Welcome to the October 2024 Newsletter. This month, we’re discussing the economy, employment, financial terminology, and more.
Summary
Josh Brown
Brown is the CEO of Ritholtz Wealth Management in New York City.
Brown said on CNBC on September 24, “I think the reason for all the recent stock buying is fairly obvious: We are now in a Federal Reserve’s losing cycle and the previous cycle – the tightening cycle – did not cause anything to blow up.”
“When we talk to people who are sitting on the sidelines with 30% to 50% of their portfolio in a money market fund, they say, ‘We were getting 5% to 5.5% with no risk and no volatility and we were happy with that. But now the Fed is cutting, and we did not have a recession that almost everyone was predicting, so now what is going to happen?’ Well, the S&P 500 Index is up 19% as of today and now money market rates are coming down! So, they say, ‘Wait a minute, 5% was awesome, 4.5% is pretty good, 4% is not going to feel great and 3.5% is going to feel terrible.’”
“So, I think there is going to be a lot of reallocation out of money market funds and back into the stock market.”
The S&P 500 Index closed on September 30 at a new all-time closing high of 5,762.48. This is 4.2% above the market close on August 30, 2024.
Quote of the Day
Jerome Powell
Powell was nominated to the Federal Reserve Board of Governors in December 2011 to fill the unexpired term of Frederic Mishkin. In January 2014 Powell was nominated for a full term of 14 years as a Federal Reserve Governor. He then became its chairman in 2018, which has a 4-year term. In May 2022, Powell was sworn in for a second term as chairman.
Twice the Senate Banking Committee voted 22-1 to approve Powell’s nomination as Federal Reserve Chair. The only senator to vote against Powell both times was Elizabeth Warren.
On September 18, the Chair said at the 2:30 PM press conference, “My colleges and I remained squarely focused on achieving our dual mandate goals of maximum employment and stable prices for the benefit of the American people. The labor market has cooled from its formerly overheated state. Inflation has eased substantially from its peak of 7% to an estimated 2.2% as of August.”
“Today the FOMC has decided to reduce the degree of policy restraint by lowering the Federal Funds rate by 0.50% to the target range of 4.75% to 5.0%.”
Pop Quiz
Claudia Sahm, an American economist, defined the Sahm rule in 2019 to explain when an economic recession has begun. What is the rule?
The answer is at the bottom of the newsletter.
The Economy
Employment
Total U.S. nonfarm payroll employment rose in August by 142,000. The official unemployment rate, U-3, decreased to 4.2%. The June and July 2024 combined employment numbers were revised lower by 86,000 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 has slowed since the first of the year.
The Job Openings & Labor Turnover Survey (JOLTS) decreased to 7.7 million open jobs across the country as of the last business day in July. 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, increased to 7.9% in August from 7.8% the month before. There were 7.4 million people unemployed in July, aged 16 and older. Last month it was 7.7 million people unemployed.
August Unemployment Rates by Education Level
| Less Than High School Diploma | 7.1% |
| High School Graduate, No College | 4.0% |
| Some College, Associate's Degree, or Skilled Trade Degree | 3.4% |
| Bachelor's Degree or Higher | 2.5% |
Average hourly earnings of all employees on private nonfarm payrolls were up 3.8% in August 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 by 0.2% in August following the 0.6% decline in July. The Conference Board’s spokesperson said, “In August, the US LEI remained on a downward trajectory and posted its sixth consecutive monthly decline. The erosion was driven by ‘new orders’, which recorded its lowest value since May 2023. Overall, the LEI continued to signal headwinds to economic growth ahead.”
Gross Domestic Product (GDP)
The Bureau of Economic Analysis said the third estimate for GDP in the second quarter of 2024 rose at an annual rate of 3.0%. GDP for the first quarter 2024 was 1.4%.
The increase in real GDP reflected an increase in federal government spending and inventory investment.
Quarterly Labor Productivity– The November newsletter will have the next quarterly update.
Seasonally adjusted nonfarm business labor productivity increased 2.3% at an annualized rate in 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 a year ago, the increase was 2.7%.
Inflation
Annual inflation decreased to 2.2% as measured by the Personal Consumption Expenditures (PCE) index in August. Core PCE index, which excludes food and energy, increased slightly to 2.7%, from 2.6% the previous two months.
University of Michigan Consumer Sentiment
Consumer sentiment in September extended its climb to 70.1, rising more than 3% above August’s reading of 67.9. The index is up 13% over a year ago. See the chart below.
Mortgage Rates and Existing Home Prices
As of September 30, 2024, the average 30-year fixed-rate mortgage had an interest rate of 6.20%, compared to 6.41% last month. The average 15-year fixed-rate mortgage had an interest rate of 5.57%, compared to 5.95% last month.
The median existing-home sale price slipped another 2.5% in August to $416,700 from the previous month, but that is still a 3.1% increase from August 2023 according to the National Association of Realtors. The inventory of existing homes for sale remains low with a 4.2-month supply in August. The desired supply-target is 6 months.
The U.S. Public Debt as Issued by the Treasury Department as of September 30, 2024, was:
$35,417,000,000,000.
Last month it was $35,275,000,000,000.
A Note on Our Growing National Debt
Our most significant negative economic indicator is our growing national debt. Congress and the Administration just cannot control spending our tax dollars. Okay, but so what? Here are two reasons why this is important.
First, as the federal government must borrow more and more, and issue more and more Treasury bonds, demand for these bonds will eventually flatten out even as the supply grows. Therefore, the only way to motivate investors to buy more Treasury bonds will be if yields increase. If intermediate-term and long-term Treasury bond yields go up, the yields on all other bonds with a similar duration will go up. As yields go up, the price of existing bonds will go down. Therefore, get ready to lose money on your intermediate-term and long-term bonds.
Second, as the debt grows, the interest on the debt will become larger and larger. Eventually all the federal government will be able to afford is the interest, Defense, Social Security, Homeland Security and Medicare. That would leave no money for food stamps, education, agriculture, NASA, EPA, disability income payments, US Geological Survey, Veteran Affairs, and Departments of Transportation, Labor, Justice, Energy, State, Treasury, Commerce, Housing & Urban Development, Health & Human Services, and Interior. Oh, woe to all members of Congress and the President when, not if, this happens.
Important Dates in October
October 4, 1582 – The Gregorian Calendar took effect in Catholic countries as Pope Gregory XIII issued a decree stating the day following Thursday, October 4, 1582, would be Friday, October 15, 1582, correcting a 10-day error accumulated by the Julian Calendar. Britain and the American colonies adopted the Gregorian Calendar in 1752.
October 7, 2023 – Hamas, The Islamic Resistance movement in Gaza, conducted a surprise military operation against Israel killing 1,139 and capturing 240 citizens. The military operation started with 2,200 rockets fired into Israel providing cover for the 1,500 terrorists. Dozens of cases of rape and sexual assault were reported against Israeli women. Now after one year, the United Nations has yet to issue a straightforward condemnation of the Hamas attack on Israel.
October 8, 1871 – The Great Fire of Chicago erupted. According to legend, it started when Mrs. O’Leary’s cow kicked over a lantern in her barn on DeKoven street. Over 300 people were killed and 90,000 were left homeless as the fire leveled 3.5 square miles, destroying 17,450 buildings.
October 14 – Columbus Day is a federal holiday and is celebrated on the second Monday in October.
October 15 thru December 7 – Medicare Open Enrollment for the selection of medical insurance to begin January 1, 2025.
October 19, 1987 – “Black Monday” occurred on Wall Street as stocks plunged a record 22.6%, the largest one-day drop in stock market history. What did Mark do on this historic down day? He was a buyer of stocks.
October 24, 1929 – “Black Thursday” occurred in the New York Stock Exchange as nearly 13 million shares were sold in panic selling. Five days later “Black Tuesday” saw 16 million shares sold. Over these four business days, the stock market dropped 25% and the Great Depression began.
October 26, 1881 – The Erie Canal opened as the first major man-made waterway in America linking Lake Erie with the Hudson River.
October 28, 1886 – The Statue of Liberty was dedicated on Bedloe Island in New York harbor.
October 31, 1517 – Martin Luther nailed his 95 Theses to the door of Wittenberg’s palace church, denouncing the selling of papal indulgences and questioning various ecclesiastical practices. This marked the beginning of the protestant Reformation.
October 31 – Halloween.
The Stock Market
Commentary
A spokesperson for Wells Fargo Investment Advisors was quoted on September 17, 2024 on CNBC saying, “Our belief suggests investors need to start repositioning excess cash in the current face of the expected of Fed rate-cutting cycle and falling interest rates.”
Bank of America spokesperson said on the same date, “Corporate client buybacks accelerated to their highest weekly level since June 2024. Trailing 52-week buybacks as a percent of S&P 500 market cap hit a record high – even above 2019 levels.”
For example, during the same week Microsoft announced plans to spend $60 billion to buy back their own stock. Stock buybacks are a good thing as it reduces the number of outstanding shares. Then even if corporate profits remain constant in dollars, earnings per share will go up as there are fewer shares. Higher earnings per share drives stock prices higher.
Stock Market Valuation
Brian Belski
Belski is the Chief Investment Strategist for BMO Capital Markets in Chicago, Illinois.
Belski said on CNBC on September 20, “In May 2024 we raised our year-end target for the S&P 500 to 5,600. Today we are raising it again to 6,100.”
What are others on Wall Street predicting for the S&P 500 Index by year-end 2024?
Again, the S&P 500 Index closed on September 30, 2024 at 5762.48.
Monthly Performance of the S&P 500 Index
Recommended Action for Your Stock Portfolio
Josh Brown
Brown is the CEO of Ritholtz Wealth Management in New York City.
Brown said on September 17, 2024, “Let’s say you are a CEO talking to your Board of Directors. You might say, ‘We have uncertainty with where interest rates will bottom out and we have uncertainty with the election outcome.’”
“So, you continue with, ‘What is the lowest risk thing we should do with our excess cash flow right now?’ The answer is, return money to shareholders. Yes, there is a shareholder benefit to raising our company dividend but from the shareholder’s tax perspective, it is better to buy back company stock.”
“When the market dropped 4% in one week in August, corporations came in and gobbled up their stock the following week. Therefore, I believe if volatility continues and the market drops again, corporations will come back in again and buy their stock. This is a big reason why a near-term stock price pullback will be short-lived.”
Therefore, what is your action plan today for the stock market? Be 100% invested. This means if you are an 80/20 investor, have 80% of your portfolio in the stock market and 20% in cash or bonds. If you are a more conservative investor with a 50/50 portfolio, then be sure and have 50% of your portfolio invested in the stock market. What is the minimum amount an investor should have in the stock market? We strongly believe an investor needs to have 40% of their portfolio in the stock market. Why? Because with this level the portfolio will have at least a decent chance of at least zero real growth (not negative growth) as the account balance will remain flat after taking into account taxes and inflation.
·Not FDIC Insured ·No Bank Guarantee ·May Lose Value
Financial Markets Vocabulary
Interval Funds
The Fees on These Funds Will Leave You High and Dry
The Wall Street Journal, July 27-28, 2024, Page B2
Some investors will believe almost anything. Look no further than interval funds – Wall Street’s most recent invention. Today there are over 100 different interval funds available. A decade ago, there were only 14. The most commonly held assets in an interval fund are private credit and nontraded debt. Ugh!
There are three problems with interval funds beyond owning private credit and nontraded debt.
First, these funds don’t provide daily liquidity. Instead, they let their investors withdraw only a small portion of the investor’s money, typically 5%, per quarter!
Second, these funds use significant amounts of leverage – borrowing up to 33% of the assets contributed by investors. Leverage is a polite word for investing borrowed money alongside an investor’s assets. But whether or not these funds appreciate in value due to the borrowing, there will always be interest and principal to pay which will reduce the fund’s return.
Third, the fees charged by these funds are much higher than the fees on a typical mutual fund or exchange-traded fund. Plus, the fund’s fee structure is on all the fund’s assets – even the amounts the fund has borrowed. Unbelievable!
Interval funds are just another trap set by the sharks circling the water. We highly recommend never buying an interval fund.
OK, Now What Do I Do?
An indicator of how much interest rates have recently changed can be seen by looking at the recent yield trend of 2-year Treasuries. See the chart below.
Two-Year Treasury Yield – the Past Six Months
Yields have dropped from the peak of 5.05% to 3.59%. Money Market funds will soon follow this trend. Many investors will not be happy with a 3.59% yield on their money market funds so, what should an investor do with their safest money?
We would never tell anyone to totally get rid of all of their cash even if money market accounts were paying zero. But here is an option for at least part of an investor’s cash holdings – a short-term high-yield bond funds. Here are two options:
• Not insured by any bank or government • Subject to risk & possible loss of principal
Our Financial Bad Boys This Month
This month the companies below are not bad boys, but companies that are very heavily burdened with long-term debt. Why have they borrowed so much? Because they need to spend hundreds of billions of dollars to finance the conversion of their cars and light duty trucks from ICE (internal combustion engines) to EV.
Requiring massive amounts of borrowed money to finance their capital expenses is one reason the auto industry, along with the airline industry, have had a very hard time getting their stock prices to appreciate.
The Bond Market
Commentary
Harvey Schwartz
Schwartz is CEO of the Carlyle Group, an American multinational company with client offerings in private equity, alternative asset management, and financial services. They are based in Washington D.C.
On September 18, Schwartz said on CNBC, “Right now when we look at our portfolio of data, we see a vibrant U.S. economy. Monetary policy has been working – I think the Federal Reserve has done an amazing job. Therefore, we see three interest rate cuts by the end of the year and then a pause.”
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
Claudia Sahm, an American economist, defined the Sahm rule in 2019 to explain when an economic recession has begun. What is the rule?
Answer: The Sahm rule is a ‘rule of thumb’ only. It is designed to signal the start of a recession. It is not a “law” like Newton’s First Law of Motion. Dr. Sahm defined her rule as:
“When the three-month moving average of the national unemployment rate (U-3) is 0.5 percentage points or more above its low over the prior twelve months, we are in the early months of a recession.”
Since the 1950’s, Dr. Sahm’s rule has predicted all recessions except two. Well, what about today? In June 2024, the 3-month moving average of the U.S. unemployment rate was 4.0%. The low was 3.5% in July 2023. Therefore, the criteria of a 0.5% increase or more in the prior 12 months was met, but just barely.
Today is the third instance where her rule does not apply because there is no evidence, we have begun an economic recession. Why doesn’t her rule work today? Why aren’t we at the start of another recession? One likely reason is the extreme expansionary fiscal policy put in place by the Congress and the Administration (spending trillions of dollars per year beyond the annual amount of tax receipts). When trillions are spent, the economy will keep humming, at least until something blows up.