What To Make Of The Recent Decline In Home Values

Hi everyone,

With tax day quickly approaching, so too is the deadline for making Traditional IRA and Roth IRA contributions for 2018. This video explains the contribution limits for various types of retirement accounts.

If you have any questions regarding whether you qualify for a Traditional IRA or Roth IRA, please ask. If you plan to make either type of contribution (or both) you will need to do so not only before April 15th, but before you file your 2018 tax return.

Home values slide in December: The average home fell ever-so-slightly, down -0.1%, in the latest S&P/Case-Shiller home price index report. Seattle homes fell for the 6th-straight month, as home price appreciation slowed throughout the second half of 2018. The average home is up +4.7% annually, which is more in-line with historical averages but still a bit of a shock compared to the +7% to +8% growth we saw not much more than a year ago.

If you were reading this blog 18 months ago, this is exactly what I predicted would happen. I think this is perfectly normal, but as always, it helps to gain historical perspective before drawing any conclusions about what is next. Here is a look at the rise in home prices dating back 30 years.

(source: FRED Economic Data, via S&P/Case-Shiller HPI)

You can see how real estate has leveled-off as of late, so much so that you might argue a bigger decline is forthcoming. I am not so sure about that, but whatever happens, one thing I am pretty sure of is that the stock market will lead the way (for better or worse). Stock prices are the leading indicator that influences both hiring and real estate values. If company values rise, more people are employed and investor confidence rises, which directly boosts housing demand. If company values fall, the opposite occurs and housing demand will weaken.

Proof of this is what occurred last Summer. It is no coincidence that housing prices started to slow around June/July, just a few months after the S&P 500 had fallen roughly -10%. I can say with confidence that the shock of seeing stocks drop caused homebuyers to pause a bit in their housing pursuits. If you disagree I would be curious to hear what you think.

Here a complete city-by-city look at the latest housing numbers:

 In The Market...

The S&P 500 gained +0.4% last week. Let's look under the hood:

(price data via stockcharts.com)

It was another constructive week for the stock market, despite modest gains. The individual sectors were a bit mixed but the week ended strong, which is what we like to see. The S&P 500 finished the week just above 2,800, which many think is an important level for the index to hold given it represents the previous high from both November and December — instances where stock prices fell sharply soon thereafter. Will this time be different and see the rally continue into March?

Our cumulative analysis would suggest yes. However, there are two momentum indicators that give us pause, which were the same problems that occurred back in November and December when the S&P failed to hold above 2,800. These are shown in the chart below, which illustrates how Relative Strength (RSI) and the percentage of stocks that are above their respective 200-day moving averages are both lower compared to when the S&P 500 index hit its previous two highs back in Jan. 2018 and Sept. 2018. Take a look…

(chart created via stockcharts.com)

The large chart in the middle shows the actual price movement of the S&P, including the recent rally to start 2019. RSI is shown in the chart above that, where you’ll notice it is fading despite these price rallies. RSI compares the size of gains in periods when price rises and compares it to the magnitude of losses on days when price falls. The above is a weekly chart, so each period being considered is one week. The important takeaway is that we want to see RSI rise — or at least remain elevated — when stock prices rise. When RSI stalls or fades amid a stock market rally, it indicates that price momentum is weakening and a reversal may be near.

Additionally, the percentage of stocks that are above their 200-day moving averages is lower compared to those previous highs from 2018. Today, 61% of stocks in the S&P index are above their 200-day moving averages. That ratio was much higher during 2018. This measure of what is called market “breadth” statistically represents how well the stocks that comprise the S&P 500 are moving in unison or not. We would like to see this percentage higher, not lower. If the S&P 500 is rising, but this percentage is falling, it indicates that a few big companies are doing all the heavy lifting, which often is not sustainable.

While we remain bullish short-term, I wanted to highlight these two indicators as factors that we are closely tracking, as they influence our buying and selling decisions.

We were pretty inactive on the portfolio front last week. The bond market took a sharp negative turn, which may result in reallocating some of those positions in the coming days. We sold our Municipal Bond fund (PZA) for a modest gain within accounts that owned it.

In Our Portfolios...

What's New With Us?

It was a fairly relaxing weekend. The weather was nice, so I was able to get outside and do some yard work. I had to cut up a tree that had fallen last month as a result of the snowfall. The tree was decaying and the weight of the snow was its final blow. Luckily it did not cause any other damage, but it did take some time to saw it apart.

Have a great week!

Brian E Betz, CFP®

Deadlines To Make Retirement Plan Contributions

Hi everyone,

Quite a bit to cover this week. Let’s start with a change we are making next year, which will affect some of you.

We are going to conduct all client reviews during the first quarter, between January 1st and March 30th. If you already meet with us during this time period for our review then nothing has changed. However, if we typically meet outside of those months, expect that we will want to move up our review date in 2019. The exception would be if we met very recently then it does not make sense to meet so soon again. But contact us and we can discuss whether a review is necessary.

We are doing this for a couple reasons. First, it allows us to meet with you during tax season, which is a time when most of you are already thinking about your finances. Second, it helps us streamline our annual review process.

We have received numerous questions about retirement plan contribution deadlines. Here is a brief video we created explaining the different deadlines for various IRAs, as well as 401k plans.

There were a few interesting headlines to come out of last week. In no particular order:

  • Johnson & Johnson executives reportedly knew that the company’s baby powder contained asbestos for decades but failed to report it. J&J executives refuted the reporting done by Reuters, however J&J shares still dropped -10% Friday.

  • Apple (AAPL) plans to build a $1 billion plant in Austin, TX.

  • Amazon workers in New York are threatening to unionize due to what they say are poor labor conditions.

  • The European Central Bank (ECB), which is to Europe as the Federal Reserve is to the US., plans to end its years of bond-buying programs that have been used to boost the European economy. This is specifically known as “quantitative easing” (QE).

  • Meanwhile, the U.S. market fell to a 9-month low.

In The Market...

The S&P 500 fell -1.2% last week. Let's look under the hood:

(price data via stockcharts.com)

Another rough week for stocks. The S&P 500 finished at its lowest weekly close since March 2018. The S&P index is down -2.8% year-to-date with 2 weeks left.

As I write this the S&P is down roughly -6.5% in December. How rare is it that the S&P would be negative in December, let alone down -6%? In the past 30 years, the S&P has only been down 5 times in December. Very rare, indeed.

Entering this week the S&P faces three stiff challenges, as illustrated in the chart below. The first is that the price of the index has fallen back down to its previous low from February/March. The hallmark of a healthy market is seeing higher price-highs. Conversely, an unhealthy market is characterized by lower price-lows. In this case, if the S&P falls below that dashed line (#1) it is anything but healthy.

Take a look at this on the chart and then I’ll explain the other two problems.

(chart created via stockcharts.com)

Similarly, the other dashed line (#2) represents the long-term rising trend line that the S&P 500 has previously used to buoy itself and propel it higher. If that occurs again here, great! But if it doesn’t and the price falls below, look out.

Finally, and possibly most concerning, is that Relative Strength (RSI) is fading lower and lower (#3 above). We use this statistic to supplement our price analysis. It helps indicate whether there is strong or weak momentum behind the price moves that occur. Right now RSI is struggling, which is a problem amid falling stock prices. In fact, notice how RSI is lower today than it was back in Feb./March, a time when the S&P was roughly around the same price as it is today. Back then RSI was holding around 50, whereas today it is holding around 40. In short, we want RSI to be higher, not lower.

We made no major changes to client portfolios last week and continue to sit on a moderate cash balance.  In a rare move, we bought and sold a position within the same week. That position was Merck (MRK), which we bought/sold for accounts that own individual stocks.

It is never our intent to buy and sell this quickly, but given how flimsy the market is right now we put a stop-loss on the position, which triggered the sale when MRK fell to the specified price. Simply put, we took a stab and it didn’t work out. Nonetheless, we were out of the position at no gain or loss, so I am content.

In Our Portfolios...

What's New With Us?

On Saturday we took our daughter to a kids soccer class and then on Sunday we went out to Snoqualmie to ride a Christmas train. Both were fun. What wasn’t fun was watching the Seahawks lose a frustrating game against the 49ers.

Have a great week!

Brian E Betz, CFP®

Is A Roth IRA Conversion Right For You?

'Tis the season to consider a Roth IRA conversion.

If you own a retirement account that you funded with pre-tax contributions, such as a Traditional IRA or a 401(k), those accounts are growing on a tax-deferred basis. You avoid paying taxes today, but will pay taxes in retirement as you take withdrawals.

Alternatively, what if you could have those savings grow tax-free?

Read More

The Decline Of General Electric Teaches A Cautionary Lesson

In The News...

Thomas Edison's company did something for just the third time in its 125-year history.

General Electric (GE), founded by Edison back in 1892, slashed its dividend payment in half from 96 cents to 48 cents per-share annually. According to CNBC it is the 8th-largest dividend cut in history (the 7 others greater than this occurred during the last recession). When were the other two times GE's longstanding, steady dividend was reduced?


Notice something those two years have in common? The first was during the Great Depression and the other was during the 2008/09 financial recession. Interestingly, those previous dividend cuts occurred near the tail ends of stock market recessions. So this likely says more about the health of GE as a standalone company than it does about the broader economy, considering we are not currently in a recession.

GE shares are down a staggering -42% from the highs back in 2016 and -24% in the past month alone. The value of GE stock has not been this low since 2012.

The lesson learned from GE: I bring this up for a couple reasons. One, because of how rare it is to see a dividend cut of this size. Two, as a reminder of something I wrote about a few weeks ago where I highlighted four ways that investors are overly emotional about investing. One of the ways is that we become too infatuated with a particular company, often because it is where we work. As a result we make risky decisions such as owning too much of that one particular stock or loading up on that stock in a 401k account.

If you worked for GE this type of downside risk is now a reality as the stock price has precipitously fallen some -40% in less than a year. I say this with great sympathy, in the event someone you know works there. But fairly or unfairly this is an example of what the other side looks like, not what we are more prone to hear about with companies like Google, Amazon or Boeing, where share prices have been on fire for the past decade.

It is likely that GE stock will rebound at some point, but how soon will that be? Also, what constitutes the rebound? Will it ever get back above $30 per-share? Hard to say.

A step toward tax reform: In other news, the Republican-led House of Representatives passed its tax reform bill on Thursday. This was expected. What is more unclear is whether there will be enough votes in the Senate to pass this bill, or some iteration of it, given that Republicans only out-seat Democrats by two members in the Senate. The biggest debate forthcoming is whether a repeal of the individual health care mandate will be included in the reform. The mandate was part of the Obamacare plan that took effect in 2010. Repealing it would reduce government spending but also mean millions of Americans would be without health insurance. (I covered some of the proposed tax changes here.)

In The Market...

The S&P 500 slipped -0.1% this past week. Let's look under the hood:

(price data via stockcharts.com)

Ironically, it was an eventful market week despite the S&P 500 going nowhere. It was a total mixed bag, without much reason. Some growth sectors rose, like Consumer Discretionary, while others fell, like Industrials and Technology. Meanwhile, the more defensive sectors (Utilities, Consumer Staples) gained, while the bond market rebounded in unison as well.

The market rally has leveled off over the past month, as the S&P 500 index has stalled out just shy of 2,600. But because we have seen more volatility at the sector-level that has created some good buy/sell opportunities for us. This past week we were more active than usual in buying and selling investments (listed below), which is how we tend to be when the market is rising. For more on why this is, see the OPINION section below.

In Our Opinion...

I get asked how often we buy and sell investments within client accounts.


The answer is it really depends. We tend to buy an investment and hold it for a number of weeks before selling -- usually between 3 and 8 weeks. Because client accounts own multiple investments our transactions are staggered, which may give the appearance that we are buying/selling more actively than is the case. Larger accounts will have more investments and more transactions than smaller ones. We try to limit transactions on smaller accounts (under $50,000), because each $7.00 buy-or-sell transaction cost is proportionately more impactful on small accounts than larger ones.

When the market trend is rising we are usually more active and when it is volatile or falling we try to be more patient. In a rising market there tend to be ebbs and flows where certain sectors perform better than others, kind of like right now. This lends to being more active. If the market is choppy, patience and poise are key. There are plenty of instances where we will own an investment that has fallen in value, but rather than sell it we will re-evaulate and may hold it for a period of time in anticipation that it will rebound.

What I am describing speaks to our investment process as much as anything. Our process isn't short-term and it isn't really long-term. It is somewhere in between. If we were to rapidly trade investments that would be inefficient to you. If we were to buy-and-hold for years our value would be pretty moot after the initial allocations are made because we would not actually manage anything over time.

In Our Portfolios...

Q&A/Financial Planning...

I encountered a situation rolling over a client's Boeing 401k this week that might apply to you.

When you leave a job or retire, we almost always recommend rolling over your 401k to an IRA. Most of the time 401k rollovers are straightforward. Your pre-tax funds are rolled over into a Traditional IRA. Your Roth 401k funds (if you have them) are rolled over into a Roth IRA.

Simple enough, right? But what if you have "after-tax" funds in your 401k?

Not to be confused with Roth 401k funds, after-tax 401k elections are the contributions you make when you want to contribute more than the $18,000 limit. A lot of company 401k plans allow this, often unbeknownst to the employees. After-tax contributions are similar to Roth 401k contributions in that the funds contributed have already been taxed. But there is one key difference... Your Roth 401k contributions grow tax-free, whereas after-tax 401k contributions grow tax-deferred. This means the after-tax bucket of your 401k contains BOTH pre-tax and post-tax dollars, despite the "after-tax" misnomer.

How this affects your 401k rollover: Your 401k statement may not separate your pre-tax and post-tax dollars relating to your "after-tax" contributions. In fact, your 401k provider may include the entire after-tax bucket of funds in one rollover check, instead of separating that chunk into a tax-deferred rollover amount (the earnings that stem from after-tax contributions) and a tax-free amount (the contributions themselves).

Why this poses a problem: If you do not separate the tax-deferred earnings portion from the tax-free contributions portion, you may accidentally rollover all of it as tax-deferred funds into your Traditional IRA. This means you would end up paying income taxes TWICE on those savings -- once when you originally contributed them into your 401k and again when you withdraw them in retirement!

Why? Because unless you maintain records showing the after-tax money that was contributed years/decades ago, no one else will either. The IRA custodian will assume those withdrawals are all taxable down the road when you begin taking withdrawals. Even if you do have such records, such record-keeping will be frustrating to maintain in future years. Plus, you will constantly have to recalculate what percentage is taxable from what proportion is not (a whole other issue that I won't detail here).

Our client's Boeing statement luckily provided enough detail for me to figure out how much of her total 401k is pre-tax vs. true after-tax, but other 401k plans may not be that helpful. 401k rollovers are pretty easy, but it is important to take inventory of your tax-deferred vs. tax-free money to ensure that the right amounts are rolled over to a Traditional IRA and Roth IRA, respectively.

What's New With Us?

I wrote a new article on our general blog page: How The RMD Laws Could Rock Your 401(k) Or IRA In Retirement. Much of this I discussed a few weeks back in our weekly blog, but I wanted to expand on the Required Minimum Distribution (RMD) rules and provide something informative for non-clients. Feel free to share.

Have a great weekend!

Betz Signature 250px.png

Brian E Betz, CFP®

How The Federal Reserve Will Make $4 Trillion Disappear

In The News...

Nine years later, it appears the day has finally come.

The U.S. Federal Reserve will begin to reduce its balance sheet by reversing the quantitative easing (QE) stimulus measures that began in the wake of the 2008 recession. For the past decade the Fed has been buying Treasury bonds and mortgage-backed securities, which has consequently injected new money into the U.S. economy. Such liquidity actions are implemented to promote lending/borrowing between banks and consumers during periods when the economy slows.

What makes this Fed decision unique? What makes QE so unprecedented is that it has been going on for nearly a decade, to where the Federal Reserve balance sheet now holds $4.5 trillion in Treasury bonds and mortgage-backed securities. To begin the unwinding process and shrink its balance sheet to a more normal level, the Fed will let $10 billion of bonds mature and roll-off its balance sheet each month moving forward. That amount will gradually increase to the tune of $50 billion monthly.

What about interest rates? This announcement came following the latest Federal Open Market Committee (FOMC) meeting this past week. The Fed opted to hold off on interest rates, keeping its benchmark federal funds lending rate at 1.00% rather than increasing it to 1.25%. The committee expects to increase rates once more in 2018. Fed leaders meet twice more before the end of the year.

The decision to roll back QE means the Fed must feel comfortable regarding its two goals:

  1. Maximum level of employment
  2. Annual inflation growth of 2%

The first goal is open to interpretation. The official unemployment rate is 4.4%, which has improved substantially from when it peaked at 10% in late-2009. A sub-5% unemployment rate appears to be within the Fed's target range, but that is hard to tell. The second goal of 2% inflation is also within range despite the fact that the Fed itself reduced its inflation expectations over the next two years.

What do I think of the Fed's decision and what does it mean to investors? See the OPINION section below.

In The Market...

The S&P 500 was fractionally up +0.1% this past week. Let's look under the hood:

(price data via Yahoo Finance)

STOCKS: The S&P index was essentially flat, so it comes as no surprise that the sectors were nearly split between winners and losers. Interest-rate sensitive sectors were the biggest movers, which is also no surprise amid the Fed announcement. Financials were the largest gainer while the dividend-heavy Utilities and Real Estate sectors were the worst performers. This week was a net-negative for us, because despite the fact that many client accounts own Financials, all accounts own Utilities.

BONDS: The bond market followed suit, although interest rates did not rise as much as you might expect in light of the Fed news. We are still sitting on a chunk of cash in most client accounts, ready to deploy it once bond market conditions oblige.

In Our Opinion...

What does the historic unwinding of QE mean for the market and investors? Right now, not much. But let's first remind ourselves how we got here...

The Fed has two jobs: Monitor inflation and manage liquidity. Said differently, ensure that prices of goods and services do not rise too quickly or fall too sharply, while also ensuring that there is the right level of cash in the economy to promote steady lending/borrowing. The latter is precisely what QE aimed to accomplish. When the economy slows and both businesses and consumers turtle-up from spending, liquidity becomes an issue. Bond-buying programs help combat that by pumping new cash into circulation. As we have seen though, deciding when to turn that off is challenging. The Fed has taken a lot of heat for not unwinding QE sooner. To be honest, I do not know if this is the right time or whether it should have happened before now. Hopefully the market is stable enough to consume this gradual monetary tightening process.

Which brings me back to what this means to investors... The stock market has moved higher over the past year without much volatility, which is just the way we want it. This needs to continue or else the Fed could deviate from its plan. We would expect interest rates to creep higher as well as the Fed raises short-term rates and as investors prefer stocks over long-term bonds (remember, weak bond demand means falling bond values, which means rising interest rates).

But if there is one thing we know, the market is unpredictable. For years the herd mentality believed that interest rates would spike. If you turned on financial news you would hear that over and over. Let me be clear...

That simply never happened.

Yes, rates have risen over the past year. But these rate increases have been tepid and have occurred long after the time when "experts" predicted. The fact also remains that long-term interest rates will ultimately be determined by how investors react to the health of the stock and bond markets over time. If stocks fall in a sharp or prolonged manner I would bet that investors flock into Treasury bonds. This would send bond values up and interest rates down.

In Our Portfolios...

Q&A/Financial Planning...

A reminder for those of you who are self-employed! Next week is your last chance to set up a Simple IRA for 2017 if you want to contribute this year. If taxes are a concern and you are able to contribute more than the $5,500 Traditional IRA annual limit, consider setting up a Simple IRA where you can contribute $12,500 (or $15,500 if you have reached age 50).

There are other considerations though, namely the requirement to match what your employees contribute. Also, consider the long-term viability of the retirement plan and whether the parameters and restrictions of a Simple IRA align with where your business is headed in years to come. If you already have a Simple IRA plan then this deadline is moot. If you have a Simple IRA and feel you can contribute more than $12,500 for the year, consider graduating to a 401k plan. I am happy to expand on any of this, just ask.

What's New With Us?

As of Sept. 18th TD Ameritrade and Scottrade are now one, joint company. You may receive some notification on this, but no action is required. I expect that your tax forms for 2017 will be consolidated between the two custodians to ensure seamless Form 1099 tax reporting.

Have a great weekend!

Betz Signature 250px.png

Brian E Betz®