Welcome to the September 2024 Newsletter. This month, we’re discussing the economy, employment, financial terminology, and more.
Summary
Tony Pasquariello
On August 20 on CNBC, Pasquariello said, “There are three important pieces of information regarding the current bullish narrative going forward:
1. Second quarter corporate earnings growth continues to impress by exceeding estimates.
2. The second half of 2024 will likely give us GDP real growth of 2.5% annually.
3. The Fed is expected to cut short-term interest rates 200 basis points in the next 18 months. Therefore, we should follow the advice: ‘Don’t fight the Fed!’”
Quote of the Day
Why did Sears fail, and Walmart succeed?
From a Silicon Valley veteran, “I shopped at Sears for many years. As a child of the working class, many of my clothes came from Sears. My parents bought most of our home furnishings there. My dad always bought Craftsman tools at Sears. Then Sears failed. They failed because their decision-makers didn’t think clearly about why people came into their stores. They did not understand their own business. They focused only on maintaining (higher) customer prices, and cost-cutting, but not on the quality of the customer’s experience.”
Sam Walton
From Sam Walton, “Exceed your customer’s expectations. If you do, they’ll come back over and over again. Give them what they want – and a little bit more.”
Pop Quiz
What is the difference between the International Monetary Fund and the World Bank?
The answer is at the bottom of the newsletter.
The Economy
Employment
Total U.S. nonfarm payroll employment rose in July by 114,000. The official unemployment rate, U-3, increased to 4.3%. The May and June 2024 combined employment numbers were revised lower by 29,000 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.
The Job Openings & Labor Turnover Survey (JOLTS) was unchanged at 8.2 million open jobs across the country as of the last business day in June. The 10-year chart below shows the recent downward trend in open jobs.
The seasonally adjusted Total U.S. Unemployment Rate, U-6, increased to 7.8% in July. There were 7.7 million people unemployed in July, age 16 and older. Last month it was 7.2 million people unemployed.
July Unemployment Rates by Education Level
| Less Than High School Diploma | 6.7% |
| High School Graduate, No College | 4.6% |
| Some College, Associate's Degree, or Skilled Trade Degree | 3.5% |
| Bachelor's Degree or Higher | 2.3% |
Average hourly earnings of all employees on private nonfarm payrolls were up 3.6% in July compared to a year ago. This was 0.3% less than last month.
Leading Economic Indicators (LEI) sponsored by The Conference Board
The LEI decreased by 0.6% in July. The Conference Board’s spokesperson said, “In July, weakness was widespread among non-financial components. A sharp deterioration in new orders, persistently weak consumer expectations of business conditions, softer building permits, and hours worked in manufacturing drove the decline.”
Gross Domestic Product (GDP)
The Bureau of Economic Analysis said the second 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 consumer spending and inventory investment.
Quarterly Labor Productivity
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 same quarter a year ago, the increase was a revised 2.7%.
Inflation
Annual inflation remained the same at 2.5% as measured by the Personal Consumption Expenditures (PCE) index in July. Core PCE index, which excludes food and energy, remained the same for the past three months at 2.6%.
The peak Core PCE inflation this cycle was 5.6% in February 2022. Lower inflation is reason for optimism for the economy as a whole and for the Federal Reserve to begin lowering interest rates hopefully at their September meeting.
Mortgage Rates and Existing Home Prices
As of August 30, 2024, the average 30-year fixed-rate mortgage had an interest rate of 6.41%, compared to 6.82% last month. The average 15-year fixed rate mortgage had an interest rate of 5.95%, compared to 6.32% last month.
The median existing-home sale price slipped 2.5% in July to $422,600 from the previous month, but that is still a 4.2% increase from July 2023 according to the National Association of Realtors. The inventory of existing homes for sale remains low with a 4.0-month supply in July. The supply target is 6 months.
The U.S. Public Debt as Issued by the Treasury Department as of August 31, 2024, was:
$35,275,000,000,000.
Last month it was $35,009,000,000,000.
Important Dates in August
September 2 – Labor Day.
September 3, 1783 – The Treaty of Paris was signed between representatives of King George III of Great Britain and Ben Franklin, John Adams, and John Jay of the United States. The treaty officially ended the Revolutionary War. The treaty recognized the United States as a free and sovereign nation, all British land east of the Mississippi was given to the United States and the U.S. was granted fishing rights off the Newfoundland Grand Banks. This was a very lopsided treaty to the benefit of the United States.
September 6, 1901 – William McKinley, the 25th US President was assassinated in Buffalo, New York. He died eight days later. McKinley was the third US President to be assassinated in office.
September 11 – Patriot Day. On this date in 2001, 19 members of the al-Qaeda terrorist group, commandeered four commercial aircrafts departing Boston and New York. Two were crashed into the World Trade Center in New York, one into the Pentagon in Washington, DC, and one crashed in a field in Pennsylvania. Patriot Day is not a federal holiday, but Presidents Bush, Obama, Trump and Biden have annually proclaimed September 11 as Patriot Day by way of an Executive Order. Primarily this day has become the day to remember the 2,977 people who died in the World Trade Towers, the Pentagon and in Shanksville, PA. This total includes 343 firefighters in New York.
September 17, 1787 – Constitution Day commemorates the formation of the United States Constitution as signed by 39 out of 55 delegates at the Constitutional Convention in Philadelphia. The country endured four years of debate and compromise after the signing of the Treaty of Paris. The resulting document formed a strong central government with three separate branches.
September 17 & 18 – The sixth Federal Open Market Committee (FOMC) meeting in 2024.
September 18 – U.S. Air Force Day. On this day in 1947, President Truman signed the National Security Act establishing the U.S. Airforce while on board the first, Air Force One. Previously the “U.S. Airforce” was part of the Army and referred to as the Army Air Corp.
September 20 – Quad Witching Day when individual stock options, stock index options, stock index futures, and options on stock index futures all expire. This day might bring significant stock market volatility.
September 22 – The First Day of Fall or the Fall’s Equinox for the northern hemisphere. An equinox is defined as the time when the plane of the earth’s equator passes through the center of the Sun. The earth has two equinoxes: typically, March 20 and September 22.
The Stock Market
Commentary
Leon Cooperman
Cooperman is an American self-made billionaire investor and hedge fund manager. He is the chairman and CEO of Omega Advisors, a New York based investment advisory firm.
Cooperman said on CNBC on August 15, “I have a more conservative view of the economy and the stock market than most. It is predicated on two assumptions:
1. Nothing is overvalued today with the 10-year U.S. Treasury at 3.9%. Going forward, I think short-term interest rates will drop and long-term rates will rise as long-term bond prices will fall.
2. We are headed towards a fiscal disaster in our country. There is no one focusing on our national debt creation and growth.” See the chart below.
“No political party is talking about this because neither party has strong leaders. The growth rate of our debt far exceeds the growth of the economy. No one knows when this will hit but ultimately this will be a major problem.”
Looking at the chart, it appears our national debt was OK through President Clinton and the Republican congress at that time, and we were OK through President George W. Bush’s administration (still under $10 trillion at the end of 2008). But Presidents Obama, Trump and Biden have spent money like drunken sailors (now $35 trillion) – and my apologies to all drunken sailors.
“Looking at past overvalued stock markets, the current magnificent seven stocks are much stronger companies than the ‘nifty fifty’ stocks of 1972. In 1972 remember this was a time of excessive stock prices (think Kodak and Polaroid) while the 10-year Treasury was at 6.5%”
“Currently I have a lot of my money in the energy sector due to the instability of the Middle East.”
Stock Market Valuation
John Stoltzfus
Stoltzfus is a managing director and Chief Investment Strategist at Oppenheimer Asset Management Inc. in New York City.
On August 15, Stoltzfus said, “In December 2023 we came into this year with a 2024 year-end target of 5,200 for the S&P 500 Index. Then we raised it to 5,500. When the market broke through 5,500, we raised it in July to 5,900. We held this target during the recent stock market pull back. We are comfortable at this point with the 5,900 target with the prospects of a soft landing or perhaps at worst, a bumpy landing.”
“Essentially things are looking good. Today we have resiliency with the consumer and resiliency with corporate earnings. If you look at the S&P 500 Index, five of eleven sectors have double digit (10% or more) earnings growth this year. Currently cyclical stocks are outperforming defensive stocks. Three of our top sectors are consumer discretionary, information technology and industrials.
The S&P 500 Index closed on August 30 at 5,648.40
Monthly Performance of the S&P 500 Index
Recommended Action for Your Stock Portfolio
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 CNBC on August 19, “We have lowered the risk of a US recession in the next 12 months from 25% to 20%.”
“Retail sales are up 0.7% and initial unemployment claims were very encouraging. Our analysis led us to lower the risk of a near-term recession. If the August employment report is OK or better, we will probably reduce the risk to 15%.”
“My overall view is the consumer is hanging in there. I’m basing that not just on the positive retail sales data, but also on the corporate second-quarter earnings data where the overall message from companies was still good.”
So, what should the typical investor do now? With a lower risk of a near-term recession, it's time to reinvest money that was previously taken out of the stock market due to economic uncertainties and to put it back in the market with an eye toward staying highly diversified with low annual costs.
·Not FDIC Insured ·No Bank Guarantee ·May Lose Value
Why We Advocate the Permanent Elimination of All Family Debt
Why does Lorenz Financial and so many other advisors advocate the permanent elimination of bad debt and paying off the family’s fixed-rate mortgage on their primary residence prior to retirement? Remember all debt is BAD DEBT except a family’s fixed-rate mortgage on their primary residence.
As a family prepares for retirement, most now believe their spending will remain about the same compared to their working years. The notion that retirees will only spend 80% in retirement compared to their working years is now rejected by just about everyone.
We take the position of permanent debt elimination for the following reasons. In retirement the one expense that will continue to grow faster than inflation is medical care. So, you are now visiting your primary care physician once a year. Good for you! But as we age, there will be a point where we are visiting our doctor or a specialist weekly! We also believe medical deductions and co-payments are likely to continue to rise.
Grocery store inflation has been nearly out of control since the pandemic. All forms of insurance have had dramatic increases. As we age, we will be hiring more help around the house – grass cutting, snow shoveling, house cleaning, minor home maintenance, and pest control. And once a retiree stops driving, transportation costs might go up even after selling the family car and dropping car insurance. Think Uber.
Retirement financial planning needs to be carefully considered as expenses are not going to be decreasing in retirement. Therefore, there is no room in the family budget during retirement for a monthly mortgage payment, credit card payments or car payments. It’s time to make a personal and family commitment to permanently get out of debt.
Financial Markets Vocabulary
What are Target-Date Mutual Funds and Why Should They be Avoided?
Target-Date mutual funds are a professionally managed portfolio of stocks and bonds that every year or so automatically transfer a percent of stock market money into bonds as the investor moves closer and closer to retirement age. Target-Date mutual funds are a one size fits all. Today a whopping 64% of 401K money is in target date funds according to Vanguard.
Well, I recently saw a one-size-fits-all SUV made by that great Russian car company Lada. Just like the Model T, it only comes in black. Are you ready to buy yet? Going to the beach in early September, I have a one-size-fits-all swimsuit – one for you and one for your spouse. Are you building up your courage to pop the big question? I have an excellent one-size-fits-all engagement ring that is just perfect!
Mark’s sarcasm above clearly shows our disdain for these types of mutual funds. But what makes them so mediocre?
First is the consideration of risk or volatility. Are you a perfectly average investor? Probably not. Even if you are, does your target date fund have a declining stocks market allocation that exactly matches your tolerance for volatility from now until retirement? It is unlikely your risk tolerance matches the target date fund exactly. For example, why would a working 20-something-year-old have any money in bonds? The chances are a 2065 target date fund has at least 10% in bonds.
Second, is cost. Morningstar reports the average target date fund has an annual expense ratio of 0.68%. The Vanguard S&P 500 Index fund costs only 0.03% per year. Other similar funds also have low annual fees.
Third, is flexibility. Some investors will save a lot in their early working years. As their portfolio grows beyond their expectations, once they reach 50 or 55, they may choose to become much more conservative with their investments. Others will be just the opposite and will want to remain aggressive in their 40’s and 50’s possibly due to higher-than-expected medical expenses 10 years earlier.
The point is 90% of us are not average. We are either more conservative or more aggressive with our investments than what a target date fund offers. And of those using target date funds, how many even know the percent stocks and bonds their fund follows now and in the future?
We recommend investors discuss their specific situation with a low-cost Registered Investment Advisor so a portfolio that fits your style perfectly can be assembled.
- Not FDIC Insured · No Bank Guarantee · May Lose Value
HEROES OF THE MONTH
Josh Hawley
U.S. Senators Josh Hawley (R-MO) and Kirsten Gillibrand (D-NY) introduced the bipartisan Ban Stock Trading for Government Officials Act. The legislation would create stringent stock trading bans and disclosure requirements for Congress, senior executive branch officials, and their spouses and dependents. The bill bans stock trading, stock ownership and blind trusts, imposes heavy penalties for executive branch stock trading, and creates additional transparency in financial disclosures.
OK, Now What Do I Do?
What to Know About Real-Estate Commission Changes
The Wall Street Journal, page B6, August 15, 2024
For the past 30 years or so, a selling real estate agent has typically paid the buyer’s agent after closing. Usually, home sellers have agreed to pay their agents a certain amount, typically 5% to 6% of the selling price. The selling agent then splits this amount with the buyer’s agent.
Two main changes are happening now. First, listing in local databases called multiple-listing services will no longer show whether a seller is offering to pay a buyer’s agent or how much. Second, buyers will be required to sign an agreement specifying how much their agent will be paid – by the buyer! Buyers will be required to sign an agreement before starting to tour homes with agents.
Buyers still have the option to “go it alone” with no buyer’s agent. It all depends on how much time the buyer is willing to spend looking at many different homes that may or may not be in the buyer’s budget.
The main thing is to thoroughly read all real estate purchase agreements and commission agreements before signing. If in doubt, consult a real estate attorney before signing.
Our Financial Bad Boys This Month
Tax Court Rules Coca-Cola Owes $6 Billion
The Wall Street Journal, page B11, August 3-4, 2024
A U.S. Tax Court judge has ruled that Coca-Cola is on the hook for $2.7 billion, or about $6 billion including interest for under reporting corporate income in the U.S. in years 2007 thru 2009. This lawsuit began in 2015. The current ruling said Coke inappropriately transferred high profits to countries with low corporate tax rates. The country in question was previously reported as Egypt where Coke has practically zero assets but somehow this particular subsidiary ended up with massive profits.
A Coke spokesperson said, “The company looks forward to the opportunity to begin the appellate process and, as part of that process, will pay the agreed upon liability and interest.
The Bond Market
Commentary
Mohamed El-Erian
Mr. El-Erian is an Egyptian American economist and businessman. He is currently the President of Queens College, Cambridge, and the Chief Economic Adviser at Allianz. Mr. El-Erian has worked for The International Monetary Fund, Citigroup, PIMCO, and has served as a member of the faculty of the Harvard Business School.
On August 13, El-Erian said on CNBC, “I think there is a 50% chance of an economic soft landing, 35% chance of a recession and a 15% chance the economy will get bigger but not hotter. The latter could include some supply shocks that would allow us to maintain some growth without overheating the economy.”
“The stock market is expecting too much from the Fed. The Fed will start to lower short-term interest rates at their September meeting absolutely, by cutting interest rates 25 basis points.”
“Hopefully the Fed Chair will be very clear on three topics at the Jackson Hole Economic Symposium August 22 to 24.
1. What is the neutral interest rate. (The neutral rate is the Federal Funds interest rate at which current monetary policy is neither contractionary nor expansionary. Current thinking is the neutral rate is between 2.75% and 3.0%)
2. What does the Chair expect the journey to look like as we move from where we are now with the federal funds rate (5.25% to 5.50%) down to the neutral rate.
3. What does the Fed expect of the economy going forward.”
“This is what I hope for, but I do not expect the Chair to be this transparent. This lack of transparency will cause markets to continue to be volatile.”
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 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 keep up with, taxes and inflation.
PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS.
Pop Quiz Answer
What is the difference between the International Monetary Fund and the World Bank?
Answer: The International Monetary Fund (IMF) is an international financial agency affiliated with the United Nations with the goals of stabilization of foreign exchange rates, lowering of trade barriers, and correction of trade imbalances among countries. The IMF (not the Impossible Mission Force) was established in 1944 and works with countries much like a credit counselor works with individuals having financial difficulties.
The World Bank is also an international financial institution that provides loans and grants to the governments of low- and middle-income countries for the purpose of pursuing capital projects to help reduce poverty.