Worst Week Of 2017... What's Next?

In The News...

If the past year has taught us one thing, the narrative matters. Lets use last week as an example:

The market had its worst week of the year, sliding -1.3%.

or...

The market slipped a little more than -1%, just the third weekly loss of 2017.

Two opposing ways to explain last week. Each portraying a different story. When we want or expect something to turn out a certain way, that anticipation shapes our evaluation of it. I say this because people continue to wait for the market to face-plant. A number of clients and non-clients have said as much to me over the past month. So when the market strings together a few losing days the chirping becomes louder and angst rises.

Here is the reality: It is common for the stock market to fall ~10% (or more) at some point every year. Keep that in mind, especially coming off a week when the market was down roughly -1%. I have said for a few weeks that I wouldn't be surprised to see the S&P 500 flatten out, but that does not mean the sky is falling.

In The Market...

The S&P 500 was down -1.3%. Let's look under the hood:

View fullsize

(data source: Yahoo! Finance)

It was a crummy week for most stock sectors, evidenced by the sea of red above. Utilities, arguably the most defensive sector, were up more than +1% and is a sector that I would like to add in the near future (some portfolios already own it).

Remember what I said in my last post about how long-term interest rates behave after the Federal Reserve raises short-term rates? If you don't, here is a reminder... What I showed was how long-term interest rates actually fell the previous two times the Fed raised rates. Sure enough, following the Fed's third rate hike rates declined yet again due to increased bond demand.

Bonds had a nice week as a whole. This often occurs when stocks are down because investors sell stocks and buy bonds (hence the increased bond demand). It is also a bit ironic that Financials were the worst stock sector, considering that financial stocks would seem to benefit most by the Fed rate hike, but lets not beat a dead horse...

In Our Opinion...

The market is essentially always open, Monday through Friday, when you consider overseas markets and the trading activity that happens within the U.S. market outside of normal hours via the "futures" market that opens at 5 p.m. PST. I bring this up because the U.S. market opened this new week nearly -1% lower than it finished last week, and with it came references connecting the market loss to investor fear surrounding health care reform and the latest bill that flamed-out last Friday.

Simply put, that is B.S.

It is a nice alibi, but it is wrong. To my earlier point, any potential market declines that occur in the near future may just be due to the fact that the market does not go up 100% of the time. If you are positive about the market then any declines might present a good buying opportunity. If you are negative about the market then you certainly did not arrive at that conclusion because of the vote surrounding a health care bill (I hope).

Bad news travels faster than good news, so be prepared for big, scary headlines if the market remains choppy here for a bit. There will be all sorts of explanations that try to reason with what occurs. This is not to say that we won't feel the need to sell or become more defensive. But it does mean that we will rely on our disciplined approach in making such decisions, tuning out the noise and allowing our analysis to guide the way.

In Our Portfolios...

Stocks: No changes last week.

Bonds: We added preferred stock (PFF) to certain accounts. Due to the risk characteristics of preferred stock, we treat this asset class as a bond for portfolio allocation purposes because it tends to be a happy medium between common stock and more conservative types of bonds.

Q&A / Financial Planning...

I had an interesting conversation last week with my friend & colleague Phil Painter of North Pacific Mortgage. Phil has come across an increasing number of new clients who have interest-only mortgages or lines-of-credit. We speculated why this is and arrived at two conclusions:

1. Many interest-only mortgages/debts were the result of challenges posed by the 2008 recession.
2. Conversations about interest-only loans are resurfacing over concern that the string of recent Fed rate hikes will cause these adjustable rates to balloon.

Even if the second conclusion does not materialize, do not be lulled to sleep by your mortgage, particularly if you are in an interest-only loan. We preach that financial goals are unique, but paying off your mortgage - for most people - is one that deserves a plan. If you are only paying interest then it becomes tougher to build equity (unless you are effectively leveraging your money by investing funds elsewhere, which few actually do). More importantly, you may delay the principal pay-down into retirement, a time when most want to limit expenses to accommodate other things, such as health care or travel.

It is easy to overlook the bigger picture. Life gets busy and we get into routines. If you own an interest-only loan, even if it is a smaller line-of-credit, tackle it head-on today. If you want a professional opinion, I highly recommend Phil Painter. He is a great guy and someone I trust immensely. Contact us if you would like an introduction, but at the very least explore your options to learn how a refinance could benefit your long-term financial plans.

What's New With Us?

We will begin migrating to TD Ameritrade in early/mid April. Gale or I will be in touch regarding the forms we'll need to complete. We will make the transition as smooth as possible.

Have a great week everyone!

Brian E Betz, CFP®
Principal