In The News...

One story has dominated the headlines recently, both inside the market and out: North Korea.

So far it has only been a war of words between President Trump and North Korean leader Kim Jong-un, which, I'm sure most of you already know. Onto why it matters...

How does North Korea affect the market? No one knows. International conflicts tend to have more short-term than long-term impacts, but it is impossible to know how much events like these influence investors. The conversation immediately goes to the worst-case scenario of outright nuclear war, which is no doubt a scary proposition but also a pretty hasty conclusion when used to influence investment decisions.

Historical comparisons: Although there is no good comparison to a potential U.S.-North Korea conflict, here is some context. The S&P 500 fell -4% the day after Pearl Harbor (which occurred on a Sunday) and -20% in total before bottoming out. The S&P fell -5% the day the market reopened following 9/11 (market was closed for 4 days). It fell a total of -13% before bottoming just 10 days after those Sept. 11th attacks. Interpret these losses as you wish, but the point here is that they weren't as catastrophic as we might have presumed they would be.

Conclusion: Nuclear war is clearly another level of potential disaster, which makes North Korea very concerning. But we as investors must keep a level head and stick to our process, particularly in the age of the 24/7 news cycle. Reacting to every statement, ad-lib or Twitter-post is a bad investment strategy and an even worse way to live your life. The long-term trend of the stock market has been rising for nearly 1 year and we will give that trend the benefit of the doubt until our analysis suggests it is otherwise broken.

In The Market...

The S&P 500 slid -1.3% this past week. Let's look under the hood:

Stocks: The bad news is, this was the worst week for stocks in nearly 5 months. The good news? The S&P 500 was only down a little more than 1%. I have mentioned how this is seasonally the worst time of the year for stocks and that appears to be taking shape. Nearly every sector was in the red, except Consumer Staples, which eked out a fractional gain.

Bonds: Stock market pain was the bond market's gain. Treasuries rallied for the second-straight week, which is the silver lining this week given that most accounts own Long-Term Treasury bonds (TLT). Perhaps most concerning for stocks is that both High-Yield bonds and Preferred Stock were each down over -1%. High-yields, in particular, often serve as a beacon for what is in store for stocks.

In Our Opinion...

Do stocks have a case of bad breadth?

If recent stock market losses are more than merely the seasonal volatility we see around this time of year, there is one indicator that may tip us off: The percent of stock prices above/below their respective 200-day moving averages. Also referred to as "breadth".

I track this ratio for the entire S&P 500, as well as for each of the 10 major U.S. stock sectors. The 200-day moving average is, for my money, the best long-term price indicator there is. When the price of a given stock, sector or index is above its 200-day average, that is bullish. If the 200-day average is rising (rather than flat or falling), that is doubly bullish. The opposite is true too. If the price is below and/or the slope of the 200-day moving average is falling, those are more bearish scenarios.

Here is a sector-by-sector look at where each breadth ratio stands (also included are the two major indexes we track -- the S&P 500 and Nasdaq-100):

Currently, 68% of stocks in the S&P are above their 200-day moving averages (the second column of percentages). This is the lowest ratio since Jan. 2017, yet it is still above 50%, which is the threshold where problems start to occur (and fast).

I included the breadth ratios from the most recent high back in late-February (first column of percentages), when 82% of stocks were above their 200-day moving averages. The S&P has risen roughly +5% since that time, despite breadth falling across every major sector. This type of divergence between rising prices and falling breadth is potentially a signal that momentum is waning. Whether it results in a significant decline from here, or presents another buying opportunity instead, time will tell.

In Our Portfolios...

(Note: Each client's account is uniquely managed, based on account size and risk tolerance. Your account will only own some, not all, of the investments bought and sold over time.)

Q&A/Financial Planning...

Buy or Build? That is the question...

I have spoken with more than a dozen clients and friends in the past few months who have undergone, or are considering, a home remodel. Some of the reasons include a growing family, the desire to make certain modifications, or simply having more money and real estate equity today to play with.

A home renovation makes a lot of sense, but is it preferable to selling and buying a different home?

The short answer is to "do you". In other words, do what fits you. Some of us are more inclined to go through a remodel than others. The same can be said of moving. Before you decide, consider these questions first...

Home Remodel:

How extensive are the renovations you need and want? The more there are, the more it might make sense to sell and buy something else.
If you will be displaced from your home, how long will that be? How might that affect your calendar of events during those weeks/months?
What are the risks that your remodel runs over-budget or past-deadline? The former is a financial problem. The latter is simply annoying.
Which renovations will add value to your home (e.g. increased square footage) vs. those that are purely for personal pleasure? Be realistic when it comes to added value...
How much could life change post-remodel that might necessitate further renovations?

I believe remodeling makes sense if you are determined to stay in your home for a prolonged period (more than 10 years). Or, if there are certain aspects of your existing location that you cannot live without, such as the specific block you live on, your view or the nearby schools.

We have never personally remodeled, but nonetheless, I would recommend starting with a small project and expanding from there. So many people blow their budget, which is understandable when you start rationalizing tens of thousands of dollars.

"Well we are already spending $30,000... what difference does it make if we spend $35,000?"

Those dollars add up even if they seem arbitrary. This means either more debt or less cash/liquidity in the bank.

Sell & Purchase:

How does current financing compare to your existing mortgage? If rates have gone up so too will your interest payments.
How do the non-house-specific factors compare? Such as neighborhood, schools, growth potential, proximity to work, crime, etc...
If you use most/all of your existing home equity toward the next home, your liquidity worsens even though your net worth stays the same.
If you are moving a good distance away, are there life factors that may necessitate you move back in the future?
How emotionally tied are you to the house? This may sound silly to some, but the less emotional you are about the property the easier it will be to list it.

There is no right or wrong answer here. It is all case-by-case. Notice I did not tackle the third option: Purchase a new home and rent-out your existing one. This carries greater complexity than the two other options. I am happy to discuss this with you if you plan to buy and keep your existing home as a rental.

What's New With Us?

Some of you have noticed that you still have an active account with Scottrade, reflecting a zero balance. This is not an error. All Scottrade accounts will be dissolved by mid-October. There is nothing that you need to do, as account information such as tax data was transferred to TD Ameritrade at the same time we moved account funds. If there are specific Scottrade records you want, such as old 1099 tax forms, let Gale or I know.

Have a great weekend!

Brian E Betz, CFP®
Principal

Market & Financial Planning Commentary

If North Korea Goes Nuclear, Will The Stock Market Follow Suit?