October 2018 Newsletter

Lorenz Financial is helping you understand the 2018 October U.S. economy and stock market.

Welcome to the October newsletter! Today, we’re going to review the housing market, the federal budget deficit, and the benefits of working with a fiduciary. Let’s jump right in!



The stock market correction that started on January 29, 2018 is over and the bull market continues! The bond market, though, 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

Lorenz Financial is helping you understand the 2018 October U.S. economy and stock market.


U.S. nonfarm payrolls rose 201,000 in August—another robust number. Average hourly earnings were up 2.9% year over year. This is the best number since May 2009. U-6, the broadest measure of U.S. unemployment with its inclusion of part-time workers looking for full-time jobs, dropped from 7.9% in July to 7.4% in August—a remarkable improvement. In the past 16 years, the best previous number for U-6 was 7.9% in December 2006 while the worst was 17.1% in the fourth quarter of 2009. It will not last forever, but right now U.S. employment is roaring!


Short-Term Interest Rates

The Federal Reserve raised the Federal Funds rate range by 25-basis points from 1.75% / 2.0% to 2.0% / 2.25%. Another 25-basis point increase is expected at the December 18 & 19 meeting. We could have 3 to 4 rate increases in 2019.

Gross Domestic Product

The Commerce Department said the second quarter GDP was unchanged at 4.2%. The GDP annual growth rate after inflation for the first six months of 2018 remains at a healthy 3.2%. Compared to the last 10 years, this is a good number.



The PCE inflation index rose 2.2% year over year in August. The core index, excluding food and energy, rose 2.0% year over year in August. The former number dropped 0.1% from the previous month while the core index remained the same.

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                                    2.03%

10 Year                                  2.14%

30 Year                                  2.15%


Home Prices

The S&P Case-Shiller national home price index posted a 6.0% annual gain in July compared to a year ago. This is down slightly from the 6.2% in June compared to a year earlier. Rising mortgage interest rates and the previous increase in home prices over the past two years is beginning to slow the growth of home prices.



Stock Market

Lorenz Financial is helping you understand the 2018 October U.S. economy and stock market.


The S&P 500 Index established a new, all-time closing high of 2930.75 on September 20. Including dividends, this index is now up 10.95% year-to-date as of September 20.


Leading Indicators For The Next Bear Market: LEI and the Yield Curve

The Conference Board said the Leading Economic Index (LEI) increased 0.4% in August to 111.2 (2016 = 100), following a 0.7% increase in July and a 0.5% increase in June. The Board’s spokesperson said, “The strengths among the LEI’s (ten) components were widespread, further supporting an outlook of above 3% growth for the remainder of 2018.”

The yield curve remains with an upward slope. The U.S. Treasury Yield Curve as of September 28 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 are holding to our 2019 S&P 500 operating earnings estimate of $170 per share. With a PE ratio range of 17 to 18, the S&P 500 Index has the ability to climb into the 3000s ($170 x 18 = 3060). On September 28, the S&P 500 Index closed at 2913.98.


Recommended Action for Your Stock Portfolio

Lorenz Financial expects the bull market trend to remain intact at least into next year. While there is plenty of time for the forward economic scenario to change between now and next year, we regard the risk of a recession as minimal at this time. Two key pre-recession indicators continue to strongly suggest that 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.


The Starship MoneyTalk by Bob Brinker

Lorenz Financial is helping you understand the 2018 October U.S. economy and stock market.Bob Brinker’s financial radio show began on January 26, 1986, the day da-Bears won SuperBowl XX. After more than 32 years, Bob retired from his radio show on Sunday, September 30. MoneyTalk, and Bob’s newsletters, have had a profound influence on Lorenz Financial’s investment philosophy and style. Bob, “May you live long and prosper.”


“Not So Good” Broker News

Because a broker is not a fiduciary, sometimes they just cannot resist the temptation to take advantage of their clients and their employer. Here are five examples.


1. Wells Fargo

Yes, they are at it again. In August 2018, Wells Fargo fired or suspended more than a dozen employees over alleged violations of the company’s after-hours meals program. The company allows dinner to be expensed if ordered after 6:30PM. However, it was discovered some receipts for orders placed before 6:30PM were doctored to reflect the order was placed after 6:30PM. If some Wells Fargo brokers are cheating their employer, would they cheat you too?


2. Fidelity Investments

In May 2018, Fidelity Investments fired or allowed more than 200 employees to resign over accusations of widespread violations of its computer buying and physical fitness benefit programs. Back in 2014, Fidelity agreed to pay $12M to settle two class-action lawsuits which alleged the firm was profiting at the expense of its own employees by offering only high-cost Fidelity mutual funds and charging excessive fees within its employee 401K plan. If Fidelity will screw over its own employees, would they also take advantage of clients? Lorenz Financial does not sell Wells Fargo or Fidelity mutual funds because of the continuous stream of shenanigans from these two major financial centers


3. Merrill Lynch

Merrill Lynch announced that effective October 1, they will reintroduce charging clients a commission on retirement accounts. If your broker charges a commission, then your broker has a conflict of interest. Sooner or later your broker will mutter to himself, “Should I sell my client Product A with a 3% commission or Product B with a 6% commission?” Guess which product you will be pitched?


4. Citigroup

A dark pool is a large broker’s in-house stock exchange. In September 2018, Citigroup was fined $12.9M by the Security and Exchange Commission for misleading clients in writing that high-frequency traders were NOT permitted to trade securities in the Citigroup dark pool. Citi used this to justify charging a higher commission on trades in their dark pool than other brokerage sites from 2011 thru 2014. The reality was at least two high-frequency trading firms accounted for more than 17% of the trades within the Citi dark pool. This was outright lying by Citigroup to their clients.


5. Principal Group

One of our newsletter members reports the following regarding the Principal Group. One spouse had retirement money at the Principal Group. After retirement, the couple wanted to move their money to T. Rowe Price. They describe their telephone encounter with Principal Group as an “ordeal”. They reported the Principal Group customer service rep was unprofessional and had a total lack of respect for the couple. After having the account open for 23 years, they were not even given a “thank you”.


Isn’t it time to only trust a fiduciary with your investments? A “broker” has no obligation to put the client’s interest first. Lorenz Financial is a fiduciary and legally required to always put the client’s interest first, to disclose all conflicts of interest, and to disclose all client costs. Contact Mark at Lorenz Financial and experience how we treat customers.



Bond Market

Lorenz Financial is helping you understand the 2018 September US economy and stock market.


Early economic forecasts show growth continued at a healthy pace in the third quarter. We remain comfortable with our GDP forecast of 3% for the calendar year 2018. The yield curve has flattened, but not inverted and is not yet a warning sign of a recession. The combination of higher short-term rates, as well as the ongoing quantitative tightening program, should support higher interest rates across the yield curve into 2019.


Federal Reserve

The Federal Open Market Committee (FOMC) voted unanimously to increase the federal funds to a target range of 2.0% to 2.25% at their meeting that ended September 26. Quantitative Tightening continues by the Fed with a $10B increase per month to $50B in U.S. Treasuries and Federal Agency bonds being sold off each month starting in October.


U.S. Treasuries

According to the Congressional Budget Office (CBO), the federal budget deficit increased by $222B thru 11 months of this fiscal year compared to the same period last year. By far and away the increase was due to $71B less income from corporate taxes, $39B more for Social Security, $35B more for Medicare & Medicaid, and $55B more to pay for interest on the national debt due to higher interest rates.


Recommended Action for Your Bond Portfolio

Our bond market investments remain mostly 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-grade money market accounts. The latter should yield approximately 2% 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 due to 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 a very high risk due to the recent strength of the U.S. dollar, low yields, and the risk of bankruptcy.