July 2016

Worrying About the Wrong Things?

Most investors worry about the impact that certain events might have on the movement of the markets. However, the things many investors choose to worry about are often not likely to have any serious long-term effect.

For example: Before the vote calling on Britain to exit the European Union, many investors -- and financial commentators -- expressed grave concern about the vote's effect on markets. In fact, in the few days after Britain voted to withdraw from the EU, U.S. and global markets fell precipitously. However, after a fairly brief period of confusion and unrest, markets began to return to normal -- although of course the Brexit vote could still have a negative impact on markets as the repercussions continue to be felt.

A common concern, especially in the U.S., was that the outcome of the vote would negatively affect U.S. trade with Britain. However, trade between the U.S. and the U.K. existed long before the European Union; it is not dependent on the EU. In addition, while trade with the U.K. is significant, Britain is not one of the top U.S. trading partners. According to the U.S. government, U.S. trade with the U.K. in 2015 totaled $114.2 billion. In contrast, U.S. trade with China totaled $598.1 billion. Last year, China accounted for 16% of all U.S. trade, while the U.K. accounted for only 3%.

Another issue that worries many investors is the outcome of the U.S. presidential race. How will a victory by either Donald Trump or Hillary Clinton affect the markets? History strongly suggests that the markets will react to the election results, but any response is likely to be relatively short-term. After all, the markets have been adjusting to changes in presidential power for a very long time.

At its most basic, stock market performance is a measure of the financial performance -- and the expected financial performance -- of the companies that make up the market. So while outside events can and do affect the financial performance of a company, a group of companies or the market as a whole, that effect is usually tempered.

What does drive market performance?

There are several economic factors that can have a significant impact on markets. One is return on invested capital, which is a measure of how efficiently a company uses its available capital to generate returns for its shareholders. Good cash flow indicates that a company is financially healthy and is not holding too much debt. And consistent growth in revenue and earnings over time shows that a company is making money -- which it then can use to make more money, for itself and ultimately for its shareholders. Companies that have these characteristics usually increase in value.

At Peachtree Investment Partners, we believe that in most cases, the best indication of a company's financial health is whether that company pays a dividend. The ability to pay a dividend consistently over time suggests that a company is a good steward of its resources, that it is well-run and has a sustainable business model. There are no guarantees, of course, but we believe that dividends are strong evidence of a financially sound company.

Dividends also can help smooth out the ups and downs of a volatile market, since dividends are paid regardless of what the market is doing. And they can add significantly to your overall return. According to FactSet, S&P dividends -- including total dividends plus gross share buybacks -- totaled $280.2 billion at the end of the first quarter; this was the largest quarterly total in at least a decade. The trailing 12-month dividend yield at the end of the quarter was 2.1%. In contrast, the U.S. 10-year Treasury yield is around 1.6%.

At Peachtree, we understand that there are some things we and our investors cannot control; these include geopolitical events such as Britain's exit from the EU and the presidential election. Rather than worrying about those things, we focus on what we can control -- such as such as choosing strong, dividend-paying stocks.

Garry K. Schaefer
Atlanta, Georgia
July 12, 2016

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