April 2016

Hopping Around; Going Nowhere

Despite a fair amount of movement up and down so far in 2016, the market does not seem to be experiencing any long-term movement. In fact, Jim Paulsen, the chief market strategist at Wells Capital Management, recently referred to this as "a bunny market" because it "hops around a bit but really doesn’t go anywhere."

At Peachtree Investment Partners, we agree with that basic assessment. We think that the markets are likely to remain basically flat this year if current realities continue. There are some things that could cause the bulls to start to run again -- corporate profits accelerating, which could cause confidence and expectations to rise, for example. And of course there is always the chance of some rogue event that could change things for well or ill. But we believe that by far the most likely scenario is a stagnant market.

That makes it even more important for investors to wring out every penny they can from their investments. And it highlights the potential downside of index funds. It is true that index funds can be cost-effective in terms of fees, but that is largely because the fund managers do no active management. The funds are designed to mirror an index. When the index goes up, investors' returns go up. But when the index does not go up, that is what happens to investors' money.

The most important way to make money in a flat market is through dividends. Dividends are separate from returns that are based on market movement. You get paid dividends whether the market is up or down. They can offset the effects of a flat or volatile market, and they also can help investors sleep better at night. And dividends continue to be strong: In the first quarter of 2016, Standard & Poor's 500 dividends were up 9.9% quarter over quarter, and 4.6% year over year.

Another approach is to invest in specific stocks. Even in a flat or down market, there are some stocks that do better than others. We believe that these are the stocks of companies that share some important characteristics:

  • They are large, established companies, which gives them the experience and the resources to weather many different kinds of markets.
  • They are professionally managed and have a track record of performing well across time.
  • They have good cash flow and good return on invested capital.
  • And, of course, they pay dividends.

These are the kinds of companies in which we invest at Peachtree. We believe that this approach offers the best protection against difficult markets. And while we can appreciate how cute bunnies are, we think that just hopping around and going nowhere is a waste of time -- and money.

Garry K. Schaefer
Atlanta, Georgia
April 13, 2016

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