April 2019

Economic News Reinforces Long-Term Investment Strategy

The economic outlook is a mixed bag after the first quarter, with positive signs and a few things that are more concerning. Let's start with the positive signs.

The stock market continues strong. The Standard & Poor's 500 is up double digits for 2019, and stock prices are still reasonable. Unemployment is low, inflation is low, and GDP growth is positive. Corporate earnings are positive, although they are not as strong as they were in the first part of 2018.

However, there are things that are making some investors jumpy. GDP growth is positive, but the rate of growth is slowing, from 4.2 percent in the third quarter of 2018 to 3.4 percent in the fourth quarter of 2018 to 2.2 percent in the first quarter of 2019. There are several explanations for this slowdown, ranging from the historical fact that GDP growth varies from quarter to quarter to concerns about the impact of trade disputes with China and other countries.

The U.S. is facing record budget deficits, which puts a strain on the Treasury. The administration’s plans for addressing those deficits include deep budget cuts, including to Medicare, Medicaid and Social Security – ideas that are likely to be wildly unpopular with voters and therefore with Congress. Whether a more palatable approach will be forthcoming remains to be seen. If the deficit issue is not addressed, it could have a negative effect on the economy.

There are unusual pressures on some important economic sectors. The devastating flooding in the Plains, coupled with the tariffs, have been a significant blow to the agricultural sector and to the industries that support it. And the current effort to eliminate the Affordable Care Act could send ripples throughout the health care industry, which is a major contributor to GDP growth.

There is uncertainty and unrest internationally, ranging from Brexit to trade negotiations with China to the stop-and-go negotiations with North Korea to the crisis in Venezuela and more. The U.S. economy is part of the global economy, so what happens abroad affects what happens here.

Partly because of issues like these, the financial press seems to be carrying more negative stories than usual. Should this prompt a change in our investment approach?

The short answer is no. At Peachtree Investment Partners, we believe in controlling what we can control and in investing for the long haul. Perhaps there is a recession on the horizon, but perhaps there is another growth spurt. As investors, we can't do much to influence that. But we can act to protect our investment.

We think the best approach is to build portfolios using mostly big U.S. companies that have recorded good cash flow and return on investment capital, and that have a lengthy and consistent record of growth in revenue and earnings. We also strongly favor companies that pay dividends. Historically, reinvested dividends have contributed substantially to long-term returns.

We believe that this approach helps to balance risk and return, especially in uncertain markets. It focuses on companies that should be better-positioned to weather economic storms, and its emphasis on dividends means that your return does not depend solely on stock price.

Garry K. Schaefer
Atlanta, Georgia
April 29, 2019

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