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What’s Happening in the US Economy & Markets Right Now

October 03, 2019

With slowing global growth, it’s all about the US economy and market right now. Major economies in Europe and Asia as well as other developing economies are all either slowing, headed into recession or are in recession already. Most major stock indexes continue to trail the S&P 500 Index in price and total returns in US dollar terms.

The US is also the destination of choice for investment in the bond market. With over $14 trillion of bonds in Europe and Asia sporting negative yields, the US continues to offer more attractive yields for Treasuries, corporates, municipals and other bonds. Add in low-to-lower US inflation, as measured by the core Personal Consumption Expenditure Index (PCE) at a mere 1.77%, and US bonds look even more attractive.

But the US markets are not all milk and honey. Trade negotiations with various nations, including China, Japan, Canada and Mexico, still persist. While there have been glimmers of easing tensions, they continue to provide uncertainty.

And now, we are hearing discussions over indicators of business sentiment for both manufacturing and non-manufacturing.

Two Purchasing Managers’ Indexes (PMIs) for manufacturing were released this week, both of which showed drops over the past 12 months. You have been hearing about this as bad news for the economy, but I’m here to give you the inside scoop.

Markit Manufacturing (White) & ISM Manufacturing (Gold) PMIs—Source: Markit, ISM & Bloomberg Finance, L.P.

The ISM number came in at 47.80, which is below the neutral 50 level and suggests a slowing in manufacturing activities and expectations. But the Markit number came in at 51.10—above 50 and actually higher than the previous month, showing improving optimism.

The divergence comes from the fact that the ISM number has a greater focus on larger and more globally focused manufacturers that are being more impacted by global slowdowns or recessions. The Markit number is more focused on domestic companies.

This matches up with the reality that the US remains in growth mode while the world slumps, as I’ve been discussing in Profitable Investing.

But taking a step further back, manufacturing is a very small sector of the US economy and is dwarfed by services and non-manufacturing. We got a snapshot on these areas of the economy today.

Markit Services (White) & ISM Non-Manufacturing (Gold) PMIs—Source: Markit, ISM & Bloomberg Finance, L.P.

Both PMIs remain in positive territory (above 50), but they are lower today than where they were back in 2017 and 2018.

But another view directly on consumers also came in this morning from the Bloomberg Consumer Comfort Index.

Bloomberg Consumer Comfort Index—Source: Bloomberg Finance, L.P.

This shows an upturn to 62.00 for the latest weekly survey results, which includes lots of disconcerting news on the US economy, including the General Motors (GM) strike. This means that that the biggest component of the US economy—consumer spending—should remain for a while longer as a positive contribution and help the stock markets.

Of course, tomorrow we’ll get data on jobs and employment, which are projected to show improvements, but my analysis is pointing to a lower number.

All of this is painting a mixed picture for stock investors. But with many US-focused industries and companies faring better over their globally focused peers, I have continued to focus my recommendations on the US sectors for now.

Then we come to the credit markets. The US credit markets have been squeezed, which is causing some near-term challenges. But this is being finally addressed by the Federal Reserve as it resumes a form of Quantitative Easing (QE) by providing repo transactions daily amounting to $75 billion.

There have also been discussions of resumed longer-term bond buying. And in turn, US bonds are regaining in price. But a lot more is now riding on the next Federal Open Market Committee (FOMC) meeting later this month.

REITs & Utes

Real estate investment trusts (REITs) and utilities continue to deliver gains and have been holding up even on bad days for the general stock market. This has been the trend in past downturns as well, including during the fourth quarter of 2018. The dividend income remains attractive, with REITs adding the benefit of the 20% tax deduction from dividend income as part of the Tax Cuts & Jobs Act of 2017 (TCJA).

There are two utility investments to focus on this month. The indexed equity play on this sector is the Vanguard Utilities ETF (VPU). This ETF has returned 22.95% year to date and provides a yield of 2.74%.

The second is the individual utility, NextEra Energy (NEE). This utility has regulated power operations in Florida as well as unregulated wind and solar operations throughout North America. The stock has delivered a return of 32.07% year to date and yields 2.22%.

Bonds, Buy ‘Em

While there was the aforementioned glitch in liquidity in the credit markets, US bonds remain great performers for the year to date. In the Profitable Investing model portfolios, I have a collection of funds, individual preferred stocks, individual mini-corporate bonds and, of course, high-performing closed-end municipal bond funds.

In particular, focus your attention on the BlackRock Credit Allocation Income Trust (BTZ). This closed-end fund has a great collection of bonds, which has the fund’s stock price trading at a big 9.41% discount to the net asset value (NAV) of the bond portfolio. That’s currently a big bargain, and it yields 7.47%, making for another great buy.

All My Best,

Neil George
Editor, Dividend Digest & Profitable Investing