Welcome to the May 2021 Newsletter. This month, we’re discussing the economy, COVID-19 vaccine updates, bonds, and more.
Summary
First, we are pleased with the enthusiasm of the American people to seek out and get a COVID-19 vaccine. We just achieved 30.5% of the US population being fully vaccinated at the end of April. To reach 70 to 80% vaccinated, two things must happen. First, more effort needs to be made to take vaccinations to where people are living, working, and gathering, and not just opening drive-thru venues offering “come and get your vaccination here.” Second, we are eagerly waiting for vaccines to be approved by the FDA for children 6 months to 16 years of age. Please continue to encourage your friends, neighbors, coworkers, and family to get vaccinated if they have not yet done so.
We continue to have a positive outlook on the resilience of the economy and its ability to survive and prosper in the upcoming post-pandemic period. It’s worth noting that during the stock market rise in April, the level of market optimism rose and is now widespread. As a result, we remain on guard for indications of euphoria – a sign that equities are over-owned and over-priced.
For now, we are maintaining our fully invested position in all portfolios while remaining vigilant.
We stated last month, “Considerable volatility and short-term pullbacks are inevitable given the high valuation levels of the stock market.” This remains true today. We encourage investors to maintain patience and courage. We expect the stock market to perform above average for 2021.
Employees should continue to make their weekly, biweekly, or monthly contributions to their employer’s retirement plan and personal and spousal IRAs. At this time, additional money can be added to an investor’s stock market allocation, but only on a dollar-cost-average basis spread over 12 months. All portfolios remain fully invested.
Quote of the Day
“That this nation, under God, shall have a new birth of freedom – and that government of the people, by the people, for the people, shall not perish from the earth.”
– Abraham Lincoln, November 19, 1863, Gettysburg, Pennsylvania
The Economy
Employment
Total U.S. nonfarm payroll employment rose by 916,000 in March, and the unemployment rate edged down to 6.0%. Improvements in the labor market were in leisure and hospitality, public and private education, and construction.
The seasonally adjusted, all-encompassing unemployment rate, U-6, declined in March to 10.7% from 11.1% in the last two months. There are 9.7 million people unemployed in the U.S., age 16 and older.
Unemployment Rates by Education Level, March 2021
| Less Than High School Diploma | 8.1% |
| High School Graduate, No College | 4.8% |
| Some College or Associate’s Degree | 3.9% |
| Bachelor’s Degree or Higher | 2.4% |
The January payroll number increased by 67,000 to 233,000. The February payroll number was revised up by 89,000 to 468,000. The rolling three-month payroll average increased to 539,000 this month from 80,000 last month. Do not get in the way of this employment freight train, or it will run you over!
Gross Domestic Product (GDP)
The Bureau of Economic Analysis said the advance estimate of the 2021 first-quarter GDP increased by 6.4%.
The increase in first-quarter real GDP reflected an increase in personal consumption expenditure (PCE), nonresidential fixed investment, federal government spending, residential fixed investment, and state and local government spending. Increased auto and light truck sales were a big part of the increase in PCE.
Inflation
Annual inflation increased to 2.3% in March as measured by the Personal Consumption Expenditures (PCE) index. The core PCE index, which excludes food and energy, increased in March to 1.8% from 1.4% in February.
Long-term inflation expectations can be determined by measuring the differences between Treasury bond yields & TIPS real yields of the same maturities. Results are:
| Bond Maturities | Annual Inflation Expectations |
| 5 Year | 2.57% |
| 10 Year | 2.41% |
| 30 Year | 2.28% |
This month’s estimated annual inflation numbers above were basically unchanged from last month.
Stock Market
Commentary
We expect the stock market performance in 2021 to be above average, but we believe most of the gains have already been made. We also expect moderate to high levels of volatility in the stock market this year. A stock market downturn could begin at any time, but due to the high levels of fiscal and monetary support, any downdraft will likely be short-lived.
Stock Market Valuations
Based on our forecast of strong economic growth in 2021 and 2022, we estimate S&P 500 operating earnings will increase to $180 this year and as high as $210 next year. This assumes the corporate income tax rate in 2022 will increase to 24 or 25%. With a price/earnings ratio of 21 times, the S&P 500 Index has the potential to reach the 4,400s late this year or mid-2022. The S&P 500 Index closed Friday, April 30, at 4,181.17. That is up 5.2% since the close last month.
Recommended Action for Your Stock Portfolio
Lorenz Financial always recommends stock market participants invest for the long-term with a portfolio that is highly diversified. Being diversified means some stock market investments can be aggressive and some conservative. This month, we are suggesting a conservative stock investment, Berkshire Hathaway. This is Warren Buffett’s company.
Berkshire Hathaway should almost be considered a mutual fund as they totally or partially own over U.S. 50 companies. In alphabetical order, their largest investments include, but are not limited to:
- American Express
- Apple
- Bank of America
- Burlington Northern Santa Fe Railroad
- Chevron
- Coca-Cola
- Duracell
- Fruit of the Loom
- Geico Insurance
- General Motors
- Kraft Heinz
- Moody’s
- NetJets
- STORE Capital
- U.S. Bancorp
- Verizon Communications
Stock in Berkshire Hathaway is offered via two classes:
- BRK-A shares closed on April 30 at $412,500.00 a share.
- BRK-B shares closed on April 30 at $274.95 a share.
We, of course, recommend the B shares.
Broadly, all stock portfolios at Lorenz Financial remain fully invested. A self-directed investor should always seek to ensure their portfolio is highly diversified and low cost.
Archegos Capital Management: This Month’s Corporate Bad Boy
Source: Page A1, The Wall Street Journal, April 28, 2021
Archegos Capital, the family office run by Bill Hwang, wreaked havoc across Wall Street when the heavily leveraged bets it made through a half a dozen banks rapidly fell apart. Excessive leverage (borrowing) tends to be at the heart of every blowup on Wall Street. Archegos was no different. Initial reports suggest it had $30 billion of exposure backed by its $10 billion of capital.
Mr. Hwang purchased “total return swaps” from the banks and invested heavily in a handful of U.S. stocks including ViacomCBS and Discovery. When the stock prices started to drop, the banks demanded more capital from Archegos, but the firm already had all its money invested. The banks immediately began selling the securities, but it was too late, and losses started piling up.
Bill Hwang had a history before this fiasco. In 2012, his firm, Tiger Asia Management, pleaded guilty to U.S. criminal charges and settled civil fraud claims related to allegations of insider trading. Mr. Hwang was barred from managing client money in the U.S. He also faced charges in Hong Kong.
What drove this event to happen – excessive greed, euphoric stock market expectations, frenzied trading in individual stocks, unchecked leverage, and insufficiently managed risk by many big banks.
We may never know how much of Bill Hwang’s family’s fortune was squandered, but we do know how much the banks lost: Credit Suisse $5.5 billion, Japan’s Nomura $2.85 billion, Morgan Stanley $0.9 billion, UBS $0.86 billion, and Mitsubishi UFJ Securities $0.3 billion. We at Lorenz Financial wonder, have the big Wall Street banks learned their lesson?
Additional Financial News
Swaps – Another Wall Street Derivative to be Avoided
“Total return swaps” are contracts offered by Wall Street banks that allow a large private investor to capture the profit (or loss) of a portfolio of stocks or other assets in exchange for a fee. With swaps, the bank owns the asset while the investor assumes the profits or losses. The banks also allow swap investors to borrow an extraordinary amount of money as part of the transaction. Swap investors are often only required to put up 25% or less of the transaction costs and borrow the rest from the bank.
Some large investors buy swaps for two reasons. First, an investor can control significant parts of a company without public disclosure. Second, the investor does not have to put up all the money to control a company; they will borrow most of it from the bank.
What does the SEC say about this? A spokesperson said, “We have been monitoring the situation and communicating with market participants.”
M/V Ever Given Update
The Egyptian government has seized the marine vessel Ever Given and demanded $960 million in payment from the Japanese vessel owners. Recently, the Ever Given, one of the largest container ships in the world, plowed into the side of the Suez Canal on March 23. It blocked all ship traffic through the canal until the vessel was refloated on March 29. Osama Rabie, Chairman of the Suez Canal Authority, said they are holding the ship, its crew, and cargo in Egyptian waters until the ship’s owners pay for the costs to refloat the ship, damages to the canal, lost canal revenues, and for damages due to loss of the canal’s reputation.
A Japanese marine accident investigator told a Japanese TV station the ship was traveling at 13 knots (15 mph) as per the ship’s Automatic Identification System prior to the ship striking the canal’s sidewall. This was even though the ship was traveling during a major sandstorm and windstorm with limited visibility, and the canal’s speed limit is only 8.6 knots (10 mph).
Massachusetts Seeks to Give Robinhood the Boot
Source: Page B11, The Wall Street Journal, April 16, 2021
On April 15, Massachusetts securities regulators asked that Robinhood Market Inc’s registration as a broker-dealer in the state be revoked. The regulators said Robinhood has “continued a pattern of aggressively inducing and enticing trading among its customers.” This is an additional filling to a complaint registered by the state against the company in December 2020. That complaint filed by the Secretary of the Commonwealth accused the brokerage company of aggressively marketing to inexperienced investors and failing to implement controls to protect them.
Robinhood responded in a blog post, “The complaint reflects the old way of thinking: That new, younger, and more diverse investors don’t have a place in the markets.”
Newest Brokers Inhibit Tax Advantage Trading
Source: Page B5, The Wall Street Journal, April 17-18, 2021
Despite the sophistication of new online brokerage platforms, trading with tax-favored methods is difficult to prohibited by these firms. Some do not allow IRA accounts. Traders get no help tracking their sales and repurchases as they try to avoid the “wash sale” rule, which disallows tax advantages if a stock is re-purchased within 30 days of selling it at a loss. Most vexing is that the trading platforms at Weibull, Sofi, Public, and Uphold don’t allow selling stocks by the tax-wise technique known as “specific-lot identification.” Robinhood allows the process but makes it so difficult, it is unusable.
Dayton Leong, an active trader with Robinhood, says, “I’m haunted by my 2020 capital gains taxes.”
COVID-19
Global Virus Variants Have Fueled a COVID Surge
COVID-19 cases are surging around the world, fueled by three highly contagious variants of the coronavirus. New cases globally rose for the ninth consecutive week through April 27, according to the World Health Organization. There were 5.7 million new cases of COVID-19 added last week alone. In southeast Asia, which includes India, deaths rose 81% compared to the previous week.
Much of Latin America is facing the aggressive Brazilian variant known as P.1. Earlier in April, 130 people were dying each hour in Brazil. Brazilians aged 20 to 49 are now dying at four times the rate that they were in January. Vaccines are in very short supply.
On April 30, India identified 386,000 new COVID cases in the previous 24 hours with 3,500 deaths. Hospitals across India report ICU beds are filled, oxygen is in very short supply, and patients are lined up in wheelchairs outside hospitals waiting to get a bed. Dr. Parkar of Lilavati said, “The whole healthcare system has collapsed. There is a shortage of beds, oxygen, drugs, vaccines, and testing.” Crematoriums are unable to process bodies as fast as they are arriving.
Canada and 113 other countries are plagued by the U.K. variant known as B.1.1.7. In Spain, new infections are up to 99% of the U.K. variant. In Italy, 87% of the new cases are also the U.K. variant. The third dominant variant is the South African strain, B.1.351, and is now in 70 countries including the U.S.
All three mutations are significantly more contagious than the original virus.
Vaccine producers are working on vaccines now that more precisely target these variants and can be distributed as booster shots as soon as they are proven safe and effective.
U.S. State Department Travel Advisories
The U.S. State Department has four levels of travel advisories for each country around the world. Because the number of COVID cases worldwide has recently exploded, the State Department has basically suggested to U.S. travelers to not travel outside the U.S.
U.S. State Department Travel Guidelines, April 21, 2021
| Travel Recommendation | Number of Countries | |
| Level 1 | Exercise Normal Precautions | 0 |
| Level 2 | Exercise Increased Caution | 16 |
| Level 3 | Reconsider Travel | 41 |
| Level 4 | DO NOT TRAVEL | 151 |
Vaccine Durability
Some vaccinations, such as the one for measles, provide lifelong immunity while others, such as for the seasonal flu, need to be given every year. Despite the success of the COVID-19 vaccines, health authorities have said it is possible that booster shots will be needed annually to ensure protection until the virus is fully stamped out around the world. They also say the vaccines might need to be updated to address potential variants that escape protection.
Infections After Inoculation Are Rare
The U.S. Centers for Disease Control has identified 5,800 cases of COVID-19 among more than the 66 million Americans who have completed their full course of vaccination. These breakthrough cases represent 0.009% of the fully vaccinated population. David Hirschwerk, an infectious disease physician at Northwell Health System in New York, said, “The experience so far is the vaccines remain highly effective, and those who had a breakthrough infection had a very mild and manageable illness.”
Having COVID-19 Increases Blood Clot Risks
A study by the University of Oxford found the risk of rare but sometimes deadly blood clots is roughly eight to 10 times greater in COVID-19 sufferers than among people who have received the Moderna, Pfizer, or AstraZeneca vaccines. The scientists behind this Oxford study are different from the scientists who developed the above vaccines.
The main finding was “the risk of severe blood clots is many-fold higher during a COVID-19 infection than receiving a vaccine.” The Oxford study, which looked at a database primarily of U.S. patients, also found the risk of blood clots within a person with a COVID-19 infection is roughly 100 times greater than the general population who have not received the vaccine.
Vaccine Deployment
U.S. Data by the CDC – April 30, 2021
| Percent of the Total U.S. Population Fully Vaccinated | 30.5% |
| Last Month’s Fully Vaccinated Percentage | 15.0% |
| Quantity of U.S. Population Receiving Pfizer Vaccine | 127,100,000 * |
| Quantity of U.S. population Receiving Moderna Vaccine | 104,600,000* |
| Quantity of U.S. Population Receiving J&J Vaccine | 8,200,000 |
| Quantity Not Identified | 200,000 |
| Total Vaccines Injected | 240,100,000 |
| Total Vaccines Delivered to U.S. Healthcare Facilities | 308,800,000 |
*2 shots required per person to be fully vaccinated. Some people receiving these vaccines have only received 1 shot as of April 30, 2021.
Worldwide Data by Johns Hopkins
| Percent of Total Population Fully Vaccinated | Number of Countries |
| Over 60% | 1 |
| 10% to 59% | 28 |
| 3.0% to 9.9% | 38 |
| 0.01% to 2.9% | 42 |
| No data reported | 61 |
Vaccine Development
Below is a summary of vaccine development for four U.S. pharmaceutical companies and one U.K. company.
Pfizer reported their COVID-19 vaccine remains highly effective six months after its second dose. The findings, released on April 1, emerge from a continuing review of the 46,300 people who participated in the Pfizer Phase 3 clinical trial that started in July 2020. At that time, participants agreed to be tested for two years after their vaccination to identify how long the vaccination lasts.
Moderna announced in the New England Journal of Medicine on April 7 that their two-shot vaccine is continuing to provide persistent antibodies six months after the second injection of the original vaccine. These tests will continue for two years to determine the lasting effects of the vaccine. Moderna previously announced they would produce 700 million doses of their vaccine in 2021. Now they project their production will be 800 million minimum and another 3 billion doses in 2022.
Johnson & Johnson’s COVID-19 vaccine hit a production snag. On March 31, the company said it found quality problems in the production of 15 million vaccine doses which were not yet distributed. Then on April 13, the CDC and FDA announced administration of the J&J vaccine into people’s arms had been paused. This action stemmed from 15 women, ages 18 to 48, who developed a rare but severe case of blood clots. This medical condition developed within two weeks following the vaccine’s injection, and now one of the women has died. This follows 8 million people who have received the vaccine.
On April 23, a federal advisory committee recommended resuming the J&J COVID-19 vaccine. The vote was 10 to 4 in favor of lifting the pause with one abstention. The risk of developing blood clots for women taking the J&J vaccine was judged at one in a million for women over 50 and seven in a million for those under 50.
Novavax’s vaccine candidate requires two shots, three weeks apart. No results have yet been published from the U.S. and Mexico Phase 3 trial that began in December 2020.
AstraZeneca originally intended to apply for emergency use authorization from the FDA in mid-April. The company recently told U.S. officials they will need until at least mid-May to finish their application. Even if approved, it is unlikely the AstraZeneca vaccine will be dispersed in the U.S., but having FDA emergency use approval will certainly lend credibility to its use in the rest of the world.
Bond Market
Commentary
We have been reminding investors the past few months that as interest rates rise, existing bond prices fall. How much a bond mutual fund’s price will fall is dependent on the fund’s average bond duration. The longer the duration in years, the more the fund’s price will decline in percent as interest rates rise.
Economic growth accelerated in the first quarter at an annual rate of 6.4%. This is up from 4.3% in the fourth quarter last year. The Chemical Activity Barometer (CAB) is a leading economic indicator with a long history of identifying economic cycles. In April, the CAB three-month moving average rose 0.7% following a 1.1% increase in March. The index is up 12.0% year over year, which is the highest reading in more than 10 years.
Intermodal rail traffic is up 16.8% in the first 16 weeks this year compared to last year. The Bureau of Labor Statistics Job Openings & Labor Turnover Survey (JOLTS) showed the number of job openings increased by 268,000 to 7.4 million, which is near the all-time high of 7.6 million at the end of 2018.
In summary, nearly all the real-time economic data is strengthening. Job and economic growth are improving, and corporate profits have already started to follow.
Federal Reserve
On April 14, Federal Reserve Chairman Jay Powell spoke at the Economics Club of Washington, D.C. and said, “Raising interest rates before 2022 is highly unlikely.” To those who have hinted it’s time for the Fed to begin to raise interest rates as the pandemic crisis is over, the Fed Chair said, “Changing rates is not time-based, it is economic outcome-based.”
The Chairman went on to say, “Before the Fed raises interest rates, we want to see three things:
- A recovery in the labor markets effectively achieved,
- Personal Consumption Expenditures (PCE) core inflation reaching 2.0%, and
- Inflation on track to run moderately above 2% for some time.”
At the April meeting, the Federal Open Market Committee voted unanimously to keep the federal funds rate at the 0% to 0.25% target range. FOMC members also voted to maintain the bond asset purchase program at the pace of $120 billion per month.
U.S. Treasury
The federal budget deficit was $1.05 trillion during the first five months of the current fiscal year, an increase of $423 billion from the same period in the prior year. Spending increased 25%, and receipts increased 5%.
Recommended Action for Your Bond Portfolio
Most bonds are not appropriate today because of rising interest rates. We’ve reduced our bond market mutual fund recommendations to the list below:
- Ultra-short-term U.S. investment-grade bond funds
- Short-term U.S. investment-grade bond funds
- Government National Mortgage Association (GNMA) bond funds
The most important aspect in selecting a bond fund in this market is to keep the bond fund’s average duration low. We suggest keeping a bond fund’s duration under two years. The higher the bond fund’s duration, the faster the fund’s price will decline as interest rates rise.
**Please note: Everyone should maintain a safe, liquid emergency fund of at least nine to 12 months of family expenses in an FDIC-insured checking account or money market account before investing in a stock or bond portfolio.**
PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS.
A personal callout – Happy Birthday, Dad!
Charles Lorenz, born April 30, 1926. Shown here on board a USN Landing Ship Tank, January 1945, Shanghai Harbor, China.