Welcome to the July 2024 Newsletter. This month, we’re discussing the economy, employment, financial terminology, and more.
Summary
Here are two different voices on where the stock market is heading in the short-term.
Rick Rieder, Chief Investment Office at Blackrock, said on CNBC on June 14, “I still like the equity market. I still think when you boil it down, when you marry the fundamentals and the technicals, they are pretty powerful.” In English, Rick is saying this is a strong stock market and let’s continue to ride it higher.
Here is a contrarian view from Jenny Harrington, CEO of Gilman Hill Asset Management, as she spoke on CNBC on June 18, “These numbers (the recent high levels of the S&P 500) make me uncomfortable. I do not see why we should have a PE ratio multiple higher than 21. I also do not see how earnings will get over $250 per share this year. Multiply the two numbers and you get an S&P 500 Index of 5,250. So, this does not seem like a ‘buy low’ moment; this seems like a ‘sell high’ kind of moment.”
In summary, we are in a bull market (an up market). But even in a bull market there are pauses to growth and even 5% to 10% consolidations or downturns that can last a few weeks to a few months. Remember August to October 2023? During those three months, the stock market dropped 10%. We recommend investors, using their patience and courage, just ride out these unavoidable bumps in the road.
Quote of the Day
President John F. Kennedy Inaugural Address, 20 January 1961
“I look forward to a great future for America–a future in which our country will match its military strength with our moral restraint, its wealth with our wisdom, and its power with our purpose.”
Pop Quiz
How do the federal income tax bracket rates for years 2018 to 2025 compare to the higher rates scheduled for 2026?
The answer is at the bottom of the newsletter.
The Economy
Employment
Total U.S. nonfarm payroll employment rose in May by 272,000. The official unemployment rate, U-3, increased to 4.0%. The March and April 2024 combined employment numbers were revised lower by 15,000 than previously reported.
Chart 1 below is based on the Bureau of Labor Statistics official unemployment rate, U-3.
In chart 2 below, even though the two-year trend of employment growth has slowed, the economy is still able to maintain good employment.
The Job Openings & Labor Turnover Survey (JOLTS) dropped to 8.1 million open jobs across the country as of the last business day in April. It was 8.5 million open jobs the previous month. The 10-year chart below shows the recent downward trend in open jobs.
The seasonally adjusted Total U.S. Unemployment Rate, U-6, remained the same at 7.4% in May. There were 6.2 million people unemployed in May, age 16 and older. Last month it was 5.9 million people unemployed.
April Unemployment Rates by Education Level
| Less Than High School Diploma | 5.9% |
| High School Graduate, No College | 4.3% |
| 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 May compared to a year ago. This was 0.2% more than last month.
Leading Economic Indicators (LEI) sponsored by The Conference Board
The LEI for May decreased by 0.5% after the first increase in over two years in February. The Conference Board’s spokesperson said, “While the Index’s six-month growth rate remains firmly negative, the LEI doesn’t currently signal a recession. We project real GDP growth will slow further to under one percent annualized over Q2 and Q3 2024, as elevated inflation and higher interest rates continue to weight on consumer spending.”
Gross Domestic Product (GDP)
The Bureau of Economic Analysis said the final estimate for GDP in the first quarter of 2024 rose at an annual rate of 1.4%. GDP for the first quarter 2023 was 2.2%, 2.1% in the second quarter, 4.9% in the third quarter and 3.4% in the fourth quarter.
The increase in real GDP reflected an increase in government spending and a downward revision to imports (the latter is a subtraction in the GDP calculation).
Labor Productivity - The revised numbers will be available in the September newsletter.
Seasonally adjusted nonfarm business labor productivity increased 0.3% at an annualized rate in the first quarter of 2024 as reported by the Bureau of Labor Statistics. With this number so low, we hope the rest of the year will show a dramatic increase in productivity. In the same quarter a year ago, the increase was a revised 2.9%.
Fourth quarter 2023 data was revised up to 3.5% from 3.2%. Artificial intelligence over the next 10 years will tend to increase productivity going forward.
Inflation - This information will be updated next month.
Annual inflation remained constant at 2.7% as measured by the Personal Consumption Expenditures (PCE) index in April. Core PCE index, which excludes food and energy, also remained the same at 2.8% in April. It was 3.2% in November 2023.
The peak Core PCE inflation this cycle was 5.6% in February 2022. Lower inflation is a 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 June 26, 2024, the average 30-year fixed-rate mortgage had an interest rate of 7.06%, compared to 7.17% last month. The average 15-year fixed-rate mortgage had an interest rate of 6.47%, compared to 6.70% last month.
The median existing home sale price in May rose to $419,300. That is a 5.8% increase from May 2023 according to the National Association of Realtors. The inventory of existing homes for sale remains low, but fortunately it's increasing, with a 3.7-month supply in May. In April it was 3.5 months.
The U.S. Public Debt as Issued by the Treasury Department as of June 26, 2024, was:
$34,855,000,000,000.
Last month it was $34,790,000,000,000.
Important Dates in July
July 1, 2, and 3, 1863 – The Civil War Battle in Gettysburg, Pennsylvania, was fought resulting in 51,100 men killed, wounded, or missing.
July 2, 1881 – James Garfield, the 20th President of the United States, was assassinated at a Washington, DC train station. The shooting occurred less than four months into his term as president. He died on September 19. Charles Guiteau assassinated the president for an imagined political debt. Garfield was the second US President to be assassinated in office. Chester Arthur was sworn in as President on September 19, 1881. Arthur did not win the Republican primary for President in 1884. The republican winner was James Blaine, but Blaine did not win the general election, the Democrat, Grover Cleveland did.
July 4 – Independence Day
July 4, 1776 – On this day 12 of the 13 colonies approved Jefferson’s Declaration of Independence. The New York delegation abstained during the July 4 vote as they were waiting for approval from Albany. Yes, the American colonies were plagued even back then by leaderless bureaucrats.
July 4, 1826 – Thomas Jefferson, our 3rd US President, died. Five hours later on the same day, John Adams, our 2nd US President died.
July 14 – French National Day commemorates the Storming of the Bastille on July 14, 1789, and the unity of the French people. Today’s national celebration includes large military parades, fireworks, and concerts.
July 16, 2024 – Major League Baseball’s All-Star Game.
July 16 to August 11, 2024 – The Summer Olympics in Paris.
July 20, 1969 – Neil A. Armstrong, commander of Apollo 11, became the first man to walk on the moon.
July 30 & 31 – The fifth Federal Open Market Committee (FOMC) meeting of 2024.
The Stock Market
Commentary
Bob Pisani
Pisani has been a financial reporter for CNBC in New York since 1990.
Pisani said on June 14, “Here are the notable stock splits announced so far in 2024.”
When a company splits its shares, it is not adding value. However, poor-performing companies do not split their shares. Splitting is a positive for a company’s stock price only at the margin.
At the end of the day, a company is a great company because of their financial fundamentals, not because they chose to split.
Stock Market Valuation
Wall Street Highest Targets for the S&P 500 Index for year-end 2024.
The S&P 500 Index closed on June 26 at 5,477.90
Monthly Performance of the S&P 500 Index
Recommended Action for Your Stock Portfolio
Brad Gerstner
Gerstner is the founder and CEO of the hedge fund, Altimeter Capital in Boston, Massachusetts, and Menlo Park, California.
Gerstner said on June 12, 2024, on CNBC, “I think we are probably getting close to the bottom in software company stock prices. We expect prices to inflect higher in terms of growth rates as we get to the end of this year and the start of next year.”
“Remember these stocks are trading 20% below their 10-year average Price/Earnings ratio. So, I think this is a good time to go hunting for these stocks.”
An investor does not have to study software company balance sheets to try and pick winners and losers. We recommend using the exchange-traded fund, IGV, iShares Expanded Tech-Software Sector. The fund owns stock in 116 software companies and has an annual expense ratio of 0.41%. It is highly volatile with 2022 performance down 35.7% and 2023 up 58.6%. But year to date the fund is only up 4.35% - that is why this appears to be a bargain now.
·Not FDIC Insured ·No Bank Guarantee ·May Lose Value
Financial Markets Vocabulary
What is a short squeeze?
Most stock market investors try to find stocks, or exchange-traded funds, or mutual funds that they believe will appreciate in price. A few try to find those securities that are going to depreciate in price. How does one make money on something expected to drop in price – by “selling the investment short.” Here is how an investor “sells short”: the “short seller” first borrows the security through their broker from someone who owns it, then sells it, then waits for the price to drop, then buys it back at a lower price and replaces the borrowed shares. Everything works so long as the security drops in price.
But when the security unexpectedly begins to rise in price, sometimes rapidly, the short sellers panic, and they must buy the security as quickly as possible at higher and higher prices – losing money on the trade. The momentum of the short sellers suddenly buying a stock instead of selling it, causes the stock price to go even higher. When the panic is over the short sellers slink away into the shadows with their heads bowed and their pocketbooks empty as the good guys celebrate – they win again!
OK, Now What Do I Do?
In the past few weeks, the US stock market has closed at another all-time high. Is that scary? It should not be. So, what should we all do now?
For everyone:
1. Review your portfolio and make sure it is low-cost and highly diversified. Well, exactly what does that mean? Let’s look at “cost” first. There are three main types of cost: cost of the products an investor owns, transaction costs & commissions, and the costs of an advisor.
Product costs of mutual funds and exchange-traded funds consist mostly of the security’s annual expense ratio. One of the cheapest options is 0.03% per year. Examples are VOO, the S&P 500 Index, and VTI, the Total US Stock Market Index. A few investments have an annual expense ratio of over 2%. An annual expense ratio of 0.9% or higher is totally unacceptable and must be avoided.
Transaction costs and commissions, whether an investor is using an advisor or not, are also totally unacceptable. Transaction costs and commissions must be zero.
Advisor costs should never exceed 1.0% a year. Many states permit advisor costs to reach 2.0% per year so be careful. Advisor costs should also be negotiable.
Regarding diversification, make sure your portfolio is approximately 85% large cap, 10% mid cap and 5% small cap. It’s also OK to have some money invested in international stocks. But do not put more than 4% of an investor’s stock market money into any one stock.
And lastly, if an investor has a taxable account, make sure the account is invested so it is tax efficient.
For those still working:
Even though stock prices are high, maintain your contribution to your retirement fund every pay period. Don’t stop!
For those who have hired a financial advisor:
No group of professionals has such a large variety of titles than financial advisors. But ignore all the business card labels – there are only three types of financial advisors: stock salespeople or stockbrokers, insurance & annuity salespeople, and Registered Investment Advisors (RIA).
Only go with RIA’s because they are the only ones who are fiduciaries – those who are legally required to always put the interests of the client first. For example, an RIA will never try to sell a client a financial product that has a commission for the advisor.
For those retired:
Okay, you are retired, but that does not mean you should put all your retirement money into bank CDs. So, you are approaching 70 years of age. What if you live to 105? Inflation and taxes will tear your retirement savings apart if you invest too conservatively. We recommend a minimum stock market investment of 40% to keep at least a part of the portfolio growing faster than (inflation + taxes).
Don’t withdraw more than 4% from your portfolio every year. OK, if the market is up 20% in a given year, you can withdraw more. But when we get hit with a bear market (a down market), cut back on spending and withdraw as little as possible from the portfolio.
For parents and grandparents:
Are you having those important life and money discussions with your children and grandchildren such as:
- What are a young person’s big-picture options after graduating from high school:
- 2 or 4-year college - US military
- Trade school - AmeriCorps or Peace Corps
- There are many variables to selecting a college major. One needs to be: how much do people in that profession make and how much will I have to borrow to get that BS degree? Don’t borrow more than the projected future starting annual salary.
- If you borrow money, you have to pay it back.
- All debt is bad debt except a fixed-rate first mortgage on your primary residence.
- A mortgage monthly payment (principal, interest, taxes, and insurance) should be no more than 25% of the family’s take home pay.
- Develop the discipline to project and track family spending on a written budget.
- Always spend less than you make.
- Have an emergency fund that will cover six months of family expenses.
- As quickly as possible once working full time, put 15% of the household gross income into a retirement plan.
And finally, nothing good every happens after midnight.
Our Financial Bad Boys This Month
Do Kwon’s Crypto Firm Agrees to Pay $4.5 Billion Penalty to SEC
The Wall Street Journal, June 12, 2024
Do Kwon
Fallen crypto tycoon Do Kwon’s company, Terraform Labs, agreed to pay $4.5 billion to the SEC and wind down the firm’s operations following a conviction in a two-week civil trial. CEO, Do Kwon, also agreed to personally pay $204 million as part of the deal. Kwon was arrested last year in the country of Montenegro while trying to use a fake Costa Rican passport.
Kwon’s troubles began in May 2022 with the ruinous collapse of his firm’s TerraUSA and Luna cryptocurrencies. The crash erased $40 billion in value from digital markets around the world. The savings of thousands of investors worldwide were wiped out. Earlier Kwon mocked his critics on social media as “idiots” and told one: “I don’t debate the poor on Twitter.”
In a parallel case, federal prosecutors in New York have charged Kwon with eight criminal counts of fraud. Kwon has denied the allegations as he awaits extradition from a jail cell in Montenegro.
The Bond Market
Commentary
Josh Brown
Brown is the CEO of Ritholtz Wealth Management in New York City.
The statement below does not apply to an investor’s emergency fund. An emergency fund should be in cash in an FDIC or NCUA-insured bank or credit union account, or in a money market account at a major bank or broker.
Brown said on CNBC on June 13, “I have a message for everyone watching. Regarding your conservative money – it’s very simple: ‘Get out of cash!’”
“If you have money that you are not spending this year or next year and you have a 3-to-7-year time horizon, I want you to consider adding duration.” The duration of a money market fund and savings account, where many people have their excess cash, is measured in days. That is now too short.
“I am not asking you to take credit risk – you can use US Treasuries to be extra safe if you choose to. The reason for adding duration is we are on the verge of the Federal Reserve cutting short-term interest rates. Therefore, a saver’s days of earning 4.5% to 5.0% on your cash, risk-free, are drawing to a close.”
“When the Fed starts to cut short-term rates, the interest rates of very short duration accounts (money market accounts savings accounts) will drop rapidly while bond funds will appreciate in value. We want you to be in the latter.”
“The higher a bond fund’s duration in years, the greater the price fluctuation of the bond fund as interest rates fall. Therefore, we recommend excess cash be moved now out of money market funds and savings accounts and into intermediate-term investment-grade or US Treasury bond funds with a duration of three to seven years.”
Recommended Action for Your Safe Money
Our recommendations for an investor’s safest money have changed from last month. We have removed ultra-short term bond funds, short-term bond funds, money market funds, and certificates of deposit. Short-term high-yield bond funds are still OK. Our recommendations, in no particular order, are:
- Intermediate-term U.S. Investment-Grade Corporate or Securitized bond funds
- Short-term high-yield bond funds
- Intermediate-term U.S. Treasury 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 for an investor’s safest money or perhaps 5% to 25% of an investor’s total portfolio. These products are mostly credit safe, but they will not provide the growth needed to stay ahead or even keep up with taxes and inflation.
PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS.
Pop Quiz Answer
How do the federal income tax bracket rates for years 2018 to 2025 compare to the higher rates scheduled for 2026?
Answer: If Congress makes no changes between now and 2026, tax rates will go up for nearly everyone. Here are the brackets for a married couple filing jointly.
