Welcome to quarter four. There’s a lot to discuss, including the Equifax security breach. Let’s dive right in!
The Fed’s monetary policy remains accommodative. Inflation is low, which allows the stock market to achieve all time new highs. The Federal Reserve announced their decision to initiate normalization of their balance in October. Under this quantitative tightening program, the Fed will gradually reduce the amount it reinvests in maturing securities. There are no signs of a pending recession. All portfolios remain fully invested.
Equifax Security Breach: What Should You Do?
You and I cannot fix, and much less, undo the breach of our most personal data at Equifax. We can only hope the Justice Department will put the Equifax villains in jail. Therefore, we need to take action now to protect ourselves. Below are our recommended actions:
1. Check your credit report.
Check your report from the 3 credit reporting agencies each year by using annualcreditreport.com. Other sites will offer the same service, but for a fee. This site is free.
2. Purchase a proactive credit monitoring service.
Get credit monitoring that offers complete assistance to help you restore your information if it’s stolen. The company recommended by Dave Ramsey and Lorenz Financial is Zander Insurance. Lifelock offers similar services. Make sure you understand the monthly cost no matter which company you go with.
3. Implement a credit freeze.
Freeze your credit at all 3 credit reporting agencies below.
For a married couple, this means each will implement 3 credit freezes, or a total of 6 for the couple.
4. Monitor your bank statements.
Look carefully at each bank statement and credit card statement for activity you have not authorized.
5. Buy a high-quality document shredder.
We recommend a micro cross-cut paper shredder. When you are finished with a document, shred it!
6. Update your passwords.
Use long, complex passwords for your online accounts. Don’t use the same password for every account. Set up two-factor authentication when allowed.
A key aspect of our work is monitoring our economic pre-recession indicators. We view our five pre-recession indicators as a method of determining the probability of a recession over the next 6 to 12 months. Our recession risk analysis is below.
Over the past year, the PCE price index has increased 1.4% and the PCE core price index also rose 1.4%. No accelerating inflation here!
During the first 8 months of 2017, payroll gains have averaged 176,000 per month. This compares to average monthly payroll gains of 187,000 for the same period in 2016. No runaway payroll growth here!
Rising Unemployment Claims
The most recent data shows the four-week moving average of new claims is 277,750. Prior to the hurricane season the four-week moving average of new claims was 234,000. Certainly an increase has occurred but as the hurricane rebuilding efforts get underway in the 4th quarter, we expect the average number of new claims to decline.
Inverted Yield Curve
As of now, the yield curve continues to maintain an upward slope, not an inverted slope. No recession danger here!
Leading Economic Indicators
The Conference Board’s Leading Economic Index increased 0.4% in August, registering its 12th consecutive monthly advance. Seven of the 10 components were positive for the month. No recession indications here!
Therefore using the current economic conditions, these five indicators are not predicting a recession in the next 6 to 12 months.
S&P 500 Index Operating Earnings & Potential Going Forward
We are increasing our 2018 S&P 500 operating earnings estimate from $140 to $142. We expect a lower dollar to serve as a tailwind for US exports. Given our outlook for relatively tame inflation, we are maintaining our price/earnings ratio range of 17 to 18 times operating earnings for the S&P 500 Index. Applying this P/E ratio to our 2018 S&P 500 operating earnings estimate provides the potential for the index to challenge the 2600 level going forward.
Brokerage Trades Will Now Settle in Two Days
Effective September 5, 2017, the standard settlement cycle for most brokerage transactions – stocks, bonds, exchanged traded funds, mutual funds – will be reduced from trade date plus 3 business days to trade date plus 2 business days.
Recommended Action for Your Stock Portfolio
There are no changes to Lorenz Financial’s stock market portfolios. All portfolios are fully invested. The most recent stock market correction was in January and February 2016. We could have another correction at anytime. Our plan is to ride out any such correction as typically within 3-6 months of hitting a correction bottom, the market is well into a recovery.
GDP grew during the first half of the year at 2.15%. Second quarter growth has been revised upward to 3.1% due to an upward revision to inventories. Our target for GDP growth in the second half is 3.1% or an average of 2.6% for 2017.
The Federal Open Market Committee (FOMC) met in September and voted unanimously to maintain the target range for the federal funds rate at 1.0% to 1.25%. FOMC members also announced their decision to initiate the balance sheet normalization program in October. Under this quantitative tightening program, the Fed will gradually reduce the amount it reinvests in maturing securities.
Beginning in October 2017, the Fed will permit up to $6 billion in US Treasury holdings and $4 billion in agency debt and mortgage based securities to roll off their balance sheet. $10 billion will roll off in each month in October, November, and December. In January the amount will increase to $20 billion each month and eventually reach $50 billion per month at some point in the future. This will allow long-term interest rates to rise, meaning existing bond prices will decrease.
Treasuries are currently paying per year:
- 2 Years @ 1.47%
- 5 Years @ 1.92%
- 10 Years @ 2.33%
- 30 Years @ 2.86%
The Fed’s preferred inflation gauge is the Personal Consumption Expenditure (PCE) price index. The Fed’s expectation for the PCE inflation rate is to end the year at 1.5 to 1.6%.
The Treasury markets show the following long-term annual inflation expectations.
- 5 Years at 1.68%
- 10 Years at 1.84%
- 30 Years at 1.92%
Recommended Action for Your Bond Portfolio
Our recommended bond market investments remain unchanged. We are investing only in short-term investment-grade corporate bond funds, intermediate-term investment-grade corporate bond funds and short-term high-yield corporate bond funds. We are not recommending any long-term bonds or bond funds.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
Need help with your portfolio?
Lorenz Financial is ready to help you! Check out our resources page on our website for great finance tips and information, and contact us today to get started on planning your financial future!
Lorenz Financial Services, LLC is a West Lafayette, Indiana fiduciary who offers financial planning and portfolio management services. If you have questions about who we are or our services, please contact us at (765) 532-3295 or email us.