July 2015

The Circle Game

It was 1970 when folksinger Joni Mitchell wrote about going "round and round and round in the circle game." That image seems to fit today's stock market. Every day seems to bring some kind of big news that threatens to send the markets into a tailspin or offers the hope of a huge rally. And yet, after all the ups and downs, it ends up more or less where it started.

Consider:

China's stock markets have been in what can almost be described as a free fall, losing about a quarter of their value -- which translates into trillions of dollars.

The U.S. Fed still has not decided when -- or how much -- to increase interest rates, but every hint from the Fed reverberates across the markets.

Greece refused to accept a bailout offer, raising the specter that it could fall into bankruptcy and be booted from the European Union.

But, on the other hand:

The European Union and Greece seemed to have worked out a deal that will keep Greece in the union. And even if this agreement falters, U.S. markets and investors have had time to adjust.

The Fed's inaction on raising rates is due mainly to the fact that there is virtually no sign of inflation. The economy continues to grow at a respectable pace. And while the markets are not repeating the successes of the last few years, neither are they slumping significantly: The S&P 500's first-half performance was the worst in five years, and yet the index remains well above 2000. Unemployment continues to decline. Bank loans are up, home and vehicle sales are up, and recent minimum wage increases at major companies such as Wal-Mart and IKEA could brighten the outlook for workers at the lower end of the economic spectrum. There are some negative signs: volatility, sluggish valuations and earnings. But it is important to remember that the U.S. economy overall has climbed out of the second-worst crisis in its history.

Despite the woes of the Chinese markets, there is relatively little exposure to those markets by U.S. investors. On the other hand, if the Chinese economy -- the second-largest in the world -- is seriously damaged, that will have repercussions on economies worldwide. The Chinese government is taking extraordinary steps to stop the slide, and there are some indications that things could be improving. But the China situation remains serious and worth watching.

Other things worth watching include a significant movement by investors out of equities and into bonds, fueled mostly by concerns about the uncertainties around the world. At the same time, mega-deals such as the insurance industry's ACE-Chubb and Aetna-Humana agreements offer opportunities for investors.

So in the end, it seems that all the big headlines have not had either an exceptionally negative or an exceptionally positive effect on the markets. We go round and round and end up back where we started.

At Peachtree Investment Partners, we believe that the best approach in times like these -- or in virtually any other time -- is to choose the stocks of strong, well-managed companies that pay a dividend. Many economists are noting that the theme of this recovery could be "slow but steady wins the race." We like to apply the same approach to individual investing.

Garry K. Schaefer
Atlanta, Georgia
July 14, 2015

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