Welcome to the May 2024 Newsletter. This month, we’re discussing the economy, employment, financial terminology, and more.
Summary
Mohamed El-Erian
Mr. El-Erian is an Egyptian American economist and businessman. He currently is the President of Queens College, Cambridge, and chief economic adviser at Allianz.
On April 15, 2024, El-Erian said on CNBC, “The stock market is comforted by three things:”
1. “We will continue to see increases in productivity.” Productivity increases tend to keep corporate costs down which will help push inflation lower.
2. “At the end of the day, the Fed will be accommodative and is leaning towards lowering short term interest rates.”
3. “In the short and mid-term, a soft economic landing is the most likely scenario.”
“But we need to continue to listen to the national security people so as to monitor the situation in the middle east.”
Lorenz Financials’ expectations are for inflation to slowly decline, later this year the Fed will have its first interest rate cut, unemployment will remain low, corporate profits will outpace expectations due in part to increased productivity, and Congress and the Administration will continue to demonstrate they have no ability nor even a desire to reduce federal government spending.
Quote of the Day
Peter Lynch
Peter Lynch was the manager of the Fidelity Magellan Fund from 1977 to 1990. During this time his average annual return was 29.2%. Lynch published three books on investing: One Up on Wall Street, Beating the Street, and Learn to Earn. The latter was written for beginning investors of all ages.
In his book, One Up on Wall Street, Lynch wrote, “Selling your winners and holding your losers is like cutting the flowers and watering the weeds.”
Warren Buffett was so captivated by this sentence, that Buffett called Lynch at home. Lynch’s 6-year-old daughter answered the phone and told her daddy, “Warren Buffett is on the phone”. Lynch wasn’t sure what to make of that, so he cautiously said, “Hello.” It was indeed Buffett who was reading Lynch’s first book. Buffett wanted permission to use that line in Buffett’s next annual letters to shareholders. Lynch quickly said, ”Yes!”
Pop Quiz
With an 8% average annual return, how much will a 25-year-old need to save every month in an employer’s retirement plan or an IRA to accumulate $1 million before income taxes by the time they are 65?
The answer is at the bottom of the newsletter.
The Economy
Employment
Total U.S. nonfarm payroll employment rose in February by 303,000. The official unemployment rate, U-3, decreased to 3.8%. The January 2024 and February 2024 combined employment numbers were revised higher by 22,000 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 growth with increasing employment over the past few months.
The Job Openings & Labor Turnover Survey (JOLTS) showed little change with 8.8 million open jobs across the country as of the last business day in February. It was 8.9 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 in March at 7.3%. There were 6.6 million people unemployed in March, aged 16 and older. Last month it was 6.9 million people unemployed.
March Unemployment Rates by Education Level
| Less Than High School Diploma | 4.9% |
| High School Graduate, No College | 4.1% |
| Some College, Associate's Degree, or Skilled Trade Degree | 3.4% |
| Bachelor's Degree or Higher | 2.1% |
Average hourly earnings of all employees on private nonfarm payrolls were up 4.1% in March compared to a year ago. This was 0.2% lower than last month.
Leading Economic Indicators (LEI) sponsored by The Conference Board
The LEI for March decreased by 0.3% after the first increase in over two years in February. The Conference Board’s spokesperson said, “Overall, the LEI Index points to a fragile outlook for the U.S. economy.”
Gross Domestic Product (GDP)
The Bureau of Economic Analysis said the advance estimate for GDP in the first quarter of 2024 rose at an annual rate of 1.6%. 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 increases in consumer and government spending.
.Labor Productivity
(This quarterly data will be updated in next month’s newsletter.)
Nonfarm business labor productivity increased 3.2% in the fourth quarter of 2023 as reported by the Bureau of Labor Statistics. In the same quarter a year ago, the increase was a revised 2.6%.
Third quarter 2023 data was revised down to 4.7% from 4.9%. Artificial intelligence over the next 10 years will tend to increase productivity going forward.
Inflation
Annual inflation increased to 2.7% as measured by the Personal Consumption Expenditures (PCE) index in March. Core PCE index, which excludes food and energy, remained the same at 2.8% in March. It was 3.2% in November 2023.
The peak Core PCE inflation this cycle was 5.6% in February 2022. Lower inflation is 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 April 30, 2024, the average 30-year fixed-rate mortgage had an interest rate of 7.43%, compared to 6.91% last month. The average 15-year fixed-rate mortgage had an interest rate of 6.85%, compared to 6.47% last month.
The median existing-home sale price in March rose to $393,500. That is a 4.8% increase from March 2023 according to the National Association of Realtors. The inventory of existing homes for sale remains low, but fortunately increasing, with a 3.4-month supply in March. In February it was 3.0 months.
The U.S. Public Debt as Issued by the Treasury Department as of March 29, 2024, was:
$34,697,000,000,000.
Last month it was $34,609,000,000,000.
Important Dates in April
April 30 & May 1 – The third Federal Open Market Committee (FOMC) meeting of 2024.
May 1 – In 1889, comrades gathering at the International Socialist Conference in Paris declared May 1 as an international holiday for labor. May 1 is not a holiday in the U.S., but it is across Europe.
May 4 – May the fourth be with you!
May 4 – The Kentucky Derby.
May 5 – Cinco de Mayo, in the United States, this date has evolved into a commemoration of Mexican culture and heritage.
May 7 – Primary election day in Indiana and elsewhere.
May 8, 1945 – VE Day or WWII’s Victory in Europe Day.
May 12 – Mother’s Day occurs on the second Sunday in May.
May 14, 1607 – A group of English settlers founded what became the first permanent English settlement in America. Jamestown was established on the bank of the James River in Virginia. Life was very difficult with 80% of the settlers dead from starvation and disease within the first three years. The first English settlement in America was Roanoke in 1585 but when a resupply ship arrived in 1590, no settlers could be found. Therefore, Jamestown is referred to as the first permanent English settlement in America.
May 18 – Armed Forces Day occurs on the 3rd Saturday in May.
May 26 – The Indianapolis 500.
May 27 – Memorial Day. This day was originally called Decoration Day. After the Civil War, this day was set aside for family members and the public to decorate the graves of the soldiers who died in that war. After World War I, the holiday was expanded to honor all American war fatalities. The name Memorial Day became more commonplace after World War II.
The Stock Market
Commentary
Dr. Siegel is a Professor of Finance at the Wharton School in Philadelphia.
Dr. Siegel was on CNBC on April 8, 2024. Here is what he said.
“The most important thing if you ask me, is what would you rather have, a strong economy through 2024 or Federal Reserve interest rate cuts? I’ll take the former.”
“I think a strong economy and strong corporate earnings are the best thing for stock prices today. Long-term, I see small-cap, mid-cap, and value stocks at very large discounts. In the short-term, I’m not sure if the momentum stocks are done” (meaning they can still go higher).
Stock Market Valuation
Tom Lee
Lee is the founder and head of research at Fundstrat Global Advisors in New York City.
Lee was on CNBC on April 12, where he said, “I don’t think 5,200 is the ceiling for the S&P 500 Index this year. I know this is going to be tough for investors to embrace, but I think something like 5,600 to 5,700 is probably where the S&P 500 ends this year. I also think corporate earnings could be $270 to $280 in 2025.”
With a PE ratio of 21, $275 earnings in 2025 would put the S&P 500 Index at 5,775. Just remember this is not a guarantee.
The S&P 500 Index closed on April 30 at 5035.69.
Monthly Performance of the S&P 500 Index
2023 Annual Performance of the S&P 500 Index
VOO, the market cap weighted S&P 500 Index ETF, was up 26.3%.
RSP, the equal weighted S&P 500 Index ETF, was up 13.7%.
Recommended Action for Your Stock Portfolio
Why should an investor put a lower percentage of their retirement savings into the stock market?
The big three categories available for your retirement savings are stock market, bond market, and cash. We have prepared two articles: This month we are sharing our thoughts on “why an investor should reduce their stock exposure.” Next month we will discuss, “why an investor should increase their stock exposure.” Within the financial services industry, identifying and implementing the best mix of stocks, bonds, and cash is called “asset allocation”. There is no wrong answer – and the right answer will be different for each investor. Below are our comments on why an investor might want to reduce their stock exposure.
1. There is risk with every type of investment, but the amount of risk varies. Even though millions of people have made millions of dollars by investing in the stock market, the market is volatile and not everyone can stomach the ups and downs. No one can predict when the next bear market (20% or more down) will strike. So, the unknown can be scary. If an investor is losing sleep over their portfolio, perhaps they have too high a percentage of their retirement money in the stock market.
2. As we all get older, most investors become more cautious. Even Mark, an aggressive investor all his life, started backing down on the percentage of his retirement in stocks when he turned 58. So do not hesitate to consider having a lower percentage of one’s retirement in stocks now as compared to 10 years ago. Reducing your stock market exposure as you get older would only be considered “normal”.
3. For those investors who put a significant portion of their money in mutual funds, or exchange-traded funds, or individual stocks that pay a healthy dividend, remember the dividend is not guaranteed each quarter. The company’s board of directors votes every quarter to pay the dividend as per the previous quarter, to lower it, to raise it, or to cancel it. Dividends are not paid until the board of directors authorizes it every quarter. If this is a surprise to you or causes you concern, perhaps put some of your high dividend stock exposure into bonds or cash.
4. Except for a few months in 2019, the Federal Funds rate has been pretty much at zero percent from the middle of 2008 through early 2022. During this time, it made no sense to have excess money in cash earning zero. Bonds also paid very little, so most investors loaded up on stocks. But now the Federal Funds rate is 5.25% to 5.50%. Many money market funds are paying over 5.0% with inflation running around 3%. So, it’s OK to have a small bucket of money in cash. Bonds are also paying more today. The only way to have a higher percentage of retirement money in cash and bonds is to reduce the percentage in stocks.
Next month: Why should an investor put a higher percentage of their retirement savings into the stock market?
·Not FDIC Insured ·No Bank Guarantee ·May Lose Value
Financial Markets Vocabulary
What did the Dodd-Frank Act do?
This act, created by Congress in 2010, overhauled the financial regulation system following the Great Recession of 2008-09. The act eliminated the Office of Thrift Supervision, assigned new responsibilities to the FDIC, and created new agencies like the Consumer Financial Protection Bureau. The latter was charged with protecting consumers against abuses related to credit cards, mortgages, and other financial products. The act also created the Financial Stability Oversight Council and the Office of Financial Research to identify threats to the financial stability of the U.S.
WHERE WERE THE HOTTEST JOB MARKETS IN 2023?
Salt Lake City and Florida Have the Hottest Job Markets
The Wall Street Journal, April 9, 2024, page A2
The Wall Street Journal, working with Moody’s Analytics, assessed around 380 metro areas in the U.S. to find the best job markets in 2023. The rankings below show the strongest 22 labor markets as based on five factors: unemployment rate, labor-force participation rate, changes to employment levels, the size of the labor force, and wages. These cities with strong job markets are well-positioned as affordable alternatives to the traditional tech and financial hubs.
OK, Now What Do I Do?
Most of us are financially speaking, doing OK to good. But some are not due to excessive debt, or no emergency fund or just living paycheck to paycheck. If so, life might seem almost unbearable. For those in this situation, lets highlight an action plan.
The first step is to get on a budget and identify all the expenses and income anticipated in each month. This can be done in a spreadsheet or in a budget app. Dave Ramsey has a good app for budgeting called “EveryDollar”. Go to https://www.ramseysolutions.com and click on “Products” and select “EveryDollar Budget App”.
By developing a plan (the budget) and then capturing every dollar spent, the participant can find opportunities to reduce spending in those areas that will bring about minimal discomfort. Critical spending includes shelter (rent or mortgage), food, utilities, insurance, taxes, transportation, and debt payments. But even these categories have opportunities for spending less.
Once a budget is under control – meaning there is money left over at the end of the month – now significant debt reduction can begin. Dave Ramsey strongly suggests starting to pay down the smallest debt first and then working your way to the next higher debt. We at Lorenz Financial recommend first attacking the debt with the highest interest rate. Typically, this is credit card debt. As each debt is paid off, more money is now available to attack the next debt.
Remember all debt is bad debt except a fixed-rate first mortgage on your primary residence. All bad debt needs to be permanently eliminated.
Ben Franklin said the only thing we can count on in life is death and taxes. Well, we would add one more – financial emergencies. To be ready for those emergencies, everyone needs an emergency fund. We recommend accumulating three to six months of typical monthly expenses. A family’s emergency fund should be kept in an FDIC or NCUA-insured money market account paying a high interest rate. Emergency fund money must be kept safe and liquid – meaning the money is in an insured account and is available today to be spent if needed.
Now with all bad debt eliminated and a safe and liquid emergency fund, the participant can focus on retirement savings, savings for that first house, or savings for college or trade school.
Keep in mind a mortgage payment, which includes principal, interest, taxes, and insurance, should be no more than 25% of the family’s monthly take-home pay. Also as soon as possible, say age 25, families should be saving 15% of their combined gross income in a retirement plan.
Parents, if you have a 14 to 17-year-old who is starting to think about life after high school and living on their own, have them draw up a budget vs income. Then when they leave out half of the important spending categories, you can help them understand that making $15 an hour, even if they work full time earning $30,000 a year, is just not going to cut it.
SK HYNIX TO BUILD MEMORY CHIP PLANT IN WEST LAFAYETTE
Nvidia Partner Bets Big on the Midwest
The Wall Street Journal, April 4, 2024, page B1
South Korea’s SK Hynix said it plans to invest $3.9 billion in an advanced chip-packaging facility in West Lafayette, Indiana. The planned facility is set to mass-produce high-bandwidth memory, or HBM, a critical component to support artificial intelligence (AI) computing.
Of course, Nvidia produces the graphic processing unit or GPU. This is the brain for artificial intelligence, but HBM is needed to achieve optimum performance. Regular memory chips which are OK for your computer and phone, are just not fast enough for AI.
The new facility will host research and development along with the packaging function. Production is expected to start mass production in the second half of 2028. Upwards of 1,000 new jobs are expected.
Indiana Gov. Holcomb said the state offered SK Hynix as much as $554 million in tax rebates and millions more in grants and performance payments. The Purdue Research Foundation and Purdue University offered additional incentives and services valued at about $60 million.
John Boyd of Boyd Co. and Brian Edelman, of Purdue Research Foundation said the deal was closed primarily due to Purdue’s top engineering program, the availability of a 120-acre site, ample power generation, sufficient wastewater treatment facilities, and a massive aquifer that will supply water to the factory (chip manufacturing requires a considerable amount of water).
Our Financial Bad Boys This Month
Sam Bankman-Fried
FTX Founder Sentenced to 25 Years in Federal Prison
The Wall Street Journal, March 29, 2024, page A1
Samuel B. Bankman-Fried was an American entrepreneur who was convicted of seven felonies including fraud, conspiracy, and money laundering in November 2023 and sentenced to 25 years in prison on March 28, 2024.
Prosecutors called this case one of the largest financial frauds in U.S. history. A jury last year found the 32-year-old guilty of stealing billions of dollars from FTX customers and defrauding investors and lenders to his crypto investment firm, Alameda Research. U.S. District Judge Lewis Kaplan said in determining the sentence he weighted the brazenness of Bankman-Fried’s actions, his lack of remorse, and the possibility he would commit future crimes. In addition to this 25-year sentence, Bankman-Fried was also ordered to pay $11 billion in financial penalties.
Prosecutors had asked for a sentence of 40 to 50 years. Defense attorneys had asked for no more than 6 years. Bernard Madoff received a sentence of 150 years for his fraud. Perhaps Sam got off easy.
The Bond Market
Commentary
John C. Williams
Williams is the President of the New York Federal Reserve Bank.
In a Wall Street Journal article on April 12, 2024, Williams said, “The central bank has made progress towards balancing its goals of reducing inflation while promoting a strong labor market.” He continued with, “But the Federal Reserve’s job isn’t done.”
Williams suggested the Fed was likely to maintain its cautious approach towards cutting interest rates when he noted, “We have not seen the total alignment of our dual mandate quite yet.”
Using the Fed’s preferred gauge to measure inflation, Core PCE, Williams said he now expected inflation to fall between 2.25% and 2.5% at the end of this year. Williams highlighted one source of optimism for those who believe inflation is still out of control: “Wage growth has slowed, and the labor market is showing fewer signs of imbalance.”
Recommended Action for Your Safe Money
Our recommendations for an investor’s safest money are unchanged from last month. Our recommendations, in no particular order, are:
- Ultra-Short-Term U.S. Investment-Grade Corporate or Securitized bond funds
- Short-Term U.S. Investment-Grade Corporate or Securitized bond funds
- Intermediate-Term U.S. Investment-Grade Corporate or Securitized bond funds
- Short-term high-yield bond funds
- Short and intermediate-term U.S. Treasury bond funds
- Cash (in a money market mutual fund paying 4.5% to 5.0% per year.)
- Bank or Credit Union Certificates of Deposit (only if FDIC or NCUA insured!)
- U.S. Savings I-Bonds (max savings is $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 their total portfolio. These products are 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
With an 8% average annual return, how much will a 25-year-old need to save every month in an employer’s retirement plan or an IRA to accumulate $1 million before income taxes by the time they are 65?
Answer:
$325 per month. What if the 25-year-old wants $2 million by age 65? Answer, save $650 a month, etc.
Parents and grandparents, the ball is in your court. What message are you now going to give to your children and grandchildren?
But not every 25-year-old has the ability to save $325 a month. What if they wait until…
Age 35? Now monthly savings will have to be $740 to achieve $1 million by age 65.
Age 45? Now monthly savings will have to be $1,830 to achieve $1 million by age 65.
Age 55? Now monthly savings will have to be $5,755 to achieve $1 million by age 65.