November 2018 Newsletter

The Lorenz Financial November 2018 newsletter can help understand the current economy.

Welcome to the November newsletter! Today, we’ll cover the lowest unemployment rate since 1969, the higher-than-expected estimate of the third-quarter GDP, and how annual inflation moderated in September. Let’s get started!



Even though we had a stock market correction in January and February this year, we are now in the middle of another one! When this correction ends, as they all do, the stock bull market will continue. The bond market is in a bear market, with interest rates slowly rising and existing bond prices slowly falling.

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


The Economy


U.S. nonfarm payrolls rose 134,000 in September—a lower number than expected—but July payrolls were revised up from 147,000 to 165,000, and August payrolls were revised up from 201,000 to 270,000. Altogether, these three months continue to shout, “employment is very robust.” Unemployment dropped to 3.7%—the lowest number since December 1969.

Gross Domestic Product (GDP)

Real GDP increased 3.5% in the third quarter, according to the advance estimate released by the Bureau of Economic Analysis. For the first 9 months of 2018, real GDP is up an  average of 3.3%. This is great news! 2017 GDP was up 2.6%, and 2016 GDP was up only 1.9%.

Short-Term Interest Rates

There was no Federal Reserve meeting in October. The Federal Funds rate remains in the range of 2.0% to 2.25%. The next meeting is November 7 and 8, where no action is expected on interest rates. But at the December 18 and 19 meeting, another 25-basis point increase is expected.


Annual inflation moderated in September down to 2.0% as measured by the Personal Consumption Expenditures (PCE) index. The core PCE index, excluding food and energy, stayed the same at 2.0% over the past year.

Long-term inflation expectations can be determined by calculating the differences between Treasury bond yields and TIPS real yields of the same maturities. Results are:

Bond                             Annual Inflation

Maturities                         Expectations

  5 Year                                     1.90%

 10 Year                                   2.05%

 30 Year                                  2.08%



Stock Market

The Lorenz Financial November 2018 newsletter can help understand the current economy.


Earlier this year, the stock market saw a correction in January and February. The low point was on February 8, down 10.16% on a closing basis from its recent closing high on January 26. This correction followed a typical pattern: The stock market established a low that was down at least 10%, followed by a short-term rally that failed, and then a retest of the low. This correction was unusual as it had a double bottom during the retest. The original low was on February 8, and the double retest of the bottom was on March 23 and April 2.

After April 2, the stock market bull market continued and established a new all-time closing high of 2,930.75 on September 20. October was a tough month for the stock market. A near-term closing low was established on October 29, at 2,641.25, or down 9.88% from the all-time closing high. Now is this correction over? Will this correction also retest the low before the bull market continues?  Impossible to say. So be patient and let this correction play out. Remember: “Corrections have never ended a bull market!” Now let’s see what is going on with our potential bear market indicators below.

Two Leading Indicators for the Next Bear Market? LEI and the Yield Curve

The Conference Board said the Leading Economic Index (LEI) increased 0.5% in September to 111.8 (2016 = 100), following a 0.4% increase in August and a 0.7% increase in July. The Board’s spokesperson said, “The LEI improved further in September, suggesting the U.S. business cycle remains on a strong growth trajectory heading into 2019.  However, the LEI’s growth has slowed somewhat in recent months, suggesting the economy may be facing capacity constraints and increasingly tight labor markets.”

The yield curve remains with an upward slope. The U.S. Treasury Yield Curve as of October 31 is below.

There are no signs of a near-term recession or bear market as measured by these two LEADING economic indicators.

Stock Market Valuation

We expect investors to focus more on 2019 earnings as we move into the winter season. We are holding to our 2019 S&P 500 operating earnings estimate of $170 per share. Our price/earnings ratio range estimate remains 17 to 18, which gives the S&P 500 Index the potential to trade into the 3,000 to 3,100 range next year.

Recommended Action for Your Stock Portfolio

Lorenz Financial expects the bull market trend to remain intact at least into next year. We regard the risk of a recession as minimal at this time. Two key pre-recession indicators continue to strongly suggest the economy will enter 2019 on a growth track. Therefore, we recommend your stock market allocation should be fully invested in a low cost, highly diversified, and tax-efficient manner at this time.


Other Topics

“But the insurance salesman said it was a good investment.”

Universal Life, a popular insurance product of the 1980s and 1990s, has come back to haunt many older Americans with skyrocketing premiums. Universal Life has two parts: first, a one-year, renewable-term life insurance policy. Of course, the term life premiums increase each year! The second part is a savings account that earns a variable rate of interest. The intent was the high interest rates of the 80s and 90s would grow the savings account and would be used to offset the increasing term life premiums. The net result was advertised as an overall policy premium that would never go up! Of course, the fine print said otherwise.

One elderly policyholder was paying $56 a month when she bought the policy in the 1980s, but now her premium is $285 a month—a budget-busting amount for many retirees. Another policyholder, a 94-year-old former hospital billing clerk, dropped her coverage from $25,000 to $21,000 but the monthly premium still climbed to $100. She has now paid the life insurance company $39,000 in premiums, but her heirs will only receive the $21,000 face value of the policy.

What can policyholders do? Some are totally dropping their plans. Other policyholders are decreasing coverage to lower their monthly premium, and others are just scared to do anything except pay the continuously increasing premiums.

Life insurance needs to be a part of everyone’s financial plan because the early death of a family’s breadwinner can be devastating. But the next time an insurance agent tells you insurance is a good investment—be nice and just say, “No thank you. I only invest with a fiduciary.”

Wells Fargo

The New York Attorney General has fined Wells Fargo $65M for deceptive sales practices and fraudulent misconduct. Two Wells Fargo brokers are now suing Wells Fargo for creating a toxic environment. Wells Fargo has announced a 10% reduction in their workforce over the next three years. We CAN make that a 100% reduction in their workforce if everyone moves their Wells Fargo accounts to another bank or brokerage house. Thanks to those subscribers of this newsletter who have already moved their Wells Fargo accounts.


Bond Market

The Lorenz Financial November 2018 newsletter can help understand the current economy.


Imports and exports are booming as measured by our two largest seaports—Los Angeles and Long Beach. On a calendar-year basis, loaded inbound containers are up 6.3%, and loaded outbound containers are up 8.7%. Container traffic through Los Angeles is up 4.9%, and traffic through Long Beach is up 10.7%. These are real-time indicators that say the economic health of the U.S. continues in great shape.

Federal Reserve

The Federal Open Market Committee (FOMC) is scheduled to meet on November 7 and 8. We do not expect any change in the federal funds rate at that time, which is currently in the range of 2.0% to 2.25%. The FOMC’s Quantitative Tightening program continues, with $50B worth of U.S. Treasuries, agency, and mortgage-backed debt securities sold off per month. The Fed’s balance sheet has dropped to $4.17T from $4.4T since the Quantitative Tightening program began.

The minutes of the last FOMC meeting reported, “Participants believe that further gradual increases in the federal funds rate are consistent with the current sustained economic expansion, strong labor market conditions, and inflation near 2 percent over the medium term.”

U.S. Treasuries

According to the Congressional Budget Office (CBO), the federal budget deficit for the fiscal year 2018 was $782B. For 2017, it was $666B. Spending in 2018 was $129B more than in 2017. Net interest on the public debt increased $62B.

As Congress spends more, more government debt (U.S. Treasury bills, notes, and bonds) will have to be issued. And, as the FOMC’s Quantitative Tightening reduces their balance sheet by $50B per month, more and more government debt will enter the marketplace. For these two reasons, the supply of Treasury debt will increase. As the supply increases, bond yields will go up and the price of existing bonds will decrease.

Recommended Action for Your Bond Portfolio

Our bond market recommendations remain unchanged. We are investing only in short-term, investment-grade bond funds; intermediate-term, investment-grade bond funds; short-term, high-yield bond funds; and high-quality money market accounts. The latter should yield 2% or more annually.

We are not recommending any long-term bonds or long-term bond funds due to the current high interest rate risk. Muni bond funds are not recommended at this time due to the risk of too many U.S. cities and states potentially going bankrupt from unfunded pension obligations. Treasury bond funds and international bond funds are not recommended at this time due to their low yield. Bond funds that invest in emerging markets are very high risk due to the recent strength of the U.S. dollar, low yields, and the risk of bankruptcy.