In The News...

The last time the unemployment rate was this low I was still a month away from graduating high school...

Unemployment fell to 4.3% in May, the best since May 2001. Here is how rare that is looking back 40 years:

Good news, right? Sure. Now take a look at the same exact chart, but with stock market movement plotted on top of it (S&P 500 index, green line):

Notice that stocks plunged roughly 1 year from when unemployment fell to levels similar as we see today (the shaded timeframes). As with most charts I share, I created this one. There is also a reason I did.

I am not sure I believe it.

It is not that I do not think the market could fall, it is that I do not believe a potential market drop would be because of unemployment. Correlation does not equal causation. In fact, I could shift those shaded regions forward in time just a bit and argue that the market's declines in late-2000 and late-2007 were what caused the unemployment rate to go up.

The latter is what I actually believe.

I bring this up because I read/hear a lot about how the economy is going to send the market lower. I believe it is the other way around, if it were to happen. This is how I believe it works:

Shareholders aggressively sell a company's stock (for whatever reason)
A lower share price means the company is worth less
Companies whose values fall are forced to cut costs
The biggest expense for most companies is personnel, which means layoffs
Repeat steps 1-4 across enough companies and, eventually, economic production falls and unemployment rises
If GDP - the total output of goods and services in society - is negative for two-straight quarters, it is deemed an economic recession

That is how it works, or at least I think so. Do stock prices fall after companies announce layoffs? Absolutely. But most often those company stock prices have already been in decline. Two recent examples of this are Macy's and GoPro. You think their share prices plunged after a particular layoff announcement? Go look at their stock prices before then. Not good.

What to make of low unemployment: I would be lying if I said I was not paying attention. But it does not influence our investment decisions. When unemployment reached similar lows back in 2000 and 2007 stocks continued to rise for the better part of a year before any major decline. Today, stocks continue to rise to new highs, which is bullish.

They did it again: A bit to my surprise, the Federal Reserve raised interest rates for the second time in three months. I did not think this one would come so soon, but the Fed has done a good job of telegraphing its moves so it isn't a shock based on their previous clues.

This is significant in that it reflects the Fed's view of a more stable economy, namely with regards to hiring and inflation. This was the fourth time the Fed has increased its benchmark federal funds rate since it began doing so a year and a half ago. Here is a brief history of those rate hikes:

Dec 2015: Up from 0.00% to 0.25%
Dec 2016: Up from 0.25% to 0.50%
March 2017: Up from 0.50% to 0.75%
June 2017: Up from 0.75% to 1.00%

Despite its critics, the Fed has done what it said it would do, which is to gradually raise short-term interest rates as hiring improves and inflation steadies. I highly doubt there will be a third rate hike this year, but we shall see.

In The Market...

The S&P 500 rose +0.3% this past week. Let's look under the hood...

Stocks: Two weeks ago I referenced how I felt the Health Care sector might be on the verge of breaking out. Two weeks later, it looks like we might be getting just that. Health Care was the runaway winner this past week, up +3.6%. Take a look:

We purchased this Health Care fund (XLV) for most accounts early this past week. It is nice to see its price move higher and our analysis prove accurate. I normally refrain from citing such short-term periods, because typically a few days is not indicative of what is to come. In this case though it might be telling considering our prior analysis. Health Care appears to be roughly where the overall market was back in November -- just about to rally following over a year of stagnation. If this is the case, Health Care has room to run. No guarantees.

Bonds: Treasury bonds continued their ascent and long-term interest rates fell closer to pre-election lows. Investment-grade bonds similarly gained for the second-straight week while high-yield bonds were essentially flat. I remain bullish on the bond market, as I have for the past month or so.

In Our Opinion...

A client told me this week that they sold their shares of Tesla (TSLA). From here there are three possible future outcomes:

Tesla stock goes up
Tesla stock goes down
Tesla stock goes flat

It is natural to second-guess a decision as time passes. I cannot tell you how many times I have heard someone say, "I wish I had not sold my Amazon stock!" or whatever stock that they sold for a gain but did so prematurely, in hindsight, because the share price went on to make new highs.

We have a tendency to look back on decisions like this to attain validation. If the share price falls after selling we feel validated, almost empowered. If it rises post-sale we feel regret. This behavior is instinctual. It is the same reason we check Zillow or Redfin to see what our house is worth. We want to get the best deal and make the right decisions.

Social media has magnified this too. It has fostered a culture where you can easily see the decisions others make and benchmark yours to theirs. But why? Worrying about the past does little good. If you learn something tangible from it that you can apply in the future, great. Otherwise, it is toxic. When it comes to investments, a few key tenets to remember:

You cannot change the past. Learn if you can and move on.
You can always repurchase the stock or fund you sold.
There is an ocean of investment opportunity out there. Whether you make 10% off shares of Tesla or 10% off shares of Proctor & Gamble, what difference does it make? Unless you work for the company and benefit in other ways, the stocks or funds you own are just names on a statement.
Just because someone else bought or sold something does not mean you should too.

In my years of doing this, I remove as much emotion from our investment process as possible. I try to stick to that process, no matter what, though I do try to refine it and improve it over time. In the same way I do not dwell on what might be perceived as mistakes made, I do not celebrate the wins, either.

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...

An annuity provider sent me an article last week entitled: "Have Indexed Annuities Become Too Complicated?"

I believe this is old news, which is easy for me to say being so entrenched in the financial services industry. So I can see how this might be news. In short, yes they have.

Annuities are a source of income for those who need a specific amount of money for a specific period of time in retirement. It is like creating a pension for yourself, except with your own money. The two main types of annuities are immediate and deferred.

Immediate annuity: You put up a chunk of money today in exchange for a stream of income that starts now. That stream of income could last your entire life, the collective lives of you and your spouse, a set number of years, etc. The longer your timeline, the smaller the annual payments.

Deferred annuity: You put up a chunk of money today, but your income stream does not begin until a point in the future (often 5 years, 7 years or 10 years later). While your money is committed, it ideally grows based on some investment strategy. The growth could be fixed (e.g. guaranteed 4% per-year) or it could vary (e.g. tied to the stock market). This is where it gets complicated, as investors seek for ways to grow their savings in the years just preceding retirement.

Once upon a time, certain annuities had appeal, particularly a hybrid known as "indexed" annuities. These became popular in the wake of the 2008 recession. Indexed annuities provide the ability to earn up to a certain amount, or "capped" return, which is tied to the performance of a particular index (typically the S&P 500). In exchange for having a cap on the potential gain each year, you are guaranteed against loss. The latter having big appeal following the financial crisis.

Indexed annuities were en vogue as investors wanted to invest but could not stomach any risk of loss. Because these annuities are not technically invested in the market - rather, credited interest based on market performance - they have been deemed insurance products. As popularity grew, more and more insurance companies created their own flavor of indexed annuity in an attempt to provide one more feature than the next. And because there are far more insurance reps than there are professional money managers, these annuities have had great distribution.

Today, most indexed annuities I see are over-engineered. Their multi-page brochures are chock-full of confusing terms, a multitude of hypothetical scenarios explaining how the annuity might perform and a ton of fine print that often buries key restrictions. It would take me an hour to fully understand the product and another two hours to properly explain it to you. That may be a bit overstated, but the point is, if I cannot easily understand an investment how could I expect you to?

Annuities, by and large, have a place for certain retirees who want to live off a known, fixed income. But they also face many headwinds. Just a few of them...

They can carry heavy commissions that are often concealed and go unknown until after you get the annuity, when it is too late
The market has a natural bias to rise over time. So while indexed annuities might look great coming off 2002 (tech bubble burst) or 2008 (financial crisis), what about all those non-recessionary years?
A lot of insurance reps (and annuity providers!) do not understand the annuities they sell. This often leads to clients making bad financial decisions, whether the insurance rep was intentionally misleading or just naive/uneducated.
If you change your mind, you will pay a sizable "surrender charge" to reclaim your money. This makes buyer's remorse costly. (In fairness, the surrender charge on a deferred annuity does typically go down over time.)
Most annuity owners do not need an annuity, they need proper financial planning that determines how they will generate retirement income and avoid running out of money. Oftentimes annuities provide an adequate solution for this, but not the best solution.

Whether an annuity is immediate, deferred, fixed, variable or indexed, it can have its place for the right type of client. But you must cut through the confusion to fully understand how it functions, the restrictions involved and how it ultimately fits you better than the next-best alternative.

What's New With Us?

I will be traveling to Ohio to visit family all of next week. It will be business as usual, working remotely, but my response time may not be as quick while I am away. I return on Monday, July 3rd. I hope your summer is starting out well!

Have a great weekend,

Brian E Betz, CFP®
Principal

Market & Financial Planning Commentary

Does The Lowest Unemployment Rate In 16 Years Make For A Healthy Stock Market?