Consumers or Business?

October
29

Written by: Jon McGraw

Who’s right, consumers or businesses?

As it relates to the U.S. economy, consumers seem to feel optimistic about it while businesses are continuing to hunker down.

This split showed up in last week’s release of the first estimate of third quarter gross domestic product (GDP), defined as the output of goods and services produced by labor and property located in the United States. The government said GDP grew a modest 2.0 percent. How we got to the 2.0 percent growth rate is where it gets interesting.

For background, GDP consists of 4 major components:

  1. Personal consumption expenditures
  2. Business investment
  3. Government spending
  4. Net exports of goods and services
    • Source: Department of Commerce

Of these four components, the first one – personal consumption expenditures – typically accounts for about 70 percent of the total. So, if consumers are optimistic and in a shopaholic mood, that bodes well for economic growth. And, in the third quarter, they were as consumer spending accounted for most of the 2.0 percent increase in GDP.

Businesses, on the other hand, were rather subdued. Capital spending actually declined in the third quarter as, “Slower world growth and worries about a budget crisis at home have spurred U.S. business to take a more cautious stance on hiring and investment,” according to MarketWatch.

Now, all we have to do is get businesses to drink the same Kool-Aid as consumers and we’ll be off to the races!


Data as of 10/26/12

1-Week

Y-T-D

1-Year

3-Year

5-Year

10-Year

Standard & Poor’s 500 (Domestic Stocks)

-1.5%

12.3%

13.7%

9.8%

-1.7%

4.7%

DJ Global ex US (Foreign Stocks)

-1.7

7.9

3.0

0.2

-7.0

7.2

10-year Treasury Note (Yield Only)

1.8

N/A

2.2

3.6

4.4

4.1

Gold (per ounce)

-1.2

9.0

0.1

17.6

17.1

18.5

DJ-UBS Commodity Index

-2.3

1.7

-2.9

1.9

-4.6

3.2

DJ Equity All REIT TR Index

-2.5

14.6

19.6

20.3

2.1

11.8

 

DO YOU PREFER TO BUY THINGS when they go on sale or do you prefer to pay full price? Now, before you snicker, consider that many people do prefer to pay full price. Why? Take clothing as an example. If you want to be trendy, you’ll likely pay full price since most clothing stores don’t put the latest fashions on sale.

Other folks, while still “fashion conscious,” prefer to wait until an item goes on sale so they can get it at a “bargain” price. And, chances are, if you’re patient, you can get that desired piece on sale as the store makes room for the next season’s clothes.

How people shop for clothes can be very instructive in how to invest successfully in the financial markets. Here are several comparisons to think about:

  1. Buy what’s on sale. Like clothing, investments occasionally drop to a point where they seem like a bargain. Just as smart shoppers like to buy clothes on sale, shrewd investors like to buy securities they believe are temporarily out of favor.
  2. Buy at full price. Well, maybe not. It’s fine to buy trendy clothes at full price because of the psychic rewards of being sharply dressed. But, investors should focus on making money, not on having bragging rights at the cocktail party about owning the latest high-flying, change-the-world Internet company.
  3. Buy only what you need. Consumer’s closets have limited space so most clothes shoppers have a limit on how many suits or coats they buy. Likewise, investors should buy only what they need to help meet their goals and objectives. Specifically, there’s no need to take extra risk if a lower-risk portfolio has a reasonable chance of helping you meet your goals.

Interestingly, investors often think very differently about how they approach buying clothes and making investments. With clothes, many people prefer to wait for a sale and are apt to buy more if they can get them at a deep discount. Conversely, when investments go “on sale,” meaning, their price has dropped, investors often shy away.

As an advisor, part of our job is to help make investing more like bargain shopping. We look for investments that are on sale, that meet your needs, and will last for more than one season. Unlike tie-dyed shirts, we think this type of investment strategy will never go out of style.

Weekly Fun – The Art of Finance Educational Series continues November 7, 2012

Every day at Buttonwood Financial Group we do what we do because of feedback from our clientele. The Buttonwood Art of Finance series was started the same way. When we hear requests for more information on a specific topic we go to work… 

Our next Art of Finance event features Richard Ong, CPA with the focus: Preparing for Post Election Tax Planning. For additional information / reservations please visit –> Butonwood Art of Finance page.