Welcome to the November 2024 Newsletter. This month, we’re discussing the economy, employment, financial terminology, and more.
Summary
Here is a run-down of the current status of our economy and national situation. Inflation is down. Employment is up. The economy is good, and consumers are spending. The Federal Reserve is lowering short-term interest rates. The election uncertainty is almost over, and the chance of a recession in the next 12 months is very low.
But Florida and the southeastern U.S. have been hit with two large hurricanes. Additionally, there are two active wars in the world involving two of the four worst, most evil, governments in the world. We also have an agitated gorilla standing in the corner and ready to pick a fight regarding our enormous national debt.
What does this mean for the short term? We believe our outlook for the economy and stock market is pretty good in the near term.
What about 2025? With the S&P 500 Index PE ratio being high and corporate profit growth slowing, a growing PE ratio we believe is not going to happen. Therefore, the only way for the stock market to rise is for corporate earnings to increase – which is likely to happen. In other words, if earnings increase 3-4% in 2025, the stock market will go up 3-4%. If earnings increase 9-10%, the stock market will go up 9-10%. Which one is more likely in 2025? We think the 3-4% increase.
Assuming the S&P 500 Index reaches 6,000 by year-end 2024, as an increasing number of stock analysts believe, then by the end of 2025, the S&P 500 Index should be between 6,200 and 6,300.
Quote of the Day
Fidel Castro
Castro (August 1926 to November 2016) was a Cuban revolutionary and politician who was the leader of Cuba from 1959 to 2008. Castro was a Marxist – Leninist communist who nationalized industries and businesses and implemented socialist reforms throughout Cuban society.
During his reign, political opposition was not permitted. The Cuban regime entailed full authoritarianism, as there were no channels for opposition. Censorship of information was extensive and independent journalism was repressed.
Castro said, “Within the revolution, everything (goes). Against the revolution, nothing (will be tolerated)”.
Communism, and its first cousin, socialism, are not just other forms of government, but governments that are paranoid and intolerant of criticism. Why? Because what communists and socialists fear most, is the loss of their power. Even though it is not the intent of these governments to destroy personal ambition and corporate innovation, they absolutely do! Without personal ambition and innovation, all economies have the potential to deeply decelerate. Therefore, free market capitalism must continue to be our economic path going forward, and a democratic republic form of government based on freedom, equality, justice, and personal accountability as our constitutional path going forward.
Pop Quiz
Why was Salmon P. Chase so significant in American history that justifies his portrait on the US $10,000 bill?
Check your sock drawer! A US $10,000 bank note today is worth about $500,000 to collectors.
The answer to this month’s Pop Quiz is at the bottom of the newsletter.
The Economy
Employment
Total U.S. nonfarm payroll employment rose in September by 254,000. The expected number was 150,000. The official unemployment rate, U-3, decreased to 4.1%. The July and August 2024 combined employment numbers were revised higher by 72,000 than previously reported.
Chart 1 below is based on the Bureau of Labor Statistics official unemployment rate, U-3.
Chart 2 below shows the two-year trend of employment growth.
The Job Openings & Labor Turnover Survey (JOLTS) increased to 8.0 million open jobs across the country as of the last business day in August. The 10-year chart below shows the downward trend continues in open jobs since March 2022.
The seasonally adjusted Total U.S. Unemployment Rate, U-6, decreased to 7.7% in September from 7.9% the month before. There were 6.5 million people unemployed in September, aged 16 and older. Last month it was 7.4 million people unemployed.
September Unemployment Rates by Education Level
| Less Than High School Diploma | 6.8% |
| High School Graduate, No College | 4.0% |
| Some College, Associate's Degree, or Skilled Trade Degree | 3.4% |
| Bachelor's Degree or Higher | 2.3% |
Average hourly earnings of all employees on private nonfarm payrolls were up 4.0% in September compared to a year ago. This was 0.2% more than last month.
Leading Economic Indicators (LEI) sponsored by The Conference Board
The LEI decreased 0.5% in September following a 0.3% decline in August. The Conference Board’s spokesperson said, “Weakness in factory new orders continued to be a major drag on the US LEI in September. Additionally, building permits declined and consumers’ outlook for future business conditions was tepid. Overall, the LEI continued to signal uncertainty for economic activity ahead.”
Gross Domestic Product (GDP)
The Bureau of Economic Analysis said the advance estimate for GDP in the third quarter of 2024 rose at an annual rate of 2.8%. GDP for the second quarter 2024 was 3.0%.
The increase in real GDP reflected an increase in consumer spending, exports, and federal government spending.
Quarterly Labor Productivity
Seasonally adjusted nonfarm business labor annualized productivity was revised upwards to 2.5% from 2.3% last month for the second quarter of 2024 as reported by the Bureau of Labor Statistics. This increase is significantly improved over the 0.3% in the first quarter. In the second quarter of a year ago, the increase was 2.7%.
The first read of third-quarter productivity will be released in November and published in our December newsletter.
Inflation
Annual inflation decreased to 2.1% as measured by the Personal Consumption Expenditures (PCE) index for September. Core PCE index, which excludes food and energy, remained the same at 2.7%, where it has stood for four of the last five months.
The Social Security cost of living adjustment for 2025 was calculated at 2.5% by averaging the consumer price index over the months of July, August, and September 2024.
University of Michigan Consumer Sentiment
Consumer sentiment in October increased slightly to 70.5, as compared to September’s 70.1.
Mortgage Rates and Existing Home Prices
As of October 31, 2024, the average 30-year fixed-rate mortgage had an interest rate of 7.02%, compared to 6.20% last month. The average 15-year fixed rate mortgage had an interest rate of 6.50%, compared to 5.57% last month.
The median existing home sale price slipped another 1.0% in September to $404,500 from the previous month, but that is still a 3.0% increase from September 2023 according to the National Association of Realtors. The inventory of existing homes for sale remains low with a 4.3-month supply in September. The desired supply target is 6 months.
The U.S. Public Debt as Issued by the Treasury Department as of October 31, 2024, was:
$35,839,000,000,000.
Last month it was $35,417,000,000,000.
TWO REASONS THE LOW INTEREST-RATE ERA IS OVER
The Wall Street Journal, October 11, 2024, page A2
Even though the Fed lowered short-term interest rates by 0.5% on September 18, 2024, the 10-year Treasury has pushed its yield back up to 4.29%, the highest in two months. Why would long-term rates rise while the Fed’s short-term rates fall?
Well, there are two reasons long-term interest rates are likely to be higher, perhaps much higher, in the coming decade than in the prior one.
The first reason is benign – inflation and economic growth won’t be as low in the future as they were before the pandemic. If inflation and economic growth are higher, so will long-term interest rates. The second reason is more menacing – growth of the federal debt is on an unsustainable path. As our debt increases, the Treasury must sell more and more bonds. As the supply of bonds increases, the only way to motivate buyers of Treasury bonds to buy more is for their yield to go up.
Since 2007, the federal debt has climbed from 35% of gross domestic product to 98%. A recent study by the Penn Wharton Budget Model suggests the U.S. debt and economy would become unsustainable as it approaches 175% of GDP. Does anyone in Washington, DC have the courage to stand up and say, “No more!” Apparently not yet.
Important Dates in November
October 15 thru December 7 – Medicare Open Enrollment for the selection of medical insurance to begin January 1, 2025. Insurance policy premiums for 2025 may still fluctuate during October but should be stable by November 1.
November 3 – Fall back! Set your clocks back one hour.
November 5 – Election Day.
November 6 & 7 – The seventh Federal Open Market Committee (FOMC) meeting in 2024.
November 10, 1775 – U.S. Marine Corps Day.
On this date, the Continental Congress authorized the creation of the Continental Marines. Semper Fi! (Always Faithful)
November 11 – Veteran’s Day. This day was first celebrated in 1918 and was then called Armistice Day as it commemorated the cease-fire that ended World War I. Hostilities ended at the 11th hour, on the 11th day of the 11th month. The actual peace treaty was negotiated and signed seven months later in France. The Japanese delegation was rudely ignored by the European and American delegations during the negotiations. This resulted in Japan beginning a massive military buildup prior to what was to become, World War II.
November 22, 1963 – John F. Kennedy, the 35th US President was assassinated in Dallas, Texas. The President was pronounced dead the same day. Kennedy was the fourth US President to be assassinated while in office.
November 28 – Thanksgiving Day. The history of Thanksgiving goes back to 1621 when the newly arrived pilgrims sat down with native Americans to celebrate a bountiful harvest with a feast of thanksgiving. At that time, the pilgrims’ meager foothold in the new world was tenuous at best.
The Stock Market
Commentary
David Kostin
Kostin is the Goldman Sachs Chief U.S. Equity Strategist based in New York City.
Kostin said on October 21, 2024, “The era of double-digit growth in the stock market may be coming to an end”. Kostin continues, “The S&P 500 Index will deliver an annualized return of 3% on average over the next decade – well below the 13.7% average annual returns in the last 10 years.”
The phenomenon of good stock market years being offset by mediocre years is called “mean reversion”. Mean reversion is a financial term for the process by which an asset’s annual price growth will tend to converge to its annual price appreciation's long-term history.
The average annual return of the S&P 500 Index is a little over 10% since its introduction in 1957. However, the S&P 500’s annual returns have varied widely from +43.7% in 1958, to -36.55% in 2008. See the chart below.
S&P 500 Annual Returns 1958 thru 2022
What has the S&P 500 Index given us since the financial crisis? From January 2009 thru October 2024 the S&P 500 Index averaged 16.8% annually. Is that sustainable going forward? We think not. That is why David Kostin’s prediction of the next 10 years at 3% might come true. If it does come true, what will the average 26-year return be (past 16 years at 16.8%, plus the next 10 years at 3%)? Answer: 11.49% which is not so bad.
Dr. Jeremy Siegel, Professor of Finance at the Wharton School in Philadelphia said, “Stock market returns can be very unstable in the short run, but very stable in the long run."
Stock Market Valuation
David Kostin said on October 7, “Our forecast for P/E ratios is unchanged for 2024. We are lifting our 2024 end of year S&P 500 Index target to 6,000 (previously 5,600) and our 12-month target to 6,200 (previously 6,000).
Here are the current Wall Street brokerage houses' predictions for the S&P 500 Index at year end 2024.
From the market close on October 12, 2022 to October 11, 2024, the market increased 62.6%! We continue to believe the market will continue its upward trajectory thru 2025 but at a slower pace. Of course, a market correction of 10% or more can occur at any time. But when we have the next correction, it does not mean the current bull market is over. The only thing that ends a bull market is a bear market (down 20% or more from a recent high). What causes a bear market? Typically, a recession causes a bear market and right now, there is no recession in sight.
The S&P 500 Index closed on October 31, 2024 at 5,705.45
Monthly Performance of the S&P 500 Index
Recommended Action for Your Stock Portfolio
Let’s take a broad look at what themes have been working in today’s stock market. Below are a variety of ideas. First in each row are listed one or more exchange traded funds and then in ( ) are listed individual stocks that are in the same category. These topics are not listed in any particular order.
Technology/Artificial Intelligence Software: QQQ or (Microsoft, Alphabet, Meta, Amazon, Oracle)
Technology/Artificial Intelligence Chips and Hardware: SMH, QQQ or (Nvidia, Broadcom, Advanced Micro Devices, Taiwan Semiconductor, Apple)
Technology/Cyber Security: BUG or (Crowdstrike, Palo Alto Networks)
Energy: IEO or (ConocoPhillips, Exxon Mobil, Diamondback Energy, Cheniere Energy)
Financial Services: VFH or (JPMorgan, Morgan Stanley, Goldman Sachs)
Utilities: VPU or (Duke Energy, GE Vernova)
Materials: VAW or (Freeport)
Real Estate: JPRE, XLRE
Industrials: VIS, or ITA for defense stocks and ITB for homebuilders
Retail: (Walmart, Costco, Amazon)
Obviously, an investor does not have to own individual stocks or even a narrow-focused exchange traded fund to be a “stock market investor”. Many people will choose to own one or more large index funds. If that is your preference, here are our favorites.
Small Cap Stocks: XSMO (5% of the U.S. stock market)
Mid Cap Stocks: VO (15% of the U.S. stock market)
S&P 500 Index: VOO (80% of the U.S. stock market)
Total Stock Market Index: VTI (100% of the U.S. stock market)
·Not FDIC Insured ·No Bank Guarantee ·May Lose Value
Financial Markets Vocabulary
What is Hyperscale Computing and is this financially important to me?
Hyperscale is the ability of a computer system to scale up as increased demand is added to the system. This typically involves the ability to seamlessly add central processing, graphic processing, memory, networking, and storge resources to a specific computer system. Hyperscale computing is necessary in order to build a robust cloud, big data, or distributed storage system. This type of infrastructure is associated with companies such as Alphabet, Apple, Amazon, Meta, Microsoft, IBM, SAP, Twitter, and Oracle. These companies are frequently called “hyperscalers”.
Just as important, these companies have the financial resources to continue to expand, thereby making it difficult for other companies to infiltrate their cloud business. For this reason, these companies are considered to have a large moat surrounding their business which makes buying their stock more attractive.
∙ Not insured by any bank or government ∙ Subject to risk & possible loss of principal
OK, Now What Do I Do?
Your first job is to understand, if you have not already, what each of the candidates who are running for elected office in your local, state, and federal elections advocate for.
Your second job is to vote.
Our Financial Bad Boys This Month
TD Bank Gets $3 Billion Penalty & Curbs
The Wall Street Journal, October 11, 2024, page B1
Toronto-Dominion Bank based in Canada with offices in the United States, has agreed to pay more than $3 billion in penalties and accepted limits on its growth in the U.S. as part of a settlement with U.S. regulators and prosecutors over charges it failed to properly monitor money laundering by drug cartels and other criminal groups.
As part of the agreement, the bank’s primary U.S. regulator, the Office of the Comptroller of the Currency, imposed an asset cap barring the bank’s retail business from growing above its current level of assets in the U.S. TD Bank also pleaded guilty to criminal charges to resolve a Justice Department investigation as some TD employees were indicted for accepting bribes.
Independent monitors are now in place to watch the bank closely and ensure compliance. These monitors are expected to be in place for four years.
Bharat Masrani, group president and CEO of TD Bank Group, said, “This is a difficult chapter in our bank’s history. These failures took place on my watch as CEO and I apologize to all our stakeholders.” Masrani previously announced he is stepping down as CEO.
The Bond Market
Commentary
Jan Hatzius
Hatzius is Head of the Global Investment Research Division at Goldman Sachs based in New York City. He is also the firm’s Chief Economist.
Hatzius said on October 7, “Strong September job gains and upward employment revisions of previous months have for now calmed fears that labor demand might be too weak to prevent the unemployment rate from continuing to trend higher. We have therefore lowered our 12-month recession probability by 5 points to the historical unconditional average of 15%.”
Here is our opinion on where interest rates are headed.
SHORT TERM RATES – The Federal Funds target rate today is 4.75% to 5.00%. The Fed plans to move this rate towards the “neutral rate” – the theoretical federal funds rate at which the stance of the Federal Reserve’s monetary policy is neither accommodative nor restrictive. Fed watchers estimate this rate is currently 3.5% to 3.75%. Therefore, the expectation for short term interest rates is they will be dropping. Money market accounts, savings accounts and short-term CD rates will also continue to drop.
LONG TERM RATES – Typically the 10-year Treasury is 100 to 150 basis points above the Federal Funds rate. Let’s round that to 125 basis points or 1.25%. This would say after the Federal Funds rate gets down to 3.5% to 3.75%, the 10-year Treasury yield will have increased from today’s 4.3% to the range of 4.75% to 5.00%.
Therefore, an investor’s short-term cash should move out of money market funds and into bonds with a 2-, 3-, or 4-year duration, but an investor’s longer-term cash holdings should wait for the long-term rates to finish increasing.
Remember bond yields and the price of existing bonds move in opposite directions. For example, as interest rates rise, the price of existing bonds drops, and vice versa.
Recommended Action for Your Safe Money
Our recommendations for an investor’s safest money have not changed from last month. Our recommendations, in no particular order, are:
- 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
- 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 only 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 or income needed to stay ahead of, or even keep up with, taxes and inflation.
PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS.
Pop Quiz Answer
Why was Salmon P. Chase so significant in American history that justifies his portrait on the US $10,000 bill?
Salmon P. Chase as Secretary of the Treasury
Answer: Salmon P. Chase was an American politician and jurist who served as governor of Ohio and in all three branches of the federal government.
While practicing law in Cincinnati, Chase became an enthusiastic abolitionist, fighting hard against slavery. As a lawyer, he defended people who had escaped slavery and those who were charged for assisting them.
Chase served in the US Senate from Ohio from 1849 to 1855. He then served as Ohio Governor in the next four years. In 1860 he ran for President from the Republican party, but the party chose Abe Lincoln. Lincoln then asked Chase to be his Secretary of Treasury where Chase did an excellent job supplying cash to the government to finance the Civil War. To honor Chase for introducing the modern system of banknotes and paper currency, Chase was depicted on the $10,000 bill as printed from 1928 to 1946.
As Treasury Secretary, Chase was instrumental in placing the phrase “In God We Trust” on United States coins in 1864.
Before Lincoln was assassinated in 1865, President Lincoln nominated Chase in 1864 to be Chief Justice of the Supreme Court. He held that position from 1864 to 1873. As Chief Justice, Chase presided over the impeachment trial of President Andrew Johnson, Lincoln’s former Vice President. The Senate voted 35 to 19 to impeach Johnson but fell one vote short of the required two-thirds majority.