April 2013

Just What the Doctor Ordered

As chairman of the Federal Reserve, Ben Bernanke functions rather like a physician to the nation's economy. And by late 2008, his patient was on life support. The stock market was in a free fall, unemployment was shooting up, and the housing bubble had burst, taking with it a lot of the net worth of millions of ordinary Americans.

Bernanke's prescription seemed to be to do whatever he could to keep the economy alive and encourage recovery, and to hope that eventually factors he could not control would right themselves.

There have been signs, especially recently, that this treatment is working. In the last quarter, for example, we have seen evidence that the housing market is strengthening. A rebound in home prices allows homeowners to feel more positive about their financial situation overall and to feel free to spend more. In addition, an increase in home sales lessens the glut of existing homes, which gives impetus to the construction industry and to those companies that supply the construction industry with everything from earth movers to lumber to cabinet pulls.

According to a release last month by the U.S. departments of Commerce and Housing & Urban Development, new starts for privately owned housing were up about 0.8% in February over January -- and 27.7% over February 2012. As an indication that the trend will continue, building permits were up 4.6% in February over January, and a whopping 33.8% over February 2012. Employment also has been increasing, although the March numbers showed a worrisome hiccup.

The federal government allowed the sequester to take effect, but so far it seems to be having little impact on most people. Congress also voted to put off a battle over raising the debt ceiling until at least May. Meanwhile, all three sides -- Republicans, Democrats and the administration -- seem at least interested in discussing a "grand bargain" that would address issues such as reform of entitlement programs and the tax code. There is still a lot of posturing going on, but there are hopeful signs.

Abroad, things seem to have settled down somewhat in Europe. The banking flare-up in Cyprus last month appears to have been dealt with.

The markets have responded to this approach, with the Dow and the Standard & Poor's 500 continually flirting with record highs. At the end of the quarter, the Dow was up 11.2% and the S&P was up 9.5% on the year.

Companies continue to hold trillions of dollars in cash; many are still waiting to see the strength of the recovery and to weigh new regulations out of Washington before spending much on expansion. And earnings estimates are in the 7% to 8% range for both this year and next, which -- if those estimates are borne out -- would be unprecedented. Meanwhile, inflation remains low, which keeps interest rates low and allows the Federal Reserve to continue its quantitative easing program.

Of course, there are potential clouds on the horizon. The delicate semi-truce in Washington could fall apart, more trouble could break out in Europe, the North Korean threat is ominous, and young Americans have $1 trillion in student loan debt, which is keeping many young families from buying their first house or making other purchases.

But Ben Bernanke's patient seems to be out of the ICU and returning to a more normal state.

At Peachtree Investment Partners, we try to focus on the future -- which looks increasingly bright. We believe that the best approach remains to invest mainly in the stocks of large, established U.S. companies that have a pattern of growth and that pay a dividend. We believe that this philosophy served investors best when the economy was gasping for breath, and it will continue to serve investors well as the economy grows stronger.

Finally, our thoughts and prayers go out to the victims of the terrorist attack at the Boston Marathon, and to their families. At the same time, we are grateful for all the people who rushed to help the injured, without regard for their own safety. It is heartening to know that there are many more good people than evil ones.

Garry K. Schaefer
Atlanta, Georgia
April 23, 2013

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