October 2018

Making Sense of Current Markets

If you have been an investor for more than a decade, you might be getting an unsettling sense of deja vu. This current bull market – one of the longest in history – has had relatively little volatility in its nine-year run. But recent weeks have been characterized by big gains followed by bigger, stomach-lurching drops. On last Friday morning the Standard & Poor's 500 Index was down 10 percent from its 52-week high, putting it at least temporarily into an official correction.

At times like these, it can be helpful to take a deep breath and a step back. Let's start by looking at some of the factors that are causing this volatility.

First, earnings are starting to slow down. The markets are driven largely by corporate earnings and the expectation of earnings, and as earnings slow down, the market can be expected to slow down. According to the ISI Group, a 1 percent change in real GDP translates into a 5 percent change in earnings for S&P 500 stocks. In other words, if the GDP falls 1 percent, S&P earnings can be expected to fall 5 percent. Lower earnings usually translate into lower stock prices.

But the GDP has had significant growth this year, including 4.2 percent annualized in the second quarter and 3.5 percent annualized this quarter. So shouldn’t stocks be up?

There are several indications that the growth is starting to slow. New home sales are down, and new car sales are down. Interest rates are rising, making it harder for companies and individuals to borrow money. Companies are starting to feel the effect of tariffs, which increase the cost of materials and, as other countries retaliate, decrease the market for American goods. International trade overall is slowing. Inflation is increasing, which means that there is pressure on wages because your money does not go as far as it used to go. And the U.S. dollar is very strong compared to other currencies, which makes American goods more expensive in other countries.

Finally, there has been a significant increase in electronic trading, which automatically triggers stock buying and selling when certain market or economic factors reach a predetermined point. This trading can cause major swings in the markets, often very close to closing, which can make investors especially nervous.

Other, non-market-related, factors also are making investors jittery. The midterm elections are almost here, with the possibility of significant changes in Washington. Add to that the general incivility on both sides, most recently evidenced by pipe bombs mailed to more than 10 political figures.

This looks like it could be the new reality, at least for a while. So what should you do to adjust?

First, consider the performance of your portfolio. Look at how much you are up or down not over the last few weeks but over the last year or the last five years. Remember that investing is a long-term endeavor, and over time, stocks have had significantly better cumulative returns than bonds or cash – although that is not a guarantee that the better performance will continue.

Of course, if you need your money during a market downturn, the long-term returns can become less important. And you do want to be able to sleep at night without worrying about what your money is doing.

At Peachtree Investment Partners, we believe in building portfolios based on established, large U.S. companies with strong management, exceptional business plans and good long-term return on investment. We believe these portfolios are best-positioned to withstand market volatility. But in the end, your investment strategy is up to you. I am happy to discuss your concerns and your investments with you at any time as together we navigate this challenging period.

Garry K. Schaefer
Atlanta, Georgia
October 18, 2018

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