January 2019

Facing Market Fears With Economic Facts

There is no doubt that the last year, especially the last half, was tough for the stock market. Many investors are feeling jittery. But it is important to differentiate between short-term drops and increases – even when those individual drops and increases are large – and long-term market outlooks. If you are worried about what will happen with your portfolio this year, it can be helpful to look at some facts.

Of course no one can predict with certainty how the market will perform. However, the economics that underlie the markets are mostly positive at the moment. For example:

  • The most-recent inflation rate available from the U.S. Department of Labor was 1.9 percent for the 12 months ending December 2018. This inflation rate is not excessive and should not trigger significant action on the part of the Federal Reserve.
  • GDP growth was 3.4 percent in the third quarter of 2018. That was down from the 4.2 percent growth in the second quarter, but still higher than any quarter since third-quarter 2014.
  • Corporate earnings, while not as strong as they were, especially in the first half of last year, are still positive.
  • Unemployment is extremely low, and job growth is strong.
  • Holiday spending, often seen as an indicator of consumer confidence, is predicted to be 5 percent higher for 2018 than it was in 2017.

So why did the markets drop so much last year, and could it happen again?

First, it is important to note that the 20 percent-plus market increase in 2017 was an anomaly on the upside. The historic annual increase in stocks since 1926 has been a little more than 10 percent a year, so 2017 was more than twice that increase. For that to continue would require significant changes in the economic factors underpinning stock performance – which did not happen.

In addition, in the wake of the tax legislation, many companies used their tax windfall to buy back their own stock, which drove up 2017 stock prices. Those buybacks have largely ended.

It also is true that markets don't like uncertainty, and there has been a lot of uncertainty. In the U.S., that uncertainty involves the impact of factors such as the incoming Democratic House majority, the Mueller and related investigations, the border-wall funding that triggered a government shutdown, and trade disputes, especially with China. Worldwide, there is uncertainty surrounding Brexit and government movements in Europe and elsewhere.

All these factors seem to have hurt the confidence of investors, who were riding high on the second-longest bull market in history. But at Peachtree Investment Partners, we believe that investing is not so much about confidence as it is about making sensible decisions for the long haul.

We believe that the best protection against market volatility is to build portfolios using mostly big U.S. companies that have a long history of good cash flow and return on investment capital, and a consistent record of growth in revenue and earnings. We also strongly favor companies that pay dividends, because reinvested dividends can contribute substantially to long-term returns. They also can help to mitigate volatility because returns are not based solely on movement of stock prices.

History shows us time and time again that it is virtually impossible to time the market; people who do almost always end up getting out too late to avoid at least part of the drop and then getting back in too late to benefit from all of the rebound. Understand the return you need and the risk you are willing to assume to get it. Then, stay the course.

Garry K. Schaefer
Atlanta, Georgia
January 22, 2018

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