January 2018

What to Make of the Market Surge

Just after the new year, the Dow Jones Industrial Average closed above 25,000. Then, on January 17, it closed above 26,000. Other market indices have recorded similar rises. So what’s going on?

Well, remember the story about the three blind men and the elephant? Each of the men was touching a different part of the elephant and so had a different opinion about the kind of animal it was. That's similar to how observers see the recent market surge.

Some believe that it is the continuing economic expansion that began after the economic collapse of 2008, with consumers spending more as their confidence returns. Others say it is the result of the more business-friendly policies of the Trump administration, especially the recent tax bill.

In the end, of course, it is probably some of both. BlackRock Chairman and CEO Larry Fink, quoted in Briefing.com, said, "Consumer demand and tax reform are driving the equity market higher."

But, as in the story of the blind men and the elephant, how you view the market rise does not change the fundamental truth: As they always have, markets move on profits and the expectation of profits.

At the moment, profits are extremely strong. According to the FactSet report on January 25, 24 percent of the Standard & Poor's 500 companies have reported earnings, and 81 percent of those companies reported sales above estimates. This is higher than the average over the past year (64 percent reported sales above mean estimates) and the past five years (56 percent). For the fourth quarter of 2017, the blended earnings growth rate for the S&P 500 is 12 percent, and all sectors report earnings growth for the quarter.

The possibility of continued growth also seems strong. Historically, consumer spending has been the main driver of U.S. economic growth. And consumers currently are in a spending mood.

Take, for example, the following recent news:

• Sales during the 2017 holiday season were up 5 percent from 2016, setting a new record for total dollars spent.

• Briefing.com reported on January 17 that Apple expects to invest more than $30 billion in capital expenditures in the U.S. and create more than 20,000 new jobs over the next five years. CNBC added that Apple plans to repatriate billions in cash it currently is holding overseas, and the company will contribute $350 billion to the U.S. economy over the next five years.

• An increasing list of companies have announced they will pay employee bonuses, raise employee pay or add benefits – or some combination of the three.

• Polls show that Americans are feeling more optimistic about the economy; a recent CNBC survey showed confidence at an all-time high. And if companies continue to raise wages and expand hiring, that optimism is likely to continue.

In addition, many retirees are finding that the recent stock market surge has boosted their retirement accounts a little more than they had planned, and therefore they might be willing to spend a little more, which also would help boost the economy.

Of course, as we all know, what goes up probably at some point will come down. That is why understanding and adhering to investing fundamentals are just as important during a bull market as they are during a market downturn – maybe even more so.

At Peachtree Investment Partners, we believe in taking a long-term, relatively conservative approach to investing. We focus on large, established companies, mostly in the U.S., that have a track record of strong leadership and sustained growth. We also believe strongly in companies that pay dividends. Reinvested dividends can significantly increase results over time, and they also can help smooth out market volatility.

These do seem to be halcyon days for investors, but the lessons of history tell us that these days will not last forever. At Peachtree, we believe it is prudent to remember that there are basic investing realities that apply – in good times and in difficult ones.

Garry K. Schaefer
Atlanta, Georgia
January 30, 2018

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