July 2013

Through the Looking-Glass

Observers of the financial markets in the last month or so must have felt a little like Alice in "Through the Looking-Glass" -- everything seems like the reverse of what it should be. More people find jobs? The markets fall. More people out of work? The markets rise.

One major issue, of course, was market jitters about the Fed potentially letting up on its quantitative easing program. The program was designed to help support the markets and the overall financial recovery, and the Fed has been clear from the start that the plan was to pull back and eventually to end the program when the economy was strong enough to continue the recovery without help. As a result, signs of the strengthening of the economy sparked a sell-off in the bond market that rippled throughout Wall Street. As The Wall Street Journal said on July 6, "The U.S. job market chalked up solid progress in June, bolstering evidence that the economy might be strong enough to grow with less help from the Federal Reserve and sending bond investors to sell."

Possible Fed tapering also caused significant volatility. In the 16 sessions starting May 22, when the Fed first started making noises about stepping back, the Dow totaled more than 2,800 points in swings. It finished lower on nine of those days, including three days with drops of at least 100 points and two days with drops of 200 points or more. It was up on seven days, including three jumps of 100 points or more and a 208-point jump. But at the end of that period, the Dow ended up almost where it started, with a net loss of only 1.4 percent.

So what should investors focus on as they review this quarter and look to the next?

First, the recovery seems to be picking up steam, and that should be good news for everyone. Recent jobs reports were more robust than anticipated, and home prices are rising. U.S. companies have seen record profits, and consumers are feeling more optimistic. The point to remember is that it is looking more and more like interest rates are increasing slowly and the Fed is pulling back on its efforts to support the economy because things actually are getting better.

Many U.S. stocks remain a good bargain for investors. Companies have strong balance sheets and are sitting on tons of cash. Consumers are more willing to spend money, and they have more money to spend. That suggests -- although it does not guarantee -- that U.S. companies will continue to see positive performance.

In comparison, fiscal problems persist in Europe, which also is hampered by the fact that addressing those issues requires the cooperation of a number of separate governments, some of which are fairly dysfunctional. Of course, the U.S. Congress is dysfunctional at times, too, but at least we are only dealing with one government.

In contrast to stocks, gold -- the darling of specialty investors who drove the price up to more than $1,800 an ounce last fall -- has fallen more than 30 percent. This is just additional evidence that, over time, the markets react to real value and reject manufactured value.

One major component of real value is dividends. At Peachtree Investment Partners, we believe strongly in what dividends add to a portfolio. They can help smooth out volatile patches, and they can add significantly to total returns. And dividends have been strong lately, reflecting the growing strength of the economy. In the second quarter, dividend increases totaled almost $18 billion.

So investors should keep focused on reality and not on the looking-glass world the markets can sometimes reflect. That way you won’t get trapped behind the mirror.

Garry K. Schaefer
Atlanta, Georgia
July 10, 2013

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