Welcome to the January newsletter! Today, we’ll discuss some recommended New Year’s resolutions, 2019 stock market predictions, increased costs of Medicare premiums, and more. Let’s get started!
Summary
As of December 31, the stock market correction continues. Lorenz Financial believes this correction will end and, sometime in 2019, an all-time new stock market closing high will be established.
Employees should continue to make their weekly or monthly contributions to their employer’s retirement plan or IRAs. The economy continues to grow successfully without runaway inflation. No recession is in sight, and all portfolios remain fully invested.
Suggested 2019 New Year’s Resolutions
- Spend less. It doesn’t matter if you make $30,000 or $1M per year. You must spend less than what you make.
- Pay down debt. All debt is bad debt. However, a fixed-rate first mortgage is okay. If you have a fixed-rate mortgage over 5.5%, refinance. If you have a fixed-rate mortgage under 5.5%, then do not pay down your first mortgage ahead of schedule–instead, pay down all other debt and then save more.
- Save more and invest for the long term in a portfolio of highly diversified, low-cost, tax-efficient mutual funds and exchange-traded funds.
The Economy
Employment
U.S. nonfarm payrolls rose 155,000 in November–a lower number than expected. The October payroll number of 250,000 was revised down to 237,000, and the September number of 118,000 was revised up to 119,000. The three-month average is 170,000–not bad. Unemployment has remained constant at 3.7% for the third month in a row. Average hourly earnings for all employees remained unchanged at an average annual rate of 3.1% in November.
Gross Domestic Product (GDP)
Real GDP increased at an annual real rate of 3.4% in the third quarter of 2018, according to the third estimate released by the Bureau of Economic Analysis. For the first nine months of 2018, real GDP was up on average 3.3%. For years 2007 through 2017, GDP averaged only 1.5% per year!
Interest Rates
The Federal Open Market Committee (FOMC) increased the Federal Funds rate range from 2.0% to 2.25% to the range of 2.25% to 2.5%. The FOMC indicated their outlook for 2019 is now two additional rate increases whereas, in October, the outlook was for three additional rate increases. The stock market was hoping for zero projected rate increases in 2019.
Inflation
Annual inflation dropped slightly in November from 2.0% to 1.8%, as measured by the Personal Consumption Expenditures (PCE) index. The core PCE index, excluding food and energy, increased from 1.8% to 1.9% during the same time period. The Federal Reserve’s target for both is 2.0%.
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 Maturities | Annual Inflation Expectations |
| 5 Year | 1.51% |
| 10 Year | 1.71% |
| 30 Year | 1.81% |
Stock Market
The 2018 Stock Market
As measured by the S&P 500 ETF, VOO, the total return of the stock market in 2018 was -4.50%. This was approximately a -6.5% capital loss, but with approximately +2% in dividends, the total return was reduced to -4.5%. For those who sold close to the bottom of the first or second correction in 2018, their losses were much worse.
2018 was unusual in that investors suffered two corrections. The first one started with an all-time closing high in late January, followed by a 10% downturn in mid-February. After the low was re-tested in late March and early April, the bull market resumed.
In late September, another all-time closing high was established. Since then, the market dropped over 19%, with a closing low on Christmas Eve. It remains to be seen if the market will go back down and retest that low. It would be commonplace to do so before the bull market resumes.
December Challenges in the Marketplace
Investor confidence was shaken by Federal Reserve Chair Jay Powell’s indifferent approach to monetary policy and quantitative tightening at his media conference on December 19. In addition, investor concerns have increased based on the fear that the U.S.–China trade war will disrupt economic growth this year as slower global economic growth takes hold. Furthermore, investors were shaken by the recent White House criticism of Powell, as well as word that Treasury Secretary Mnuchin called the six major bank CEOs asking their liquidity status.
These developments created a rogue wave of negative news, which led to a larger market decline than we expected. This has rendered our late November upgrade of the market to “attractive for purchase” premature. The increase in stock market selling pressure that developed during the recent decline leads us to return to a dollar-cost-average recommendation for new stock market money until we see evidence that the market is stabilizing. As a result, an additional “buy signal” might develop. If it does, we will alert subscribers by email or by inclusion in the next regularly scheduled monthly newsletter.
2019 Stock Market Predictions
Here are the 2019 end-of-year S&P 500 Index stock market predictions by some of the major brokerage houses:
3100 – JPMorgan Chase
3000 – Goldman Sachs
2910 – Wells Fargo
2900 – Royal Bank of Canada & Bank of America Merrill Lynch
2800 – Stifel
2750 – Morgan Stanley
2506 – December 31, 2018 close
Jeremy Siegal, professor of Finance at the University of Pennsylvania Wharton School of Business, said regarding 2019, “I do not see a recession in the cards. If we avoid a recession, we’re going to have a really good market.” Prof Siegel added, “We could see the market up 5 to 15% in 2019.”
If the market goes up 15% in 2019, the S&P 500 Index will be at 2880.
A 10-Year Forecast for the Global Stock Market
The current stock market correction has temporarily lowered stock market PE ratios and valuations. This correction will end, and when it does, stock market valuations will once again be on the high side. These projected 2019 high valuations have therefore significantly influenced our stock market forecast for average returns over the next 10 years as below:
U.S. stocks +3 to 5% per year
International stocks +6 to 8% per year
A portfolio of 70% U.S. and 30% international stocks should produce an average annual return of +4.5% to +6.5%. With only 2% inflation, these numbers are okay to good following the great years we just had from 2009 to 2017.
Next month, the above Stock Market portion of this newsletter will return to our normal topics.
Medicare Premiums
When you turn 65, are you planning on using Medicare and thinking it is free medical insurance? Sorry, no–the standard monthly premium is now $135.50 per person in 2019. But if your modified adjusted gross income as reported to the IRS on your 2017 tax return (they always look back two years) is above the levels below, you’ll pay the standard premium plus the Income-Related Monthly Adjusted Amount (IRMAA). IRMAA is an extra charge added to your monthly Medicare premium. See the chart below for 2019 premiums.
Individual Tax Return * | Joint Tax Return * | Standard Medicare Part B Monthly Premium | Income Related Monthly Adjustment Amount (IRMAA) | Total Monthly Premium Per Person |
| $85,000 or less | $170,000 or less | $135.50 | $0.00 | $135.50 |
| Above $85,00 & up to $107,000 | Above $170,000 & up to $214,000 | $135.50 | $54.10 | $189.60 |
Above $107,000 & up to $133,500 | Above $214,000 & up to $267,000 | $135.50 | $135.40 | $270.90 |
Above $133,500 & up to $160,000 | Above $267,000 & up to $320,000 | $135.50 | $216.70 | $352.20 |
Above $160,000 & up to $500,000 | Above $320,000 & up to $750,000 | $135.50 | $297.90 | $433.40 |
Above $500,000 | Above $750,000 | $135.50 | $325.00 | $460.50 |
* Modified Adjusted Gross Income from 2017 for Medicare payments in 2019
Because these high monthly payments for retirees are frequently unexpected, Lorenz Financial advises if a client has a high amount of capital gains to take (selling stock) in a taxable account, or if they plan to convert a lot of money from a Traditional IRA to a Roth IRA, they should do so in the years they turn 60, 61, or 62.
If the client significantly adds to their Modified Adjusted Gross Income in the year they turn 63 or later, their Medicare monthly payment per person at age 65 will be much higher as per the chart above.
Bond Market
Federal Reserve
The Federal Open Market Committee (FOMC) met on December 18 and 19. On December 19, Fed Chair Powell announced the Federal Funds rate was increased from the range of 2% to 2.25% to the range of 2.25% to 2.5%.
U.S. Treasuries
The 10-year Treasury has a 21 basis point higher yield than the 2 year Treasury. We are on watch to see if the yield curve inverts (meaning the 2 year Treasury has a higher yield than the 10-year). We are not concerned when a short-term inversion develops of shorter-term maturities, which has happened recently.
Recommended Action for Your Bond Portfolio
Our bond market recommendations remain unchanged. We are investing only in short-term investment-grade bond funds, intermediate-term investment-grade bond funds, short-term high-yield bond funds, and high-quality money market accounts. The latter should yield 2% or more annually.
We are not recommending any long-term bonds or long-term bond funds due to the current high interest-rate risk. Muni bond funds are not recommended at this time due to the risk of too many U.S. cities and states potentially going bankrupt due to unfunded pension obligations. Treasury bond funds and international bond funds are not recommended at this time due to their low yield. Bond funds that invest in emerging markets are very high risk due to the recent strength of the U.S. dollar, low yields, and the risk of bankruptcy.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS