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July 2017

Markets Digest Good News, Bad News

There is a lot of news these days, but the markets don't seem to be paying much attention. The big jumps that followed the election have mostly leveled off, at least for the moment. Instead, the markets seem focused on the kind of data that drives economic rather than political fortunes. And that data is largely mixed.

On the plus side, analysts predict that second-quarter earnings will be up 9% year over year. Markets move on earnings and expectation of earnings, so this is a very positive data point.

Oil prices continue to be under pressure, which helps to keep costs down for many companies – in turn adding to the potential for greater earnings.

Inflation remains subdued, despite increases in employment. However, this is not completely positive. It suggests, and other data supports, that consumer spending is still lagging – which is not necessarily good news for an economy whose largest driver is consumer spending.

At the same time, the U.S. banks passed their annual stress test. This means there will be money for companies to invest in growth and for individuals to invest in companies. If the banks are healthy, that is good news for the economy – and for stocks.

And finally, the U.S. real gross domestic product is accelerating to 3% year over year, and European economies also continue to rebound.

However, some of the data is less optimistic. For example, valuations are extremely high, meaning that some stocks might be overvalued. According to Factset Earnings Insight from July 14, the second-quarter blended earnings growth rate for the Standard & Poor's 500 is 6.8%, and the forward 12-month P/E ratio is 17.6. This P/E ratio is above both the five-year and the 10-year average.

Also, the Federal Reserve is in the process of tightening, and demand for loans remains weak. This suggests that companies and individuals might be putting off plans for expansion or major purchases.

And finally, there is the unknown threat from North Korea. This has the potential to be the kind of geopolitical situation that can make markets jumpy. Although so far there has been little market reaction, the fact that North Korea is unpredictable and has increasing capabilities to cause significant destruction and unrest worldwide makes this a threat that investors – and everyone else – cannot take lightly.

At Peachtree Investment Partners, we believe that the best approach in times of uncertain and contradictory data is the same approach we take in all investing environments: a focus on fundamentals and the long term. We choose stocks of companies with a history of reliable performance and strong competitive advantages, because we believe those companies are best positioned to weather whatever the market does.

We also prefer stocks that pay dividends. Dividends provide investors with a regular income stream, thus acting as a kind of hedge against market volatility. And, since 1929, almost half the stock market's total returns have come from dividends. Dividends pay you.

We believe this focus on the long term, on quality and on dividends serves our clients' interests best in almost all market cycles.