In The News...

Another month in the books in 2017.

The U.S. market, per the S&P 500, gained +1.0% in April. It was a nice bump higher considering stocks had been slipping over the six-week stretch from March 1st to mid-April. The last two weeks was a nice bounce that helped the market finish positive for the month.

Seattle housing laps the nation: Home prices rose slightly in February and by an average of +5.8% annually, according to the latest S&P/Case-Shiller housing report. Seattle continues to dominate real estate, where prices are up +2% month-over-month and +12% over the past year. Seattle housing growth has doubled the national average in recent months and maintains a sizable lead over the #2 housing market, Portland, where prices have risen +9.7% annually. Here is a complete city-by-city look at the 20 major markets:

(source: S&P/Case-Shiller Home Price Index)

Seattle has thrived thanks to the success of Amazon and Boeing, the reemergence of Microsoft and the ongoing technology migration. I would suspect that home values will level off a bit next year, meaning a slower pace of price increases. That would channel a pattern already experienced by San Francisco, where prices led the nation for a very long time before the pace of growth began to slow a bit in late-2016.

In The Market...

The S&P 500 gained +1.4% last week. Let's look under the hood...

Stocks: Stocks sprang higher to start last week and held those gains the rest of the way. Health Care, Technology and Consumer Discretionary led while only Real Estate lagged.

Bonds: High-yield bonds and preferred stock steadily rose again. Treasury bonds sold off, causing interest rates to jump. Despite last week's decline, I actually believe we may see interest rates fall again here in the next few weeks. If you are interested in knowing why, let me know -- I am happy to share my analysis.

Earnings bonanza! As of Friday, April 28th, roughly half (58%) of the 500 companies in the S&P index had reported quarterly results. Both revenue and earnings growth are the highest since 2011, as sales and profits are up +7.5% and +12.5%, respectively (per Factset). Sales and profits have risen across all 10 stock sectors, which reflects broad market strength rather than leadership by a few, concentrated sectors. Forty percent of S&P 500 companies have yet to report, so while impressive, these numbers are still preliminary.

In Our Opinion...

Stock price does not matter. Let me explain.

Amazon stock price recently surpassed $900. A lot of people would consider this expensive. To think that $900 would only get you one Amazon share does not feel as worthwhile as buying a bunch of shares of a much cheaper stock.

All else being equal though, price does not matter.

Instead of buying Amazon, let's say you use $900 to buy 10 shares of Kraft (currently priced around $90). If the price of Kraft goes up 10% to $99, will you earn more or less than if your one share of Amazon goes up by 10% from $900 to $990?

Neither.

A 10% gain is a 10% gain, regardless if you own one share that costs $1,000 or 1,000 shares that cost $1 apiece. You will cumulatively earn the exact same dollar amount. I prefaced this with "all else being equal" because, clearly, no two companies are alike. Amazon and Kraft are entirely different businesses whose stock prices have separate supply and demand characteristics.

"Yeah, but what if the higher-priced stock splits and I double my shares?"

That is fine, but on paper there is no benefit to a stock split. Your equity does not change. The stock price proportionally adjusts to the size of the split.

2-for-1 split? The share price is cut in half.
3-for-1 split? The price is slashed by one-third.

There is some merit to believing that a lower stock price will enable and encourage more investors to buy the stock, which increases demand and subsequently its price. While that may be true in theory, it is pure speculation. If you buy a stock in hopes that it will split, or continue holding it for only that reason, you may want to rethink your decision.

We put zero emphasis on a stock's price in terms of the number of shares that can be purchased. Neither should you.

In Our Portfolios...

Stocks: No changes this week.

Bonds: We bought an investment-grade bond fund (LQD) for our conservative and moderate accounts.

Q&A/Financial Planning...

I am helping a client refinance their home mortgage, which will allow them to lower their interest rate, as well as lock in a fixed percentage and dispose of their current, variable rate.

We often think about refinancing as "saving money". On the surface this is true. If you go from a 5.0% 30-year fixed rate to a 4.3% 30-year fixed rate you are saving on interest once you get passed what I call the break-even date. Since it costs you something to refinance, I like to calculate the number of months it will take to make that money back through interest savings. I find the break-even date by dividing the interest dollars saved per-month into the cost to refinance.

But there is another thing to remember, especially the closer you are to retirement. If your new loan term is longer than the remaining years on your existing loan, your loan payoff date gets pushed out. This is quite common, as many people will be 5 or 10 years into their existing mortgage and choose to refinance into a 30-year fixed loan. It has been especially popular the past few years, as interest rates have fallen and homeowners have recovered equity post-2009.

Pushing out your payoff date is not a problem if you have the right plan. It is something to be aware of, particularly if your goal is to pay off your mortgage by a certain date. If you are refinancing then presumably your monthly payment is going down (unless you are taking on a shorter-term loan). You want to be responsible with the newfound "savings". Consider using that extra money to do one of the following:

Make an additional, lump-sum mortgage payment each year
Pay off other debts - either non-productive debts (e.g. credit cards) or those with higher interest rates compared to your mortgage
Invest the extra cash to help save toward retirement, which also enables you to make a greater lump-sum mortgage payment in the future
Sock it away as cash to build up a cushion for emergencies

Let me know if you have questions. Our friends at North Pacific Mortgage can help if you are interested in refinancing. I always advocate considering what options are available to you, but it is equally important to understand the ramifications before doing so.

What's New With Us?

We have begun setting up accounts at TD Ameritrade. Once most accounts are established, I will send you a second round of Docusign forms to e-sign. This will include the account transfer request, as well as a form for making contributions or distributions (if applicable). Let me know if you have any questions about this process. My goal is to have most accounts transferred by the end of May.

Have a great week!

Brian E Betz, CFP®
Principal

Market & Financial Planning Commentary

Something To Know About Mortgage Refinancing And Something To Forget About Stock Prices