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Chart Divergence in the Global Economy

One of the best ways to keep your hand on the pulse of the global economy is to look at the Global Manufacturing & Services PMI reports. The reports compile survey data from executives around the world in both goods-producing & non-goods producing industries. As you can see in the chart above, after both reports surged in 2017, there has been a strong divergence between the two over the last year and a half. While the service sector of the global economy has held up quite well, manufacturing growth has ground to a halt. The slowdown in global manufacturing has been driven by an overall slowdown in global demand and has been exacerbated by trade conflicts. While this is certainly something that we are keeping our eye on, the good news is that manufacturing only makes up a fourth of global economic activity, with services making up the difference. Therefore, although manufacturing will likely struggle moving forward, the global economy should be able to maintain a decent, albeit slower pace of growth.

It is easy to get wrapped up in the daily up and down minutia of the never-ending news cycle. However, examining the economy with the bigger picture in mind, not much has really changed. This economic expansion has consisted of very slow, somewhat anemic, growth. Stronger economic growth in 2018 was the exception, not the rule. However, it appears last year’s strength was only a pulling forward of economic activity, rather than a real expansion of demand. The current slowdown of activity is proof positive that the economy has not fundamentally shifted toward stronger growth. 

Chart Inflation
Federal Reserve Chairman Jerome Powell has repeatedly cited that the Fed’s goal is to have the domestic inflation rate run at or close to a 2% annual rate as measured by PCE (Personal Consumption Expenditures Price Index). Through the first half of 2018, the Fed’s goal was in sight which prompted a series of interest rate hikes which were supported by strong underlying economic data. However, in mid-2018 the PCE began moving sharply lower and away from the Fed’s stated benchmark. What is not as clear, is why the inflation data has changed directions so quickly. The economic data remains strong, consumers are still confident, and interest rates are still at relatively low levels. All of these observations would tell us that inflation should be moving upwards. However, as the chart suggests, inflation has moved lower which is one of the reasons—along with marginally softer economic data—that the Fed has backed off raising rates in the near term. The Allegiant Private Advisors team will be paying close attention to the inflation data as we move through 2019, to see if the present catalysts begin to drive the inflation data back towards the target range.

GDP Report 2019 First Quarter

Gross Domestic Product (GDP) grew by 3.2% in the first quarter, which was significantly higher than expectations of 2.3%. While the headline number is quite strong, the underlying details are in-line with our expectations for a slowdown in growth for the American economy this year. A buildup in inventories, a surge in net exports and growth in government spending accounted for over 2% of GDP growth during the quarter. All three of these factors are highly unlikely to be sustained moving forward and stripping them out, underlying growth was just 1.1% - the weakest growth in nearly six years. The weakness below the surface was driven by a sharp deceleration in spending by consumers and a slowdown in business investment. Consumer spending grew only 1.2%, which represents the second weakest spending growth since 2013. In sum, while many people are celebrating GDP growth ticking back over 3%, a deeper look reveals that the U.S. economy appears to have lost some momentum in early 2019.

Investing without foresight invites significant risk to client portfolios. As fiduciaries, we have an obligation to explore how current trends may impact our collective economic future, and in turn, how they may affect our investment strategy. Combining research with independent thinking leads us down exciting roads, and in our current environment, there are significant, sweeping developments that provide context for our approach.

Paul Cantor, CFA, AIF®, CFP®, a Principal and Chief Operating Officer at Allegiant Private Advisors, delves into investment strategy and "The Devolution of Globalization" in a new article for Financial Advisor Magazine. Click here to read more

APA Vorndran 3x4HI RGBAllegiant Private Advisors is pleased to announce that Paraplanner Kristina (KJ) Vorndran, CFP®, CRPC®, has earned the Chartered Retirement Planning Counselor® designation. 

The CRPC® program focuses on the entirety of the retirement planning process, encompassing pre-and post-retirement needs from sources of retirement income including personal savings and employer-sponsored retirement plans to income taxes, retirement cash flow, Medicare, asset management and estate planning. Individuals who hold the CRPC® designation must complete a course of study, pass an examination and adhere to standards of professional conduct.

Chart Growth Stocks vs Value Stocks
The chart above shows the relative performance of growth stocks compared to value stocks over ten-year periods dating back to 1937. The blue bars illustrate ten-year periods where value stocks outperformed growth, while the red bars indicate periods where growth stocks outpaced value. As you can see, value stocks have generally outperformed growth stocks – over 75% of the time to be exact. However, over the last ten years, growth has outperformed value by almost 4% per year – the second worst relative ten-year period for value stocks. While many investors and market commentators tout this as a reason to shift more money into growth stocks, we prefer to not let recent performance influence our expectations for market returns. So, while value investors may be kicking themselves right now, it is more than likely that over the long-run value stocks will continue to reward their shareholders with strong returns. 

Investments are subject to risk, including the loss of principal. Some investments are not suitable for all investors, and there is no guarantee that any investing goal will be met. Past performance is no guarantee of future results. Talk to your financial advisor before making any investing decisions.

Portfolio Manager Luke Nicholas, CFP®, CFAAPA Nicholas 3x4HI RGB, earned a promotion to Principal in January 2019, but even greater things are in store for him over the next year. We invite you to get to know Luke better, in his own words:

It is hard to believe that I am quickly approaching my six-year anniversary at Allegiant Private Advisors. I consider myself extremely blessed to have found a company with such an accomplished, close-knit team and incredible client base. While the financial industry is rife with sales-driven quotas and greed, I am proud to know that all of my co-workers and I come to work every day with only one thing in mind – providing top-level, fiduciary guidance for our clients. Before I dive into my time at Allegiant further, let me take a step back and tell you how I got here. 

Chart Construction Spending

Construction spending is a great indicator of the health of the underlying economy and therefore one that the team at Allegiant likes to track closely. The chart above shows the year-over-year growth rate of construction spending broken down in two main categories: residential and non-residential. Although the total construction spending (dotted line) growth is still positive, the growth rate has been declining for almost six years. The real drag on construction spending growth recently has been the residential segment (grey line), which turned negative on a year-over-year basis late last year. The housing market has been confronted with rising material and labor costs, along with rising interest rates – which have both hurt homebuyer affordability. While non-residential spending (gold line) has remained strong, largely driven by a recent surge in government-related spending, the drop off in residential housing is a concern. If in fact the declining spending is signifying a looming slowdown in the housing market, that could have a significant impact on the economy. Coupled with additional economic indicators, the construction data supports our narrative that economic growth is set to slow in 2019 after the one-time boost of the tax cut. 

The Allegiant Private Advisors team regularly helps guide our client families through many of the most crucial decisions in life, from purchasing a new business or preparing portfolios to support living life to its fullest, to the important duty of planning legacy gifts.

Many people wish to leave a gift to charity when they pass away. These legacy gifts are often outlined in a Will or Trust agreement. While this path works for many people, there may be a more tax-effective way to gift to charities after your death: naming them as the beneficiary of your IRA. This strategy can improve outcomes for all parties involved and can be especially attractive for those wishing to leave money to a mix of charities and family members, especially those in high tax rates.