Welcome to the October 2022 Newsletter. This month, we’re discussing the economy, employment, financial terminology, and more.
Summary
The return of the S&P 500 Index to the area of the June 2022 lows has produced substantial improvements in our underlying stock market technical indicators when compared with the technical readings at the June lows. This includes an important decline in the level of the selling pressure in the market. In addition, stock market sentiment has now reached extraordinary levels of bearishness. A bearish (low) sentiment reading is actually very bullish as sentiment is a contrarian indicator announcing near-term stock market upward movement.
In our view, the conditions are now in place to justify an upgrade of our stock market view to “attractive for purchase.” While it is possible the market may stage a short-term rally and then retest the current lows again, this would not result in a change to our market view.
Quote of the Day
“The one thing that is the difference between success and failure: taking risks”
– T. Boone Pickens
Billionaire Investor
Thomas Boone Pickens Jr. (May 1928 – September 2019) was an American business magnate and financier. At age 12, Pickens began delivering newspapers. He quickly expanded his paper route from 28 homes to 156. He later cited his boyhood job as an early introduction to “expanding quickly by acquisition.”
In his 2008 book—The First Billion is the Hardest—Pickens called for the construction of more nuclear power plants, the use of natural gas to power the country’s transportation system, and the promotion of alternative energy including solar and wind.
Pop Quiz
Fearless Girl, as she stands down Wall Street’s Charging Bull.
How does one nurture a “real,” confident, and fearless girl? With loving parents who inspire and an excellent education. Speaking of education, Lorenz Financial has clients in Indiana, Michigan, Illinois, and Missouri. Which of these four states require a personal financial education course to graduate high school? Which are the 14 states out of 50 that require such a course?
The answer is at the bottom of the newsletter.
The Economy
Employment
Unemployment Rates by Education Level, August 2022
| Less Than High School Diploma | 6.2% |
| High School Graduate, No College | 4.2% |
| Some College or Associate’s Degree | 2.9% |
| Bachelor’s Degree or Higher | 1.9% |
Average hourly earnings of all employees on private nonfarm payrolls were up 5.2% compared to a year ago.
The extraordinary strength of the U.S. labor market is allowing the Federal Reserve to be aggressive in raising interest rates to fight inflation.
Leading Economic Indicators (LEI)
The LEI for August dropped by 0.3%—the sixth consecutive monthly decline. Below are the previous monthly LEI results:
- July decreased 0.5%
- June decreased 0.7%
- May decreased 0.6%
- April decreased 0.4%
- March decreased 0.1%
These six consecutive declines in the LEI signal a potential recession.
Gross Domestic Product (GDP)
The Bureau of Economic Analysis said the final estimate for GDP decreased by 0.6% in the second quarter of 2022 compared to a decrease of 1.6% in the first quarter.
Annual inflation decreased in August to 6.2% as measured by the Personal Consumption Expenditures (PCE) index. But the core PCE index, which excludes food and energy, increased to 4.9% in August from 4.7% in July!
This is actually terrible news—core PCE inflation increasing! These results will push the Federal Reserve to continue to aggressively increase short-term interest rates and press ahead with Quantitative Tightening so as to defeat inflation.
The Federal Open Market Committee (FOMC) watches PCE core inflation more than the other inflation indicators. Here is a little bit of PCE core inflation history this cycle:
- July 4.7%
- June 5.0%
- May 4.9%
- April 5.0%
- March 5.2%
- February 5.3% (peak PCE core inflation this cycle)
- January 5.2%
Long-term inflation expectations can be estimated by measuring the differences between Treasury bond yields & TIPS real yields of the same maturities. Results are:
| Bond Maturities | Annual Inflation Expectations |
| 5 Year | 2.14% |
| 10 Year | 2.15% |
| 30 Year | 2.05% |
This month’s estimated annual inflation numbers above are 35 basis points lower on average compared to last month.
The Public Debt as Issued by the U.S. Treasury, September 30, 2022
$30,924,153,770,000
Important Dates in September
October 15 thru December 7 – Open enrollment for obtaining or changing medical insurance in 2023.
October 10 – Columbus Day is a federal holiday.
October 31 – Halloween
The Stock Market
Commentary
This month we have quotes from three important Wall Street people.
Scott Minerd
Scott is the Chief Investment Officer at Guggenheim Partners Global in New York, NY.
On September 8, Scott said on CNBC, “Since 1960, PE ratios have trended lower when inflation is higher. With year-over-year PCE Core inflation at 4.7% and S&P 500 trading at 19 times earnings, we should see stocks fall another 20% by mid-October. I’ll say broadly, the bottom will be 3000 to 3400 on the S&P 500 Index. I would be a buyer at those levels.”
Josh Brown
Josh is the CEO of Ritholtz Wealth Management in New York, NY.
On September 15, Josh Brown said on CNBC, “The rallies we have seen such as the one between the closing low on June 16 to August 16 have been a ‘counter trend’ rally as the overall trend of the market has been down since the all-time closing high on January 3.”
“The NASDAQ 100 (ticker symbol QQQ) has been below its 200-day moving average for 113 consecutive days. The takeaway for investors is, there is no rush to be buying into NASDAQ (the tech sector) as long as we are below the 200-day moving average.”
“The idea that a 20% decline in the stock market is anything BUT ‘out of the ordinary.’ We have 94 years of stock market data. The average drawdown is 16.9%. And 24 of those 94 years we have had a 20% pullback or greater. Therefore, a 20% decline happens about 1 out of every 4 years.”
Richard Fisher
Richard is the former Dallas Federal Reserve Bank President.
On September 22, Richard said on CNBC, “The Federal Reserve (the Fed) said they want the federal funds interest rate to be in the range of 4.25% to 4.5% by year-end, but it could go higher. Also, they are predicting the 2023 peak interest rate will be 4.5% to 4.75% next year, but keep in mind, it could go higher.
“The Fed’s reading of the labor market is so strong, the Fed believes they have a lot of leeway to increase interest rates to fight inflation and at the same time cause minimal damage to the economy. And most importantly, the Fed is going to exercise that leeway!
“I feel the Fed is willing to let unemployment go up to the mid to high 5%. They’ll take political heat for that from Congress and the administration. But I know for certain Chair Powell and the Board of Governors could care less what the politicians say. If the Fed does not stop this inflationary event – if they don’t get the horses back into the barn, which they let out—they will all go down in history as doing a crappy job fighting inflation.
“We will have a continual stream of interest rate increases for some time. Next year will be the real test. Have rate increases bent the inflation curve or not?”
Stock Market Valuation
The closing low for this bear market so far has been 3,585 on September 30 as measured by the S&P 500 Index.
Our base case is
| Year | Earnings/Share | PE Ratio | Approx. S&P 500 Index High |
| 2022 | $222 | 16.1 | 3,585 |
Monthly Performance of the S&P 500 Index
Recommended Action for Your Stock Portfolio
With the market judged “attractive for purchase”, our recommendation is for investors to add to their stock market holdings by buying U.S. stock market mutual funds and exchange-traded funds with up to 50% of their cash holdings. We will make a decision in the near term regarding when the remaining 50% should be invested.
Bond market money should remain in cash or other low-volatility holdings. See the Bond section below.
For those in the workforce, please continue to contribute to your employer’s retirement plan and to your and your spouse’s IRA every pay period.
Morningstar style boxes show an investor the investment style and size of mutual funds and exchange-traded funds.
Funds will be in one or more style categories: value, growth, or blend (which is a little of both). Funds will also fall into one or more of the size boxes: large, mid-sized, or small-sized capitalized companies.
These charts can be seen by going to https://www.morningstar.com and entering a ticker symbol such as SCHD for the Schwab U.S. Dividend Equity ETF. Then, click on the “Portfolio” tab to see the Morningstar’s style boxes as below for SCHD.
If an investor is managing their own money, why do this? Because diversification is one tool to minimize risk. An investor must not end up with a portfolio consisting only of six or seven mid-cap value funds for example. For your own portfolio, focus on diversification, low cost, and tax efficiency.
OK, Now What Do I Do?
People born around the year 1900 (Mark’s grandparents) had a life expectancy of 46 years for men and 48 years for women. Broadly, this generation and previous ones did not save for retirement in large part because they had no measurable retirement—they died! But Baby Boomers, Generation X, Millennials, and Gen Z will have a long retirement, so saving for it is crucial!
This message is for the parents and grandparents of today’s younger generations. The older generations must counsel the younger generations by saying, “Young people, your grandparents did not have to save for retirement because they did not have a long life in retirement. But your generation might live 40 years or more in retirement! Please do not plan on living off just Social Security! So, you must save for retirement every year you work.”
How do you accumulate significant retirement savings?
Answer: Save as much as you can as early as you can.
Let’s use an example of a 22-year-old whose Social Security full retirement age (FRA) is 67. What is the most important money they will save?
Answer: The most important money they will save is when they are 22. Why? Because that money has 45 years to grow until they turn 67. The money they save when they are 23 has only 44 years to grow. The money they save when they are 24 has only 43 years to grow and so on. Most 22-year-olds will say, “I can’t save any significant amount of money right now—I have a low income and a lot of expenses.”
Even if you only save $2,000 a year, and never increase the amount saved per year, with a 9% return (not the stock market’s average return of 10%) after 45 years the account will have $1,040,000. Not bad for only saving $2,000 per year!
In 45 years, a person will probably not have enough income with only Social Security and $1 million to live on for 40 more years in retirement. So as a person’s income increases over the years, please plan on saving more and more each year until you are saving 15% of your total gross income.
Well, how do you save even a small amount of money, much less a large amount?
Answer: Spend less than you make. It doesn’t matter if you make $50,000 or $250,000 per year, you must spend less than you make!
What do you do with your retirement savings?
Answer: Hopefully your employer has a retirement plan, so start there. Look at the options they offer and pick the investment that
- Puts a high percentage of your money into the U.S. stock market
- Has low annual expenses.
If the employer offers a company match, the employee must capture 100% of the match. IT’S FREE MONEY SO GET ALL OF IT! (Sorry for yelling.)
Second, open a Roth IRA inside a brokerage account. Good brokerage choices include Vanguard and T Rowe Price. Pick a low-cost stock index fund. Lorenz Financial’s favorite stock index fund is VTI—the Vanguard Total Stock Market Index. This is an exchange-traded fund. The annual expense ratio is 0.03%. That is $3 cost per year for every $10,000 invested. The minimum investment is 1 share. The September 30 closing price was $179.47 per share.
If you prefer a mutual fund, try VTSAX. This is Vanguard’s Total Stock Market Index Fund, Admiral shares. Its minimum initial investment is $3,000 and the annual expense ratio is 0.04%.
For those below age 50, the maximum amount that can be put into a Roth IRA in 2022 is $6,000 per person. In the year a worker turns 50, the total amount that can be invested is $7,000. For a married couple, only one spouse needs to work for both to have a Roth IRA. Maximum income limits to fund a Roth IRA begin at $129,000 of income for a single filer and $204,000 for joint filers in 2022.
Parents and grandparents, please do not fail to discuss this topic with the younger members of your family.
OUR FINANCIAL BAD BOY THIS MONTH
Randi Weingarten Flunks the Pandemic
Source: The Wall Street Journal, September 2, 2022, page A14
The National Assessment of Educational Progress (NAEP) scores were released on September 1 for the 2021-2022 school year. They were—by any standard—a calamity showing an unprecedented decline in reading and math scores by American children compared to the 2019-2020 school year.
Nine-year-old test scores declined the most with math scores down seven points and reading scores down five points. Two decades of progress have been erased in two years. You’d think this would be cause for reflection by our education elites, but no such luck. Media headlines blamed “the pandemic” as if Covid-19 ran American school districts and decided to force students to sit at home in front of screens for more than a year. Educators—as they call themselves—did that!
American Federation of Teachers chief, Randi Weingarten, who pushed shutdowns as long as she possibly could before parents revolted, tried to forget this ever happened with her statement on Twitter: “Thankfully after two years of disruption from a pandemic that killed more than 1 million Americans, schools are already working on helping kids recover and thrive. This is a year to accelerate learning by rebuilding relationships and focusing on the basics.”
The Bond Market
Commentary
The pace of economic growth has been disappointing so far this year. Real GDP in the first quarter was -1.6% and -0.6% in the second quarter. The FOMC estimates real GDP with a range of +0.1% to +0.3% for 2022. The forecast for GDP for 2023 is within a range of +0.5% to +1.5%.
Port traffic at the ports of Los Angeles and Long Beach is down 2% in the first eight months this year as compared to the same time last year.
Our recession risk indicators continue to indicate a heightened risk of recession.
The Federal Reserve and its Federal Open Market Committee (FOMC)
The FOMC voted unanimously at the September meeting to raise the federal funds rate 75 basis points to the target range of 3.0% to 3.25%. In the post-meeting media conference, Fed Chair Powell stuck to his blunt message—inflation is too high and the Fed is going to raise interest rates to a “restrictive policy stance.” Our conclusion is, The FOMC is determined to lower inflation and this process will inflict economic pain.
The U.S. Treasury
The real-time economic data indicates the pace of growth will remain weak into early next year. The strong labor markets provide the Fed with plenty of room to continue to raise interest rates in an effort to combat inflation.
Recommended Action for Your Bond Portfolio
We have made one addition to our bond fund recommendations this month: U.S. Treasuries. Our bond market recommendations, in order, only include the following:
- U.S. Savings I-Bonds
- U.S. Treasuries
- Cash
- Ultra-Short-Term U.S. bond funds
PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS.
Pop Quiz Answer
How does one nurture a “real,” confident, and fearless girl? With loving parents who inspire and an excellent education. Speaking of education, Lorenz Financial has clients in Indiana, Michigan, Illinois, and Missouri. Which of these four states require a personal financial education course to graduate high school? Which are the 14 states out of 50 that require such a course?
Answer:
Of the four states mentioned, only Michigan and Missouri require a personal financial education course to graduate high school. Indiana and Illinois do not. The total list of states that have this requirement is:
Florida
Georgia
Iowa
Michigan
Mississippi
Missouri
North Carolina
Ohio
Rhode Island
Tennessee
Utah
Virginia