January 2017

The Markets and the New Administration

As we near the inauguration of President-elect Donald Trump, there seems to be a kind of underlying nervousness among many investors. This is not unusual; investors are often concerned about how the markets will adapt to a new administration. But it could be more profound than usual this time around.

If we learned nothing else from the November election, we learned that no one knows what is going to happen until it actually happens. That was true with the election results, and it is true with the question of how the markets will react. However, it is helpful to consider what we do know:

First, markets rise on the reality of earnings and the optimism that accompanies the expectation of continuing earnings. At the moment, several large U.S. companies are reporting strong earnings and optimism about their earnings going forward. For example, earlier this month GM raised its earnings outlook for 2017, and they are a good barometer for large industrials.

Those and similar results are good signs that the economy, and the markets, are strong and healthy. They also are signs that the global economy is stabilizing and improving. And as always, the U.S. economy and U.S. markets remain the most-watched and most-respected in the world.

But many questions remain. For example:

In general, we would expect a government featuring a Republican president, Senate and House to be friendly to business, because it is likely to mean less regulation and lower corporate taxes. At the same time, though, interest rates are likely to continue to rise slowly, which could affect capital expenditures.

Also, it is important to acknowledge that Trump is not a run-of-the-mill Republican -- or a run-of-the mill president. Unlike virtually all previous presidents, he has never held elective office, so he has no track record of governing. The policies and plans he espoused during the campaign and since the election often have been short on details and sometimes contradictory. In addition, he seems at odds with his own party on many issues, which adds another layer of uncertainty about what the administration will do and what effect that will have. For example, as the president and Republicans wrestle with when and how to repeal and replace the Affordable Care Act, health insurers and hospitals warn about potential financial fallout in those industries if the ACA is repealed without at least the framework of a replacement.

And there seems to be growing concern that the start of the Trump presidency will be mired in controversy and infighting – between Trump and Congress, between Democrats and Republicans, and between factions within the parties. If this infighting becomes severe, it could affect what the new administration is able to accomplish, especially during the so-called honeymoon period, before people start positioning themselves for the midterm elections. This also could contribute to uncertainty -- and the markets traditionally don’t like uncertainty.

So we don’t know exactly what will happen once the new president takes office. But at Peachtree Investment Partners, we believe that the best investment approach, especially during transitional times, is to focus on large, well-financed and well-run American companies that are leaders in their segments. We also believe in investing in stocks that pay dividends. Dividends can help ease the impact of market volatility on your portfolio by providing you with returns that are not directly related to market movement.

Meanwhile, we offer our best wishes to the new president and Congress.

Garry K. Schaefer
Atlanta, Georgia
January 18, 2017

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