Why Bull And Bear Market Talk Is B.S.

/

This is officially the longest bull market in history. Or so I am told.

According to CNBC, this bull market run is 3,455 days old. It began in March of 2009 and has eclipsed the previous record run from 1990-2000. A bull market is a period in which stock prices rise without experiencing a -20% or more decline.

The thing is, who cares?

Bull and bear markets are irrelevant. The terms mean nothing. Investor Joseph Fahmy sums this up well:

(source: twitter.com/jfahmy)

I could not agree with him more. I understand why so many people talk about bull markets and bear markets. We are conditioned to think about investing in those terms because the financial media fascinates about them.

And in fairness I can see why. It keeps it simple and we like simple.

Bull market = Good
Bear market = Bad

We typically like things explained in black-or-white terms. So we use bull vs. bear markets as a primary way of judging the overall stock market because it requires little time or thought.

The problem is, it provides no value. The market is anything but simple and the notion of debating whether the bull market will end is largely emotional. Investing should be process-based and as emotionless as possible. I cannot imagine someone basing their investment decisions on whether they think we're in a bull market or a bear market. 

If someone asks me how long I think the bull market will continue here is what I say: The overall U.S. market remains in a rising trend, which to me, started back in the summer of 2016. When I say rising trend I mean the price trend of the S&P 500 index. It is based on the various timeframes we analyze. Until that rising price trend is broken, the benefit of the doubt goes to the market's ascent.

I will leave the bull market/bear market mumbo jumbo to others and instead continue to focus on the price movement of the stocks that comprise the overall U.S. market. To anyone who manages money, I would recommend they do the same.

In The Market...

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

(price data via stockcharts.com)

The S&P is sitting at a new record high. The growth sectors all finished in the green while the dividend-heavy sectors (Real Estate, Utilities and Consumer Staples) were the lone losers. I found it interesting that bonds rallied (interest rates lower) amid the rise in growth stocks. But oh well.

We are fully invested across all of our portfolios and continue to be weighted toward Technology, which continues to lead the overall market higher. The Tech sector jumped to a record high as well and remains the healthiest looking sector out there.

If the market can continue to rise into September it may set up for a very nice end to the year. Seasonally speaking, the fourth quarter is the strongest. There is nothing more bullish than new price-highs and we are seeing them across many stock names.

In Our Portfolios...

What's New With Us?

It was a weird weather weekend here in Seattle, between the overcast and the haze that is still present from the B.C. fires. I managed to get some yard work done. While the smoke was bad early in the week, by the time most of it cleared on the weekend I'm not sure the air was any worse than it normally is in other major cities. I suppose we must be conditioned to having the cleanest of air.

Have a great week!

Brian E Betz, CFP®
Principal

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

An Old Saying Rings True Yet Again

/

Top Of Mind...

There is an old saying among certain professional investors: "The news follows the price."

What it means is, by the time the news breaks to explain why a certain stock price or the overall market moved up or down it is already past tense. This is mostly the case with the broader stock market though than it is with individual stocks, as individual companies are prone to gyrate higher or lower immediately following the release of their quarterly earnings results. Most of the time the broader stock market will already be rising when good news arrives, or already falling when bad news hits.

Now it seems to be happening again within the bond market. Bond guru and former PIMCO-Founder Bill Gross said this week that we should expect a mild bear market for bonds. Specifically, he referred to U.S. Treasury bonds, which are traditionally the safest and most conservative of all bond classes.

The thing is though, Treasury bond values have already been falling for the past five months. Long-term interest rates have simultaneously risen because bond values and their interest rates move opposite one another (a frequently discussed concept that I won't detail here but am happy to explain).

I have written for the past two months that the Treasury bond market was on shaky legs. I derived that opinion from our own price analysis, which started months ago. The fact that a famed bond investor like Gross muttered the words "bear market" are not reasons to justify investment decisions you might make, despite the fact that his expertise carries weight when he speaks.

It is not that I necessarily agree or disagree with Gross' assessment. I have felt that the Treasury bond market has been in trouble for a while, but I refrain from using the words "bull market" or "bear market" in general because they have become such ambiguous terms.

Gross went on to say that he favors investment-grade corporate bonds, which are an asset class that look relatively appealing when compared to Treasuries but are still fledgling a bit as we speak. I am glad he mentioned that though because it helps reiterate that not all bonds are created equal -- a popular myth that needs to be expelled. Corporate bonds differ from Treasury bonds. Investment-grade bonds differ from high-yield bonds. Short-term bonds differ from longer-term bonds. So on and so forth.

For more proof that news follows price, look at 2002 or 2008. During the "dot-bomb" era the worst year of stock market returns was 2002. Yet, leading up to that year the market had already fallen some -25% between the summer of 2000 and the end of 2001. But it was not until unemployment picked up in late-2001 that the news stories started rolling in.

When Lehman Brothers declared bankruptcy in Sept. 2008 the U.S. stock market had already lost 20% in the 10 months preceding that event. Did the market worsen from there? It sure did, but stock prices were already on the decline for quite some time before that point.

These are just a couple stark instances that may help explain why our investment management approach focuses almost entirely on price movements, rather than product launches, press releases or someone else's research report. Supply and demand are the only aspects that matter when it comes to analyzing market movements and the purest reflection of supply and demand is price.

This may help explain why I am often ambivalent when asked what I think about a particular business when it makes news. It isn't that I am uninformed, it is just that the news does not matter much to me because by the time it comes it is in the past. Yesterday's news, if you will.

In The Market...

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

(price data via stockcharts.com)

It was a choppy few days that needed a big Friday to finish positive for the week (and did). Most sectors were higher while the defensive ones, namely Consumer Staples and Real Estate, were down.

Technology is easily the best-looking sector heading into next week, but for tech stocks to continue to lead they will need to surpass their previous price highs that many of them set in late-January. The same goes for the entire market as a whole via the S&P 500, but the S&P is still more than 4% away from its record high, whereas the Tech sector is within striking distance of its all-time high. Technology may hold the key for the broader market.

Bonds were negative again and have fallen in seven of the last 10 weeks dating back to December. The 10-year Treasury bond yield is knocking on the door of 3.00% but it has yet to rise that high. I think that is where interest rates will run into some resistance if history has anything to say about it. I could envision bonds rallying some point soon, even if it is temporary.

This chart of the 10-year Treasury yield (interest rate) shows why:

(created in stockcharts.com)

Notice in late-2013 that interest rates made a sharp U-turn when the yield reached right about 3.00%. This is certainly no guarantee that history will repeat itself, but if it does, bonds would benefit in the interim. I suspect that rates will pull back a bit if/when 3.00% is reached before ultimately rallying higher.

In Our Portfolios...

In Financial Planning...

Going through open enrollment at work?

If so, this is a reminder that we are happy to review your employee benefits options as it relates to deciding between health care plans and any flexible spending accounts your company offers. These choices are often complicated and confusing, especially Health Savings Accounts (HSAs). I would suspect that HSAs will slowly replace more traditional PPO options over time. If you want help understanding your HSA, let us know.

What's New With Us?

In light of the snowfall we had the past few days I will be trying to stay warm while finishing up my latest house project -- installing new flooring in our laundry room. Also, next week I will be out of the office most of Thursday and all day Friday, so the weekly blog may be delayed until the following Sunday or Monday.

Just so I don't forget, our new office address effective March 1st is:

801 2nd Ave Suite 800
Seattle, WA 98104

I will provide my new direct line phone number when officially moved.

Have a great weekend,

Brian E Betz, CFP®
Principal

Understanding The Jobs Numbers Is a Job In Itself

/ Percension Wealth Advisors, LLC/

In The News...

I want to briefly touch on something I didn't have a chance to discuss last week: Jobs.

The latest report for April showed unemployment fell to 4.4%. That is the lowest in 10 years, since March 2007. What does it mean and is it significant?

It depends. The problem is that you can use a variety of jobs-related statistics to prove your argument, depending whether you think the job market is strong or weak. It is complicated because while the notion of having a job is straightforward (a lower unemployment rate seems obviously better), the context around the entire job market is not. Point being, it is not as simple as saying things are rosy because the official unemployment rate is the lowest in a decade.

A negative take: One big difference between today and 2007 lies in the participation rate. This is the ratio of working-age Americans either employed or actively-looking-for-work compared to the total working-age population. The following chart shows that while unemployment (BLUE line, right axis) is back at lows seen 10 and 20 years ago, labor participation (RED line, left axis) has fallen some -4% since 2007 and is currently at 63%. Take a look...

A -4% decline in participation may not sound like a lot, but when you consider there are 254 million working-age citizens in the U.S., 4% in either direction is significant.

A positive take: A stat that gets thrown around a lot is the number of people not in the labor force, currently 94 million. No doubt that number is high, but context is needed because it stems from the total pool of working-age Americans, which includes retirees. Baby Boomers (those born between 1946 and 1964) comprise nearly one-third of the U.S. population and are gradually retiring with each passing year. Those retirees are counted in the denominator of that 63% participation ratio. There are other caveats that may help explain the 94 million who "aren't working", but that is a big one.

The numbers that matter: Just as important to the growth in jobs is the growth in pay, shown below. Average hourly pay (BLUE line) is up +2.5% year-over-year, which is just a shade above the 2.2% inflation rate (RED line) that reflects the average cost increase of the things we buy every day.

Most telling from above is how wages have only inched higher despite the stark rise in the cost of goods and services. Look no further than the housing market to feel this impact. In a hot real estate market such as Seattle, it is difficult for many prospective homebuyers to keep pace with housing prices without wage increases. (I don't mean to oversimplify what it takes to buy a home or the savings process required. I am merely using a situational example to illustrate my theoretical point that wage growth and inflation are just as important as the number of people hired.)

All in all, the April jobs report was positive. But before praising or refuting the conditions of the labor market, realize that a lot of stats matter aside from the 4.4% headline figure that you see.

In The Market...

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

(data source: Yahoo Finance)

Stocks: Seven of the 10 equity sectors were down on the week. Technology led the way, as the exchange-traded fund "XLK" is at all-time highs, eclipsing the previous mark set in March 2000 (more on this below). On the flip side, Financials, Real Estate and Materials were each down more than -1.0%. For those who own the Real Estate fund (VNQ), I feel we are nearing a point where Real Estate could rebound in the near future, coming off of consecutive weekly declines.

Bonds: A bounce-back week for the bond market, which may be getting close to breaking out. Investment-grade bonds were the best of the bunch, which we own in most accounts. If stocks were to slide further, or if the S&P 500 has trouble getting over 2,400, that could mean good news for bonds.

In Our Opinion...

I mentioned that technology is breaking out to all-time highs. Here is a look at where the price of XLK stands in relation to the past 20 years:

(chart via stockcharts.com)

Back in February, when tech was some 6% below its current price, I was concerned about the rally stalling out near that previous record high from March 2000. Now that it has pushed above it, this investment looks promising.

One concern I do have is that the relative strength reading (RSI) is sitting up around 80.0 on this monthly chart. That is well above the "overbought" level of 70.0 that investors use as a predictor that a sell-off is near. There is no tried-and-true approach when comparing price with RSI, but we do so because RSI helps measure buying and selling momentum, which can help provide clues to potential trend changes.

I tend to think that a RSI reading above 70.0 is actually bullish, particularly if similar, past instances turned out well in the weeks that followed. Will this be the case here? I tend to think the rally has some legs in it. As a result, I have my eye on tech again as a potential buy.

In Our Portfolios...

Stocks: No changes this week.

Bonds: No changes this week.

Q&A / Financial Planning...

What is the difference between stock options and restricted stock?

Many of you benefit from owning stock options or restricted stock (or both), as your employer grants you company shares as an employee incentive. It is easy to overlook the details that differentiate options from restricted shares, so here is a high-level comparison of the two:

STOCK OPTIONS:

  • The right to buy shares at a predetermined price ("exercise price"). Not an obligation to buy.
  • Your reward is if the share price exceeds the exercise price on-or-after the vesting date. If so, your stock options are profitable.
  • Your risk is if the share price is lower than the exercise price on the vesting date. In this case, you earn nothing but lose nothing.
  • If you leave your employer and own vested shares that you have not purchased, you typically have 90 days to buy them post-departure.
  • Taxes vary depending on whether the shares are incentive (ISO) or non-incentive (non-ISO) stock options.
 

RESTRICTED STOCK:

  • Shares are simply given to you by your employer (no option to buy).
  • You must wait for the vesting date to actually own the shares (if you leave your employer prior to vesting, bye-bye shares!).
  • The value of the shares are taxed as ordinary income for the year in which the shares vest.
  • (Number of shares that vest) x (Share price on the vesting date) = Initial amount you are taxed on
  • If you hold the shares past the vesting date, the difference between the eventual sale price and the price on the vesting date is taxed as either a long-term or short-term capital gain (unless you elected 83b tax treatment).

    What's New With Us...

    If you have not received the account transfer request to move your account(s) from Scottrade to TD Ameritrade, you will over the weekend. Please be on the lookout for that form, which we would appreciate if you could e-sign once you get it. Call me if you have any questions.

    Have a great weekend!

     

    Brian E Betz, CFP®
    Principal