Bob’s Journal for 2/14/19

Investors should shift their focus from the United States to other economies, especially Europe.

Most investors have been complacent about Europe since the Greek debt crisis seemed to be resolved a few years ago. But there’s a lot more going on in Europe, and little of it is good.

The European economy has been weak the last several years. After the Greek debt crisis, economic growth never really took off, with the exceptions of Germany and a few other countries. The Brexit issue hovers over the European economy.

But Germany’s economy recently turned soft, joining many others. The Markit Purchasing Manager Indexes (PMI) for most countries are lower than they were 12 months ago. Germany’s PMI is down 11.4 and now is under 50. Measures above 50 indicate economic growth and measures below 50 indicate a contracting economy.

Other European countries with declines in their PMIs over the last 12 months include the Netherlands, Greece, the United Kingdom, Austria, Ireland, Spain and France. Italy’s PMI is down 11.5 points and now is 47.8.

The slowdown occurs when European interest rates already are among the lowest in the world and the European Central Bank (ECB) has used most of the stimulus tools it is legally allowed. In fact, the ECB has been planning to cease its stimulus.

Some analysts argue that much of the slowdown in Europe, especially in Germany, is due to a transition in auto manufacturing caused by new diesel car emission standards.

If true, some negative pressure on the economy will ease over time. But I don’t think the weakness can be attributed completely to the emission standards. The European economy has other weaknesses and will weaken further if growth in the United States and China continues to slow.

A looming major problem for Europe is Italy’s banking and debt imbalances.

Italy’s economy never really recovered from the financial crisis, and it has been contracting since about mid-2017. Because they are loaded with bad debts, Italy’s banks have reduced lending capacity. That further erodes economic growth.

Much of the bad debt is Italian government bonds. The country’s government is in a weak financial position. It is unable to improve its finances, and that reduces confidence in both government bonds and the banks. Interest rates on Italian government bonds are much higher than for other large European countries.

A bank run countrywide is a possibility if confidence in the government or its banks continues to weaken.

The situation is more critical than the Greece crisis of a few years ago. Italy is a much larger economy. A serious financial crisis in Italy would lead to a much larger dispute over what the ECB and other countries could do to help and likely would lead to a split of the European Monetary Union.

None of that is a certainty. It didn’t happen as a result of the Greece crisis. But investors need to be aware of the possibility and monitor events in Italy and Europe. It’s one reason we own some gold in our portfolios.

The Data

One reason the Fed paused its interest rate increases is the lack of inflation, and that continues in the latest inflation data.

In the last month, the Consumer Price Index was unchanged, and it increased only 1.6% over 12 months. Excluding food and energy, the index increased 0.2% for the month and 2.2% over 12 months.

The Producer Price Index declined 0.1% for the month and increased 2.0% over 12 months. Excluding food and energy, it increased 0.3% for the month and 2.5% over 12 months.

Small business owner optimism declined, according to the NFIB Small Business Optimism Index. The index declined to 101.2 from 104.4 last month. That is the largest one-month decline since June 2015 and the index’s lowest level since November 2016. That means the surge in the index following the election in 2016 is completely reversed. We’ll have to wait a few months to determine how much of this decline was based on the government shutdown and how much on other factors.

December’s retail sales weren’t good, according to the Census Bureau report. They declined 1.2% for the month and 1.8% after excluding autos. That’s the steepest monthly decline since September of 2009. Despite all the reports that online retailers are supplanting traditional retailers, non-store retail sales declined 3.9% for the month. Over 12 months, total retail sales increased only 2.3%.

New unemployment claims for the latest week increased 4,000 for a total of 239,000. The four-week average now is at its highest level in more than a year.

The labor market was strong in December, according to the JOLTS (Job Openings and Labor Turnover Survey) report. The number of job openings increased 3.1% for the month. Hiring increased, but only at a 1.6% rate. That means the gap between job openings and hires is at a new monthly record, 1.428 million. The gap between openings and the unemployed who are actively looking for work is at the second-highest level, 1.041 million. Over 12 months, job openings increased 29.4%, while hires increased only 7.1%.

The Markets

The S&P 500 gained 0.82% for the week ended with Wednesday’s close. The Dow Jones Industrial Average rose 0.76%. The Russell 2000 added 1.65%. The All-Country World Index (minus U.S. stocks) declined 0.86%. Emerging market equities lost 1.77%.

Long-term treasuries rose 0.06% for the week. Investment-grade bonds fell 0.11%. Treasury Inflation-Protected Securities (TIPS) lost 0.01%. High-yield bonds gained 0.02%.

The dollar rose 0.94%.

Energy-based commodities were unchanged for the week. Broader-based commodities declined 0.98%. Gold was unchanged.

Bob’s News & Updates

I’d love to hear how you’ve benefited from your Retirement Watch subscription. Do you have a Retirement Watch success story to share? Let me know by sending me an email at this address: CustomerService@RetirementWatch.com. Thanks!

The number of regular viewers for my Retirement Watch Spotlight Series continues to increase. You should sign up because I make in-depth presentations of key retirement finance topics. You can watch these online seminars from the comfort of your home or office at times you choose. To learn more about my new Spotlight Series, click here.

A recent five-star review of my book on Amazon.com said, “A complete retirement guide! One of the best books on this topic!” Click for more details about the revised edition of “The New Rules of Retirement.”

I’m a regular contributor to the Forbes.com blog. You can view my contributor page here.

Do your heirs know how to handle an inherited IRA? If not, they’ll join the long list of heirs who made simple mistakes that triggered additional taxes and penalties. To avoid this result, be sure your heirs have a copy of Bob Carlson’s Guide to Inheriting IRAs.

P.S. As a final reminder, I’d love to hear how you’ve benefited from your Retirement Watch subscription. Do you have a Retirement Watch success story to share? Let me know by sending me an email at this address: CustomerService@RetirementWatch.com.

Thanks!