In Investing, Fundamentals Trump Politics
More than two months into the Trump presidency, its effect on the markets remains unclear. After a brief dip right after the election, the Dow Jones Industrial Average started a climb that topped out at a record-breaking close of 21,115 on March 1. Most market watchers gave at least some of the credit for the rise to optimism on the part of companies and investors about the new president's commitment to reducing regulations, cutting taxes and otherwise enacting a business-friendly agenda.
However, markets pulled back somewhat as it appeared the president's agenda was having trouble gaining traction. The failure to pass a health care bill, despite GOP control of both houses of Congress and the White House, seemed to make investors skittish about the chances of passage for other priorities such as tax and regulation reform. On March 27, the Dow was down for an eighth straight trading day -- its longest losing streak since July 21 through Aug. 2, 2011. But then, on March 28, the Dow rose more than 150 points. And so it has continued since then -- up and down.
The point is that no one knows what will happen in Washington or in the markets in the coming months. Experts and amateurs alike can speculate, but if it were possible to know for certain, we would all be millionaires.
At Peachtree Investment Partners, we think it is important to understand what factors move markets over the long term, and what ones are less likely to do so. Long-term, markets move on earnings and the expectation of earnings. Look, for example, at earnings during the so-called Trump Bump.
During the fourth quarter of 2016, Standard & Poor's 500 earnings were better than many observers expected. According to Factset, that quarter was the first time the S&P saw year-over-year growth in earnings for two consecutive quarters since the fourth quarter of 2014 and the first quarter of 2015.
Also according to Factset, strong earnings are expected for the first-quarter 2017. Factset estimates that S&P earnings growth rate for the quarter will be 9.1 percent. If that estimate proves true, it will be the highest year-over-year earnings growth for the S&P since the fourth quarter of 2011.
So in other words, the "Trump Bump" was also an earnings bump. Of course, geopolitical events can have an effect on markets. But long-term, markets move on financial expectations and realities.
Just as it is important to understand what does and does not have a lasting impact on markets, it is also important to acknowledge what investors can and cannot control. As an investor, your control over politics is very limited: You vote, you might contribute to a campaign or work as a volunteer. But that's about it.
What you can control, though, is the approach you take to investing. At Peachtree, we believe that the best way to chart a long-term financial course is to focus on well-financed, well-run American companies that have a track record of success, good management and a competitive advantage. We like companies that consistently report good return on invested capital and good growth.
And most of all, we like companies that pay a dividend. Dividends can help you avoid some volatility in the market, and they also can contribute significantly to your returns over time. Since 1929, almost half the market's returns have come from dividends.
Bottom line: We believe that the best approach is to have a well-thought-out plan designed to help you meet your goals – and then stick to that plan.
Garry K. Schaefer
Atlanta, Georgia
April 12, 2017
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