

Likewise, the state government has its fiscal house in order. Utah was among the first states in the nation to start erasing public pension liabilities by gradually shifting government workers to a defined contribution pension system.

Progressives dismiss red states like Utah as places that reward the superrich with low tax rates. But perhaps the most confounding thing about Utah is that despite (or because of) its anti-progressive policies, it has the least income inequality in the nation, according to the latest U.S. Census Bureau data. The Beehive State is buzzing!

The Retirement SECURE Act

middle-aged couple planning for retirement together

In late December 2019, Congress passed the above act, and it was signed by President Trump. Here are the major retirement changes which began on January 1, 2020:

* Required Minimum Distributions will now begin at age 72, up from 70 and a half.

* If you are still working at age 70, you will now be able to contribute to an IRA.

* It is now easier and cheaper for small employers to offer retirement plans. So, if you work for a small company without a 401K plan, your employer might create one in 2020.

* Part-time workers will now be able to participate in their employer’s retirement plan.

* Companies will be able to auto-enroll new employees into a 401K plan with contributions rates up to 15% of salary (previously it was 10%).

* Children who inherit IRAs from a parent must now withdraw all the money from the inherited IRA within 10 years. Previously the heir could stretch the withdrawals over his or her lifetime.  Heirs withdrawing money from an inherited Traditional IRA will pay income taxes on the withdrawals. Heirs withdrawing money from an inherited Roth IRA will pay no income taxes. The 10 annual withdrawals do not have to be equal in size.

These are broad statements regarding the SECURE Act. Please see your tax advisor for specific details.

Big Exchange-Traded Funds (ETFs) Are Growing – The Small Ones, Not So Much

money and the economy

Of the 1,662 ETFs tracked over the past five years, 54% have closed or shrunk! It was the smaller ETFs that closed or shrunk. Most of the fastest-growing and largest ETFs are those broad, low-cost products managed by the juggernauts BlackRock Inc (iShares), Vanguard, and State Street (SPDRs)—which together manage 81% of the assets inside all ETFs.

Almost all the ETFs that have closed and returned investor’s money, have been the smallest of the ETFs – some with only $75 million in assets. We only buy ETFs with a minimum asset value of $500 million.

Buying an ETF is generally a good idea for your portfolio due to their low cost and broad diversification, but be careful which ones you buy.

Bond Market

January 2020 Newsletter


The U.S. Treasury yield curve remains relatively flat, indicating that GDP growth is likely to remain modest for the foreseeable future. Our forecast for 2020 GDP growth is 1.8% to 2.2%. The Federal Reserve Vice-Chairperson, Richard Clarida, said in a January speech, “The economy is in a good place with the unemployment rate at a 50-year low and inflation approaching the fed’s target of 2%.”

Federal Reserve

The Federal Open Market Committee (FOMC) held a two-day meeting on January 28 and 29. The members voted unanimously to keep the federal funds rate unchanged at 1.5% to 1.75%. The post-meeting statement said, “The current stance of monetary policy is appropriate to support the sustained expansion of the economy, the strong labor market, and appreciation of inflation moving towards the Committee’s 2% objective.”

U.S. Treasury

The Treasury announced that it’s bringing back the 20-year bond in the first half of 2020, likely in May. We expect the 20-year bond to have a higher yield than the 30-year due to the initial limited supply of the 20-year bond. It is unlikely a 50-year bond will be released in 2020.

Recommended Action for Your Bond Portfolio

Our bond fund recommendations have not changed since last month except for removing the category “conservatively allocated balanced funds.” Our favorite fund in this category, Vanguard’s Wellesley Income Fund, generated a 16.4% return in 2019. We do not expect this to be repeated in 2020. A possible portfolio weighting of 20% is suggested for each category below.

  • Short-term and intermediate-term U.S. bond funds with a portfolio that consists of at least 60% securitized debt – debt backed by an asset
  • Ginnie Mae bond funds
  • TIPS bond funds
  • Cash

In all cases, try to select a bond fund with an SEC yield over 3% and a duration of fewer than 4 years.

Next month: Learn about the worst financial advice we’ve ever heard!