Welcome to the February 2022 Newsletter. This month, we’re discussing the economy, employment, financial terminology, and more.
Summary
Gross Domestic Production (GDP) last year was an excellent 5.7%. In 2022, we expect GDP to be between 3% and 4%. Unemployment has dropped significantly from the high levels of peak COVID. Supply chain woes will slowly unwind during the year. Inflation is stubbornly high. In March, the Federal Reserve will begin to raise short-term interest rates and end their bond buying. Later in 2022, they will begin to reduce their balance sheet of $8.4 trillion in bonds. These Federal actions will cause interest rates to increase and the price of existing bonds to decrease.
We expect the choppy stock market to continue during the first half of 2022 with a high level of volatility. We recommend maintaining equity allocations within the risk tolerance of each investor. We will look to identify a midterm off-presidential election year buying opportunity as the year progresses.
Quote of the Day
“Central banks played a crucial role in stabilizing the markets during COVID-19, thanks to their willingness to revise their monetary policy playbooks. Doing so in the future will be crucial as crises increase in frequency.”
Stanley Fischer
Dr. Fischer earned his Ph.D. in Economics from the Massachusetts Institute of Technology. Dr. Fischer, who is now retired, was previously the Vice-Chair of the U.S. Federal Reserve, the Governor of the Bank of Israel, and the Chief Economist at the World Bank. While at MIT, Ben Bernanke was one of his doctoral students.
Pop Quiz
An investor’s question: I am 21 now. When I reach 25, I will have graduated from a five-year electrician’s trade school. If I work, save, and invest at 8% in the stock market for 40 years, how much do I have to invest every month to have $1 million when I am 65?
The answer is at the bottom of the newsletter.
The Economy
Employment
Total U.S. nonfarm payroll employment rose by only 199,000 in December while the official unemployment rate, U-3, dropped to 3.9% from last month’s 4.2%. The average job growth in 2021 was 537,000 per month. The Job Openings & Labor Turnover Survey (JOLTS) said there were 10.6 million open jobs in the U.S. as of the last business day of November—compared to 11.0 million openings the last day of October.
The seasonally adjusted, Total U.S. Unemployment Rate, U-6, declined in December to 7.3% from 7.7% last month. It was 11.7% in December 2020. Compared to 6.3 million last month, there are 6.0 million people unemployed in the U.S., age 16 and older.
Unemployment Rates by Education Level, December 2021
| Less Than High School Diploma | 5.2% |
| High School Graduate, No College | 4.6% |
| Some College or Associate’s Degree | 3.6% |
| Bachelor’s Degree or Higher | 2.1% |
The average hourly earnings of all employees on private nonfarm payrolls were up 4.7% compared to a year ago.
Gross Domestic Product (GDP)
The Bureau of Economic Analysis said the advance GDP estimate for the 2021 fourth quarter increased by 6.9% compared to 2.3% in the third quarter and 6.7% in the second quarter.
The U.S. economy grew at 5.7% in 2021, the fastest growth since 1984.
Inflation
Annual inflation rose 5.8% in December as measured by the Personal Consumption Expenditures (PCE) index. The core PCE index—which excludes food and energy—rose 4.9% in December, as compared to the adjusted 4.7% in November.
According to the National Association of Realtors, the nationwide median price of an existing home sold in December 2021 was 15.8% higher on average than December 2020. The median price was $358,000.
Long-term inflation expectations can be estimated by measuring the differences between Treasury bond yields & TIPS real yields of the same maturities. Results are:
| Bond Maturities | Annual Inflation Expectations |
| 5 Year | 2.82% |
| 10 Year | 2.44% |
| 30 Year | 2.23% |
This month’s estimated annual inflation numbers above are 9 basis points lower on average compared to last month.
Important Dates in February
February 1 – Chinese New Year. This is the year of the tiger.
Panthera Tigris
February 2 – Groundhog Day
Marmota Monax
February 12 – Abraham Lincoln, the 16th U.S. President, was born on this date in 1809.
February 14 – Valentine’s Day
February 21 – President’s Day is celebrated on the third Monday in February to honor the birthdays of President Washington and Lincoln.
February 22 – George Washington, the first U.S. President, was born on this day in 1732.
Stock Market
Commentary
On January 19, Rick Rieder, Blackrock’s Global Chief Investment Officer of Fixed Income and Global Allocation, said on CNBC, “Corporate earnings can grow 10% in 2022 and the equity (stock) markets can increase 8%. Equities will be the best asset class this year, but the stock market growth will be uneven and volatile. Nominal GDP will be up 7% (up only 2% after 5% inflation) this year and corporate revenues will be up 7%.”
On January 27, Scott Chronert, Citigroup U.S. Equity Strategist, said “Here is how we are advising clients today:
- Keep a focus on the fundamentals. We expect corporate profits to be up 8% in 2022.
- Navigate your portfolio as the Federal Reserve changes focus from maximizing employment to reducing inflation. We see value-oriented companies with strong balance sheets as being in favor this year.
- Monitor the “quality metrics” of companies. Focus on companies making and growing their profits and cash flow.
- Be wary of companies with no earnings even if they have a high revenue growth rate.”
Stock Market Valuations
We believe the stock market in 2022 will be okay with increased volatility as compared to last year. Last month, we said the S&P 500 Index can reach 5,198 by year end. We’re backing off a bit this month to 5,060 at or before year end.
| Year | Earnings/Share | PE Ratio | Approx. S&P 500 Index High |
| 2022 | $230 | 22.0 | 5,060 |
The current market all-time closing-high was 4,796.56 on January 3, 2022. If we reach 5,060 this year, that is a 5.5% gain over the January 3 all-time high.
Last month, we said, “During 2022, it is possible we will have a stock market correction where the S&P 500 Index PE ratio temporarily drops to 17 or 18 and the S&P 500 Index drops to 4,200.” On January 24, we had an intraday low of 4,222.
S&P 500 Index
Recommended Action for Your Stock Portfolio
What investments does Lorenz Financial recommend for 2022?
First, we recommend the total U.S. stock market index. Vanguard’s admiral fund shares are ticker symbol, VTSAX. The same investment at Vanguard using their ETF is ticker symbol, VTI. Either one will work as these index funds will provide a very high level of diversification, very low costs to own, returns that match the total US stock market index, and if placed in a taxable account, these funds are significantly tax efficient.
For investors that want to drill down beyond the total market index, below is our list of favorite S&P 500 sectors for 2022 that we published last month in alphabetical order. This month we have added health care to the list.
- Consumer Discretionary (VCR)
- Energy (VDE)
- Financials (VFH)
- Health Care (VHT)
- Industrials (VIS)
- Materials (VAW)
- Technology (VGT or QQQ)
In addition to these seven sectors of the S&P 500 Index’s 11 sectors, we recommend two additional ETFs:
1. VanEck Semiconductor manufacturers (SMH)
2. Schwab US Dividend Equity (SCHD)
SMH is a good large-cap “growth” pick within the tech sector.
SCHD is an excellent large-cap “value” pick.
All portfolios remain fully invested. Additional money can be added to an investor’s stock portfolio on a dollar-cost-average basis. Our expectation is this will be a difficult year in which to secure significant stock market gains.
Here are two legal documents that are available to avoid probate court on your passing.
Transfer on Death (TOD) and Payable on Death (POD) – These documents are available at most brokerage houses and banks to transfer an account on the death of the account owner to another person, trust, or company without going through probate court. During the lifetime of the account owner, the owner has full control of the account and the beneficiary has no control. The beneficiary only assumes control of the account upon the death of the account owner. The beneficiary of the account as stated in the Transfer on Death or Payable on Death will override whatever might be in the account owner’s will.
Recently many states have allowed assets such as cars and homes to be transferred to a beneficiary using a TOD.
Even though TODs and PODs are easy to set up, they have two disadvantages. First, what if a TOD or POD beneficiary dies before the account holder and the beneficiary’s name is not changed on the documents? The answer is the account is thrown into Probate Court upon the death of the account holder.
Second, what if the beneficiary has a mountain of debt and is being sued? Now the beneficiary receives a sizeable inheritance through a TOD or POD. What happens? The debtors can grab the inheritance to pay off the debts.
Need more answers on estate planning? Always seek the advice of a licensed estate planning attorney in your state.
OK, Now What Do I Do?
Last month we emphasized, “maintain an adequate, safe, and liquid emergency fund”, “eliminate all debt except a fixed-rate first-mortgage”, “capture any free money if your employer offers a match in the company-sponsored retirement plan”, and “contribute to two Roth IRAs even if only one spouse has income.” This month we want to cover more of the basics.
First, if a person is at least 30-years old, go to: https://www.ssa.gov
Click on the “my Social Security” button and sign in or create a new account. After reaching your account, download and print out “Your Social Security Statement”, which is now only two pages. This will show you how much you are able to receive in Social Security income at various ages. Then, do the same for your spouse.
Social Security income can begin at age 62 with a permanently reduced amount or as late as age 70 with an upwardly adjusted amount. Broadly, Social Security income increases 8% per year for every year after age 62 a person waits to begin collecting. The increases stop after age 70.
Second, a good basic book to read on do-it-yourself investing is Common Sense on Mutual Funds by John C. Bogel. The book is currently being sold as the 10th-anniversary edition.
Our Corporate Bad Boy This Month
Meta, formerly Facebook, Voted the Worst Company in 2021
Source: December 2021 Yahoo Finance Annual Survey of 1,541 people
The participants of Yahoo Finance survey have crowned Meta, ticker symbol FB, the worst company of 2021. Meta, or Facebook, received 50% more votes than the second-place finisher, Alibaba.
The result isn’t totally surprising. 2021 has been Facebook’s worst year since being embroiled in the Cambridge Analytica scandal in 2018. At that time, Cambridge Analytica obtained tens of millions of Facebook user profiles enabling Cambridge to build voter profiles to sell to political organizations. Then, there was the ongoing WhatsApp data-sharing controversy, users’ phone numbers being sold on Telegram, the allegedly overestimating of ad audience figures to maximize ad revenue, more antitrust lawsuits, fighting with Apple over Cupertino’s All Tracking Transparency policy, the massive outage in October, and the failed Instagram for Kids project.
The biggest PR hits came in September when company documents appeared to show Facebook understood just how harmful Instagram was to teenage girls. Then, there was the whistleblower, Frances Haugen’s public testimony that Facebook prioritized profit over its impact on society.
FB stock is down 21% since its high in early September 2021.
Bond Market
Commentary
The U.S. Treasury yield curve has flattened in recent months as short-term rates have moved up faster than longer-term rates. All three of the yield curve spreads (30-year to 3-month, 10-year to 3-month, 10-year to 2-year) remain positively sloped (meaning no indication of a recession). All of the yield curve spreads are at healthy levels. The 10-year Treasury yield will likely drift towards 2%.
In summary, real GDP growth bounced back smartly in the fourth quarter due to inventory restocking. Real GDP grew at a robust rate for the full year. The economy continues to grow in fits and starts as COVID waves ripple through communities and disrupts the supply chain, but the higher than typical GDP and lower than typical unemployment rate gives us optimism for the economy for 2022.
Federal Reserve
The Federal Open Market Committee (FOMC) voted unanimously to keep the federal funds’ target rate at the 0% to 0.25% level at their January meeting. With the new larger reduction in monthly bond purchases, the Fed will end its Quantitative Easing program (buying bonds) in March. It’s also expected at their March meeting, the Fed will begin to increase short-term interest rates. Perhaps as soon as their May meeting, it is expected the Fed will begin to reduce its balance sheet by selling some bonds and let some bonds mature without replacing them. This latter action is called Quantitative Tightening.
U.S. Treasury
10-year sovereign interest rates around the world are dominated by the 10-year U.S. Treasury. See below:
Recommended Action for Your Bond Portfolio
We have made two changes to our bond fund recommendations this month. We have eliminated the category, Short-Term U.S. bond funds, and added the category, cash. Most bonds are not appropriate today because it’s expected in the short- to mid-term, interest rates will rise above today’s levels. As bond yields increase, existing bond prices decline. Our bond market fund recommendations only include:
- Ultra-Short-Term U.S. bond funds
- U.S. Savings I Bonds
- Cash
The most important aspect in selecting a bond fund in this market is to keep the bond fund’s average duration low. Lorenz Financial suggests keeping a bond fund’s duration under two years. The higher the bond fund’s duration, the faster the fund’s price will decline as interest rates rise.
Before Investing
Of course, everyone should maintain a safe and liquid emergency fund of at least 6 to 9 months of family expenses in an FDIC insured bank or an NCUA insured credit union. An emergency fund should be kept in a checking account, savings account, or money market account—it should not be “invested or tied up in any way”. Every family should have an adequate, safe, and liquid emergency fund before investing in a stock and bond portfolio.
PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS.
Pop Quiz Answer
An investor’s question: I am 21 now. When I reach 25, I will have graduated from a five-year electrician’s trade school. If I work, save, and invest at 8% in the stock market for 40 years, how much do I have to invest every month to have $1 million when I am 65?
Answer: $330 per month.
If the investor waits until they are 35 years old, and therefore has only 30 years to save and invest, he or she will need to invest $736 per month to accumulate $1 million by age 65 with an 8% average annual return. At age 45 with only 20 years to invest, he or she will need to invest $1,822 per month.
And remember if the 25-year-old saves 2 x $330 per month ($660 per month), he or she will end up with $2 million after 40 years.