Do Pregnancy Rates Predict Stock Market Returns?

/ Percension Wealth Advisors, LLC/

Before I dive into this week's blog post, I want to let you all know that we are actively looking to hire an Executive Administrative Assistant. The full job posting is available on our site here. If you know someone who might be interested, let me know. They can reach out to me directly with their resume as well. Now on to this week's market thoughts...

Do pregnancy rates predict future economic recessions?

According to the National Bureau of Economic Research (NBER) they sure might. Their study tracked 109 million births that occurred from 1989-2016 and found that the number of conceptions declined ahead of eventual declines in economic growth (GDP) back in the late-80s, then again ahead of the tech bubble in the late-90s and then once more ahead of the subprime mortgage crisis in 2007.

This chart shows the positive correlation between conceptions (solid line) and economic production (dashed line):

(per the National Bureau of Economic Research, via CNBC)

I can get on board with this. When we are financially optimistic we tend to spend more. When we are pessimistic or uncertain we tend to spend less. Kids are expensive, so it is reasonable to assume that couples might think twice about having one or more kids if they are concerned about things like job security, stock market conditions or the U.S. economy in general. There are very few areas that are truly recession-proof and two of them happen to be child care and college tuition. If birth rates decline it is very possible that it is because families consider those costs, at least to some extent.

This hopefully goes without saying but this report should not influence investment decisions, at least not in a vacuum. It is a human interest story more than anything. But it is a pretty plain way of thinking about how we feel about the market and economy.

Corporate earnings boom: It was a solid quarter for large publicly traded companies. Revenue growth was terrific and the overwhelming majority of companies surpassed earnings expectations. Here are a few of the highlights (per FactSet):

  • Earnings grew nearly +15% in Q4, which was the most for any quarter since 2011.
  • All 11 stock sectors experienced profit growth. So unlike prior quarters, positive earnings results were not limited to a handful of sectors.
  • Sales increased +8.2%, which was also a high dating back to 2011.
  • Compared to estimates, 77% of all S&P 500 companies beat their sales targets. This is the highest percentage since FactSet started tracking data in 2008.

Because we emphasize sales over profits, here is a sector-by-sector look at revenue growth in Q4:

(source: FactSet)

Housing prices inch higher: Home values appreciated by an average +0.2% in December nationwide (per the S&P/Case-Shiller report). Seattle real estate beat that average, rising +0.6% during the month, and continue to lead all major cities on an annual basis as Seattle homes have risen +12.7% in value over the past year. Las Vegas continued to narrow that gap, up +11.1% annually, followed by San Francisco (up +9.2%).

Here is a complete city-by-city look at housing price changes:

In The Market...

The S&P 500 rose +3.6% last week. Let's look under the hood:

(price data via stockcharts.com)

Last week's surge came on the heels of the S&P falling -2% the week prior, so some context is needed. Nonetheless, following a week where all 10 stock sectors were negative it was good to see all 10 sectors rally back. As a whole the S&P 500 index still remains 3% below its previous peak set back on Jan. 26th. In my view that peak needs to be surpassed soon in order to sustain this rally in the weeks ahead. Or I sense market conditions will remain choppy.

If this rally is to sustain across all/most sectors of the market, I still think Technology will lead the way. Tech continues to look the healthiest among all areas of the market, on all timeframes we analyze. This past week it was Tech and the other growth-oriented sectors that performed the best, namely Financials and Industrials.

We continue to own Financials as well as a tech-heavy index fund (SPYG) across most accounts. I have been looking to add the Tech sector fund (XLK) for a couple weeks but am still weighing whether to cut bait on our Utilities position or wait for a potential rebound in the Utilities sector. This is getting in the weeds a bit, but I am happy to share more if you're interested in my thought process.

Since I didn't send out a blog last week I didn't get to mention that the U.S. market snapped its 15-month winning streak, as the S&P 500 fell -3.9% in February. So far March is starting out much better than did February.

In Our Portfolios...

What's New With Us?

I will be sending you our updated Form ADV 2A, which is disclosure information pertaining to our firm. This is a form you received when you first became a client and is something we update at least annually. If you have any questions about its contents, please ask. However, no action is required of you. It is purely for your information.

I am hoping the sunshine lasts through the weekend so that I can mow our yard for the first time this year. I will also finish getting settled in to our new office at 2nd Avenue and Columbia St. If you happen to be in downtown Seattle please stop by and say hi!

Have a great weekend,

Brian E Betz, CFP®
Principal

Unemployment Hits An All-Century Low

/ Percension Wealth Advisors, LLC/

In The News...

Employment and earnings both got a boost.

Jobs report: Unemployment fell to 4.1% in October, which is the lowest jobless rate since Dec. 2000. The monthly survey shows that +261,000 jobs were added in October, which may be skewed because the previous month's jobs data was artificially low due to Hurricane Harvey and Irma. It may be more appropriate to consider the average of the two months as a more representative hiring trend. Rather than +18,000 new hires on September and +261,000 in October, a blended gain of +140,000 in each month is more reasonable.

Here is a 30-year historical look at unemployment, which you can see has steadily declined since late-2010:

Earnings season ends: Ninety percent of companies in the S&P 500 have reported financial results for the 3rd quarter. Both sales and profits were better than expected, per the data provider FactSet, as revenues rose +5.8% (vs. +4.9% expected) and profits rose +6.1% (vs. +3.1%). The Energy sector was the runaway winner in both respects, while Materials and Technology were the next-best sectors. Utilities was the worst-performing sector and the only one that saw both sales and earnings decline during the quarter.

In The Market...

The S&P 500 dipped -0.14% this past week. Let's look under the hood:

(price data via stockcharts.com)

The weekly winning streak was finally snapped. The S&P 500 had risen in eight-straight weeks, which came to an end with the slight loss. Early on it looked like the streak would be extended to nine, but just as the S&P neared 2,600 it quickly reversed course on Thursday and Friday. I mentioned a few weeks back that 2,600 might become a point of resistance that prevents stocks from broadly rising much further in the near term. So far that is the case.

Digging beneath the surface, it was a strange week. Some of the growth-oriented sectors (Industrials, Materials) were down while the more defensive sectors (Consumer Staples, Utilities) gained. Normally this type of defensive investor behavior would set up well for bonds to rise too but that was not the case. Investment-grade bonds had an unusually bad week (down -1%) and high-yield bonds declined the most in 3 months.

When high-yield bonds start to fall that can often be a sign that stocks will soon follow suit. For now it does not look to be any more than a speed bump. In fact, I believe recent high-yield bond losses presents a buying opportunity, based on past price trends shown in the following chart for the fund, ANGL:

(chart created in stockcharts.com)

This is what is called a "fallen angel" high-yield bond fund. We purchased this for a number of client accounts. Rather than being comprised of companies with consistently sub-investment-grade debt status, this fund contains corporate debt issued by companies whose debt ratings were recently downgraded from investment-grade to high-yield (or "junk") status. In theory these companies are experiencing short-term financial issues and will soon again be upgraded to investment-grade status. That theoretical bet would mean greater demand for those bonds in the future, which plays in the favor of owning this fund over a more traditional high-yield bond fund that owns debt of companies that are perpetually junk status.

But purely looking at the historical price trends in the chart above, you will see how today's price (a) seems to follow a pattern of past instances (b, c, d). If such is the case, I would expect ANGL to rebound soon. If not, we will measure that risk and adjust accordingly.

In Our Opinion...

I have had discussions with a number of people recently about the tax benefits of donating before year-end. Assuming you itemize your taxes, the tax amount you stand to avoid by making a cash donation would be equal to:

(Donation amount) x (Tax rate the donation would have otherwise been assessed)

So, if you donate $1,000 and that money would have otherwise been taxed 25%, you avoided $250 in taxes.

I feel this is important because as much as many people want to be charitable, they overstate what they consider to be "savings". In the above example, instead of paying $250 in tax dollars to Uncle Sam, you would be donating $1,000 and avoiding $250 in taxes, which nets out to be $750 out-of-pocket. This is more than if you just paid $250 in taxes, but for whatever reason when it comes to the out-of-pocket amount (charity aside) the concept is misunderstood.

I get asked whether it would be smart to donate. That is really difficult to answer because we all have different motivations and requirements for donating. For me, I like to have personal involvement with an organization if I am going to make a significant donation. I also like to have some idea of how the money will be used. I donate out of goodwill rather than financial incentive. If there is tax incentive, great. If not, oh well. Again, to each their own.

I know some people who will write a check and are unconcerned with how the money is used. I find this most common among Baby Boomers. I know others who are more compelled to donate if they know precisely how the money will be used and receive updates on the cause. I find this more common among the under-30 crowd. Then there are those who fall somewhere in the middle, myself included, who want to have some personal involvement but do not need status updates or reassurance. These perceived generational differences were first highlighted to me by someone I know on the King County Advisory Board for the Salvation Army. Since he mentioned it I have since observed these same tendencies. Just some food for thought.

Charitable donations are timely right now because they must be made prior to Dec. 31 in order to qualify for 2017. The amount you can deduct will be limited, based on the type of organization you donate to and the type of asset you donate (e.g. cash vs. other property). Donations to public charities are capped at 50% of your adjusted gross income (AGI). Let me or Gale know if you would like more information, including help calculating the tax benefits.

In Our Portfolios...

Q&A/Financial Planning...

In last week's blog I overlooked one of the proposed benefits within the Republican tax plan. It involves 529 college savings plans. The proposed tax reform would improve 529 plans in two distinct ways:

  1. 529 savings could be used tax-free to pay for up to $10,000 in qualified expenses for either high school or elementary school. This is a valuable change considering the number of kids who attend private high schools.
  2. 529 accounts can be established when the baby is in the womb. Currently, 529 plans cannot be set up until the baby is born. This means up to an additional 8 months (or so) of extra time to save toward future education expenses. Time is your best friend when it comes to building wealth.

These are small wins, but wins nonetheless. As a refresher, the biggest benefit of setting up a 529 college savings plan is that the earnings grow tax-free if eventually used to pay for education expenses (i.e. tuition, room/board, supplies). This provides the best available vehicle for parents and grandparents to save for their kids and grandchildren. If you would like more information, including the pros/cons of the 529 plan relative to other savings options, let us know.

What's New With Us?

A quick reminder to provide us any address changes if you move. It is important that we maintain updated contact information for you on your account(s). If you started using a different email more than the one that this blog is delivered to, please update me in that regard as well.

Happy Veterans Day to those of you who served our country.

Have a great weekend!

Betz Signature 250px.png
 

Brian E Betz, CFP®
Principal

"Black Monday" Turns 30 Years Old

/ Percension Wealth Advisors, LLC/

In The News...

Thirty years ago, on Oct. 19th 1987, this happened:

(chart created via stockcharts.com)

Now known as "Black Monday", the S&P 500 fell -20% in one day. It remains the largest daily decline ever in the market - more than two times worse than any other day on record (for reference, the worst one-day decline during the 2008 recession was -9.0%). Following Black Monday it took roughly one year for stocks to recover those losses, also shown in the above chart.

Earnings season is here again. So far 17% of S&P 500 firms have reported third-quarter financial results. Among those 100 or so companies that have reported, profits are up +1.7% (vs. +3.0% estimate) and sales are up +5.1% (vs. +4.9% est.), according to data provider FactSet. Earnings kick into high gear this week, with many of the big boys reporting in the coming days. Google, Amazon and Microsoft all release results after-market on Thursday Oct. 26th.

Change at TD Ameritrade: Our custodian, TD Ameritrade, has revamped its commission-free ETF (fund) lineup. This brings good news, bad news and no news.

The good news is that TD has expanded its list of transaction-cost-free funds from 100 to 296. This means more investments to choose from that will cost us/you nothing to buy and sell. For context, when we buy or sell a fund (ETF) for your account that is not on this list, it is $6.95 to do so. We try to use funds from this list because it means there are zero trade costs, provided we hold the investment for the required 30-day minimum (which we most often do).

The bad news is that while TD has increased the overall number of funds to 296, it has removed certain funds from the list. This includes the S&P 500 index fund we use (IVV), along with most of the bond funds we use (AGG, LQD, JNK and TLT). We do not trade the bond funds nearly as often so in that sense it isn't a big deal. But it does mean I will need to research new, comparable commission-free bond funds and start using those instead when practical.

This is no news if you have $100,000 or more of invested, billable funds with us because we already pay for all trade costs if that is the case.

This is something I considered when deciding which custodian to choose upon leaving Scottrade. I had asked TD whether the list of commission-free funds could be reduced and the answer I got was a pretty vanilla corporate response. Honestly though, I could not expect much else. Changes happen and we roll with the punches. If this type of change were the deciding factor that kept me from choosing TD Ameritrade then our priorities were misguided when choosing a custodian. It's something we will adjust to and move forward.

In The Market...

The S&P 500 rose +0.9% this past week. Let's look under the hood:

(price data via stockcharts.com)

It was the 6th-straight weekly gain for the S&P 500 index, which has risen more than +4% over that time. The last time the S&P went seven-straight weeks? Dec. 2014. History suggests we should see a pullback here, though it may only be in the 2-3% loss range over the next few weeks. We'll most likely see the broad market flatten out over the next month or so. But seasonality still plays in the favor of the market rally continuing through December, as again, Q4 is typically the best three-month stretch of the year.

Meanwhile, bonds sold off as stocks continued to rise. Long-term interest rates look like they might be on the cusp of spiking higher, but have had a tough time doing so when they have reached this point (to be specific, whenever the 10-year Treasury bond yield has hit 2.4%). This is a tad concerning for our bond positions, but we will continue to monitor bond values with patience over the coming days and weeks before making any changes.

In Our Opinion...

Should you invest in Bitcoin?

A number of people have asked me this in recent weeks. The short answer is, I don't know. The longer answer requires researching and learning more about Bitcoin before feeling comfortable recommending it to anyone.

What is Bitcoin? Bitcoin is a digital currency, designed as an alternative form of payment to U.S. dollars or other foreign currencies. In effect, it provides a uniform currency across economies and eliminates the need for exchange rates. Bitcoin makes international buying/selling easier, but it is unregulated.

What is one Bitcoin worth? This is where it gets tricky, given its recent value surge. According to the NYSE Bitcoin Index, one year ago Bitcoin was worth roughly $600, six months ago it was worth $1,000, three months ago it was worth $4,000 and today it is worth $5,700. That is a +450% gain in just one year!

Bitcoin's rise may be the problem. Not because Bitcoin isn't "worth" $4,000 or $5,700 or whatever amount on a given market day. An investment is worth whatever buyers and sellers are willing to buy and sell for provided they have access to the same information. Bitcoin's value is a problem because it is supposed to be used as a currency and currencies should be somewhat stable. The extreme day-to-day price volatility makes it difficult to use in the exchange of goods and services, at least I would assume...

So... is it an asset or a currency? Given the increasing demand and rapid value growth, the result is that consumers buy Bitcoin as an investment and not for its original, intended use. This makes Bitcoin more of an asset and less of an actual currency, kind of like gold or other precious metals. This isn't to say that it won't become a mainstream currency, but for now it looks and smells a lot more like an investment/asset.

My biggest Bitcoin fear: When people start buying it for no other reason than they think they will get rich quick that makes it ripe for turning into a bubble. I suspect this is the case based on some of the inquiries I have gotten.

We could say the same thing about any given stock, but there is one key difference. For many investors, it is calming to be able to see the company they invest in and read things about what the company is doing. It emotionally helps validate the investment decision. Bitcoin, in comparison, is a bit of a black hole. Even if that is not truly the case, I know a few people who have blindly thrown money into Bitcoin without knowing anything about it. My fear is that the moment its value falls, investors will be quick to bail. Unlike stocks, which have lived more than a century and have a track record of rebounding from massive price declines, Bitcoin has yet to weather any real storms.

The Verdict: I need to dig a bit deeper on Bitcoin. For now I would refrain from buying it, but if you are interested let me know and we can discuss.

In Our Portfolios...

Q&A/Financial Planning...

Is it open enrollment time for benefits at your company?

If so, don't simply go through the motions with regards to your health care options and other available benefits, such as flexible spending accounts. Take the time to assess the differences between health care plan options, particularly if you anticipate any major medical expenses coming in 2018. Evaluate whether the tax-savings of the Health Savings Account (HSA) make it a worthier choice than the PPO, HMO or whatever other options are provided. We are happy to help if you have questions regarding your plan options.

What's New With Us?

I spent the weekend battling a stomach virus that I picked up from our daughter (who got it at day care), but I am all better now and ready for a great week.

Enjoy the week ahead,

Betz Signature 250px.png
 

Brian E Betz, CFP®
Principal

Stocks Climb Higher Into The Peak Earnings Week of 2017

/ Percension Wealth Advisors, LLC/

In The News...

This is a big week ahead.

More than one-third of all S&P 500 companies announce quarterly earnings this week. Among the heavy-hitters that report Q2 results are: Google, Amazon, Facebook, Exxon-Mobil and Proctor & Gamble. In terms of company size, those are the 2nd, 4th, 5th, 8th and 14th-largest companies, respectively, in the world.

Coming into this week, roughly 20% (97 companies) had released earnings. So far, so good. According to the data company FactSet, earnings growth is up +7.2% vs. +6.6% expected. Revenue growth is up +5.0% vs. 4.9% expected. Of those that have reported, 77% have beaten their sales estimates. This would be the highest percentage since pre-2008.

The fact that sales growth is not only strong but outpacing targets is great. I emphasize sales over earnings because it is easier for companies to manage their bottom line than it is to generate top-line revenue growth (as I have stated before). It is still very early in earnings season so a lot can change, but this week will be pivotal in shaping those to come.

In The Market...

The S&P 500 gained +0.6% last week. Let's look under the hood...

(price data via Yahoo Finance)

Stocks: The S&P 500 finished last week at a new record high of 2,472. Seven of the 10 major stock sectors were higher, led by Utilities, Health Care and Technology.

There was quite a bit to like about last week. New highs are bullish, as is good sector distribution - meaning there are more than just a few sectors leading the overall market higher. When I perform my weekly analysis every Friday, the result is a scorecard of which sectors I believe are worth buying vs. selling vs. holding. There are currently more sectors worth buying than I have assessed in recent months.

However, we are also nearing August, which is notoriously the start of the most volatile time of year for the market. The S&P 500 has been negative in five of the past seven Augusts, dating back to 2010. So seasonally speaking, the weeks ahead tend to be troublesome.

Bonds: A really good week for the entire bond market. High-yield bonds kept climbing while Treasury bonds bounced nicely, up nearly +2.0%.

In Our Opinion...

Knowing when to hold 'em is very important. The past few weeks have been quite representative of that.

Despite just saying how there are multiple stock sectors worth buying, you may notice that our buying/selling activity has been tame lately. There are a number of reasons for this, but the two biggest are:

  1. Patience pays
  2. Opportunity cost often does not pay

These go hand-in-hand. There are often instances each week when I consider pivoting from one stock ETF to another. I have refrained because of the above premises. Whenever we decide to reallocate from one fund to another, I always ask myself:

  • Has something changed to prevent our current investment from rising in value as anticipated?
  • Is the outlook for the next-best investment alternative measurably better to justify incurring the transaction cost?

The first point is the big one. The market will always be unpredictable to some extent, no matter how much analysis is performed. So it is important to know whether the outlook for a particular holding has changed, or, if it is just taking longer to develop than previously thought. The second point is not an issue for clients who have invested over $100,000 with us, as we subsidize the transaction costs. But it is a concern for smaller accounts, which is why we try to limit transactions.

Right now I still feel good about our major stock holdings, which are the Nasdaq-100 index fund (QQQ), Health Care sector fund (XLV) and Real Estate sector fund (VNQ). Most client accounts own all three.

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...

"How should I allocate my 401k?"

In the past week, a few different people hit me with this question. 401k accounts tend to be less nimble than the type of account management we do, which stresses the need to buy-and-hold even more. However, this does not necessarily mean you should just pick a target-date fund and never change it (e.g. Vanguard 2025, 2035 or 2045 target-date funds).

This year shows why, for a couple good reasons. First, Technology has consistently been the best sector year-to-date. Even if your 401k does not offer sector funds, chances are it does offer a growth-oriented stock fund that skews more heavily toward Tech than, say, a standard S&P 500 index fund. There is nothing wrong with a S&P index fund. In fact, I typically recommend it to 401k owners because the 401k plan investment menu options are so poor. But consider the difference in year-to-date returns between a S&P fund (IVV) and a growth-oriented, tech-based index fund such as the Nasdaq-100 (QQQ):

IVV: Up +11%
QQQ: Up +22%

The tech-heavy QQQ fund is up double the return of the S&P. Most plans offer a similar type of fund, yet most 401k owners are unaware.

Second, bond funds have held their own this year. Preferred stock is up nearly +9% on the year, which is nothing to sneeze at and a pretty good source of diversification away from big stock-based funds. Remember, we treat preferred stock as a bond because of its makeup and risk characteristics. Not all plans will offer a preferred stock option, but many do.

If you need help allocating your 401k, let Gale or I know. At the very least it is good to understand the differences between plan investment options and take advantage of them when they fit your risk tolerance and ability to periodically reallocate your holdings over time.

What's New With Us?

Do you want to donate some toys? (Or just want a tax deduction?) 

This weekend I will be representing the Salvation Army at a "Toy & Joy" event hosted by CenturyLink. As a member of the King County Board, we are accepting donations of toys that will go to kids-in-need in the greater Seattle area. If you would like to contribute, let me know and I can figure out a pickup. This is one way you can claim a charitable deduction on your taxes for 2017.

Have a great week!

 

Brian E Betz, CFP®
Principal

France Follows The U.S. Blueprint While The U.S. Budget Awaits One

/ Percension Wealth Advisors, LLC/

In The News...

The political landscape has been relatively quiet, but that won't be the case for much longer due to two looming events sure to have lasting impressions.

U.S. budget deadline: First, the U.S. government has until April 29th to agree on a spending bill to fund government expenses through its September 30th fiscal year-end. The biggest unknown is whether certain major budget matters, particularly those promised during President Trump's election campaign, will be included in this negotiation or pushed out as part of the 2018 budget talks.

This type of thing is not new, but it is unique. Congressional infighting has threatened to shut down the government before, as well as risk default on certain financial obligations. However, Republicans have leverage due to control over both the executive and legislative branches. What makes this truly different is that these talks will occur on the watch of a new president who is intent on playing hardball. Interestingly, if a government shutdown does occur on April 29th, that happens to be President Trump's 100th day in office.

Do I think the government will shut down? No. There are too many outs that Congress can use to postpone certain decisions. These kick-the-can-down-the-road methods are part of the bigger problem preventing true budget reform, but that is for another day (and platform). But this is the first glimpse into Trump's deal-making, should he engage himself into the process this week as most believe.

France channels the U.S.: Meanwhile, France is taking a page from the U.S. playbook with its own presidential election. The two finalists for the French presidency are outsiders. Far-right candidate Marine Le Pen and political newcomer Emmanuel Macron will face-off in a final vote on May 7th. Le Pen has a Trump-esque populist approach to immigration and border protection. Macron is a former investment banker with virtually no political experience, whose focus is economic development and socially liberal policies. Current President Francois Hollande chose not to run for a second term, which opened the playing field for an array of candidates.

Among many differences between the two finalists, what makes this a big deal is that one candidate (Macron) wants to remain in the European Union while the other (Le Pen) wants to secede and tighten up French borders. Macron is the heavy favorite, but as recent history has shown, don't assume anything. Should Le Pen win the election run-off, the short-term market reaction could rival the volatility that occurred when Great Britain voted to leave the European Union last summer. France is the 6th-largest economy in the world, so this matters.

In The Market...

The S&P 500 rose +0.9% last week. Let's look under the hood:

(data source: Yahoo Finance)

Stock bounce-back? The majority of stock sectors rebounded. Consumer Discretionary (a current holding of ours) continues to look like the strongest sector. Utilities (another holding of ours) still looks bullish, despite the relatively flat week. The S&P 500 index is still floundering around a value of 2,350, where it has resided since late-February.

Earnings wave: Nearly 40% of S&P 500 companies report first-quarter results this week, including some of the big-boys like Google, Amazon and Exxon-Mobil. That will spark some market movement, one way or the other. More on earnings in the Opinion section below.

Bond-breakout? Conservative bonds such as long-term treasuries and investment-grade corporate bonds look primed for a rally, but we're not quite there yet. Both TLT (treasuries) and LQD (inv-grade corporates) were flat last week, which is positive considering the collective rebound within the stock market. As I often write, "safe" bonds like LQD and TLT often tumble when stocks rally, and visa-versa. The fact they held their ground amid a stock bounce is constructive. We are not quite ready to pull the trigger and buy just yet, but those bond ETFs are of interest.

In Our Opinion...

Stop me if you have said or heard this before...

"I don't understand. It was a great quarter for the company. So why is the stock price down?"

This confusion is common. Companies often exceed their earnings estimates or hit revenue targets, only to see the stock price react in an unexpected negative manner. There is no pure positive correlation between a company's share price and recent financial performance.

The best explanation for this is because it is impossible to know the motivations of every individual buyer and every individual seller -- those who make up the supply/demand for that stock. In the case of earnings season there are often catalysts within a company's results that may hurt its share price, contrary to our expectations. For example:

  • The company beat its earnings estimate, but not by enough to invite new buyers
  • The revenue target was reached, but total sales still declined compared to prior quarters
  • Overall, the financials look good but customer growth is leveling off
  • A management shake-up is announced that investors dislike
  • During the earnings call, the outlook for future performance is revised lower due to unfavorable business conditions

These are just some reasons that might taint an otherwise rosy quarter. The opposite holds true too. Here are some reasons that might actually boost a stock price despite reporting a poor quarter:

  • A quarterly profit loss was reported, but the loss was less than anticipated
  • Total sales fell short of expectations, but a new opportunity or partnership is announced that will boost sales in the future
  • A business unit is being dissolved or a layoff is announced. As tough as these events are on those affected, the right type of restructuring helps the business run more efficiently and profitably moving forward

The common theme here sums it up best: Quarterly earnings reports reflect on a company's past whereas its stock price reflects its future prospects. Investors care more about where they think a business is headed than where it has been. This is also why savvy investors refrain from buying/selling around earnings season. It is because of the wildly unpredictable nature of a) earnings reports, and, b) how stocks react to earnings reports. For these reasons, investing turns into gambling when buying or selling a particular stock near its earnings date.

In Our Portfolios...

Stocks: No changes last week. The Industrials sector is showing some opportunity, although it is unlikely we would yet sell either our Consumer Discretionary or Utilities positions to purchase Industrials.

Bonds: No changes last week. We may add investment-grade corporate bonds in the near future, at which point all accounts would be 100% allocated again.

Q&A / Financial Planning...

Are income taxes coming to a 401k plan near you?

As the federal budget negotiations heat up you will hear suggestions of ways to fund certain initiatives. These initiatives include reducing the corporate tax rate from 35% to 15%, paying for health care and building the border wall. One target in the budgetary cross hairs is the enormous amount of money sitting in tax-deferred investment accounts (401k, IRA) as well as the enormous amount of money that will be pumped into these plans in the future.

Here is an article that touches on one proposal to tax annual 401k gains at a nominal 15% rate. I have heard of other ideas ranging from lowering the yearly 401k contribution limits to replacing tax-deferred salary contributions with after-tax contributions only. All of these ideas would boost tax revenues in the short-term.

Let me be clear though: Do not lose sleep over this. Do not adjust any long-term plans based on these rumors, but it is worthwhile knowing what is being considered. I think it would be insane for the government to muck with the current 401k structure. It is our only form of retirement savings that is both universally understood and used. To revise it in a way that hurts retirement savers would potentially set us back an entire generation. Employers would scale back their plans and employees would stop utilizing them. The odds are slim that anything significant will happen to these tax laws, but it is worth mentioning.

What's New With Us?

You will receive an email from Docusign this week requesting your electronic signature to set up your TD Ameritrade account. Once your TDA account is established I will send a follow-up email (also via Docusign) to transfer your existing Scottrade account to TDA. If you have multiple accounts we will complete this process for each of them. The good news is that it only takes a minute or so to complete the e-sign process. Please call me if you have any questions along the way.

Have a great week everyone,

 

Brian E Betz, CFP®
Principal