Welcome to the January 2025 Newsletter. This month, we’re discussing the economy, employment, financial terminology, and more.
Summary
Richard Fisher
Fisher is the former Dallas Federal Reserve Bank President.
On December 12, Fisher said on CNBC, “The economy is doing well. Financial conditions are wonderful! Employment remains healthy as does growth. But there are still some inflation pressures present in the services sector.”
“My real concern is what happened in fiscal year 2024 that ended this past September 30. The federal government had revenue of $4.62 trillion but spent over 19% of it on interest on the national debt. If our government was a company, no bank would invest in this company with so much debt. One thing that has been helpful to the U.S. has been the high amount of foreign investment we have had. If we didn’t have this, the 10-year Treasury would be at 5% instead of the 4.2% (where it is today). Also, I view tariffs and massive deportations, if they happen, as inflationary and anti-growth.”
From Mark, as Dan Ives says below, “Get out the popcorn!” Looking at VOO in 2023, the S&P 500 Index was up 26.32% and in 2024 it was up another 25.0%! So, investors have a lot of profits, some of which are in taxable brokerage accounts. If an investor wants to sell, to lock in their gains, and perhaps buy a different stock, they hopefully did not sell in December and have to pay capital gains taxes by April 2025 but will sell in January and not pay the taxes until April 2026. So, everyone please be prepared for a possible wave of selling in January with the market temporarily dropping another 5% or more.
Quote of the Day
Dan Ives
Ives is the Global Head of Technical Research at Wedbush Securities headquartered in Los Angeles.
On December 12, Ives said, “The fourth Industrial Revolution is playing out right in front of us. This is just the beginning. Get the popcorn out, because the rest of technology companies now see the benefit of the AI revolution!”
Pop Quiz
If artificial intelligence is part of the fourth industrial revolution, what and when were the first three, and now the fourth?
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 significantly by 227,000. The official unemployment rate, U-3, rose to 4.2%. The September and October 2024 combined employment numbers were revised higher by 56,000 than previously reported.
Chart 1 below is based on the Bureau of Labor Statistics official unemployment rate, U-3.
Chart 2 below shows the two-year trend of employment growth.
The Job Openings & Labor Turnover Survey (JOLTS) increased to 7.7 million open jobs across the country as of the last business day in October. It was 7.4 million in the prior month. The 10-year chart below shows the downward trend continues in open jobs since March 2022.
The seasonally adjusted Total U.S. Unemployment Rate, U-6, increased to 7.8% in November compared to the month before which was 7.7%. There were 6.7 million people unemployed in November, age 16 and older. Last month it was 6.5 million people unemployed.
November Unemployment Rates by Education Level
| Less Than High School Diploma | 6.0% |
| High School Graduate, No College | 4.6% |
| Some College, Associate's Degree, or Skilled Trade Degree | 3.6% |
| Bachelor's Degree or Higher | 2.4% |
Average hourly earnings of all employees on private nonfarm payrolls were up 4.0% in November compared to a year ago. This was unchanged from the previous month.
Leading Economic Indicators (LEI) sponsored by The Conference Board
The LEI increased 1.9% in November. The Conference Board’s spokesperson said, “November’s increase was mainly driven by more positive consumer assessments of the present economic situation, particularly regarding the labor market.”
Gross Domestic Product (GDP)
The Bureau of Economic Analysis said the final estimate for GDP in the third quarter of 2024 rose at an excellent annual rate of 3.1%. GDP for the second quarter 2024 was 3.0%.
The increase in real GDP reflected an increase in exports and consumer spending.
Labor Productivity - Quarterly
As per the December revision, annualized and seasonally adjusted nonfarm business labor productivity did not change and remained at a 2.2% increase during the third quarter of 2024 as reported by the Bureau of Labor Statistics. In the third quarter a year ago, the increase was 2.0%.
Inflation
Annual inflation increased to 2.4% as measured by the Personal Consumption Expenditures (PCE) index for November. It was 2.3% the year ending in October. Core PCE index, which excludes food and energy, remained the same at 2.8% in November as in October.
University of Michigan Consumer Sentiment
Consumer sentiment in December increased to 74.0, as compared to November’s 71.8.
Consumer sentiment improved for the fifth consecutive month, rising about 3% to its highest reading in seven months.
Mortgage Rates and Existing Home Prices
As of December 31, 2024, the average 30-year fixed-rate mortgage had an interest rate of 7.07%, compared to 6.92% last month. The average 15-year fixed-rate mortgage had an interest rate of 6.48%, compared to 6.12% last month.
The median existing-home sale price decreased slightly in November to $406,100. But that is a 4.7% increase compared to November 2023 according to the National Association of Realtors. The inventory of existing homes for sale dropped to a 3.8-month supply in November. The desired supply-target is 6 months.
The U.S. Public Debt as Issued by the Treasury Department as of December 31, 2024, was:
$36,288,000,000,000.
Last month it was $36,120,000,000,000.
Important Dates in January
January 1 – New Year’s Day, a Wednesday this year and a federal holiday.
January 1 – The Emancipation Proclamation was issued by President Lincoln on this date in 1863. In part President Lincoln wrote, “all persons held as slaves within the rebellious areas are, and henceforward shall be free.”
January 1 – The stock and bond markets will be closed on Wednesday for observance of New Year’s Day and will reopen on Thursday, January 2, 2025.
January 17 – Benjamin Franklin was born on this date in 1706.
January 20 – The 60th Presidential Inauguration will take place at the United States Capitol at noon.
January 20 – Dr. Martin Luther King Jr.’s birthday. Dr. King’s birthday is celebrated on the 3rd Monday of January even though he was born on January 15. The stock and bond markets will be closed on January 20 as this is a federal holiday.
January 27 – International Holocaust Remembrance Day.
January 28 & 29 – The first Federal Open Market Committee (FOMC) meeting in 2025.
January 29 – Chinese New Year. This is the year of the snake, as it is said the snake represents wisdom, elegance, and mystery.
The Stock Market
Commentary
Aswath Damodaran
Damodaran is a professor of finance at the Stern School of Business at New York University.
When asked on December 13, “Is the stock market overvalued?” Damodaran said on CNBC, “The market is richly priced, but it is not in bubble territory. Here is the way I think about it. Would I sell everything and head for the hills? No, it’s not that kind of market. Am I going to take every dollar of cash I have and throw it into the market? No, it’s not that kind of market either.”
“So, I’ll take an 8 to 10% return in the market in 2025 after the past two years of +25% growth each year. An 8 to 10% return for me is good enough.”
Stock Market Valuation
Rob Sechan
Sechan is CEO, Managing Partner and Co-founder of NewEdge Wealth based in New York City.
On December 23, Sechan said on CNBC, “I think momentum continues into the year end in the technology trade. The setup though for 2025 will be a little bit different. We are trimming our overweight in the technology sector, and we are replacing it with “value cyclical stocks.” This is on the notion that this outperformance of the technology stocks at the current pace CANNOT CONTINUE!”
“We reserve the right to unwind this trade if value stock earnings disappoint. We have this setup for the 493 stocks in the S&P 500 (not the magnificent 7) to really deliver in 2025 in the midst of the magnificent 7’s earnings growth decelerating meaningfully from 55% growth in 2024 to 20% expected growth in 2025.”
“If you want to drive alpha1 we think there is an opportunity in U.S. value stocks because they are oversold, and we believe in American exceptionalism.”
(1) Alpha is used in investing to describe a strategy’s ability to beat the market, or its “edge.” Alpha is often referred to as “excess returns.”
What do the large brokerage houses project for the S&P 500 Index by the end of 2025?
The S&P 500 Index closed on December 31, 2024 at 5,881.63. Looking at VOO in calendar year 2024, the S&P 500 was up 25.0%.
Monthly Performance of the S&P 500 Index
Recommended Action for Your Stock Portfolio
Everyone’s asset allocation is possibly out of whack after two excellent years in the stock market. If an investor desired an allocation of 70% stocks and 30% bonds plus cash in early 2023, they are probably at 75% or even 80% in stocks today with the past two year of great stock market returns. Therefore, everyone should think about their risk tolerance going forward and if some re-allocation needs to take place, January is the time to do it.
So where to put stock market money in 2025?
We have moderate to high expectations for the technology, industrial, materials, health care, financial, and consumer discretionary sectors.
We have moderate expectations for the communication services, consumer staples, and energy sectors.
We have low expectations for the utility and real estate sectors.
So where to put bond market money in 2025?
We primarily recommend two areas:
- Short-term corporate or securitized bond funds
- Short-term high-yield bond funds
We do not recommend any bond funds with a duration longer than four years as we believe intermediate-term and long-term interest rates are headed higher.
Remember, when the Federal Reserve cuts interest rates, they are only cutting the very short-term rates. The other rates move with market forces that the Federal Reserve cannot directly control.
·Not FDIC Insured ·No Bank Guarantee ·May Lose Value
Financial Markets Vocabulary
2025 IRMAA Brackets
Last month we displayed the federal income tax brackets for 2025. There is another set of 2025 brackets that are important for those on Medicare – the Income-Related Monthly Adjustment Amount or IRMAA brackets. These brackets adjust annually just like the income tax brackets. IRMAA brackets are based on a taxpayer’s “modified, adjusted gross income”, (MAGI). For 2025, everyone on Medicare will pay a minimum of $185 per month. For taxpayers with a high income, they will pay more for Medicare Parts B and another charge for Medicare Part D on top of the $185 per month per person. See the chart below.
The amount a Medicare recipient pays in 2025 will be based on the MAGI amount on their 2023 income taxes as compared to the 2025 table above. This is because the monthly Medicare cost determination is made for 2025 in the fourth quarter of 2024, and at that time the most recent tax return for individuals and families is their 2023 return.
Keep in mind these are monthly charges in addition to the $185 per month, and they are charges per person with no discount for married couples. For example, a married couple with a 2023 MAGI of $215,000 will pay Medicare $185.00 + $74.00 + $13.70, or $272.70 per month per person.
OK, Now What Do I Do?
What do we know?
- Gross Domestic Product (GDP) is excellent at 3.1%!
- Consumers are spending, travel is up, and sentiment is increasing.
- Labor’s employment and unemployment numbers remain very good.
- A healthy economy with a high GDP is great for the stock market, but bad for the bond market. Why bad for bonds? Because a ripping economy will push intermediate-term and long-term interest rates up. As rates increase, the price of existing bonds will decrease.
What do we not know?
- The Fed announced at their December meeting after cutting short-term interest rates cumulatively one full percentage point, they are pausing near-term rate cuts. Well, how long will the pause be and how many cuts of short-term rates in 2025 will there be? The stock and bond markets did not like the fact that the Fed’s estimates of 2025 rate cuts dropped from four to two.
- Inflation has been stagnant in most of 2024. As inflation drops, its tougher to get it closer to 2%. We don’t know when we will get to 2%.
- We do not yet know the new administration’s specific policies on tariffs, immigration, taxes, and federal government spending cuts.
In 2025, with a decent stock market expected and with short-term interest rates dropping but with immediate-term and long-term interest rates rising, what should an investor do?
1. Embrace delayed gratification. Save and invest today for a happier tomorrow (retirement). For example, let’s say an investor plans to retire in 30 years. Therefore, the money saved in 2025 has 30 years to grow. The money saved in 2026 has only 29 years to grow and the money saved in 2027 has only 28 years to grow, etc. Therefore, the most important money an investor saves is the money saved this year and not the money saved 10 years or so from now.
2. Use your patience and courage to be a long-term investor in the stock market and not jump in and out of the market.
3. Keep a healthy amount of your retirement savings in the stock market. Everyone is different but in general, the younger an investor is, a higher the percentage of their portfolio should be in stocks. For example, investors in their 20s and 30s should have a stock market percentage in the range of 80% to 100%. Investors in their 50s and 60s should have their stock market percentage between 50% and 70%. Someone beyond the age of 80, should have their stock percentage between 30% and 40%.
4. Work hard to permanently pay off all bad debt. All debt is bad debt except a fixed-rate, first mortgage on your primary residence. If you have a 3 or 4% mortgage, why pay it off early? Yes, this is different advice than what Dave Ramsey says.
5. Build up your emergency fund to cover three to six months of expenses.
6. Save at least 15% of your gross family income for retirement.
7. Consume all of your vacation time. This is one way to reduce job-related stress.
∙ Not insured by any bank or government ∙ Subject to risk & possible loss of principal
Our Financial Bad Boys This Month
McKinsey Settles Civil & Criminal Opioid Claims
The Wall Street Journal, December 14-15, 2024, Page B9
McKinsey said it agreed to accept responsibility for its role in helping Purdue Pharma turbocharge sales of its flagship Oxycontin opioid painkiller. The consulting firm entered into a $650 million settlement and deferred-prosecution agreement with the U.S. Justice Department.
Also, a former McKinsey partner, Martin Elling, pleaded guilty to having obstructed justice by destroying documents related to the business relationship between McKinsey and Purdue Pharma.
In 2021, McKinsey reached a settlement with all 50 states, five U.S. territories, and Washington DC to pay $642 million to resolve civil litigation. The firm in 2023 reached separate settlements totaling $347 million with Native American tribes, public school districts, insurance companies, and municipal governments.
A McKinsey spokesperson said on December 13, “We should have appreciated the harm opioids were causing in our society, and we should not have undertaken sales and marketing work for Purdue Pharma. This terrible public health crisis and our past work for opioid manufacturers will always be a source of profound regret for our firm.”
We at Lorenz Financial do not believe that corporate fines and delayed prosecution agreements significantly change future illegal and unethical behavior by individuals or corporations. We believe that when people do bad things, they need to go to prison! We expect more from the U.S. Justice Department than what they are delivering as the CDC reports more than 645,000 people in the U.S. died from overdoses involving opioids since the epidemic began.
The Bond Market
Commentary
Jerome Powell
Powell is Chairman of the Federal Reserve.
During the chairman’s news conference on December 18, 2024, Powell said, “My colleagues and I remain squarely focused on achieving our dual mandate goals of maximum employment and stable prices for the benefit of the American people. The economy is strong overall and has made significant progress towards our goals over the past two years. The labor market has cooled from its formerly overheated state and remains solid. Inflation has moved much closer to our 2% long-run goal.”
“We are committed to maintaining our economy’s strength by supporting maximum employment and returning inflation to our 2% goal. To that end, the Federal Open Market Committee decided today to take another step in reducing the degree of policy restraint by lowering the Federal Funds rate by another quarter percentage point to the target range of 4.25% to 4.5%. This is a full percentage point lower than the rate in August 2024.”
Recommended Action for Your Safe Money
Our recommendations for an investor’s safest money have changed from last month. We have removed our recommendations for intermediate-term bond funds, except for I-bonds which are 30-year bonds. Our recommendations, in no particular order, are:
- Short-term U.S. Investment-Grade Corporate or Securitized bond funds.
- Short-term high-yield bond funds.
- U.S. Savings I-Bonds which have a max savings of $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 only for an investor’s safest money or perhaps 5% to 25% 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 and inflation.
PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS.
Pop Quiz Answer
If artificial intelligence is part of the fourth industrial revolution, what and when were the first three, and now the fourth?
ANSWER:
The first industrial revolution was primarily centered in the Lehigh Valley of eastern Pennsylvania where anthracite coal, iron ore, early steel, and textile manufacturing experienced mechanical breakthroughs. Specific advancements came from Samuel Slater who memorized the British system of textile making and brought it to America. Also, Eli Whitney’s invention of the cotton gin was important. As “Necessity is the Mother of Invention”, both the War of 1812 and the building of the Erie Canal between 1817 and 1825 produced significant new mechanical technologies. Broadly this period can be summarized as the beginning of the transition from manual labor to water and steam power. The first industrial revolution occurred from 1760 to 1840.
The second industrial revolution, the Technology Revolution, was a phase of rapid scientific discover, standardization, interchangeable parts, and mass production. Railroad networks were greatly expanded due to inventions of the Bessemer process of converting pig iron into steel, the open-hearth steel furnace, the telegraph advanced communication, and sewage systems began to spread beyond major cities. Finally, electricity was beginning to replace water and steam power. The second industrial revolution began after the Civil War in 1870 to the beginning of WWI in 1914.
The third industrial revolution, the Information Age, refers to the period of widespread adoption of automation using Programmable Logix Controllers (PLC’s) and basic robots. Other inventions included nuclear power via fission, bullet trains, space travel, and various digital technologies including CPU microprocessors, computers, the internet, and analog cell phones. The third industrial revolution occurred from 1950 to 1998.
The fourth industrial revolution is a vastly accelerated version of the third industrial revolution. It includes advanced robotics, mobile smart devices using 5G, smart sensors such as LiDAR which can detect nearby moving or stationary objects, fully autonomous vehicles, advanced GPU microprocessors, the beginnings of artificial intelligence, nano technology, 3D printing, medical advancements enabling early diagnoses of heart disease and cancers, drone use beyond hobbies, radar absorbing materials, biotechnology, the global positioning system, cloud computing within massive data centers, and large-scale adoption of renewable energy such as wind and solar with continuing research into fusion power. The fourth industrial revolution began in 1999 to present.