May 2019 Newsletter

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Welcome to the May newsletter! Today, we’ll update you on the potential indicators for a bear market, the latest on Wells Fargo, recommended actions for your bond portfolio, and more. Let’s get started!


The stock market’s December correction is over as we have hit a new all-time closing high. We are blessed with low inflation, moderate economic growth, low interest rates, and a stock market that is melting higher.

Employees should continue to make their weekly or monthly contributions to their employer’s retirement plan or IRAs. The economy continues to grow steadily without run-away inflation. No recession is in sight, and all portfolios remain fully invested.

The Economy

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U.S. nonfarm payrolls rose 196,000 in March.  The February payroll number of 20,000 was revised up to 33,000 and the January number of 311,000 was revised up to 312,000.  The three-month payroll average dropped from 186,000 to 180,000.

Unemployment remained the same at 3.8%. The Labor Department defines the broadest measure of unemployment as “U-6.” In March 2019, U-6 was 7.3%.  A year earlier, it was 8.1%. Average hourly earnings fell slightly to a 3.2% annual growth rate in March compared to a year earlier.

Gross Domestic Product

The U.S. economy grew at a real annual rate of 3.2% in the first quarter despite headwinds of a partial federal government shutdown and a variety of trade issues, suggesting the current expansion has room to run as it enters its 10th year.

Jamie Dimon, CEO of JPMorgan Chase, expressed on April 12, “People are going back to work. Companies have plenty of capital. Business confidence and consumer confidence are both high – this economy could go on for years.”


Annual inflation decreased again slightly in March to 1.49% as measured by the Personal Consumption Expenditures (PCE) index. The core PCE index, which excludes food and energy, decreased to a real inflation level of 1.55% year over year during the same time period. The Federal Reserve’s target for both is 2.0%, so these new inflation numbers are beginning to become noticeable in a worrisome way.

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                             Annual Inflation

Maturities                           Expectations

5 Year                                  1.85%

10 Year                                1.95%

30 Year                                1.99%

Stock Market

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The S&P 500 Index closed at a record high of 2933.68 on April 23. The previous high was 2930.75 on September 20, 2018. This new high represents a 24.7% increase since the market capitulation on December 24, 2018. Hopefully, you were a buyer of stocks in late December and not a seller.

Lorenz Financial had predicted we would reach a record closing high this year, but we didn’t think it would come as early as April. We encourage our clients to be long-term investors by demonstrating courage when markets are low and displaying patience for the future when markets are high. We suggest our investors ignore (the best they can) the aggressive extremes that sometimes occur in the stock market.

Will the following two leading indicators predict the next bear market?

1. The U.S. Treasury Yield Curve as of April 30 is below.

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There is a noticeable dip in the yield curve at 1yr, 2yr, 3yr, 5yr, and 7yr. Those yields are below the yields at 1mo, 2mo, 3mo, and 6mo. But what is really important is the spread between the 10 yr & 2 yr Treasuries increased a very significant 10 basis points in the past month alone from 14 basis points to 24. That move has killed off talk of a near-term recession.

2. The Conference Board said the Leading Economic Index (LEI) picked up 0.4% in March. 

The LEI spokesperson said, “Despite the relatively large gain in March, the growth trend in the US continues to moderate, suggesting the U.S. economy is likely to decelerate later this year towards its long-term potential of about 2% per year.”

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Neither the Treasury yield curve nor the LEI suggests the beginning of a near-term (6- to 9-month) recession.

Stock Market Valuation

We continue to estimate 2019 S&P 500 operating earnings will approach $167 or higher. Our estimated price/earnings ratio range remains at 17 to 18 times operating earnings due to our environment of low inflation and low interest rates. Therefore, the higher end for the S&P 500 Index this year should be 3006 = 167 x 18.

Recommended Action for Your Stock Portfolio

Lorenz Financial expects the bull market trend to remain intact at least to year end. We regard the risk of a recession as low at this time. Our two key pre-recession indicators continue to suggest the economy will continue on a slower, but positive, growth tract in 2019. Therefore, we recommend investor’s stock market allocation should be fully invested in a low-cost, highly diversified, and tax-efficient portfolio.

Wells Fargo gets snagged again.

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The Security & Exchange Commission announced on March 12, 2019, Wells Fargo and other brokers have agreed to repay their clients $125,000,000 because the brokers put the clients into higher-cost mutual funds without properly disclosing lower-cost versions of the same funds were available. Of all the brokers fined, Wells Fargo paid the highest penalty of $17.4 M.

The penalties are due to brokers like Wells Fargo putting clients into mutual funds that charge a 12b-1 annual fee. These annual fees are typically 0.25% of the amount invested. This fee is paid by the client and represents an annual payment from the mutual fund company to the broker as a kickback to the broker for selling that particular higher-cost version of the mutual fund.

Typically, cheaper versions of funds that do not charge a 12b-1 fee are available. These cheaper funds are of course less attractive to the brokers like Wells Fargo as the brokers get no annual kickback from the cheaper funds.

Lorenz Financial sells no mutual funds with a 12b-1 fee and has no conflicts of interest. We always put the interest of our clients first.

ALERT:  On March 28, 2019, the CEO of Wells Fargo, Tim Sloan, announced his retirement effective immediately after being in the job less than three years.

Lorenz Financial does not offer Wells Fargo mutual funds to clients; we do not use Wells Fargo as a broker for client trades; and we do not use Wells Fargo as a custodian of client funds.

Bond Market

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Last month, we said, “The incoming data indicates economic growth will be muted in the first quarter.” Wow, were we wrong! First quarter GDP was a whopper at 3.2%.

Job openings declined from 7.6M in January to 7.1M in February. But 7.1M is still much higher than the 6.2M people unemployed.

Port traffic was a slightly mixed bag of results. Los Angeles port container traffic increased 4.6% 2019 first quarter to 2018 first quarter. Port of Long Beach traffic decreased 4.6%, while New York/New Jersey traffic increased 6.6%.

In summary, economic growth continued in the first quarter and is anticipated to continue during the next six to nine months, even though slower growth later this year is expected.

Federal Reserve

The Federal Open Market Committee (FOMC) met on April 30 and May 1. We do not expect any changes in the Federal Funds rate. Today, the Federal Funds rate is 2.25% to 2.5%. The incoming economic data supports the current Fed policy of maintaining current interest rates. The Fed this month will begin to reduce Quantitative Tightening from selling bonds at the rate of $30B per month to $15B per month. This is also referred to as their “balance sheet runoff.”

U.S. Treasuries

Recent speeches by Fed Presidents and Fed Governors indicate there is increasing concern among some members that inflation expectations are drifting too low and that the fed may need to achieve inflation above the 2% target for a period of time.

The CBO reported the federal budget deficit increased to $693B during the first half of the 2019 fiscal year. Tax receipts increased 1%, but expenses rose 5% compared to a year earlier. This is not sustainable!

Recommended Action for Your Bond Portfolio

Our bond market recommendations have not changed since last month. We are investing only in the following types of bond funds or ETFs:

  • Short-term, investment-grade U.S. bond funds
  • Intermediate-term, investment-grade U.S. bond funds
  • Short-term, high-yield U.S. bond funds
  • High-quality U.S. money market funds
  • Conservatively allocated U.S. balanced funds (50% to 70% in bonds, the rest in stocks)