July 2019

Market Rests on Three Solid Legs, But One is a Little Wobbly

Like a table, market performance rests primarily on four individual legs: profits, inflation, interest rates and psychology. If you are feeling a little jittery about the markets, it might help to take a look at each of these legs.

Profits. Profits have been a primary driver of this extraordinarily long bull market. And profits are still rising. Certainly the rise has slowed somewhat, which is not unusual after years of increase. As always, certain sectors or stocks are posting better profits than others, but the trend overall is still positive.

Interest rates. Consumer spending is the primary driver of the U.S. economy. Low interest rates make it easier for consumers to borrow money to buy things, ranging from houses to cars to appliances to big-screen TVs and more. When consumers either are making more money or can borrow money cheaply – or both – they generally buy more products. Low interest rates also make it easier for companies to borrow money, which they can use to expand, to introduce new products or to go after larger market share. Even though the Federal Reserve declined to lower rates at its June session, it has hinted that it might do so later this year. And regardless, interest rates are still relatively low.

Inflation. High inflation means your money can't buy as much, so people and companies can be reluctant to spend during periods of high inflation. On the other hand, sometimes they spend more freely because they think that inflation will continue to go up, eroding the purchasing power of their money even further. The Federal Reserve seeks to control inflation by raising or lowering interest rates. The Fed dropped interest rates to close to 0% after the Great Recession in order to stimulate the economy. As the economy has recovered, the Fed has raised rates slightly, but rates – and inflation – are still low by historical standards.

So three of the legs that support the economy appear to be stable. What about the fourth one?

Psychology is more subjective than the other three elements, but it is no less powerful. Things that occur outside the traditional market indicators can make investors feel more confident or more nervous than the objective realities of the market might suggest. And right now, psychology seems to be having a significant impact.

Part of it is just human nature: There has been a long period of market growth, and there is a natural tendency to worry about when it will end. In addition, markets don’t like uncertainty – cultural, economic or political. And there is a lot of uncertainty at the moment.

The U.S. and many other countries are experiencing significant cultural unrest, as the more-liberal, post-war governments and populations are facing a challenge from more nationalistic, farther-right factions. Economically, decades of relatively open trade are under attack. Tariffs the U.S. is enacting or threatening to enact have increased the prices on many items for consumers and on materials for manufacturers. At the same time, tariffs have helped to reduce or destabilize markets for some U.S. products. And there is political instability, as Democrats and Republicans increasingly seem unable to work together to govern, and the 2020 election is shaping up to be as divisive and volatile as 2016.

As always, it is impossible to predict what the market will do, and when. But there are some things you can do to help protect yourself against a market downturn. At Peachtree Investment Partners, we believe in buying stocks of large U.S. companies that have a proven record of strong cash flow and good management. We also believe in stocks that pay dividends. Reinvested dividends can increase your overall return, and they help to shield you against market volatility. Finally, we believe that investing with an eye on long-term goals can make it more likely that you will meet those goals.

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Garry K. Schaefer
Atlanta, Georgia
July 9, 2019

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