Strong U.S. Data Bests China
November 2nd, 2018
Markets rebounded this week, boosted by strong corporate earnings results from Starbucks, Molson Coors, and DowDuPont. Also giving the Dow a shot in the arm was news the U.S would resume trade talks with China later this month at the G-20 summit in Argentina. On the economic front, we saw strong reports on nonfarm payrolls and manufacturing, providing further support of healthy U.S. economic momentum. In international news, China released figures on manufacturing which showed factories struggled to expand in October as the U.S.-China trade war drags on. With investors feeling optimistic on the economy, corporate earnings, and trade, the Dow added 2.36% for the week.
Job Growth Surges in October
The U.S. economy added 250,000 jobs to the payrolls in October, up from a downwardly revised 118,000 jobs added in September. Meanwhile, the unemployment rate held steady at 3.70%. Job growth was broad-based with education and healthcare +44,000, professional and businesses services +35,000, manufacturing +32,000, construction +30,000, transportation and warehousing +24,800. The much-followed wage growth number posted a 3.10% year-over-year gain, its fastest increase in nearly a decade. The month’s jump in wages shouldn’t prompt concerns of a broad jump in inflation that would prompt more aggressive Fed tightening, however. The year-over-year numbers are clouded by last year’s Hurricane Harvey which lead to an unusual drop in wages in October last year. The storm prompted lower-paid workers to drop off the payrolls, leading to a drop in wages a year ago. With workers back on the job, those wage losses have now reversed. Excluding October’s wage gains, workers have seen a modest boost in their paychecks, with wage growth up an average of 2.70% this year. The strong jobs market, combined with robust wage growth, is expected to keep the Fed on track to hike interest rates next month.
U.S. Manufacturing Continues to Expand
Despite the on-going trade war with China, U.S. manufacturing continued to expand in October. The Institute for Supply Management Index registered 57.7, down slightly from September’s 59.8. Despite the drop, manufacturing remains well above 50 which indicates expansion in the manufacturing sector, while numbers below 50 indicate contraction. New orders remained moderately strong but did manage to slip to 57.4 in October from 61.8 in September. Employment in manufacturing continued to expand, dipping slightly to 56.8 in October from 58.8 the prior month. The most notable weakness was in new export orders which fell from 56.8 in September to 52.2 in October as U.S. exporters became subject to retaliatory tariffs. While the export component was weak, U.S. manufacturing more generally has held up fairly well, supported by robust domestic demand.
Chinese Factory Floors Struggle
It was another tough month for Chinese manufacturers, with China’s Official Manufacturing Purchasing Managers’ Index (PMI), which focuses on large companies and state-owned enterprises, falling to 50.2 in October, down from 50.8 in September. The reading shows the manufacturing sector barely expanded in October as U.S. tariffs continued to take their toll. New export orders contracted for the fifth straight month as the latest round of U.S. tariffs went into effect. Meanwhile, the private survey by Caixin & IHS Markit, which focuses on small and medium-sized businesses, posted similar results. The index ticked up slightly to 50.1 in October, up from September’s 50.0. The sub-index for new orders rose slightly to 50.4 from 50.1 in September. Meanwhile, new export orders, which are an indicator for future activity, continued to contract, registering 48.8 in October, a slight improvement from September’s 47.6 reading in September. The PMI reading shows that U.S. tariffs along with otherwise lackluster global growth are having a bruising impact on China.
Strong corporate earnings reports, healthy jobs and manufacturing numbers, and optimism for a China trade deal combined to turn investor sentiment positive this week. Markets grew more optimistic on a China trade deal on Thursday as initial reports signaled a more formal trade plan may be in the works. Unfortunately, the optimism proved unfounded when on Friday the White House clarified that trade talks could not resume until Beijing outlines specifics on how it intends to comply with U.S. demands. The news prompted traders to take gains off the table after an otherwise strong week. As we’ve seen in recent weeks, China remains a big driver of investor sentiment as the U.S.-China trade dispute grinds on. Nevertheless, the U.S. economy continues to hum along with companies remaining confident enough on the business outlook that they continue to add to their payrolls and businesses continue to see healthy customer demand. The next big test for the market comes next week at the Federal Reserve holds its Federal Open Market Committee (FOMC) meeting. Interest rates have been the other driver of sentiment for investors and, while a hike is not expected this go-round, traders will be parsing the Fed’s statement carefully.
The Week Ahead
Year-End Financial Planning Strategies
As the end of the year approaches and with the changes implemented as a result of the Tax Cuts and Jobs Act, there are a few year-end financial planning strategies you may want to discuss with your advisor. These include:
- Health Savings Accounts. Millions of Americans are eligible to contribute to a health savings account, but not everyone takes advantage of its benefits. An HSA allows people with certain types of health insurance plans, generally high deductible plans, to save for medical expenses. Money in an HSA can be invested similar to a 401k, and contributions are tax deductible. Furthermore, withdrawals, including any investment gains, are tax free when used for qualifying medical expenses. Unlike a Flexible Spending Account, funds in an HSA can be carried forward year after year. Individuals who qualify for an HSA can contribute as much as $3,450 to a HSA in 2018, or $6,850 for families. Individuals who are 55 or older can contribute an additional $1,000 as a catch-up contribution. These benefits make it an attractive option for individuals who qualify to help save for medical expenses either in the current year or for health care costs in retirement.
Charitable donations. The Tax Cuts and Jobs Act (TCJA) signed by President Trump in December 2017 implemented some changes to the nature of tax deduction for charitable donations. If you intend to make charitable contributions before the end of the year, you should discuss with your advisor which strategies may be optimal for you.
- Charitable donations. The Tax Cuts and Jobs Act (TCJA) signed by President Trump in December 2017 implemented some changes to the nature of tax deduction for charitable donations. If you intend to make charitable contributions before the end of the year, you should discuss with your advisor which strategies may be optimal for you.
For background, the IRS offers taxpayers two options for reducing their taxable income: (1) the standard deduction, or (2) the itemized deduction. The standard deduction is a fixed dollar amount that depends on the taxpayer’s age and filing status (i.e. single, head of household, married filing jointly, etc.). Itemizing deductions allows taxpayers to deduct home mortgage interest, real estate and personal property taxes, state and local income taxes or sales taxes (but not both), charitable gifts, unreimbursed medical and dental expenses, and other expenses. Naturally, most taxpayers choose the deduction that gives them the biggest tax break. In order to itemize, taxpayers need their combined itemized expenses to the tax year to be greater than their standard deduction amount.
Under the TCJA, the standard deduction for 2018 nearly doubles the 2017 amount, increasing the deduction to $12,000 for individuals, $18,000 for heads of household, and $24,000 for married couples filing jointly. Prior to the TJCA, the standard deduction was $6,350 for single filers, $9,350 for those filing as head of household, and $12,700 for joint filers.
As mentioned, the TCJA doesn’t change the basic rules for charitable deductions. However, because the law nearly doubled the standard deduction, fewer people will itemize deductions – and you can only deduct charitable contributions if you itemize. The Tax Policy Center estimates that the law cut the number of itemizers from 46 million to 19 million.
- Charitable stacking, bunching, or lumping is a giving strategy you may want to discuss with your advisor. This strategy could help taxpayers surpass the new standard deduction and itemize. A married couple who claims the maximum $10,000 in deductions for property and state income taxes and also paid $6,000 in mortgage interest will need at least $8,000 of charitable gifts in order to surpass the $24,000 standard deduction limit. Instead of giving $4,000 per year annually to a charity, the couple could bunch those planned donations and give $8,000 in one year, taking them above the new $24,000 standard deduction.
- Qualified Charitable Distributions (QCD): If you are subject to required minimum distributions (RMDs), and if you do not need your RMD for living expenses, you may want to consider a QCD. A QCD is an IRS provision that allows tax payers to donate IRA withdrawals up to $100,000 annually directly to a charity without paying income tax. It is one giving strategy that helps individuals who qualify fulfill their RMD obligation while reducing taxable income.
If you have any questions about year-end financial planning, please do not hesitate to contact one of our advisors.