Welcome to the February 2024 Newsletter. This month, we’re discussing the economy, employment, financial terminology, and more.
Summary
We are increasing our confidence level in the economy for three reasons. First, economists are no longer talking about the next Fed rate increase but the start of interest rate cuts. Second, inflation has come down. The Fed watches the Personal Consumption Expenditure (PCE) index more so than the Consumer Price Index (CPI) index. Both CPI and PCE have core numbers that exclude the volatile food and energy components. Specifically, annual Core PCE was 4.7% in February 2023 and was only 2.9% in December 2023. Third, we have massive fiscal spending which is keeping the economy running. The latter is unfortunately also driving the national debt higher and higher.
Our conclusion is there will be no recession this year, inflation and interest rates will continue to decrease, and unemployment will stay low. We should have a decent year in the 2024 stock market so long as corporate earnings come in as expected.
An Employee’s Savings Plan for Retirement
First, employees should contribute to their employer’s retirement plan to the point of capturing 100% of their employer’s match. Its free money so grab it all!
Second, every employee should then max out their annual Roth IRA contribution for themselves and their spouse. Only one spouse needs to be working for both to contribute to a Roth IRA. In 2024 the max contribution is $7,000 per person ($8,000 for those 50 or older).
Third, employees should then annually increase their contribution to their employer’s retirement plan by saving half of all future pay increases. The target is to eventually be saving 15% of your family’s gross income. Fourth, everyone should be spending less than they make and reducing debt.
Quote of the Day
John Adams
John Adams (October 30, 1735 – July 4, 1826) was an American statesman, attorney, diplomat, writer, and Founding Father. Adams served as the second President of the United States from 1797 to 1801.
“All the perplexities, confusion and distress in Americans arise, not from defects in their constitution or confederation, not from want of honor or virtue, so much as from the downright ignorance of the nature of coin, credit and circulation.”
Obviously, President Adams was an advocate of a financial education for everyone. Sadly, only 25 states today require financial literacy for high school graduation. Those states are:
- Alabama
- Connecticut
- Florida
- Georgia
- Indiana
- Iowa
- Kansas
- Louisiana
- Michigan
- Minnesota
- Mississippi
- Missouri
- Nebraska
- New Hampshire
- North Carolina
- Ohio
- Oregan
- Pennsylvania
- Rhode Island
- South Carolina
- Tennessee
- Utah
- Virginia
- West Virginia
- Wisconsin
Pop Quiz
What are the top four most-common financial mistakes of Americans over the age of 30?
The answer is at the bottom of the newsletter.
The Economy
Employment
Total U.S. nonfarm payroll employment rose in December by 216,000. The official unemployment rate, U-3, remained unchanged at 3.7%. The October 2023 and November 2023 combined employment numbers were revised down by 71,000.
Chart 1 below is based on the Bureau of Labor Statistics official unemployment rate, U-3.
The Wall Street Journal reports remote workers are being laid off at a 35% higher rate than workers who show up in the office. As per a 2021 Gartner survey, executives and managers believed in-office workers were higher performers than remote employees. Wayfair, the online home goods retailer recently told employees that remote workers would be more likely to be affected in company layoffs. Wayfair then announced they were cutting staff by 13%.
In chart 2 below, the two-year trend of lower employment growth continues even though there is now a 2-month trend of higher employment.
The Job Openings & Labor Turnover Survey (JOLTS) showed there were 8.8 million open jobs across the country as of the last business day in November. The 9-year chart below shows the recent downward trend in open jobs.
The seasonally adjusted Total U.S. Unemployment Rate, U-6, increased in December to 7.1% vs 7.0% last month. There were 5.9 million people unemployed in December, aged 16 and older. Last month it was 5.8 million people unemployed.
December Unemployment Rates by Education Level
| Less Than High School Diploma | 6.0% |
| High School Graduate, No College | 4.2% |
| 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 December 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 December dropped but only by 0.1%. This was the 21st month in a row with a decline.
As such, the LEI continues to signal a recession in the near term. The Conference Board’s spokesperson said, “Despite the overall decline of 0.1%, six of the ten indicators made positive contributions to the LEI in December. Overall, we expect GDP growth to turn negative in Q2 and Q3 of 2024 but begin to recover later this year.”
Gross Domestic Product (GDP)
The Bureau of Economic Analysis said the advance estimate for GDP in the fourth quarter of 2023 rose at an annual rate of 3.3%. GDP for the first quarter 2023 was 2.2%, 2.1% in the second quarter and 4.9% in the third quarter.
The economy can and will change over time, but as long as we have a healthy increase in GDP each quarter, we will not have a recession.
Labor Productivity
Nonfarm business labor productivity increased 3.2% in the fourth quarter of 2023 as reported by the Bureau of Labor Statistics. In the same quarter a year ago, the increase was only 2.7%.
Third quarter data was revised down to 4.9% from 5.2%. Artificial intelligence over the next 10 years will tend to increase productivity going forward.
Inflation
Annual inflation was unchanged at 2.6% as measured by the Personal Consumption Expenditures (PCE) index in December. Core PCE index, which excludes food and energy, dropped to 2.9% in December from 3.2% the previous month.
The peak Core PCE inflation this cycle was 5.4% 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 January 31, 2024, the average 30-year fixed-rate mortgage had an interest rate of 6.75%, compared to 6.63% last month. Also, the average 15-year fixed rate mortgage had an interest rate of 6.18%, compared to 5.96% last month.
The median existing-home sale price in December dropped to $382,600 from $387,600 in November according to the National Association of Realtors. The inventory of existing homes for sale remains low with only a 3.2-month supply.
The U.S. Public Debt as Issued by the Treasury Department as of January 31, 2024, was:
$34,154,000,000,000.
Last month it was $33,957,000,000,000.
Important Dates in February
February 2 – Groundhog Day
February 10 – Chinese New Year. This is the year of the Green Dragon symbolizing energy, strength, and power.
February 12 – Abraham Lincoln, the 16th US President, was born on this date in 1809.
February 14 – Valentine's Day.
February 19 – 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 US President, was born on this day in 1732 using the newly adopted Gregorian calendar. When Washington was born, the U.S. was still on the Julian calendar and his birthday was February 11, 1731 – one year and 11 days earlier.
February 23 – Battle of the Alamo. The Mexican army won the battle but lost the war.
February 29 – This is a Leap Year! Happy birthday times four to everyone born on this day!
The Stock Market
Commentary
Bob Pisani
Pisani has been a financial reporter for CNBC in New York since 1990.
On January 2, 2024, Pisani showed the following three charts which illustrate the performance of the S&P 500 since 1928.
Since the S&P 500 was up over 20% in 2023, let’s look at the chances of another up year in 2024.
Stock Market Valuation
After a two-year wait, the S&P 500 set a new all-time closing high on January 19 at 4,839.81. The previous all-time closing high was 4,796.56 way back on January 3, 2022. Friday’s rally was propelled by technology stocks continuing to climb higher. For example, Nvidia is up another 20% so far this year as of January 18. Chip stocks, cybersecurity and software companies are reaping the biggest benefits of this market upturn.
But the market did not stop on January 19. The market set a new all-time closing high each day for the next four business days. See the chart below.
At Lorenz Financial, we focus on S&P 500 closing highs and not intra-day highs as we feel closing highs are more important. The most important closing high is a Friday closing high. With the advent of algorithmic high-speed trading, these day-traders are scared to death to hold financial assets such as stocks overnight and more importantly over a weekend. Therefore, the question becomes each day, when they leave the market, where is the index, up or down? We strongly believe market closing prices are much more an indication of market sentiment than intra-day highs and lows.
As a review, Ed Yardeni’s 2024 year-end target for the S&P is 5,400. Most analysts are a little lower at 5,050 to 5,100. But in either case, so far it looks like another stock market up year is in store for U.S. investors.
UBS said on January 16, 2024, “We are increasing our 2024 S&P 500 target from 4,850 to 5,150 given the Fed’s recent pivot, subsequent declines in interest rate expectations, and above trend 2024 Earnings Per Share (EPS) revisions. Our EPS for the S&P 500 is now increased from $225 to $235.”
Monthly Performance of the S&P 500 Index
2023 Annual Performance of the S&P 500 Index
VOO, the market cap weighted S&P 500 Index ETF, was up 26.3%.
RSP, the equal weighted S&P 500 Index ETF, was up 13.7%.
Are My Investments Making Enough?
Investing is first about staying within the limits of an investor’s risk tolerance. Then strive to become a long-term investor by using patience and courage to avoid short-term trading. Next focus your portfolio on being highly diversified, keeping product and advisor costs low, staying tax efficient, all to achieve long-term returns greater than the rate of inflation plus the family’s marginal income tax rate plus an advisor’s fee percentage.
A conservative investor will strive to achieve a return of 1 to 2% on a long-term basis after reducing their return due to inflation, taxes, and advisor fees. An aggressive investor will strive to achieve 6 to 7% annually after subtracting out inflation, taxes, and advisor fees.
Using round numbers, let’s say a fictitious investor made 10% in a given year with no Roth IRA (meaning everything will eventually be subject to income taxes). We will say they are in a 30% tax bracket for federal and state income taxes. Now they are left with 10% - 3% = 7%. The 3% is the amount of taxes owed. (10% return x 30% tax rate = 3% taxes owed)
We will assume inflation is running at 3%, so now they have 4% remaining. Most advisors charge 1% a year, but not Lorenz Financial. So, subtracting 1% and the investor is left with 3%. And it’s likely they only achieved their 10% return in this typical year by having 100% of their money in the stock market! It’s unfortunate the investor started with a 10% return, but really, they only make 3% after taxes, inflation, and advisor fees, but that is the world we live in.
Recommended Action for Your Stock Portfolio
There are a variety of techniques on how to build a stock portfolio. Of course, some are good, and some are bad. Let’s do a quick review.
Buy and Hold
This is the simplest strategy for achieving long-term growth. There are consistently 10 or so days in a year where the market zooms up. If an investor was to be in the stock market every day of the year, except those 10 big up days, the likely annual return of that investor would be 0%. An investor has to be sure and capture those big up days and the only way to do that is to be in the market.
Buy, Hold and Forget About It
This is an exaggerated position of Buy and Hold. Forgetting about your investments is a dangerous concept.
Remember the “Nifty 50” stocks of the 1970s? Well, they included the following companies that have gone bankrupt or are a much smaller company today.
- Digital Equipment Corporation
- Eastman Kodak
- Emery Airfreight
- National City Bank
- Heublein
- International Telephone and Telegraph
- JCPenny
- MGIC Investment Corp
- Joseph Schlitz Brewing
- Sears
Polaroid, International Flavors, and Xerox are not bankrupt, but they are a lot smaller company today. Please do not forget about or ignore your investments.
Diversification
Because there is a variety of different types of risks to investing, by diversifying a portfolio, these risks can be minimized. The right combination of stocks, bonds, cash, and possibly other assets can allow a portfolio to grow with much less risk and volatility than a portfolio that is invested completely in stocks.
Dollar Cost Averaging
An excellent investment tool is dollar-cost-averaging. This simply means every pay period an investor puts the same amount of money into their retirement plan. Sometime the market is up and sometimes it is down, but by investing every pay period the investor will lower their cost basis as fewer shares are bought when the market is higher, and more shares are bought when prices decline. Another advantage is an investor does not need to worry about, “If I buy today, am I buying at a high point and the market will go down from here?”
Are the Costs of My Portfolio Too High?
An investor has two types of costs to think about: The costs of the products in the portfolio such as annual expense ratio, spreads between buying and selling, trading expenses by mutual funds and ETFs, commissions, loads, and transaction fees. The second type of fee could come from the investor’s advisor. Many advisors charge 1% to 2% per year.
Before you know it, an investor might be paying 3% to 4% in fees. That is terrible! Try and keep your expense to less than 0.5%.
·Not FDIC Insured ·No Bank Guarantee ·May Lose Value
Financial Markets Vocabulary
For investors who buy individual bonds, there are two broad types – General Obligation Bonds and Revenue Bonds. What are the differences?
General Obligation Bonds (GO Bonds)
GO bonds are only issued by a taxing authority – a school district, city, county, or state government. Interest and debt repayment are guaranteed by the full financial resources and taxing power of the issuer. GO bonds are typically considered safer than Revenue Bonds as those who issue Revenue Bonds can not raise taxes to help pay for the bonds. Therefore, GO bonds typically pay a lower interest rate than Revenue Bonds.
Revenue Bonds
Revenue Bonds are debt instruments which the payment of interest and return of principal to the investor depends on the revenue from the asset the bond issue is used to finance. Examples are toll roads and bridges, hospital expansions, housing developments, airport expansions, sports stadiums.
Broadly, we at Lorenz Financial do not recommend individual bonds just as we do not recommend individual stocks. Investors have no power or influence to control the outcome of a concentrated investment. ETFs and mutual funds offer a much greater amount of diversification, which reduces risk.
OK, Now What Do I Do?
As people approach retirement, many will realize their most valuable asset is their employer’s retirement plan (401K, 403B, 457, or the federal government’s TSP). So, the question becomes, what do I do with this pot of money when I retire?
Broadly we recommend rolling over the money to an Individual Retirement Account (IRA). Why? Because inside the employer’s retirement plan there are perhaps 15 to 25 investment options. Are these the best options in the whole investment landscape? Probably not. Are they the least expensive options? Likely not.
So, depending on the needs and objectives of the investor, their risk tolerance, their timeframe, and tax status, likely there are better, safer, cheaper, higher growth options that can be purchased inside an IRA as compared to the investment options inside the employer’s plan.
Most plans will allow the money in a retirement plan to be rolled over to an IRA when the employee reaches 59.5 years of age – even if the employee is still working. But before doing so, make sure the plan allows you to continue to contribute to the plan after the rollover. Also make sure you, the employee, do not take possession of the plan’s money. If you get a check, do not cash it as now that would be considered you have made a withdrawal from the plan and you will owe income taxes on the whole amount,
Just remember there are sharks in the water, and they smell your money! If you decide to hire a financial advisor, we only recommend hiring a Registered Investment Advisor, a fiduciary who always puts the interest of the client first.
Our Financial Bad Boys This Month
Settlements Reached in College Financial Aid Suit
The Wall Street Journal, January 25, 2024, page A3
Five of the nation’s most prestigious universities agreed to settle a lawsuit accusing them of colluding to limit student’s financial-aid packages, saying in court filing that they would pay a combined $104.5 million into a fund for students harmed by the alleged antitrust violations.
Brown, Columbia, Duke, Emory, and Yale universities said they would settle the two-year old case. This brings the total number of universities that have settled this case to eight out of a total of 17. The other three that have settled are University of Chicago, Rice University and Vanderbilt University.
The nine universities that have not settled are:
- California Institute of Technology
- Cornell University
- Dartmouth College
- Georgetown University
- Johns Hopkins University
- Massachusetts Institute of Technology
- Northwestern University
- University of Notre Dame
- University of Pennsylvania
The people who run these universities should be ashamed of themselves!
The Best and Worst Airlines of 2023
The Wall Street Journal, January 25, 2024, pages A9
In this brief summary, we will focus on the worst airline, JetBlue. Of the nine largest airlines, a rating of 9 means the lowest and a rating of 1 means the highest.
Here are JetBlue’s rankings for 2023.
- On Time Arrivals 9
- Cancelled Flights 9
- Extreme Delays 9
- 2-Hour Tarmac Delays 9
- Mishandled Baggage 6
- Involuntary Bumping 4
- Complaints 6
- Overall Rank 9
The Bond Market
Commentary
The Federal Open Market Committee (FOMC) held a two-day meeting on January 30 and 31. Wednesday afternoon Chair Powell spoke to reporters and discussed a variety of topics.
“While the six months of declines in inflation have been good, the committee is looking for more broad-based evidence that prices are falling. We need more data which will give us more confidence that we are on a sustained path to 2% inflation.”
Chair Powell went on to say, “Based on the meeting today, I would tell you that I don’t think it’s likely that the committee will reach a level of confidence by the time of the March meeting to identify March as the time to cut interest rates.”
The FOMC kept the Federal Funds rate in the target range of 5.25% to 5.50%. The 10-year Treasury is at 3.914% and the 2-year Treasury is at 4.207%. What! Where are the 5% and 5.5% Treasury bonds and CD’s? Well retail interest rates have dropped.
Recommended Action for Your Safe Money
Our recommendations for an investor’s safest money is unchanged from last month. Our recommendations, in no particular order, are:
- 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 4.5% to 5.0% 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.)
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 20% of their total portfolio. These products are safe, but they will not provide the growth needed to stay ahead of inflation and taxes.
PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS.
Pop Quiz Answer
What are the top four most-common financial mistakes of American investors over the age of 30?
Respondents to the survey gave the following answers.
- 51% admit to not saving enough.
- 40% do not have sufficient emergency fund.
- 37% say they have accumulated too much debt.
- 28% confess to only beginning to save money later in life.
Parents and Grandparents: Your job is to teach your children and grandchildren the appropriate financial values to avoid the mistakes above as the schools in your area probably are not.
Lorenz Financial does not provide legal advice. Please consult an estate lawyer in your state for the most up-to-date and complete estate planning information.