October 2017

Market Quietly Brings Good News as Bad News Grabs Our Attention

If you pay attention only to your favorite newspaper or news channel or news feed, you might be of the opinion that things are going to hell in a handbasket -- whatever political landscape you favor. In addition to national tragedies such as the mass shooting in Las Vegas and hurricanes in Texas, Florida and Puerto Rico, there are congressional battles, international saber rattling, Cabinet upheaval and arguments about NFL players either kneeling or not kneeling. It can seem there is a circus going on in Washington.

But investors would do well to avoid watching the clowns and the lions and the elephants, and keep their eyes on the market -- which has been steadily extending a strong bull market that already is in its ninth year and has hit record high after record high. Why doesn't the market seem rattled by the news?

First, in general, markets like gridlock in Washington. They would rather deal with the status quo than adjust to changes mandated by Congress. That is especially true when the traditionally business-friendly GOP is in power, because whatever Congress eventually does accomplish is likely to be pro-business. In the meantime, there are a raft of regulatory changes that companies are quietly embracing.

Business understands that political realities change, but financial realities are much less pliable. And those financial realities are largely favorable to business. Unemployment remains low, and the economy continues to grow, so much so that the Federal Reserve feels it can begin to allow interest rates to increase slowly.

Most importantly for stocks, though, are earnings. As of September 22, FactSet Earnings Insight reported that 43 Standard & Poor's 500 companies had issued positive guidance on earnings per share (EPS); this is significantly higher than the five-year average (27) since FactSet began tracking this in 2006. Also, 54 S&P 500 companies had issued positive revenue guidance for the third quarter, which is more than double that five-year average.

In an update on October 6, FactSet said that the third-quarter estimated earnings growth had fallen to 2.8 percent from 5 percent. But most of that decline --77 percent -- came from the insurance industry as a result of the massive hit it is taking in the wake of Hurricanes Harvey, Irma and Maria. As a result, that estimate revision represents an unusual series of natural disasters rather than a systemic change in economic factors. Overall, earnings are likely to remain strong in most sectors.

At Peachtree Investment Partners, we believe that what drives markets over time are earnings and the expectation of earnings. As a result, we favor creating portfolios made up mainly of large, U.S.-based companies that have a strong track record of good management and strong cash flow. We believe that when the circus folds up its tent -- or another circus comes to town -- those companies will remain the best choice for investors.

Garry K. Schaefer
Atlanta, Georgia
October 17, 2017

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