Who’s right, consumers or businesses?
As it relates to the U.S. economy, consumers seem to feel optimistic
about it while businesses are hunkering 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!
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 clothing 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 Focus – Think About It…
“You don't want too
much fear in a market because people will be blinded to some very good buying
opportunities. You don't want too much complacency because people will be
blinded to some risk.”
--Ron Chernow, American
biographer
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