Context, Context, Context
/Hi everyone,
There is a narrative from this past week that I can’t let slide. I saw headlines Thursday afternoon praising the fact that January was the best month for the stock market in 30 years. Whether technically true or not, the reference lacks context. A more appropriate narrative would be something to the effect of:
“The S&P 500 is nearly even since the end of November, down -1.5% over that time.”
No doubt January was a strong month, but usually when we hear the “best” of something happened, we assume that great things are to come.
Is this the case? Will stocks zoom higher in February? No one knows for sure. But the story of January, in which stocks rallied more than +8.0%, cannot be told without realizing that stocks fell -10.0% the month before. Context matters. More discussion on my stock market outlook below.
Housing prices flatten: Real estate values were essentially unchanged nationwide in November and are up roughly +5.0% in the past year. Growth rates continue to level off, especially on the West Coast where homes in Seattle and San Francisco (both down -0.7%), as well as Portland (-0.5%) and San Diego (-0.6%) were all negative in the month.
Whereas Seattle and San Francisco used to lead the nation by a considerable margin in terms of annual appreciation, housing in both cities are only up roughly +6.0% in the past 12 months. I believe this is the fifth-straight monthly price decline for Seattle real estate. Here is a complete city-by-city look at this latest S&P/Case Shiller housing data:
In The Market...
The S&P 500 gained +1.6% last week. Let's look under the hood:
(price data via stockcharts.com)
Stocks up. Bonds up. All is great, right?
We are still not out of the woods. Here is the same long-term monthly chart of the S&P 500 index that I shared at the end of December. Stock price history over the past 6 months resembles three different points in time. These are the areas highlighted on the chart. Notice how in two of the three instances, stock prices fell a lot further in the months that followed. In the third (and most recent) instance, prices floundered a bit before starting a new, big rally.
(chart created in stockcharts.com)
No predictions here, just emphasizing the longer-term picture in terms of how recent market behavior plays into it. At the end of December, the market outlook was very negative. If we are to believe that is still the case, then January was just one big counter-rally inside of a larger downtrend. I will say that the short-term stock market outlook looks neutral-to-positive. New uptrends have to start somewhere, so there is a possibility that this is it. I would not count on that just yet, but certainly conditions have improved since one month ago.
Portfolio-wise we were really only active with our individual stock positions, for those accounts that own both stock funds and individual stocks. We captured a very nice gain selling Twilio (TWLO) and absorbed a modest loss on Microsoft (MSFT).
Heading into next week, the Software segment within the Tech sector continues to look strong. Health Care continues to look the best among all major sectors, while Real Estate (VNQ) made a big jump and is showing up on our radar as a potential breakout sector.
On the bond side, we will likely add Preferred Stock (PGF) sometime soon, as that asset class looks poised to continue its recent rally.
In Our Portfolios...
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Going into Super Bowl Sunday I was really excited for what I thought was going to be a great game. I left being more excited about the fact that it had snowed 2 inches here, our first snow this Winter. I can appreciate a good defensive game, but it felt as much sloppy as it did a defensive struggle.
Have a great week!
Brian E Betz, CFP®
Principal