March 1, 2019
The Dow 30 handed investors their first weekly loss of the year, slipping -0.02% for the week. A weaker than expected U.S. manufacturing report and readings showing that the manufacturing sectors in both China and Europe were in contraction weighed on market sentiment heading into the Friday close. The tiny loss came despite a healthy U.S. Q4 2018 GDP report, which investors failed to give much credence to due to weakening signals abroad. The mood on the Street was flat this week, which was ultimately reflected in the market’s performance.
Trade Wars Take a Toll on Manufacturing
The U.S. manufacturing sector continued to hold its own in the on-going trade war battles. Unfortunately, Chinese and European manufacturers did not share the same fate as both saw their manufacturing sectors contract in February. In the U.S., the Institute for Supply Management (ISM) Index continued to expand, although at a slower rate than January. The index fell to 54.2 in February from 56.6 in January. Economists had forecasted the index to slip to 55.5 in February, so the actual reading was somewhat of a disappointment. Numbers above 50 indicate expansion, while numbers below 50 indicate contraction. Although new orders, production, and employment all decelerated during the month, they still remained in expansion. One of the more positive aspects of the U.S. report was that, despite the on-going trade war, new export orders and imports grew at a faster rate in February compared to the previous month. Overall, U.S. manufacturers’ business has remained resilient to the ongoing headwinds, with firms remaining optimistic for continued strong demand ahead according to the ISM’s survey.
While U.S. manufacturing held up in February, both Chinese and European manufacturing sectors fell into contraction. China’s Official Purchasing Manager’s (PMI) Index, which measures output at large companies and state-owned enterprise manufacturers, posted notable weakness. The Official PMI fell to 49.2 in February, down from 49.5 in January. That was the index’s third straight monthly drop, and its worst showing in three years. Within the report, new exports orders stood out as a significant concern, down for the ninth straight month. Despite the dismal reading, there appeared to be some bright news for Chinese manufacturers, total new orders – an indicator of future activity – edged back into expansionary territory, suggesting some improvement in domestic demand as China seeks to encourage lending among banks to boost the economy.
In Europe, manufacturers saw their sector contract for the first time since 2013. Eurozone PMI fell to 49.3 in February from 50.5 in January. Weakness in intermediate and investment goods more than offset growth in consumer goods. Considering the challenging trade environment, it was not surprising to see that export orders fell once again for a fifth consecutive month. On a country level, Germany – Europe’s biggest economic powerhouse – posted the worst performance, with their PMI falling to 47.6 from 49.7 in January. To pour salt on the wound, the outlook for the Eurozone does not appear to be getting any better. New orders remain in a downward trend, falling at a faster rate than output to a degree not seen in seven years. For all the headlines the U.S. and China have garnered on trade, European manufacturers appear to be suffering the most from the global trade spat, while having the Brexit deadline looming in March.
Q4 2018 GDP Beats Expectations, Investors Barely Blink
Q4 2018 GDP showed economic growth rising 2.60%, beating economist estimates of 2.20% growth. Results were driven by a 2.80% increase in consumer spending and non-residential investment, a proxy for business spending, which was up 6.20%. The reading on non-residential investment came despite a -4.20% decline in spending on structures. Spending on research and development (R&D) also proved strong during the quarter, up 9.90%. Higher spending on R&D is notable as it is often a good sign of future productivity growth. For all the handwringing by markets in the fourth quarter of 2018, the U.S. economy proved them wrong by instead showing resounding strength. Investors, however, seemed unimpressed by the nearly three-month-old news, choosing instead to focus on the less rosy, global manufacturing readings.
Early on Friday, it appeared the Dow 30 was headed towards its tenth consecutive winning week. That move was cut short, however, once the manufacturing numbers were released. The report highlighted the fact that manufacturers are finding themselves in increasingly difficult positions as the trade wars continue to drag on, but there were reasons for optimism following last week’s negotiations between the U.S. and China. The momentum from those talks persuaded the White House to delay a new round of tariffs on China that were set to take effect on March 1st, while both sides expressed optimism that a deal would ultimately get hammered out. The news comes at a crucial time for the global economy. Although the U.S. economy continues to stand strong, powered by domestic demand, investors realize that a prolonged decline in global economic conditions could ultimately weigh on U.S. economic conditions in the not too distant future.
The Week Ahead
Want to Know the Secret to Happiness? Choose Experiences over Things
We enjoy helping clients manage their financial assets to live the life they want, and as part of our holistic approach to wealth management, we regularly share the abundance of research surrounding the relationship between money, happiness, health, and longevity. Now that people are living longer and can expect to spend 20, 30, or more years in retirement, it’s more important than ever to understand these connections and how to utilize the assets we have generated to derive greater happiness and ensure we live long, healthy, fulfilling lives.
In recent years, there has been a tremendous shift in consumer spending with more people just like Betty choosing to spend their money on experiences with family and friends versus spending on material goods. A study by consulting firm McKinsey & Company revealed that personal-consumption expenditures (PCE) on experience-related services — such as attending spectator events, visiting amusement parks, eating at restaurants, and traveling — have grown more than 1.5 times faster than overall personal-consumption spending and nearly 4.0 times faster than expenditures on goods. PCE is the primary measure of consumer spending on goods and services in the U.S. economy. It accounts for about two-thirds of domestic final spending. What the McKinsey research showed is that the experience economy is booming. Ms. Cuniberti is a testament to that and seems to have known this secret long before the data revealed this rising trend.
Individuals who value experiences over material items are happier and more fulfilled. Psychologists explain that the excitement of a new purchase, such as a car or clothing, fades quickly, but the joy and memories of experiences, from epic adventures such as travel or zip lining (Betty did both on her 93rd birthday in Costa Rica) to meaningful encounters such as intimate dinner parties with people we care about, can last a lifetime. Furthermore, the positive emotions and memories we attach to experiences tend to grow and become even more cherished over time. Research by Cornell University proved this point. The Cornell research indicates that our experiences “are more open to positive reinterpretation, they tend to become more meaningful parts of one’s identity, and they do more to foster social relationships.” Time and time again, researchers have shown that shared experiences with friends and family enhance our enjoyment and have a deeper psychological link to long-term intrinsic happiness.
People who have more frequent social interactions not only live longer, but also live healthier lives and experience less stress, depression, and feelings of isolation. Researchers say that another way to use your money to maximize the happiness return on your financial investments is learning a new skill or hobby. The act of learning something new is proven to reduce stress and strengthen our brains by expanding neural pathways. Engaging in hobbies and activities can expand our social circles, too, which leads to even more shared experiences and stronger social networks.
Again, Betty seems to be one step ahead of the research and has been living these values her whole life. Betty grew up playing just about every sport in high school. In 1936, her softball team won the New York State Tournament, played in Madison Square Garden, and went on to Nationals. During World War II, Betty joined the Civil Air Patrol and learned to fly. When she was married, she and her new husband took a very non-traditional honeymoon: a five-week camping trip across the country from coast to coast, enjoying many of our nation’s breathtaking national parks along the way. Betty has always sought new skills, challenges, and activities. She has been a Scout leader, president of the Ohio Society of Professional Engineers Auxiliary, and was named Woman of the Year in 1963 by the Kiwanis Club in Columbus, OH. She has been a classic car aficionado and collector and attended car shows and tours nationwide. Betty has three children and seven grandchildren. She lives in Texas and continues to inspire everyone around her. Probity has been so grateful to have witnessed the extraordinary way Betty chooses to live her life, and we are thankful to be of service to so many generations of Cunibertis who share their matriarch’s passions and wisdom.
We hope you will join us in wishing Betty a very happy 100th birthday. Probity Advisors hopes all of our clients will maximize the happiness return on their financial investments. If we can be of service to you or your loved ones, please do not hesitate to contact us.
Important Disclosure: The information contained in this presentation is for informational purposes only. The content may contain statements or opinions related to financial matters but is not intended to constitute individualized investment advice as contemplated by the Investment Advisors Act of 1940, unless a written advisory agreement has been executed with the recipient. This information should not be regarded as an offer to sell or as a solicitation of an offer to buy any securities, futures, options, loans, investment products, or other financial products or services. The information contained in this presentation is based on data gathered from a variety of sources which we believe to be reliable. It is not guaranteed as to its accuracy, does not purport to be complete, and is not intended to be the sole basis for any investment decisions. All references made to investment or portfolio performance are based on historical data. Past performance may or may not accurately reflect future realized performance. Securities discussed in this report are not FDIC Insured, may lose value, and do not constitute a bank guarantee. Investors should carefully consider their personal financial picture, in consultation with their investment advisor, prior to engaging in any investment action discussed in this report. This report may be used in one on one discussions between clients (or potential clients) and their investment advisor representative, but it is not intended for third-party or unauthorized redistribution. The research and opinions expressed herein are time sensitive in nature and may change without additional notice.