Welcome to the February 2026 Newsletter. This month, we’re discussing the economy, employment, financial terminology, and more.
Summary
The economy is expanding at a healthy pace and entering 2026 on a solid foundation. Job gains have been lower than desired, and inflation remains elevated but below 3%. If we could just keep the federal government from spending more than they take in, our future would be brighter with more stable interest rates.
The stock market, as measured by the S&P 500 Index, temporarily broke through the 7,000 level for the first time on January 28. During the first half of 2026, we expect the stock market to exhibit higher volatility than in the past few years. For the courageous, this can create buying opportunities when the market is down. Volatility will also tend to flush out the weaker market participants as they will likely sell at the bottom of each dip. We also expect the bottom 493 stocks in the S&P 500 to perform better than the Magnificent 7, so everyone’s portfolio should be diversified to take advantage of the upside potential spreading out into nearly all corners of the market.
Quote of the Day
On January 13, 2026, Liz Ann Sonders, Chief Investment Strategist at Schwab, said on CNBC, “My message to long-term investors is don’t try to play the short-term game currently employed by retail traders. What we do know over any reasonable long time-horizon is there is a strong connection between economic fundamentals (inflation, employment, GDP, productivity, and corporate profits) and stock prices.”
“We are big believers in investing. Investing is about owning. Gambling is only about hope. These are two very different investment philosophies.”
So, when a stock market person talks about “gambling”, they are not talking about “Texas Hold’em”. They are talking about the following types of speculation:
- Crypto
- Sports betting
- Stocks with only upward price momentum but no corporate profits
- Options trading
- Private Equity
- Private Credit
- Day Trading
- Zero Day Options
- Leverage and inverse ETFs
- Margin Loans
- Commodity Futures
- Penny Stocks
- Short selling
So, are you a long-term investor?
Pop Quiz
Who is Kevin Warsh?
The answer to this month’s Pop Quiz is at the bottom of the newsletter.
The Economy
Employment
Total U.S. nonfarm payroll employment rose by 50,000 in December. The official unemployment rate, U-3, increased to 4.4%. The October and November 2025 combined employment numbers were revised lower by 76,000 than previously reported.
Chart 1 below is based on the Bureau of Labor Statistics official unemployment rate, U-3. Note there was no report for October.
Chart 2 below shows the two-year trend of employment growth.
The Job Openings & Labor Turnover Survey (JOLTS) decreased to 7.1 million open jobs across the country as of the last business day in November. It was 7.7 million in October. The 10-year chart below shows that the downward trend has continued in open jobs since March 2022.
The seasonally adjusted Total U.S. Unemployment Rate, U-6, decreased to 8.4% in December as compared to 8.7% in November. There were 7.0 million people unemployed in December, aged 16 and older. In November, it was 7.4 million people unemployed.
December Unemployment Rates by Education Level
Average hourly earnings of all employees on private nonfarm payrolls were up 3.8% in December compared to a year ago. It was 3.5% in November.
| Less Than High School Diploma | 5.6% |
| High School Graduate, No College | 4.0% |
| Some College, Associate's Degree, or Skilled Trade Degree | 3.8% |
| Bachelor's Degree or Higher | 2.8% |
Leading Economic Indicators (LEI) sponsored by The Conference Board
The LEI declined 0.3% in November after a revised decrease of 0.1% in October. The Conference Board’s spokesperson said, “Throughout 2025, weak consumer expectations and new orders led the decline in the LEI. The strongest contributions to a positive LEI were from labor market data including unemployment insurance claims and weekly hours worked in manufacturing. Despite real GDP growth hitting 4.4% in Q3 of 2025, the LEI continues to suggest the US economy will slow in 2026.”
Gross Domestic Product (GDP)
The Bureau of Economic Analysis said the final estimate for GDP in the third quarter of 2025 increased at a significant annual real rate of 4.4%! GDP for the second quarter 2025 was revised to an excellent 3.8%. The economy continues to rip higher!
The increase in the third quarter GDP reflected a decrease in imports, which is a subtraction in the GDP calculation, and an increase in consumer spending and exports. For the year 2024, GDP increased 2.8% and grew 3.2% in 2023.
Labor Productivity (quarterly releases only)
Fourth quarter preliminary data will be released on March 5 and revised on March 24.
Annualized and seasonally adjusted, nonfarm, labor productivity increased by a whopping 4.9% in the third quarter of 2025 as reported by the Bureau of Labor Statistics. It was originally reported as being 3.3%. So far in 2025, quarterly labor productivity has been:
- 1st qtr -2.1%
- 2nd qtr +4.1%
- 3rd qtr +4.9%
By calendar year, labor productivity grew 2.3% in 2024 and an anemic 1.6% in 2023. High labor productivity is a very good sign for the economy.
Inflation
Annual inflation increased slightly to 2.8% as measured by the Personal Consumption Expenditures (PCE) price index for November. The revised annual October number was 2.7%. The annual core PCE price index, which excludes food and energy, increased slightly in November to 2.8% from 2.7% in October.
University of Michigan Consumer Sentiment
Consumer sentiment in January increased significantly to 56.4 compared to December’s revised 52.9. See the 10-year chart below.
Consumer sentiment lifted about 3.5 index points this month, with gains seen across all index components. Consumers continue to report pressures on their purchasing power stemming from high inflation from 2021 to 2023.
Mortgage Rates and Average Existing Home Prices
As of January 30, 2026, the average 30-year fixed-rate mortgage had an interest rate of 6.16% compared to 6.20% last month. The average 15-year fixed rate mortgage had an interest rate of 5.75%, which was unchanged compared to the previous month.
The median existing single-family home sale price decreased in December 2025 to $409,500, but that was up 1.8% compared to 12 months earlier. The seasonally adjusted annual rate of existing home sales increased 1.8% compared to a year earlier, according to the National Association of Realtors. The inventory of existing homes for sale decreased by 18.1% compared to December 2024. This represents only a 3.3-month supply of homes for sale.
The Average Transaction Price for a New Car or Truck in USA in December
$50,326 – The first time the average is over $50K.
The smart buyer says, “A three-year-old used car will be half the price of new.”
The U.S. National Debt as Issued by the Treasury Department as of January 30, 2026, was:
$38,675,000,000,000. Note, $38 trillion is 1,000 times larger than $38 billion, and $38 billion is 1,000 times larger than $38 million.
Last month it was $38,349,000,000,000.
Important Dates in February
THE STOCK MARKET
Commentary
Mike Wilson of Morgan Stanley said on CNBC on January 8, “The impact of deregulation, corporate operating leverage (see financial vocabulary below), fiscal policy (by Congress and the President), and monetary policy (by the Federal Reserve) is still undervalued by the stock market.”
“Their collective impact remains underappreciated in terms of fueling the rolling recovery. The surprise for 2026 could be that we see PE multiple expansion for stocks.”
Stock Market Valuation
Rick Rieder, Senior Managing Director and Chief Investment Officer at BlackRock, said his S&P 500 most favorite sectors in 2026 are (in alphabetical order):
- Energy
- Financials
- Health Care
- Industrials
- Technology
The S&P 500 Index closed on January 30, 2026 at 6,939.03. Year to date, the Index, as per VOO, the exchange traded fund, was up 1.45% including dividends.
• Markets are volatile • Always consult your financial advisor before investing
Recent Annual S&P 500 Performance As Per The Exchange Traded Fund, VOO
2025: +17.82%
2024:+24.98%
2023: +26.32%
2022: -18.19%
2021: +28.78%
2020: +18.29%
2019: +31.35%
Recommended Action for Your Stock Portfolio
The Wall Street Journal, December 6-7, 2025, page B3
Do You Really Know What’s Inside your 401K?
Leave it to Wall Street to take a cheap, simple, elegant idea and junk it up with fees, complexity, and opacity. This is what is happening to target-date funds, the investment favored by tens of millions of American investors.
Nearly two-thirds of all employees own at least one target-date fund in their retirement account. These all-in-one funds hold stocks, bonds, and other assets in predetermined proportions, scaling down risk as the investor ages. These funds used to own as little as two or three funds: a US stock index fund, a US bond index fund, and a money market account. But according to Morningstar data, 35% of all target date funds own at least two dozen different investment vehicles. Why?
Crack open some of these target-date funds and you will find a growth and value large-cap funds, another pair of mid-cap funds, and another pair of small-cap funds. Then add some sexy “strategic”, or “discovery”, or “momentum” funds. Then add similar slicing and dicing of international and emerging market funds and then repeat the same grab-bag strategy for bond funds. Has the resulting jumble of funds reduced volatility or increased returns? Absolutely not! This is bad, point 1.
Over the past decade, another devious change has taken place with some target-date funds. As the pressure to cut fees has intensified, some retirement plan administrators have moved away from mutual funds and exchange-traded funds to “collective investment trusts” (CIT). CITs are pools of assets offered by banks and trust companies. CITs are overseen by bank regulators, not by the Securities and Exchange Commission. Ooo! That’s not good. This is bad, point 2 for target-date funds.
CITs are moving towards higher risks, lower transparency, and the potential for higher fees. CITs disclose some information about their fees and holding, but nowhere near what a mutual fund or exchange-traded fund shares with the public. Nothing good ever comes out of “less transparency”. Point 3.
Now here comes the sledgehammer, point 4. Managers of alternative investments – primarily private equity, private credit, and non-traded real estate – are eyeing CITs in target date funds as their next great opportunity where a lack of transparency is their greatest asset. These money managers have identified the real target in target-date funds – YOU!
The ultimate hands-off investment vehicle – target-date funds – is going to require you to be more hands-on. If you don’t like what is happening to your target-date funds, sell them and get an advisor who will help you develop a portfolio that matches your risk tolerance. At Lorenz Financial, we have never liked target-date funds, and the list as to why not is getting longer.
∙ Not FDIC Insured ∙ No Bank Guarantee ∙ May Lose Value
Financial Markets Vocabulary
OK, what is “corporate operating leverage”? Briefly, operating leverage indicates how efficiently a company uses its assets to generate profits from each additional sale. Operating leverage hinges on the balance between fixed costs (which don’t change with sales volume) and variable costs (which do change with sales volume). Relatively high fixed costs compared to variable costs give a higher operating leverage. Industries such as technology, airlines, railroads, shipping companies, cruise lines, and utilities often have high leverage.
High leverage amplifies both gains and losses; a small sales increase leads to a large profit jump, while a sales dip causes a profit crash. High operating leverage is a good thing, especially during a bull (up) stock market.
Let’s explore “Degree of Operating Leverage” (DOL). The most common way to calculate DOL is by dividing the percentage change in operating profit (EBIT – earnings before interest and taxes) by the percentage change in sales. A DOL of 2 means a 10% sales increase results in a 20% profit increase.
OK, Now What Do I Do?
The only thing worse than paying taxes is remembering all the tax changes each year. Here are some key federal income tax changes for 2026.
• Not insured by any bank or government • Subject to risk & possible loss of principal
Our Financial Bad Boy This Month
The Wall Street Journal, January 27, 2026, page B9
BlackRock Private Credit Fund Tumbles
Mounting investor angst about skyrocketing loan losses at BlackRock’s TCP Capital has sent the net asset value of the private credit fund down 19% in one day. So far, 10% of the loans in the fund are politely classified as non-performing. That’s a nice way of saying “in default”.
These types of funds make high-interest loans to midsize corporations with junk credit ratings, using income from the loans to pay big dividends to their investors.
Just another example of alternative investments, this time private credit, that is exhibiting high risk, which Lorenz Financial judges to be not worth the fees and returns actually paid out. Note, BlackRock did not lose 19%. BlackRock’s alternative investors lost 19%.
Please do not consider investing in private credit or private equity.
WHY IS COMPUTER MEMORY BECOMING SO EXPENSIVE?
Estimates are Nvidia (NVDA) and their manufacturing supplier, Taiwan Semiconductor Manufacturing Co. Ltd. (TSM), will produce 7.5 million AI chips in 2026. Whereas a new laptop may need 16 Gigabytes (GB) to 32 GB of memory per computer and a smartphone may use 8 GB to 12 GB, each Nvidia AI chip needs 288 GB of memory!
The demand for memory chips, especially the new ones called High Bandwidth Memory (HBM), has skyrocketed! As demand (for anything) exceeds its supply, prices go up. New memory manufacturing facilities, called fabs, are being planned and built (even in West Lafayette), but the process takes three to four years minimum to begin producing chips. Dirt has not even started to be moved for example in West Lafayette.
The cost of memory, as a percent of the total cost of a computer or phone, is going up from the previous low of 10% to an expected 30%.
Remember, we are not talking about computer storage, which runs from 256 GB to 1 Terabyte on a phone or laptop. Information put into storage is stable until deleted, but memory, the working area of a computer, is erased whenever the device is turned off.
MICROSOFT’S NEW DATA CENTER POLICIES
Microsoft announced on January 13, five new core principles that will guide the company’s data center expansion around the country and, in theory, mitigate some of the political and public backlash over those data centers. Among other things, Microsoft said they are committing to not asking for tax breaks from local communities as they build out their infrastructure. Those five principles are:
- Microsoft will pay our way to ensure our data centers don’t increase the price of electricity for the local community.
- Microsoft will minimize the use of water and replenish more of the water we use.
- Microsoft will create jobs within the community.
- Microsoft will add to the tax base for local hospitals, schools, parks, and libraries.
- Microsoft will strengthen the community by investing in local AI training for local businesses and non-profits.
OK, today we are giving three cheers to Microsoft.
JENSEN HUANG SAYS ARTIFICIAL INTELLIGENCE IS A 5-LAYER CAKE
Wall Street Journal, January 22, 2026, Page B4
Nvidia Chief Executive Jensen Huang speaking at the World Economic Forum in Davos, Switzerland, described AI as a five-layer cake consisting of energy, chips, cloud / data centers, large language models, and applications. Huang said AI’s applications – how the technology is used in a specific industry – is the most critical layer of that cake as it is where the economic benefits lie.
For example, an S&P 500 company, will need AI applications for:
- Finance
- Marketing
- Engineering
- Supplier Support
- HR
- Community Relations
- IT
- Shareholder Services
- Manufacturing
- After Sales Support
- Employee Benefits
- Legal
- Distributor Support
- Training
- Research & Development
- Inventory
- Executive Office & Board of Directors Support
For the most part, these applications do not yet exist.
The Bond Market
Commentary
On January 28, Federal Reserve Chair Powell gave these comments following the Open Market Committee’s decision to keep short-term interest rates constant in the target range of 3.50% to 3.75%.
“The U.S. economy expanded at a solid pace last year and is coming into 2026 on a firm footing. While job gains have remained low, the unemployment rate has shown some signs of stabilization, and inflation remains somewhat elevated.”
“Our monetary policy actions are guided by our dual mandate to promote maximum employment and stable prices for the American people. At today’s meeting, the Committee decided to maintain the target range for the federal fund rate at 3.5% to 3.75%.”
Recommended Action for Your Safest Money
Our investor’s safest money recommendations are now listed below and in order with the top line, PRPFX, representing the potentially highest returns, is credit safe, but likely will have the highest volatility. This month, we are adding short-term US corporate junk bond funds as an option for PART of a family’s safe money.
- Permanent Portfolio mutual fund, PRPFX, gold bullion, or silver bullion.
- Short-term US corporate junk bond fund.
- Short-term U.S. investment-grade corporate or securitized bond funds.
- FDIC bank or NCUA credit union, 1 to 4 yr CDs, paying at least 3.7%.
- Bank or brokerage-house, high-yield savings or money market accounts (3.7% min.).
- US Treasury Bills of 1 year, or Treasury Notes of 2, 3 or 4 years.
- U.S. Savings I-Bonds which have a max contribution of $10,000 per account per year, are tax deferred for 30 years, do not drop in value like bonds drop in value when interest rates rise, interest is paid and compounded monthly, and the interest rate resets every six months based on inflation (the higher the inflation, the higher the interest rate).
The bottom option in the list above, U.S. Savings I-Bonds, are the most credit safe, have the lowest volatility but potentially the lowest returns. We recommend everyone spread their “safe money” over at least five of the seven ideas above.
Due to the low return of all these investment products, investors should not put 100% or anything close to that, in these products. These products are only for an investor’s safest money or perhaps 5% to 30% of an investor’s total portfolio. These products are credit safe, but they will not provide the growth or income needed to stay ahead of, or even keep up with, taxes plus inflation.
Past performance is not a guarantee of future results.
Pop Quiz Answer
Who is Kevin Warsh?
Answer:
Warsh is an American economist nominated to become the next Federal Reserve Chairman, replacing Jay Powell, whose term as chair is expiring. Warsh did not earn his “economist” title by earning a PhD in economics, but earned it through his extensive, very high-level experience in developing and implementing economic policies, managing central banking policies, and working in financial markets.
- Warsh earned his bachelor’s degree from Stanford University and his law degree from Harvard. He also attended Business schools at Harvard and MIT.
- In the early 2000’s, Warsh worked in Mergers and Acquisitions at Morgan Stanley.
- From 2002 to 2006, Warsh was a Special Assistant to President George W. Bush for economic policy.
- From 2006 to 2011, Warsh was the youngest Federal Reserve Governor ever and served during the very challenging Great Recession of 2008-09.
- From 2011 to 2026, Warsh has been a lecturer at Stanford Graduate School of Business and a Distinguished Fellow at the Hoover Institution. He has also worked for Stanley Druckenmiller’s family office.
If confirmed by the Senate, Warsh’s four-year term as Fed Chair will begin on May 16, 2026. The Federal Reserve Chair is also a Fed Governor, who has a term of 14 years.