In The News...

I learned something new this past week.

I learned that there is an international pact called the Paris Agreement, in which member nations band together to promote climate change and combat global warming. I had never heard of this accord until a few days ago when President Trump made the controversial decision to withdraw the U.S. from it.

All in favor: As best I understand it, those who favor the Paris Agreement believe it reflects a necessary, joint commitment to fight the scientifically proven fact that ongoing pollution causes the Earth's temperature to gradually rise, threatening both global economic growth and the lives of future generations.

All opposed: Those who agree with Trump's decision to ditch the Paris Agreement believe it will help the U.S. economy by preserving domestic jobs in industries that produce fossil-fuel based energy, such as coal. In Trump's case, there is debate over whether this is more about him believing the Paris Agreement simply represents a "bad deal" that he will later renegotiate, versus a staunch disbelief/disregard of global warming.

I have never really taken time to research global warming. I have tapped a number of people on both sides and most seem to accept global warming due to scientific evidence. I plan to learn more about it, but in the meantime cannot offer much opinion until I do. My thoughts on how this topic relates to the work financial advisers do in the Opinion section below.

Seattle for the win: Seattle housing led the nation in price growth for yet another month, and the gap is widening. The latest S&P/Case-Shiller report shows Seattle homes were up +2.6% in March and +12.3% over the past year. That double-digit annual growth not only laps the rest of the nation, which grew +5.8%, but is +3.0% higher than the next-closest city (Portland).

Here is a complete city-by-city look at the 20 major housing markets:

Why Seattle? The Pacific Northwest, particularly Seattle, continues to benefit from a few factors.

Housing prices became so hot in areas of California, namely the Silicon Valley, that businesses (and consequently their employees) have migrated north.
Seattle was a hotbed for innovation before any Silicon Valley migration.
Seattle is tech-heavy but not tech-dependent, which is something often overlooked. There is great commerce balance, considering non-tech giants like Starbucks and Boeing are based here.
Globalization continues to "flatten" the world, so it is not as daunting for younger workers to move to an isolated area like the Pacific Northwest (stigmas and all).
Finally... Amazon (enough said).

As I have said before, at some point Seattle will level off similar to San Francisco. But for now the housing wave remains strong for existing homeowners and becomes more challenging for first-time homebuyers.

In The Market...

The S&P 500 climbed +1.0% this past week. Let's look under the hood...

Stocks: Another strong week for stocks, as only Financials and Energy were in the red. Every other sector was up at least +1.0%, which is bullish. We continue to hold Utilities (XLU) across all client accounts. We also own either the Nasdaq-100 fund (QQQ) or S&P 500-index fund (IVV) as well, depending on account size. Real Estate (VNQ) is a fund that larger accounts or more aggressive accounts continue to own. We have yet to see the rally I had anticipated in that sector, but Real Estate was up like most sectors last week, which is positive.

Bonds: Another week where bonds were unshaken despite a stock rally. Most accounts continue to own Investment-Grade Corporate Bonds (LQD) as well as High-Yield Bonds (HYG or JNK). On Friday, Long-Term Treasuries (TLT) rallied more than +1.0%. Treasuries may be primed to rally further in the weeks ahead, as I have written at-length in the past few months. I have said I thought that interest rates would fall and so far they have. But conditions can change quickly, so no time to dwell on history.

Did investors "go away" in May? Not so much... The S&P 500, when including dividends, gained +1.4% in May while the Nasdaq-100 was up nearly triple that, rising +3.9%. I mention the Nasdaq-100 because it tends to be more reflective of "risk-on" investor behavior, meaning investors are showing greater risk appetite. The Nasdaq-100 is predominantly comprised of stocks in the Tech and Consumer Discretionary sectors, two areas that are more cyclical (meaning they rise more compared to the overall market during positive periods and fall more comparatively when the market is down).

2,400 and gone? Excluding dividends, the S&P 500 index surpassed 2,400 on its third attempt in late-May and appears poised to rally further. Take a look...

The dashed line reflects 2,400 on this daily chart (each candle on the big chart represents a day). I am interested to see whether this rally sustains into the summer months, especially into August, when volatility often picks up. Right now, stocks continue to look good based on our technical analysis.

In Our Opinion...

It is okay to say I don't know.

I do not give uneducated or inauthentic answers to questions relating to investing or financial planning. So when I am asked what impact leaving the Paris Agreement will have on the market or economy, I cannot give an answer.

As mentioned I have taken no time to learn about global warming, so I am not ashamed to admit I had no idea an international agreement even existed in the first place. In fact, I would still have no idea had headlines not erupted following Trump's decision to remove the U.S. from participating in it. Yet, in 2017 it seems we are supposed to have an immediate and steadfast opinion on matters like this.

Unfortunately, I don't. At least until I learn more. If someone says the agreement is bad "because it will kill jobs" without providing employment stats, or says it is good "because it's science" without detailed scientific evidence, I am not going to naively choose either side.

The same thing applies to investing and financial planning. For example, two questions I received just this past week that are difficult to answer:

I hear gold prices are going to skyrocket when the economy tanks. Should I sell and buy gold?
Snapchat just went public. Should I buy it?

The first question is tough to answer, although I know a lot about gold. It is tough because this specific question, which I get from time to time, often comes from a place of cynicism. The person is usually very pessimistic and believes the world is going to implode (gold prices usually rise when stock prices plunge, which is the logic here).

Part of my job is to assuage such fear. We would not be in this business if we felt the market was constantly on the verge of collapse. But some people simply believe each year will be 2008, despite any rationalization provided to the contrary. With that mindset being as strong as it often is, sometimes nothing can be said to overcome those concerns.

The second question, relating to Snapchat, is impossible to answer. Our investment approach relies on past price history and Snapchat, like any company that goes public, by definition has no price history. I get why people like IPOs -- the media attention makes them sexy to invest in. Plus, a lot of people think every tech company that goes public will be the next Google (a dangerous mentality to have). So while I could give an opinion on Snapchat, the responsible thing to do is say "I am not sure" when asked if it is a smart investment. As price trends develop over time, only then will I feel comfortable voicing my opinion.

So if you ask me a question that I am not educated on, I will likely research it and get back to you. It is okay to say I am not sure or I don't know.

In Our Portfolios...

Stocks: Purchased the Nasdaq-100 fund (QQQ) for accounts above $50,000 and the S&P 500 index fund (IVV) for accounts below $50,000. For accounts that own individual stocks (certain portfolios above $150,000), we sold Oracle.

Bonds: Purchased the Long-Term Treasuries fund (TLT) for certain accounts and will look to add this for additional accounts into next week.

Q&A/Financial Planning...

If you are a parent or grandparent to young kids, I thought I would share a decision that my wife and I personally made this past week. We opened a 529 college savings plan for our infant daughter, Brooklyn. We chose the Utah Educational Savings Plan (UESP) due to its low cost structure, strong Morningstar rating and flexibility for me to manage the account. (Most plans have a "set it and forget it" approach that automatically shifts from stocks to bonds as the child nears age 18, but our situation is obviously unique in that I am capable of managing the funds and desire to do so.)

529 plans provide two chief benefits when saving for college:

Account earnings grow tax-free, meaning you are not taxed if used to fund future college expenses. If you start early enough and contribute a lot, earnings can comprise a big chunk of the eventual balance, which means big tax savings.
Such plans provide a defined structure, which instills good savings discipline/behavior if proper financial planning is conducted at inception.

There is some flexibility too. For instance, if there are multiple children and the designated child does not go to college, you can change beneficiaries to another child that does go to college.

There are some distinct disadvantages, or at least pitfalls to know:

If funds are withdrawn for uses other than college expenses, all earnings are not only taxed as ordinary income but penalized 10% as well.
If you do not properly plan and save the right amount over time, you can quickly fall behind as your child ages. This means you diminish the tax advantages and the overall point of having the plan.
If structured incorrectly, particularly with grandparent-owned 529 plans, you could face adverse tax and financial aid consequences in the future (which I won't detail here, but contact me for more).

I generally recommend 529 plans, but only for motivated parents and grandparents who execute on the savings behavior required to achieve their goal. For us, we plan on saving to accommodate 3 years of college education for our daughter (while using other funds, potential scholarships or student debt to pay for the fourth year). Among the other mathematical factors that went into determining how much we need to save, I based it on a tuition cost of $25,000 per-year (in today's dollars), a 5% college inflation rate and an annual 7% investment growth rate over the next 18 years.

I am happy to share why this math is necessary. Let me know if you have any questions on 529 plans, or college savings in general.

What's New With Us?

For those of you who receive monthly performance summaries via Morningstar, please know that the May summaries will be delayed. Due to the migration from Scottrade to TD Ameritrade, I am working through a project to merge account histories within Morningstar. Once that project is complete I will send out May summaries. If you have not previously received a monthly performance summary and would like to begin receiving them, just ask.

Have a great remaining weekend!

Brian E Betz, CFP®
Principal

Market & Financial Planning Commentary

Accord-Cutting: Trump Withdraws U.S. From Paris Agreement