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®

Tax Deduction Rules When Claiming Retirement Plan Contributions

Hi everyone,

With tax season on deck, here is a summary of the tax deductions you can claim relating to different types of retirement account contributions:

If you want to make Traditional IRA or Roth IRA contributions for 2018, you have until April 15th to do so. Contact us if you have questions. Also, the above video is available on the FAQ page of our site, under the drop-down Taxes.

In The Market...

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

(price data via stockcharts.com)

The loss snaps the four-week winning streak stocks had been on. Six of the 10 stock sectors declined on the week. Real Estate and Technology led the way, while Energy, Consumer Staples and Health Care were each down more than -1.0%.

Stocks were resilient despite the weekly decline. Prices started the holiday shortened week lower, before rallying the rest of the way. Last week was constructive, yet there is still a ton of price resistance to contend with for the January gains to hold. So far they have, which often isn’t the case when stocks rally off of a big downward move. The best-case scenario right now is that stock prices move sideways for a couple weeks, before continuing their ascent.

Our bond positions performed well last week. We continue to own Treasury bonds and Corporate bonds in most accounts.

On the stock side, we were more active compared to prior weeks. We added a S&P 500 growth fund to many accounts, which is heavily weighted in companies in the Technology and Consumer Discretionary sectors. We also added to the cloud-computing Tech fund that most accounts already owned. The Tech sector has been leading this recent rally, specifically the Software and Semiconductor industries.

In Our Portfolios...

What's New With Us?

I painted the guest room in our house on Sunday, which was my highlight. That now makes roughly 75% of the interior of our house I have painted.

Have a great week!

Brian E Betz, CFP®

401k And IRA Contribution Limits Go Up For 2019

Hi everyone,

For the first time since 2013, the amount you can contribute into an IRA is increasing, from $5,500 to $6,000 ($7,000 if age 50 or older). The 401k contribution limit is increasing as well. The amount of pay you can defer into your 401k plan goes up from $18,500 to $19,000 ($25,000 if 50 or older). This chart Josh put together does a nice job detailing the 2019 contribution limits for various accounts, as well as the gift and estate tax exclusions. Take a look:

 A couple things to stress regarding IRA contributions:

  • Your ability to deduct your IRA contribution may be limited/restricted if you already contribute into a 401k plan. Check with us or your CPA before doing so.

  • The $6,000 limit covers all IRA plans you own. For instance, if you intend on making both Traditional IRA and Roth IRA contributions, you can split the $6,000 between accounts but your cumulative contribution cannot exceed $6,000. Meaning, you could not deposit $6,000 into one IRA and another $6,000 into a second IRA. But you could do $5,000 into one IRA and $1,000 into another IRA, or $3,000 into one and $3,000 into another, etc.

  • If you plan on making a Roth IRA contribution, we advise waiting until the calendar year is over to do so, rather than make recurring monthly contributions. This ensures that your income does not exceed the IRS limit that prevents you from making Roth contributions. You have until April 15th of the following year to make IRA contributions for the prior year, so there is plenty of time. You don’t want to risk funding a Roth IRA throughout the year, only to learn that your income was too high and have to scramble to get the funds out of the Roth to avoid paying a penalty.

  • The above IRA limits apply to 2019, not 2018. I emphasize this because if you plan on making IRA contributions for 2018 (which you have until April 15, 2019 to do), the contribution limit of $5,500 applies ($6,500 if age 50).

If you have questions on any of the above, just ask!

In The Market...

The S&P 500 gained +2.6% last week. Let's look under the hood:

(price data via stockcharts.com)

 A 3rd-straight weekly gain for the S&P 500, which saw every major stock sector finish in the green. Is this the beginning of a much larger rally? Maybe, but I would not bet on it for one major reason.

Looking back over the previous market “corrections” that have occurred since the start of 2018, the S&P 500 found what is called price “support” each time it fell to 2,600 (the dashed line in the chart below). This means that stock prices rebounded when the S&P fell to this price on three separate occasions. These points in time are circled in the chart below.

(chart created in stockcharts.com)

The fourth time this occurred in December (last circle on the right), the price support at 2,600 did not hold and the S&P sharply fell another -10% below it in a matter of days. Since then, S&P index stocks have methodically worked their way back up toward 2,600, finishing last week just below that mark.

Now what?

Technically speaking, we might anticipate that 2,600 will become a “resistance” level that prevents stock prices from building on this current rally. It is common for a price-point to turn from support to resistance after the support is broken. This potential outcome is plain as day when looking at the above chart.

If this alone were the only headwind that existed I may be more optimistic, but the fact that many of the other statistical measures we care about are damaged fuels the stock market risk I believe is present heading into next week.

With that being said, the picture is better than it was last week, which was better than the week before that, which was better than the week before that… So there has been improvement. However, the market does not go up or down in a straight line, so it is most likely that further declines come before the S&P 500 eventually mounts a sustainable rally.

If we are right, then patience pays. If we are wrong, we will adjust accordingly by potentially adding to our stock positions.

We added a couple bond positions last week — a Corporate Bond fund (SPLB) and a Municipal Bond fund (PZA). The Muni bond fund was only added to taxable/brokerage accounts, as the tax-exempt nature of the bond interest paid by Muni bonds is of no benefit to IRA accounts. I believe the bond market has potential over the coming weeks and could potentially provide a hedge in the event that stock prices do fall lower from here. We shall see.

In Our Portfolios...

What's New With Us?

On my commute home from the office Friday I drove along the Highway-99 Viaduct one last time before it closed down for its pending demolition. As excited as I am for the new underground tunnel and a Seattle waterfront that may rival San Francisco’s Embarcadero, I’m going to miss the Viaduct. On a clear day, the view driving along it through downtown Seattle is been tough to beat.

On that note, our office hours will be more varied over the next few weeks until the new tunnel opens. Josh and I may potentially be working from home a bit more due to the massive increase in traffic that the Seattle Dept of Transportation anticipates. I am all about efficiency and sitting in a long, unnecessary commute is inefficient. Our business hours will remain the same, as will our effort and focus, so I expect no impactful change on our day-to-day operations. But I do want to give you the head’s up.

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®

Are Trade War Fears A Ticking Time Bomb For The Market?

Last week was anything but boring.

U.S. stocks fell nearly -6% as trade war fears swelled and the Federal Reserve ushered in a new chairman. The sell-off started following the decision by the Fed to raise short-term interest rates.

Interest rates rising: The Fed increased the Federal Funds rate from 1.50% to 1.75%. This is the target lending rate that banks use to borrow money from one another in short stints (emphasis on short-term). It is the sixth rate hike since the Fed started increasing them back in Dec. 2015.

This was the first Fed committee meeting led by new Chair Jerome Powell, who recently replaced Janet Yellen. I liked his communication style regarding Fed policy, as he was more direct and less academic than Yellen or her predecessor, Ben Bernanke. But it remains to be seen whether the Fed's current aggressive approach to raising rates is the wisest path. Powell indicated there will be three more interest rate hikes in 2018, which sounds unrealistic to me if the stock market remains volatile.

Trade war looming? Meanwhile, President Trump placed tariffs on certain Chinese imports as retaliation for what has been deemed intellectual property theft. This comes two weeks after he issued tariffs on steel and aluminum imports from certain countries. This has led to fears of a global trade war - particularly between the U.S. and China - the two largest economies by a wide margin. Here are the five biggest economies based on gross domestic product (per the International Monetary Fund):

  1. United States: $19.4 trillion GDP
  2. China - $11.9 trillion GDP
  3. Japan - $4.9 trillion GDP
  4. Germany - $3.7 trillion GDP
  5. France - $2.6 trillion GDP

(GDP = value of all goods and services produced annually)

Actual tariffs or smoke and mirrors? There is one detail worth pointing out... the tariffs on steel and aluminum won't actually go into effect on the countries that matter until May 1st. Also, the Chinese tariffs effectively have a two-week grace period while the Trump administration announces which Chinese exports will be affected. So a lot can, and likely will, change. Until the tariffs actually go into effect, I can't view this as much more than a power-play for trade negotiations or political purposes.

When Fed Chair Powell was asked about the impact of tariffs and a potential trade war, he seemed relatively unconcerned. Powell said that it would not impact current conditions but that some Fed members voiced concern about the future impact. Huh? That makes no sense, but then again, maybe he knows something we don't. Perhaps he does not expect the tariffs to happen. Nonetheless, the prospect of tariffs and trade wars would have widespread implications should they take hold.

In The Market...

The S&P 500 fell -5.9% this past week. Let's look under the hood:

(source: stockcharts.com)

There is not much to say about last week's sector performance, other than it was bad. As we would expect, growth sectors like Technology and Financials got hit much harder than the likes of Utilities. Last week looked very similar to the stretch in early February when U.S. stocks fell -10% in the matter of a 10 days. The overall market finds itself in a familiar spot, with the S&P 500 finishing at almost an identical low and sitting right above its 200-day moving average. Take a look:

(created in stockcharts.com)

Notice how similar the two points in time are. The 200-day moving average is a pivotal threshold today as it was in February. We want the S&P index to hold above that pink line. We figured it would be a bumpy ride, but if the S&P breaks below the 200-day moving average it would likely set off a wave of additional selling among investors.

Reasons for optimism: Stocks have fallen -7% in the past two weeks, but two weeks does not make a trend. Until that February price-low is broken, which coincidentally means falling below the 200-day moving average as well, benefit of the doubt goes to the bull market.

Reasons for concern: Some of the momentum indicators we use in tandem with price movements are weakening. Relative Strength, which is the smaller chart above the price chart above, has fallen back to 30.0 level that presents serious risk. Also, only half of the stock prices that comprise the S&P 500 index are above their respective 200-day moving average prices. It is the lowest ratio of companies trading above their 200-day averages since March 2016. As mentioned already, if that worsens much more the bottom could fall out pretty quickly.

In Our Portfolios...

In Financial Planning...

This may be a good time to remind everyone that situations like this present an opportunity to invest during a market dip, provided you have a long-term time horizon in mind. If you are of the mindset like I am, which is that the market will rise in the long run, then these situations offer a chance to do things such as:

  • Increase your 401k contribution
  • Invest excess savings
  • Make a lump-sum contribution into a 529 college savings plan
  • Max-out your IRA contribution for the year (if eligible)

You might have to sit through an uncomfortable period should the market decline further, but eventually it will pay off if 100+ years of market history provides any proof.

What's New With Us?

In light of the past few days, I spent much of the weekend digging into the market and prepping for the week ahead. That is, when I wasn't recovering from the food poisoning I got at an event we attended on Saturday. All better now though!

Have a great week,

Brian E Betz, CFP®

The Truth About The Stock Market Decline And 7 Ways You Can Take Advantage Of It

Top Of Mind...

I have so much to say about the past two weeks that I really do not know where to begin. Let's start here: Which of the following statements sounds better to you?

"The U.S. stock market has plunged -7% in the past six days."


"Through the first six weeks of the year, the U.S. stock market is down -2%."

The second one, right? Both are factual, yet, your perception of the market will be largely framed by which facts you hear and how those facts about the market are editorialized to you. Context gets totally lost in an era where media outlets are competing for eyeballs and clicks. That does not mean that the past two weeks have been rosy. Far from it. But it also does not mean that financial armageddon is upon us, either.

Want to keep score? Stop counting points: On Monday when the major indexes fell roughly -4% apiece, here was a major headline...

The words "biggest one-day drop in history" is not only misleading, but it is factually incorrect. It was the worst day since August, 2011 when you look at the percentage change, which is the only calculation that matters. The number of points a particular index rises or falls is irrelevant because the stock market has gradually risen over its entire 100+ year history. This means that each additional point the Dow or S&P 500 rises or falls becomes less significant to whatever period you are measuring -- that day, that week, that month, etc.

The math is pretty simple. If the S&P 500 loses 100 points from a starting value of 1,500 then it has fallen -6.7%. Down the road if the S&P loses that same 100 points from a starting value of 2,500 then it has only fallen -4.0%, nearly 3% less severe of a loss. But of course you should not let facts and basic math get in the way of a good headline...

Yes, the past two weeks have been bad. But context is rarely given because, frankly, much of the financial media is lazy. My advice here would be to focus on percentages. Points are pointless.

What We Are Doing: I want to address how we are reacting to the recent market decline before sharing some options for you to consider.

Most client accounts carry a cash balance somewhere between 20% and 40%. These are funds we obviously want to reinvest, but given current conditions we are being patient. I said last week that the long-term stock market uptrend was not broken based on one week of activity. That uptrend is in more jeopardy now that the S&P encored with a -5% loss this past week.

We would like to invest the cash available into bonds, but the bond market has been in decline too (which is something I warned about a few weeks ago). The scenario that most concerned me after last week was one in which stocks continued to fall and interest rates spiked, meaning bond values fall too. Because that is exactly what has happened, patience is more important than rushing to try and pick when we think bond prices will bottom. Ideally it would be great if bond values were rising right now, as they often do when stocks fall. But they aren't. So cash is king for the moment.

What You Can Do: Here are 7 ways you can take the lemons the market has given you and make lemonade...

  1. If you have been sitting on cash because you wanted the market to dip before investing, is this what you have been waiting for? If not, how much further would it have to fall before you put new money to work? Whatever you do, do not freeze. If this sounds like you, be ready to act. You wanted the ball. You got the ball. You are wide open. Will you shoot?
  2. Along those lines, I read a terrific idea from industry adviser/pundit Josh Brown, who proposed something on his "Reformed Broker" blog. When market losses like this occur, pick a handful of blue-chip stocks that you think are great long-term investments to own. Pick a price that is well below whatever each one is currently at. Then, in your brokerage account (or IRA), set a limit order to buy them at those bargain prices you've identified. The bad news if those prices are eventually reached is that it likely means the overall market has tumbled even further from where it sits today. But the good news is that it means you likely acquired those shares at what could end up being massive discounts in the long run. Call it a potential hedge in the grand scheme of things.
  3. If your financial situation has improved and/or you are willing to take on more investment risk, call me. We can look at using the cash currently sitting in your account to purchase stock funds rather than bond funds when the time comes to reinvest. The idea being that stocks rally stronger than bonds do when both asset classes eventually rebound. Additionally, if you want to do my #2 suggestion above but do not have the desire to set up a brokerage account on your own, we can help you with this process of investing new funds. After all, it is what we do.
  4. Increase your 401k contributions. This year you can contribute up to $18,500 if you are under age 50 and $24,500 if age 50 or older. If the percentage you are deferring comes up short of those limits, consider increasing it.
  5. Make a lump-sum IRA contribution. You can contribute up to $5,500 for 2017 ($6,500 if age 50 or older), if done by April 17th. You can contribute the same amounts again for 2018. Just make sure you meet the requirements. I can easily help you figure out whether you qualify for a 2017 contribution.
  6. If you invest in a 529 college savings plan consider making a lump-sum contribution, particularly if your child or grandchild is not close to going to college.
  7. If none of these six ideas appeal to you despite having the cash or budget to do them, okay, fine... Increase your mortgage payment or other debt payments. Get those paid down quicker, especially if the interest rate associated with the loan is variable and subject to increase in the future. If what I have been saying about long-term interest rates continues to materialize, your loan could become more expensive to finance in the future.

If you have questions on any of the above, call me. More on the state of the market below.

In The Market...

The S&P 500 fell -5.0% this past week. Here is how the individual sectors performed:

(price data via stockcharts.com)

Another week of red across the board. Every sector was negative, and as mentioned above, the S&P index is now slightly negative year-to-date (down -2.0%). The bond market continued its slide lower as well, as long-term interest rates climbed higher and remain at highs not seen since late-2013. 

The S&P 500 did something it had not done since Oct. 2016, which is fall below its 200-day moving average price. The 200-day moving average is one of the pillars of our investment process. It is the best reflection of the long-term trend of the market.

We look for two things in regards to the 200-day moving average. 1) We want the price of any given investment to be above its 200-day average price; and 2) We would like the slope of the 200-day moving average itself to be rising over time. When both of these conditions are met, that is most ideal. Take a look at the current price of the S&P relative to its 200-day moving average (the pink line):

(created in stockcharts.com)

Also shown on here is a trend line that I believe is relevant (the blue, dashed line). The price of the S&P index closed this past week just above both this trend line and its 200-day moving average. That is crucial if the bleeding is going to stop.

If we take the same chart but blow up the timeframe from an 18-month view to a 3-year view, you will notice how the slope of the 200-day moving average (pink line) started rising back in June 2016. It is no coincidence that it was right around that time when I became bullish on the stock market again. You will also notice that by that time, the price of the S&P 500 had already been above the 200-day moving average for nearly three months. Here it is:

(created in stockcharts.com)

The positive view: Once both those conditions were met (the price climbed above a rising 200-day moving average) it was lift-off for the U.S. market. I would contend that the S&P 500 now having fallen to its 200-day moving average could set off a new rally as well. It is one of the primary points that we consider to be "price support", where the price can get buoyed and then begin to rise from there. So far that has been the case, as the S&P touched down to the 200-day moving average on Friday before bouncing higher to end the week.

The negative view: If the S&P 500 falls below its 200-day moving average, market conditions will become more problematic. Conditions are likely to be choppy for the foreseeable future anyway, but the risk-of-loss increases significantly if stock prices collectively break below their long-term moving average. Why? Because it would reflect that the collection of 500 companies that comprise the S&P, thus comprising the broad market. are moving lower in unison. And, because the 200-day moving average is a popular metric among professional investors, it would likely trigger more selling activity if the price does in fact break below it.

The bottom line: The rising price trend remains in tact, although it is hanging on by a thread heading into next week. I still look at this as a buying opportunity, but that could change very soon.

In Our Portfolios...

In Financial Planning...

I got this reminder the other day from the Social Security Administration (SSA). At first I quickly deleted it, before restoring it from my trash folder. You would not have received this notice unless you established an account on the Social Security site, which you can do here.

If you do not have an account on the SSA site, create one (it's free). I then encourage you to check your reported wage information for accuracy. It is NOT unusual for wage information to be incorrect. Since this wage data directly impacts the amount of future Social Security benefits you will receive (if still working), it is a good idea to keep records of your income each year and crosscheck it against what the SSA has on file.

What's New With Us?

I had a great meeting with our rep at State Street, one of the primary exchange-traded fund (ETF) providers we use. State Street is one of the largest ETF providers and the creator of the first-ever exchange-traded fund, its S&P 500 index fund "SPY" that it created back in 1993. If you want more info on the funds we use, why we use them and how we select them, let me know.

I will spend most of the weekend prepping for next week and working on our house. Fun times.

Have a great weekend,

Brian E Betz, CFP®

The End Of Neutrality And Weighing The Final GOP Tax Plan

In The News...

December is normally a slow news month, but for whatever reason a ton of stuff has transpired recently.

Net Neutrality no more: The Federal Communications Commission (FCC) voted 3-2 in favor of repealing the Net Neutrality laws that were enacted during the Obama administration to prevent internet service providers like Comcast or AT&T from giving preference to certain websites over others. Neutrality laws ensured that those providers allowed all internet traffic to flow equally and freely. This includes everything from a web page to an email service to Facebook, YouTube, etc.

As best I understand it, the argument in favor of eliminating Net Neutrality is that these internet broadband providers would be forced to improve their existing systems/services. The argument against it is that providers will increase their prices or provide preferential internet speeds to certain sites, such as those operated by sister-companies. For example, Comcast owns NBC and could allow NBC content to stream quicker than content from other, comparable news outlets. Internet providers could block certain content or charge more to access content. In short, higher prices to consumers. This graphic sums it up:

(photo created by Alphr.com)

Interest rates going up: The Federal Reserve raised its benchmark lending rate, the Federal Funds rate, from 1.00% to 1.25%. The last Fed Funds rate increase was in June 2017. Two of the nine Fed committee members opposed this latest rate increase, which is telling for future meetings. I would anticipate we do not see another rate hike for at least six months based on some level of dissent over this latest rate increase.

Bonds rallied off the news. On a related note, this was Fed Chair Janet Yellen's final press conference before Jerome Powell takes the helm in Feb. 2018. I would suspect there will be some choppiness in the bond market as that transition takes place. I recall that being the case when Yellen took over for former Chair Ben Bernanke, as she quickly learned that her words and tone carried great influence over interest rate expectations among investors.

Yellen responded to a question about Bitcoin, calling it a "highly speculative asset". She said the Fed has no plans to pursue regulatory measures given Bitcoin's currently insignificant role as a form of payment. Keep an eye on this because Bitcoin will invariably be pulled into the political discourse, whether regulatory steps can be taken or not.

Tax reform done? Republicans issued the final version of their tax reform plan. For my thoughts on this check out the OPINION section below.

    In The Market...

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

    (price data via stockcharts.com)

    The S&P 500 rose for the 4th-straight week. With only two weeks left this is setting up to finish as the best market year for U.S. stocks since 2013. Momentum continues to favor this bull market on all three time frames we analyze: Monthly, Weekly and Daily trends.

    Technology rebounded nicely last week and is a position we added for most client accounts (XLK). We sold our Consumer Discretionary sector fund (XLY), which was mostly due to preferring other certain that we will look to purchase. Financials and Health Care are the primary targets we are looking to buy.

    Santa Rally coming? I would suspect that things will be a bit choppy right around year-end, as investors take capital gains tax planning into consideration. However, the seasonally bullish "Santa Rally" could help push stock prices even higher. This 7-day period, should it occur, would be the last five trading days of December, plus the first two days of January.

    In Our Opinion...

    Republicans unveiled their final tax reform plan, expected to be signed this week. Here are the highlights:

    • Income tax brackets are slightly lowered across the board, but seven different brackets remain (shown in the graphic below). Remember that income taxes are progressive, meaning that different segments of your income are taxed at different rates. For example, if you are married and have taxable income of $200,000, the first $19,050 is taxed 10%, the middle amounts are taxed 12% and 22%, and the final $35,000 is taxed 24%.
    • The standard deduction doubles from $6,350 to $12,000 for individual tax filers and from $12,700 to $24,000 for married couples.
    • Personal exemptions are eliminated. You can currently deduct $4,000 for you, your spouse and any dependents (e.g. kids) you can claim.
    • The limit on home mortgage interest is reduced. Currently, you can deduct interest tied to a maximum $1 million mortgage loan. Moving forward you can only deduct interest related to up to $750,000 of mortgage debt.
    • The mandate that everyone must purchase health insurance is eliminated.
    • Corporate tax rate for C-Corporations is reduced from 35% to 21%.
    • A one-time, lower repatriation tax rate is applied to U.S. companies with foreign operations who bring cash and other assets back to the U.S. Right now those companies are only taxed when they bring profits and assets back to the U.S. To encourage them to come home, companies will be taxed 15.5% on cash assets and 8% on non-cash assets.
    • Small businesses like S-Corporations and LLCs, where income passes through to the owner's individual income tax return, will get a 20% deduction on such income. Service-based businesses that earn more than $315,000 would not receive this deduction.
    • 529 college savings could be accessed, tax-free, for K-12 education expenses.

    Tax reforms I like: I like the reduction to corporate tax rates and the deduction for small, pass-through businesses. I really like that 529 college savings will be extended to pre-college education. I also like that, contrary to prior proposals, the student-loan interest deduction remains in tact.

    The aforementioned 20% deduction for pass-through businesses is one that will garner a lot of debate. It is an attempt by lawmakers to help small businesses amid reducing the corporate tax rate from 35% to 21%. I am obviously bias, but I am all for giving a boost to small business owners.

    However, there is a concern that entities will be created simply to take advantage of this deduction, specifically because of wages. Instead of workers earning wages as employees this could compel them to "leave" their employer, set up a pass-through entity and then get rehired as a contractor by that same employer. This would allow the worker to have their previously paid wages now show up as consultancy fees (or some term other than wages/salary) and flow through the income statement of their business. Those earnings would flow to the bottom-line, and thus, be eligible for the 20% deduction.

    Tax reforms I dislike: I have less of an issue with what was done than I do with opportunities missed. The various income tax brackets were reduced, but not my much. I do not see it resulting in "the biggest tax cuts in history", but because the rates were reduced at all, the plan will be marketed as such.

    The promise of over-simplifying the tax code was a broken one. The tax plan does little to simplify anything. Simplifying the tax code would be to enact a flat income tax, or at the very least, cut the number of tax brackets down to three or four.

    The standard deduction is doubled, but personal exemptions are eliminated. That seems to be largely an offset, though big families who itemize their deductions will suffer most. They lose the personal/dependency exemptions (previously a deduction of $4,000 per-family member), yet won't benefit from the standard deduction increase because they itemize their deductions.

    I certainly do not like the fact that the Joint Committee on Taxation estimates that this tax plan will add $1.5 trillion to the budget deficit over the next decade. But, I will leave it to others to debate the budgetary consequences.

    In Our Portfolios...

    Q&A/Financial Planning...

    'Tis the season to consider a Roth IRA conversion! If you own a tax-deferred IRA or 401(k), check out my latest blog post detailing how a Roth IRA conversion might benefit you in retirement. I describe what a Roth conversion is and some different circumstances that influence this decision. I encourage you to read it here.

    What's New With Us?

    I will be out of town for Christmas from Friday (Dec. 22nd) to the following Wednesday (Dec. 27th). Those two dates are specifically the days we are flying, so my availability will be limited. I will be working remotely while gone and should be available in between those dates. I likely will not write a blog this week, so if I do not talk to you -- Merry Christmas & Happy Holidays!

    Have a great week,


    Brian E Betz, CFP

    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®

    GOP Unveils Its Tax Plan. Could It Lead To A Housing Recession?

    In The News...

    Republican Congressional leaders released details of their tax plan. Here are the major reforms:

    • Income taxes: The number of tax brackets would fall from the current seven to four: 12% (assessed on taxable income between $24,000 and $90,000 for married couples), 25% (on income from $90,000 to $260,000), 35% (on income from $260,000 to $1 million) and 39.6% (income above $1 million). The most notable change is that the 25% bracket would cover income up to $260,000 for married couples. Today, income that exceeds $153,000 is taxed at 28% and income exceeding $233,000 is taxed at 33%. 
    • 401(k) contributions: No changes to contribution limits or deductions.
    • Small business taxes: A portion of pass-through income from business profits would be taxed at 25% rather than the owner's likely higher personal tax rate.
    • Mortgage interest deductions: Today you can deduct interest on up to two home mortgages, not exceeding $1 million in mortgage debt. The $1 million limit would be cut in half, meaning you could only deduct interest tied to a maximum of $500,000 in mortgage debt.
    • Standard tax deduction: This would double to $12,000 for individual tax filers and $24,000 for marries couples.
    • Personal exemptions: Would be eliminated. Today, you get to deduct $4,000 apiece for you, your spouse and any dependents in your household. So, a family of four would go from $16,000 in exemptions to $0.
    • Alternative Minimum Tax (AMT): Would be eliminated.

    There are more changes, but these are the major ones. For my personal thoughts on this initial GOP tax plan, scroll to the OPINION section below.

    New Fed Sheriff In Town: Four years after taking the reigns of the U.S. Federal Reserve, Chairwoman Janet Yellen is being replaced. President Trump's nominee, Jerome Powell, will take over the Fed in Feb. 2018 when Yellen's term expires. Yellen has held the position since 2014. She took over the post from former Chair Ben Bernanke (2006-2014), who in turn took it over from Alan Greenspan (1987-2006).

    What does this regime change mean to future monetary policy? Probably not much. From what I have read Powell was a supporter of Yellen and the two were largely in lockstep with regards to the timing of interest rate hikes. I highlight that because among those who have bashed the Fed, the biggest backlash has been how long it took the Fed to begin raising interest rates. While the change in leadership initially seems like no news, remember that this is Trump's appointee. Trump had promised major shake-ups to monetary policy and it appears that will not be the case. In my view that is wise. I am also not surprised at the pivot, either.

    Latest on real estate: Housing prices gained +0.5% in August, per the latest S&P/Case-Shiller report. The tide might be turning a bit, as Seattle homes appreciated just +0.2% for the month and Portland homes were up +0.1%. San Francisco was the only of the 20 major cities tracked that saw prices decline, slipping -0.1%.

    Annually speaking, homes have appreciated nationwide by an average of +6.1%. Seattle real estate has gained +13.2%, while Las Vegas ranks second with prices rising +8.6%. Here is a complete city-by-city look:

    I would expect housing prices broadly to settle in to the +4% to 5% annual growth range in the coming year. That is more representative of a smooth housing market. I would expect prices in/around Seattle to slow a bit as well, meaning prices that rise at a slower pace than the currently torrid +13% growth. Seattle homes should remain near the top compared to the other major cities, given the ongoing tech migration and recent success of Amazon, Boeing and Microsoft.

    In The Market...

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

    (price data via stockcharts.com)

    Ten months down, two to go. So far 4th quarter seasonal strength I have preached has been as advertised. The S&P index rose +2.3% in October. Staring down the barrel of November and December, here is a recent historical look at how the S&P 500 has performed in these two months, cumulatively (including dividends):

    2016: +5.9%
    2015: -1.4%
    2014: +2.4%
    2013: +5.6%
    2012: +1.8%
    2011: +0.7%
    2010: +6.7%
    2009: +8.1%
    2008: -6.6%

    As you see, broad market performance has been positive nearly every year in these two months over the past decade. Coming off a somewhat mixed week, with four of the 10 sectors being in the red, I still believe market conditions look strong moving forward. Next week I will dig into earnings season results, which will begin to wind down.

    In Our Opinion...

    Among the proposed tax reforms, the most significant may be the slashed mortgage interest deduction. You can currently write-off interest tied to $1 million in mortgage debt. Under this tax proposal that $1 million limit falls to $500,000, meaning a reduced tax deduction if your mortgage exceeds $500,000. Here is what Jerry Howard, CEO of the National Association of Home Builders, had to say about it on CNBC:

    "There are seven million homes on the market right now that are more than $500,000. Those houses are automatically going to be devalued." -- Jerry Howard, National Association of Home Builders

    Howard went on to say that this would lead to a housing recession, as such depreciation would become contagious and spread across real estate markets. This is a bombshell quote considering the source.

    Rather than use $500,000, a more appropriate number to cite would be $625,000. At that purchase price, assuming the home buyer puts the standard 20% down toward the home, the resulting mortgage would be exactly $500,000. If your mortgage balance today is less than this, you are unaffected. If it is more, your tax deduction falls.

    But is it that straightforward? Maybe not. First, remember that deducting mortgage interest is part of itemizing your tax deductions, rather than taking the standard deduction. Under this tax plan the standard deduction would double from $6,000 to $12,000 for individuals and $12,000 to $24,000 for married couples. On its surface it appears this would compel more people to take the standard deduction and fewer people to itemize. Let's just see...

    Let's assume that your average mortgage balance during the year is $500,000 and the interest rate on that mortgage is 4.50%. That means you would have paid the following in mortgage interest throughout the year: $500,000 x 4.50% = $22,500 in mortgage interest paid.

    Is it a coincidence that this is very close to the $24,000 standard deduction for married couples? Probably not. So, in a vacuum, if the only itemized deduction you had was interest tied to a $500,000 mortgage, you would be very close to the break-even point between itemizing vs. taking the standard deduction.

    Back to Howard's quote... I disagree that this change would lead to a housing recession, for two reasons. First, if we are talking about residential homeowners, their list of reasons for buying a home likely does not include whether they can deduct all of the resulting mortgage interest. If their list of reasons does include such math, it is probably toward the bottom of their priorities. Existing homeowners will still upgrade into a bigger/nicer home if their life needs it and their finances allow it. First-time home buyers are new to the game and won't know any different.

    Second, real estate investors (the other type of buyer) are unique. I would suspect many of them purchase with cash, meaning little-or-no financing. I would further assume real estate investors are already deducting the interest tied to the mortgages on their primary residence, if they have a mortgage at all. If they purchase additional real estate with the help of a mortgage they cannot deduct that mortgage interest today anyway, so reducing the debt limit from $1 million to $500,000 is irrelevant to them.

    It is hard to give too much opinion on the overall tax plan because the details are fresh and there seems to be a number of potential tax offsets. I do favor a simpler tax code and like seeing fewer income tax brackets (I have actually long-favored a flat tax). I would be interested to know your thoughts -- feel free to email me with them.

    In Our Portfolios...

    Q&A/Financial Planning...

    Do you know your 401(k) vesting schedule?

    Mostly likely not. If you just started a new job or are unsure how long you will stay at your current one, make sure you know the vesting requirements on these employee benefits:

    1. Employer contributions made into your 401k account
    2. Restricted stock (RSUs)
    3. Stock options

    "Vesting" means how long you have to wait until you have earned the dollars or shares granted to you. When it comes to restricted stock or stock options awarded to you, the vesting is usually stated pretty clearly on a statement. When it comes to employer 401k contributions, namely the matching provisions, you usually have to dig into the 401k plan summary to know the vesting schedule.

    For example, I recently reviewed the new 401k plan for a client who changed jobs earlier this year. He earns a 25% employer match on up to 6% of his pay. So, if he contributes the full 6% that is eligible for the match, his employer effectively contributes 1.5% of his salary into his 401k. Those employer dollars vest in four increments: 25% after 1 year of service, 25% after 2 years, 25% after 3 years and the remaining 25% after 4 years.

    This is key because he is not sure if he will be with the company for four years (as most people aren't given how frequently workers change jobs these days). There is value in pointing out what money he would be at risk of losing should he leave at any time within the first four years of employment.

    It is common for the quality of the employer match to persuade or dissuade people from participating in the 401k at all. That is for another conversation, but the point here is that if you are spending time evaluating the employer match you better look at the vesting schedule while you are at it.

    What's New With Us?

    As I mentioned a few weeks ago, I am going to start creating some short, YouTube-like videos that address different aspects of our firm. The first one will be on our investment philosophy and how it compares to traditional long-term investment theory. I'll be eager to get some feedback.

    Last weekend it was 70 degrees here in Seattle. Today it is snowing. Go figure...

    Have a great weekend,

    Betz Signature 250px.png

    Brian E Betz, CFP®

    Quite Possibly The Worst 401k Idea Ever

    In The News...

    After dropping off our daughter at day care this week I stopped by Walgreens to refill a prescription. There was just one problem...

    The pharmacy didn't open until 9am.

    I was not going to wait an hour so I continued on to the office. As I sat in traffic on Highway-99 I thought: there must be a better way. Six hours later, the solution has arrived.

    Dr. Amazon: The Seattle logistics giant reported quarterly earnings on Thursday, which included news that Amazon has acquired pharmaceutical licenses to distribute wholesale prescription drugs in 12 states. This implies being able to order prescriptions and have them delivered right to your doorstep. On the earnings call Amazon was coy about its pharmaceutical intentions, but I assume their plans will disrupt the industry and spell trouble for the likes of Walgreens and CVS. Additionally, the move into health care introduces potentially millions of Baby Boomers to Amazon.

    The worst 401k idea ever: In an effort to balance their tax reform package, Republicans have apparently discussed reducing the 401k contribution limit from the current $18,000 per-year to a fraction of that, reportedly $2,400 per-year. Their logic: If workers put less into their 401k plans, which provides tax-deferral, they will be forced to pay more in current income taxes year to year.

    This is true. It is also incredibly stupid.

    A 401k plan is as much about providing a vehicle that encourages good retirement savings behavior as it is about postponing taxes on contributions. The overwhelming majority of Americans do not save enough for retirement. I know this because I am in the trenches. I routinely see situations where people could save more and should save more, but do not. Most Americans consume what they do not save and it would be naive to think that those lost 401k contributions would seamlessly get funneled elsewhere (though we would do our best to help). Maybe the alternative will be the "MyRA" savings vehicle that President Obama unveiled in a State Of The Union speech a few years back. Remember that? Exactly, because it was a poorly engineered idea and has since been phased out.

    If the 401k contribution cap is somehow cut by 86% ($15,600), I would likely advise most of you to scrap your 401k contributions and max-out a Traditional IRA instead. The maximum IRA contribution right now is $5,500 per-year ($6,500 if over age 50). For comparison, your employer would have to match 130% of your 401k contributions just to break-even with the IRA cap!

    (max 401k contribution of $2,400) + ($2,400 x 130%) = $5,500

    The good news is that this proposal appears to be dead-on-arrival, wisely shot down by President Trump (though it hasn't gone away completely). But the fact it was even muttered outside of a group brainstorm has me worried about whoever is in charge of tax reform.

    In The Market...

    The S&P 500 climbed +0.2% this past week. Let's look under the hood:

    (price data via stockcharts.com)

    This was a bumpier week for stocks than we have seen in a couple months, which is what I had said I expected in last week's blog. The S&P 500 was higher by week's end, but not before falling more than -1% midweek. The S&P extended its weekly winning streak to seven, which is rare territory.

    While the 10 sectors were largely split between gainers and losers, this was a net-positive week for stocks, in my view. I do still think we'll see some flattening out in the weeks ahead, but it was good to see buyers step in and "buy the dip" (ourselves included) when stocks started to fade.

    Earnings season seems to have lured buyers back into the fold too, particularly across the big tech names like Google, Facebook and Microsoft. Technology was the runaway winner, up +2.4% weekly. This was nice to see considering most client accounts owned the tech-sector fund (XLK) or the comparable Nasdaq-100 fund (QQQ) -- the former being tech-exclusive and the latter being tech-heavy. We sold XLK off Friday's gains. I still like the long-term outlook for technology but selling made sense in the near-term based on my analysis. This resulted in a nice gain for accounts that owned it.

    In Our Opinion...

    Have you ever heard a financial professional say that investing is about removing emotion?

    I would hope so, because I have said it before. But that statement needs to be tweaked. Investing is about limiting emotion, not removing it. It is impossible to totally remove emotion when deciding when to invest, what to invest in or if it is time to sell. Here are a few examples:

    1. Loving your company too much. As a result, many people own a disproportionately high amount of company shares relative to other investments (primarily through their 401k plan, exercised stock options or restricted stock).
    2. Believing the market is "due to correct". Just because you think the market cannot continue at this pace means nothing. If you think we are on the brink of World War III or that the market is rigged, to each their own. But such sentiments are usually rooted in emotion, not rational analysis.
    3. Being quick to buy a falling stock or sell a rising one. I often say there is a reason an investment is rising or falling and you typically want to be on that side of the trend.
    4. Holding an investment due to special meaning. I see this often when investors hold a certain stock simply because a family member owned it for years. There is implicit confidence because someone you trust owned it. This is poor reasoning, in a vacuum, because the world changes so much generation to generation.

    You may work for a great company, especially around Seattle or the Bay Area. But do you truly know both how your company will perform in the future as well as how investors will react to that performance? The answers are maybe and no.

    Now, it is ironic in a sense. If you are heavily weighted in company stock it is probably due, in part, to company success. But at some point it makes sense to find some balance and diversify away from that one stock. I'm not saying sell everything or even sell the majority, but put down the kool-aid for a moment and assess the investment risk.

    If you believe the market is going to fall or crash, why is that? Fear that we will see a repeat of 2008? Your political views? Anything can happen but it could be a long wait.

    Just for fun, let's say it isn't. Let's say the market drops -10% tomorrow. Would you buy then? If not, how much would the market have to fall before you buy? If you are determined to wait until the next recession passes, you have to be right not once but twice. You first have to be right about the market falling in the near future. You then have to identify when the recovery begins, which could take weeks or months. Easier said than done, especially if your rationale stems from emotion rather than a disciplined investment process.

    I would be lying if I said emotion never creeps into my decision-making process when choosing investments to buy or sell. But it is a fraction of thought as compared to leaning on our statistics-driven investment process.

    In Our Portfolios...

    Q&A/Financial Planning...

    If you own an IRA or 401k and are approaching age 70, here are three letters to know: RMD.

    RMD stands for "Required Minimum Distribution". It is the amount you must withdraw from your tax-deferred retirement accounts each year once you turn age 70 1/2 (don't ask why the half year applies -- the IRS is weird). The RMD rules are the government's way of saying that you have delayed paying taxes for too long and now must start recognizing your savings as taxable income.

    How RMDs work: To keep it simple, you look up your age on one of two charts provided by the IRS. Your age will correlate to a "life expectancy factor" that you divide into the cumulative value of your tax-deferred 401k's and IRAs. The resulting figure is what you are required to withdraw and recognize as ordinary income in your tax return. Each year thereafter you look up your age and divide the new factor into your overall account balance. This life expectancy factor declines as you age past 70 because presumably your account balance is falling each year that you withdraw more and more funds.

    The first year is unique! Take special notice when you turn 70.5 years old. Whenever that is, your first RMD must be taken by April 1st of the following year. Every year thereafter your RMD must be taken by Dec. 31st.

    Why is the first RMD deadline April 1st rather than Dec. 31st? Likely because most people are unaware of the RMD laws so the IRS gives you a break in that first year. However, it gets a bit more complicated. Not only must you take that first RMD by April 1st, you must take the second RMD by Dec. 31 of that same year. Year 1 is the only year subject to taking two, separate RMD amounts.

    Let's work through a quick example. Let's assume you turned age 70.5 on July 12, 2017. Here are the deadlines for taking your first few RMDs:

    Year 1, taken by April 1, 2018 = (Balance on Dec. 31, 2016) / (Factor for age 70)
    Year 2, taken by Dec 31, 2018 = (Balance on Dec. 31, 2017) / (Factor for age 71)
    Year 3, taken by Dec 31, 2019 = (Balance on Dec. 31, 2018) / (Factor for age 72)
    Year 4, taken by Dec 31, 2020 = (Balance on Dec. 31, 2019) / (Factor for age 73)

    Note that this requires you to go back and look at what your account balance was at the previous year-end. If you need help calculating this, let me know.

    What if I don't take my full RMD? This is where the IRS cleans up... You are penalized 50% of whatever amount you did not take but were supposed to take. So.... let's say your RMD is $10,000 and for whatever reason you only withdraw $2,000. The $8,000 missed RMD is penalized 50%, which means an additional $4,000 tax penalty! Now you see why the RMD rules are a big deal.

    Can I avoid taking RMDs? The best way to avoid taking RMDs is to convert a portion (or all) of your tax-deferred funds into Roth IRA funds prior to age 70. RMD rules do not apply to Roth IRAs. Of course, whatever balance you convert to a Roth IRA must be recognized as income, so you are still paying Uncle Sam one way or another. However, by not being subject to RMDs it is less administrative hassle during retirement and it also means future tax-free growth because that is the biggest perk provided by a Roth IRA.

    I often recommend doing Roth IRA conversions in chunks by doing a series of them as you near age 70. This spreads out the tax burden over multiple years. Or even better, if you anticipate a year or two where your household income will be unusually low, that would be a good time to convert to a Roth IRA because your income tax rate would be lower than normal.

    Can I apply IRA withdrawals made prior to age 70 toward future RMDs? No.

    Say I am 72 years old and I take MORE than my stated RMD for the year. Can I apply the excess amount toward next year's RMD? No.

    What's New With Us?

    Unfortunately we do not get any trick-or-treaters on our street, which I think is due to being on a steep hill. But we will be dressing up and going to a Halloween party this weekend.

    Have a great weekend!

    Betz Signature 250px.png

    Brian E Betz, CFP®

    Hiring Falls But Employment Rises... Wait, What?!

    In The News...

    The number of U.S. jobs fell for the first time in 7 years. And it may not be a big deal.

    First, the facts...

    • A total of -33,000 jobs were lost in September. This followed the prior three months where an average of +180,000 jobs per-month were added.
    • Despite this jobs decline, the unemployment rate fell from 4.4% to 4.2%.
    • The participation rate improved to 63.1%. This measures the number of those either working or looking for work as compared to the total working-age population.

    How can this be? How could unemployment improve as jobs are being lost? Two reasons: Hurricanes Harvey and Irma. Those natural disasters threw off the census that measures the number of jobs added or lost for the month, called the Establishment Survey. In this poll, anyone unpaid for whatever week the 12th falls on is considered unemployed. While the Department of Labor claims the hurricanes skewed the -33,000 job-loss figure, the DOL does not believe it affected the unemployment figure of 4.2% or the participation rate, both of which are computed by the other employment census -- the Household Survey.

    Household Survey: This census considers anyone with a job as employed for the month, even if they miss work the week the 12th falls on. I mention this because "Employment falls for the first time in 7 years!" will likely lead news headlines. Ironically, President Trump has long-called the Dept of Labor jobs numbers "false" or "phony", but this time the unemployment numbers may actually be misleading given the unique impact of two massive hurricanes striking within weeks of each other.

    The eye of the beholder: It certainly does not help that we have dozens of different ways to interpret employment data. Depending on your bias you could find any nugget you want and use that data point to argue whether the jobs market is doing well or poorly. In my opinion, the participation rate matters as much as anything because it gives a complete view of employment relative to the total working-age population. Participation had been on the decline since early-2000, until making a positive turnaround roughly two years ago. This will be key as more Baby Boomers retire and younger Millennials and Generation Z'ers step into the workforce.

    In The Market...

    The S&P 500 gained +1.3% this past week. Let's look under the hood:

    (price data via stockcharts.com)

    STOCKS: The S&P 500 index climbed for the 4th-straight week and 6th time in the past seven weeks. So much for the volatile summer, huh? Since the blip in early-August the S&P has rallied +5.5% over the past seven weeks. Again everyone, this is bullish behavior. Eight of 10 sectors were higher last week, led by those we want to see leading amid a bull market -- Materials and Consumer Discretionary.

    We sold our Financials sector fund (XLF) this past week for a nice gain of roughly 5%. Not all accounts owned this -- larger accounts and smaller, more aggressive accounts did. I still like Financials long-term but based on my analysis looking out over the next few weeks it made sense to take the gain and evaluate other options. One sector I am eyeing is Industrials (XLI).

    BONDS: A down week for bonds, but not as bad as I would have expected given the S&P was up more than 1%. Of course, stocks and bonds are not negatively correlated anyway, even if they show tendencies from time to time. I don't read too much into this past week. For now I still favor the odds that bonds will rally in the coming weeks.

    In Our Opinion...

    It happened again.

    As I sat down for lunch with someone I know through volunteer work, the first question I got was... "So when do you think the big correction will happen?"

    I have written at-length about how I believe pessimism has fueled the stock market higher, though there are no data points to confirm/disprove that. Major market declines -- I am talking more than the -5% or -10% drops we see every year -- do not typically come until investors have become euphoric, or at the very least, complacent.

    Looking at the data, stocks are technically "overbought" right now if you look at the Relative Strength Index (RSI). This measurement actually plays a central role in our analysis because it helps substantiate whether I believe a certain trend will continue or a new one is forming. RSI gauges price momentum by comparing the size of gains versus losses over a period of time. This is typically 14 periods, which could be 14 days, 14 weeks, 14 months, etc.

    A RSI reading above 70.0 is considered "overbought". The S&P 500 is currently at a daily RSI reading of 78.0, a weekly RSI of 76.0 and a monthly RSI of 83.0. Sooooo, using the S&P as our barometer, the stock market is technically overbought on all three primary timeframes we use in our analysis. This would indicate that the market is overheated and due for a loss.

    But it just isn't that straightforward. A stock can stay overbought for a very long time before ever realizing the sell-off that is expected. RSI is almost counter-intuitive in that way. Momentum breeds momentum until it doesn't, if that makes sense. Even when RSI falls back below 70.0 it often leads to greater demand among investors who want to buy the price dip, which in turn sends RSI higher as momentum picks back up.

    To illustrate this, look at how the S&P 500 behave back in 2013 and then again during this current bull market rally. Notice that in 2013 the S&P ripped off another +30% gain after RSI crossed above 70.0 and was technically "overbought":

    (chart created via stockcharts.com)

    The opposite holds true too. When RSI for a particular investment falls below 30.0 it is considered "oversold" and due to rally. Similarly speaking, when this happens you have to be careful because the investment in-question can fall further and further and RSI can remain below 30.0 much longer than anticipated. This often occurs when investors unwittingly see that a stock has precipitously fallen in value and they buy it thinking they are getting a discount. More often than not that investment falls even further, resulting in unexpected losses for the investor who thought they were going to make some quick money.

    The bottom line is that there is usually a reason an investment's value is rising or falling. If it is rising you should embrace the trend. If it is falling you do not want to be on the wrong side of that, hoping for a rebound. This is where trend-analysis matters, but I won't revisit that concept here.

    In Our Portfolios...

    Q&A/Financial Planning...

    Will your income be lower than normal this year?
    Are you 10 years or more away from retirement?
    Are you retired and have enough savings to avoid dipping into your 401k or IRA?

    If "yes" to any of these, you might want to consider converting a portion of your 401k or IRA account into a Roth IRA.

    Why do a Roth IRA conversion? To lower your tax bill. Right now the money sitting in your 401k or IRA are pre-tax (unless you opted for the Roth 401k option), meaning you have deferred paying income taxes on those contributions and the earnings that stem from them until you retire. Eventually you will have to pay taxes as you withdraw money down the road. But if you convert now you will pay taxes today in exchange for never paying them again, no matter how large your account grows.

    That last part is key, because I think we would agree that your account will be larger in the future than it is today (if you are still working). That means a much greater tax burden down the road. If you think your household income will be abnormally low this year, it might make sense to do a Roth IRA conversion so the funds can be subject to a lower tax bracket than they would be if you converted them next year.

    But Brian, why not just wait until I am retired and withdraw money then? At that point I won't be working and my tax rate should be much lower anyway.

    Fair point, but there are a few holes in that argument. First, remember what I just said about your savings being much greater by that point than they are today. Even if you are in a lower tax bracket in retirement, the gross amount of taxes you pay will cumulatively be greater than taking your tax medicine now on a smaller nest egg.

    Also, by converting to a Roth IRA you avoid the Required Minimum Distribution (RMD) rules that kick in at age 70. The RMD rules mandate that you take out a certain amount from your tax-deferred 401k or IRA accounts each year until you die. This is the IRS' way of ensuring you eventually pay your taxes, rather than continuing to stockpile savings and deferring taxes even longer.

    Though the RMD rules seem like a first-world problem to have, they can be annoying by forcing you to pay taxes. They can also make other parts of your life expensive. For instance, your Medicare Part B premiums increase as your income exceeds certain thresholds. RMD withdrawals will send your income higher and higher, particularly when you add in other sources like Social Security or pensions.

    If you are nearing retirement, consider mapping out whether it makes sense to convert some portion of your tax-deferred savings. You can convert as little or as much as you want. For example, you could take a $50,000 IRA and convert $10,000 of it every year for 5 years, thus spreading out the tax burden across five tax returns. This may pose an administrative headache over time, but it is still an option.

    One last thing: I want to make sure I distinguish a Roth IRA conversion from a Roth contribution. A Roth conversion is taking pre-tax ("tax-deferred") IRA funds already in existence and turning them into Roth IRA funds. A Roth contribution is making a deposit of cash into your Roth IRA. The maximum you can contribute is $5,500 if under age 50 and $6,500 if older, provided your household income is within IRS limitations.

    Deadlines: The deadline to do a Roth IRA conversion for 2017 is Dec. 31st, so you have some time. The deadline for making a 2017 contribution is tax day of next year. Let us know if you are interested in either and we can help determine if it makes sense to do so.

    What's New With Us?

    I will be traveling for work down to San Jose and San Francisco later next week, but will be available as always.

    Have a great weekend,

    Betz Signature 250px.png

    Brian E Betz, CFP®

    Why September Is A Schizophrenic Month For The Market

    In The News...

    This time of year is conflicting. Summer starts to wind down, but the holidays are here before we know it. Game of Thrones (my favorite show) ends but football season starts up, which fills my limited TV viewing void.

    This same type of seasonal schizophrenia can be said about the stock market. September is historically a bad month for stocks. The S&P 500 index has been down in five of the past nine Septembers, including the past three. This is not to suggest doom on the horizon, but rather, September is simply a weaker month for stocks. The rub is, once we get through September we enter the strongest three-month period, October thru December, which is consistently the best market quarter of the calendar year.

    Why is September historically weak? Tough to say. But a few factors may be in play to explain why it could be here... First, summer travel slows and more people are back to work, which means more computer time and thought about finances. This leads to greater buying and selling of stocks. Second, it's the last month of the quarter, which often comes with the volatility associated with quarter-end. Third, the S&P 500 is currently riding a nine-month winning streak that is at-risk of being snapped here in August, with four days remaining. That alone might lead some to think that the market tide is shifting downward and it is time to sell.

    I do anticipate greater volatility in the weeks ahead, but for now the edge still goes to the odds that the market will rise heading into the end of the year. At least until the longer-term trend shifts, which it has yet to do.

    In The Market...

    The S&P 500 gained +0.8% last week. Let's look under the hood...

    (price data via Yahoo Finance)

    Stocks: The S&P 500 avoided a third-consecutive losing week. Most sectors followed suit, rising between 0.5% and 2.0%. The collective weekly rebound was nice to see, but will need to continue into next week to propel the S&P index back near/above its record high set back in July.

    Bonds: Treasury bonds rallied for the fourth-straight week, with interest rates falling to the lowest levels since June. We currently own long-term Treasuries (TLT) within many client accounts. We are getting close to selling this holding but would like to see the price run another 1% or so higher before doing so.

    As you'll see in the Portfolios section below, we bought a Utilities sector fund (XLU) following the sale of the Health Care fund (XLV). This allocation was made for most every client account, with the exact allocation ranging from 10% to 35%. Utilities possess arguably the smoothest, rising long-term trend among all major stock sectors. Take a look at the weekly chart of XLU here, which illustrates this upward pattern dating all the way back to 2010:

    (chart created via stockcharts.com)

    In Our Opinion...

    As a business owner, a little paranoia is a good thing. It helps you stay focused on the day-to-day. It also helps you stay aware of competition and future risks without obsessing over them. As an investor, paranoia can paralyze you from putting money to work, but if harnessed properly can create opportunity.

    The past 12 months is a great example of this. Every week someone voices to me their fear that the market will crash. In the past, as recently as the presidential election, I voiced my belief that the market tends to behave in contrast to what the consensus thinks will happen. There certainly is no consensus here that the market will fall, but the fact that it seems so many are waiting for it to do so has actually helped push stocks higher (the S&P is currently up +10% year-to-date).


    My guess is this... When investors are nervous or fearful what do they do? Nothing, that's what. They don't invest, which means money stays on the sidelines. As time passes these investors slowly get back into the game, particularly as they see the market rise and fear missing out. It is not until a point of collective euphoria where we see big market drops or recessions.

    Are we at that point of euphoria yet? No, I don't believe so. In addition to our daily statistical market analysis, I have yet to see/hear the behaviors from clients that suggest such excessive optimism. Frankly, I need to anecdotally hear about people pursuing speculative/ultra-risky investments, or a desire to load up on real estate -- things that are beyond their risk profile or financial means. Instead, I still come across people who appear ready to invest but cannot pull the trigger. For these reasons, I would say euphoria has not arrived.

    In Our Portfolios...

    Q&A/Financial Planning...

    Are you able to save more OR in need of tax deductions?

    Now is the time to adjust your retirement plan contributions to increase the amount you save/shelter from taxes between now and year-end. If you own a 401k (or like-account) through your work, review your contribution percentage and see if it is too low. A lot of people do not consider this until November, when it is too late to enact meaningful change for the current year.

    Your contribution amount should not be as simple as, say, only putting in what your employer matches. For example, you may be under-funding your 401k if you take home considerably more income than you spend each month. Or, if you are frustrated by how much you pay in taxes each Spring. Conversely, you may be over-funding your 401k if you have considerable debt that you are having trouble paying down. The benefit you're getting by aggressively funding your 401k can get swallowed up by the interest payments tied to your debt.

    If you plan to make IRA contributions, you have until April 15th of next year to do so for this current year. If you think your income could exceed the limit that prevents you from making tax-deferred contributions (or similarly, the limit that prevents you from making Roth IRA contributions), wait until the end of the year before making any deposits. Otherwise, you will have to remove those contributions in order to avoid an IRS penalty. Me or Gale are happy to help you figure out your savings abilities and limitations.

    What's New With Us?

    A few weeks ago I mentioned that I am looking to hire an Administrative Assistant. The target start date is Jan. 1st. I realize that is a number of months away, but just want to put out a reminder in the event you may know someone who is interested and qualified in the coming months. I am happy to provide a detailed job description upon request. This person will assist me directly and assume the duties of Chief Compliance Officer.

    Have a great weekend,

    Betz Signature 250px.png

    Brian E Betz, CFP®

    Stocks Climb Higher Into The Peak Earnings Week of 2017

    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®

    Amazon Is "Primed" To Buy Whole Foods - What It Means

    In The News...

    I suppose it is a busy week when news like Verizon completing its purchase of Yahoo! is overshadowed by an even bigger story. That would be the news that Amazon is set to buy Whole Foods for $13.7 billion.

    Amazon primed to buy Whole Foods: This came out of nowhere (at least to me). However, being familiar as I am with Amazon's history and company culture, nothing it does can surprise us anymore. The details are sparse as I write this, some of which I am intentionally avoiding in order to give my immediate reaction, void of other opinion.

    Do not underestimate this deal, even if you shop at a large grocer like Safeway or Kroger. This deal to buy Whole Foods signals Amazon's intent on diving deeper into grocery retail. In many ways this deal makes sense. Amazon is the leader in selling goods at the most competitive prices. Whole Foods is considered so pricey by many that it is known as Whole Paycheck. Now the bigger story that results from this...

    What the deal means: There is a reason that major retailers Costco, Walmart and Kroger were each down -7%, -4% and -9%, respectively, on Friday. People think of Amazon as a retailer, which is incorrect. Amazon is a logistics giant that dominates in its ability to get things from Point A to Point B. (In fact, I have long thought that Amazon might buy Uber.) If logistics were a marathon, Amazon is on mile 10 while most retailers have barely left the starting line. It is its logistics horsepower that makes Amazon a major threat to traditional grocery giants. This deal likely means food costs will go down too, which is good for our grocery bills but bad for food producers.

    Whole Foods was stuck in no man's land. Baby boomers, which comprise roughly one-third of the population, do not shop there enough. Millennials mostly buy online or are willing to do so once the option comes available. This leaves those in their mid-30s to mid-50s as the primary Whole Foods customer, which is a narrow, shrinking market.

    Whole Foods is sensitive to economic factors too. Organic food is available at more retailers than five or ten years ago. If the economy worsens, buyers would simply switch to a cheaper grocer in order to save money. In short, I just don't see long-term customer loyalty.

    What's next for Amazon? I will be fascinated to see where this goes. I have written previously about the slow death of brick and mortar store locations and the adverse impact that would have on commercial real estate. But ironically, I wouldn't be surprised if Amazon uses certain Whole Foods locations to set up their futuristic Amazon Go stores, explained here:

    In The Market...

    The S&P 500 gained +0.1% this past week. Let's look under the hood...

    (price data via stockcharts.com)

    Stocks: I am not sure last week was quite as positive as the sector-by-sector view indicates. Most were in the green, but of those in the red it is interesting that Technology was the big loser. Perhaps this is short-lived, perhaps investors are pivoting from technology and into other sectors or perhaps Tech will soon drag the other sectors down along with it. Tech finished this week roughly -4% below its previous high set just over a week ago, so to be clear it isn't anything dramatic, yet.

    One investment that many accounts own is a real estate investment trust, or REIT, for short. That fund was up nicely this past week, but will it continue to move higher? Here is what I'm looking at, with sights set on seeing the price break higher above the upper pink line shown here:

    (chart created in stockcharts.com)

    I believe this fund (VNQ) will rally higher, otherwise we would not still own it. We'll see what the next few weeks brings.

    Bonds: We continue to see the same rally unfold within bonds that I have mentioned for the past couple months. This plays well for some of our holdings. I believe there is more room to run. And coincidentally, long-term bonds rallied yet again coming off the news that the Federal Reserve will raise rates for the 4th time since it started to do so 18 months ago. More on that next week.

    In Our Opinion...

    I am not sure if I made this up or subconsciously heard it somewhere, but I like the following phrase:

    "On a long enough timeline, any prediction can come true."

    I say this as a few more prominent investors predict that the stock market will endure a massive crash in the near future. A crash, they estimate, could be upwards of a -90% loss. These are some of the reasons I routinely hear, based on fear or weakening investor demand:

    • The Fed - specifically years of artificial monetary stimulus that they believe has caused irreparable damage. Years of bond-buying and a 0% federal funds rate, which were done in tandem to suppress interest rates and stimulate economic growth
    • International debt problems - in China, greater Europe and elsewhere
    • Aging baby boomers - who will slow their savings habits and begin to spend more and invest less
    • Millennials - who are slower to start careers compared to previous generations and seem less interested in investing
    • Risks of war or terrorism
    • President Trump's economic policies

    I am not going to start listing names and sharing links (you can easily search for them) as that is beside the point. The fact is, many crash predictors have been at it for years, going back to the initial rebound coming off the last recession bottom in 2009. They have been routinely, flat-out wrong each time. Meanwhile, the market has steadily risen with the exception of some stagnant periods (2011, 2015) and a few 10% or so short-term losses (which are actually normal).

    So what makes this time different? I have no idea and neither do they.

    They would argue that this market rally is driven by unsustainable methods, namely the Fed and other international central banks. But even if they are right this time, they will not be vindicated. The same way that a batter who strikes out nine-straight times is not universally praised if he gets a hit in his 10th at-bat. You cannot keep making bold predictions - keep being wrong - and then pat yourself on the back if/when it actually does happen.

    Furthermore, many of the crash predictions you will hear are made using VERY wide windows of time. They don't say a crash will happen "next month" or even "in the next three months". Rather, they will say something broad/vague like "this year or next" or "sometime soon". They do not tell you exactly how they are invested themselves and they give no attention to the previous market gains that they missed out on by exiting the market years ago (at least I presume they have been out of the market, or there is a real problem with their sentiment). In some ways, missing out on a gain is just as damaging as absorbing a loss.

    The biggest difference between today and even a decade ago is the presence of social media, which allows literally anyone to make a bold market call and catch some traction. Now imagine if you are someone with clout... You can see how easy it is to spread provocation. A lot can be said and interpreted through a blog post or 140 characters.

    So what do you do? Nothing.

    Stay the course. There are periods that we reallocate more conservatively, using certain bonds and even cash (though not preferred). When we do it though it is not based on some doomsday prediction. It is based on the ongoing market analysis that I perform each day.

    In Our Portfolios...

    Q&A/Financial Planning...

    What are exchange-traded funds (ETFs) and how do they differ from mutual funds?

    As you know, we invest in ETFs, which have risen in popularity over the past 20 years to become widely used investment options for investors who want to easily diversify. Similar to mutual funds, ETFs track specific assets, sectors or regions.

    • Want to own silver? You might buy an ETF that tracks the price of silver.
    • Want to own technology but without the risk of owning one particular stock? Buy an ETF that tracks the tech sector.
    • Want to invest in Russia? Buy an ETF that mirrors the Russian stock market.

    You get the point. Mutual funds have long been the traditional means of investment diversification. A mutual fund is created and managed by an investment firm, who buys and sells individual stocks/securities that comprise the fund. Similar to ETFs, each mutual fund is established for the purpose of tracking a particular segment of the market. However, mutual funds tend to carry much higher overhead costs to run them than ETFs due to increased infrastructure. These costs are passed along to the investors who own shares in the fund. Their investors pay for such overhead costs via internal expenses that come out of their investment value, despite little disclosure. There are expenses for owning ETFs too, but they tend to be a fraction of what mutual funds charge.

    Mutual funds remain very relevant because they are the primary investment vehicle for 401k plans. This might not be the case if not for firms like Vanguard that have reduced their fund expenses to match those of their ETF peers. However, many companies continue to offer overpriced mutual fund options within their 401k investment lineups, and unfortunately, many participants still own them.

    ETFs are much more flexible than mutual funds. If you invest in a mutual fund your money is not actually invested until the end of the market day. ETFs, on the other hand, trade like stocks. They are easier to buy and sell, making them more liquid. This makes a big difference to us as investment managers.

    Finally, ETFs tend to be more tax-efficient than mutual funds. I won't get into the weeds on why, but they typically are.

    What's New With Us?

    For those who actively use our Morningstar service, we are in the process of merging the old Scottrade account data within the new TD Ameritrade accounts. This is for account reporting purposes and only affects what you see in Morningstar. The project will be completed by early July. If you receive a monthly Morningstar account summary I will post your May and June summaries when the project is completed.

    Morningstar is a useful account reporting tool. It allows you to view all of your investment accounts in one, consolidated snapshot. This means you can view your TD Ameritrade account plus others like your 401k, other IRAs and brokerage accounts. Please call Gale or myself with questions.

    Have a great weekend,


    Brian E Betz, CFP®

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

    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®

    Seattle Real Estate Leads The Nation In Price Growth

    In The News...

    Here is a list of the major U.S. cities where housing prices have grown by double-digits over the past year:

    1. Seattle
    2. Portland

    That is the list.

    Across the country home prices are up +5.8% annually, according to the national average supplied by the latest S&P/Case-Shiller housing report. Seattle and Portland have doubled that mark, up +10.8% and +10.0%, respectively. The West Coast has benefited most from the housing market recovery, thanks to a strong job market and technological growth. However, whereas cities like San Francisco have cooled off a bit in the past six months, the Pacific Northwest continues to surge.

    Businesses, namely tech firms, have found Seattle to be a great supplement to comparably pricier areas in California. Google, Facebook and Salesforce are among those that have expanded north from the Silicon Valley, taking advantage of cheaper real estate. Add that to an already robust foundation created by Amazon, Boeing, Costco, Microsoft, Starbucks, etc. and any additional business migration is icing on the cake for the greater Seattle area.

    As the housing market thrives in Seattle the question becomes: If the price-gap narrows between Seattle and metropolitan California, will Seattle real estate similarly begin to slow? One interesting statistic I found is that Washington is one of four states where the most common job title is "Software Developer". Not even California can say that.

    (source: NPR)

    Does this mean Seattle is more sensitive to a tech slowdown than other parts of the country? Sure. But notice that the most common job title is "Truck Driver" in the majority of states, so it might be an easier conclusion to draw if Truck Driver was exempted so that we could see the next-highest job classification in those states.

    It is not news that Seattle and Portland real estate are strong. What is news is that these areas have consistently led the nation over the past few years and the gap between these cities and the rest of the country has widened. Here is a look at the complete list of 20 major cities.

    In The Market...

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

    The six-week winning streak for the S&P 500 came to an end. It was a worse week than the -0.3% decline implies, as the majority of stock sectors were negative. Technology led the way, while Energy and dividend-paying sectors lagged (Real Estate, Utilities).

    If you recall my suggestion from two weeks ago that the bond market may be poised to break out, that clearly has not been the case. It was the worst week for the bond market in recent memory. I have a close eye on the bond market given our positions in both high-yield bonds and preferred stock. High-yield bonds often foreshadow what is to come within the stock market. If last week is an indication, it could be a bumpy couple weeks ahead for stocks.

    In Our Opinion...

    Investor sentiment worsened sharply last week. The percentage of respondents who feel positive (bullish) about the market looking ahead dipped from 38% to 30% in the latest AAII survey. The percentage of those who have a negative (bearish) market outlook spiked from 35% to 47%.

    The 16% spread between the 46% who are bearish and the 30% who are positive is the largest negative gap in over a year. A bearish jump of that magnitude is pretty rare and is usually followed by a sell-off. I don't like speaking in absolutes, but the data bears that out pretty consistently when I look back at how the S&P 500 has reacted following similar spikes in Dec. 2015, Aug. 2015, May 2013 and May 2012. Then again, pessimism has helped fuel this rally dating back to last fall.

    The AAII investor sentiment reading is just one subjective indicator. We do not emphasize it. Since respondents are effectively asked how they feel the market will perform in the future, the recent rally may provide context for them to assume the market is "due for a drop". (I intentionally use quotations because it is a common phrase I hear all the time.) Oftentimes though a rally has legs much longer than most realize. Market rallies tend to beget bigger rallies. So even if we do see a market decline in the near future, it could be short-lived.

    Let's see how the next few weeks plays out.

    In Our Portfolios...

    Stocks: No changes.
    Bonds: No changes.

    Q&A / Financial Planning...

    As I review 401k accounts for many of you and others this spring, one thing I see is misalignment between someone's tax needs and how they contribute to their 401k account (pre-tax vs. Roth). If your 401k plan does not offer a Roth option, this likely does not apply. But if it does, take a look at your contribution choices.

    Pre-tax 401k salary deferral: Your contributions avoid taxes today. In exchange you defer taxes on those dollars, plus earnings, until you begin taking withdrawals in retirement. At that time you pay taxes on any distributions.

    Roth 401k salary deferral: Your contributions are taxed today. In exchange, any earnings grow tax-free. When you begin taking withdrawals in retirement you pay no taxes.

    On its face the Roth option seems like the better bet. No one likes paying taxes and tax-free is better than tax-later. But that is not necessarily true. If you are in a high tax bracket because you make a lot of money, it may be wiser to use the pre-tax/tax-deferred option. If your tax bracket will be considerably lower in retirement (an unknown, I know) it might make sense to avoid taxes today and instead pay them on the back end.

    I mention this because I do see some people overload on the Roth option when their greater need is for tax reductions today. You can contribute up to $18,000 into your 401k ($24,000 if age 50), which is sheltered from taxation. Also, if you switch jobs or retire, you have the option of converting those tax-deferred funds into Roth funds. I often recommend this for clients who experience an unusually low income year because it allows them to convert at a lower tax rate, reducing their tax burden and providing tax-free growth from that point forward.

    If you feel your 401k contributions may not align with your tax needs, contact Gale or myself. (Note that this applies if you own a 403b or 457 plan and a Roth option is offered. I just say "401k" for simplicity.)

    What's New With Us...

    As a reminder, if I haven't spoken with you about the change from Scottrade to TD Ameritrade, don't worry, I will be in touch soon.

    Enjoy your week everyone!


    Brian E. Betz, CFP®

    A Trade War We Can Get Behind

    In The News...

    The dominoes fell nicely last week.

    First it was Fidelity. Then Charles Schwab quickly followed suit. A day later TD Ameritrade did the same. One after another, the major investment custodians lowered their trading fees on stocks and exchange-traded funds (ETFs) last week, in the name of competition. Here are the changes:

    Fidelity: Reduced from $8.00 to $5.00
    Schwab: Reduced from $7.00 to $5.00
    TD Ameritrade: Reduced from $10.00 to $7.00
    Scottrade: No change, held at $7.00

    Executing buy & sell orders for stocks has become more commoditized as technology evolves. This drives down costs, which is good news for investors. You may wonder why our custodian, Scottrade, did not move. It likely has to do with the pending sale to TD Ameritrade, which is set to close in September. That, and the fact that Scottrade is already competitive at $7.00 per-trade.

    This is pretty good timing. As mentioned a few months back, I have been diligent, but patient, in evaluating which new custodian to use given the pending TDA-Scottrade deal. We have decided to go with TD Ameritrade and will begin that transition very soon. TDA was a top choice before news of this acquisition. I will contact each of you in the coming days to discuss what should be a seamless and secure account transition from Scottrade to TDA. There is no cost or tax implication related to this move. Paperwork should be minimal, with the option to be completed 100% electronically. I have vetted this process thoroughly and am very excited about the move.

    Among the positives of choosing TD Ameritrade:

    • TDA offers a menu of commission-free ETFs, which means it costs nothing to buy or sell those funds. This is a nice perk considering we invest in some of the funds on that menu.
    • TDA is a growing firm, while already being one of the biggest players in the space.
    • Improved banking features, which will help those of you looking for a savings account-like solution. Banking that is smoothly integrated with your investment accounts.
    • An improved online platform (could be a personal preference).
    • At $7.00 per-trade, that cost is not the lowest in the industry but we can live with that for two reasons. First, on smaller accounts we do not excessively trade. Second, effective March 1st, we pay for all trading costs for clients who invest over $100,000. So the impact of an additional couple dollars per-trade is minimized on smaller accounts and is a non-issue altogether for larger ones.

    Scottrade has been a fine home for us these past few years, but this is the right time to move. I will be in touch, but if you have any questions in the meantime, just call.

    In The Market...

    The S&P 500 index gained +0.7% last week. Let's look under the hood:

    It marked the 6th-straight weekly gain for the S&P index. Turns out we did not see the follow-through across defensive sectors (i.e. Utilities) and bonds that I anticipated may happen. Not yet, anyway. Growth-oriented sectors regained the lead, while both dividend-heavy sectors and bonds fell. Overall, no major messages to take away from last week. I sense there will be more jockeying within sectors and a potential pause coming at the S&P 500 level, but overall the longer-term view looks good.

    We currently hold Materials and Consumer Discretionary sectors across most client accounts. We remain invested in high-yield bonds and preferred stock as well. Those asset classes have been steady despite lagging last week, thanks in part to their nice dividend yields.

    In Our Opinion...

    I sold my car this past weekend. My Nissan and I had been together for 11 years. It is not practical with a baby on the way, so the break-up was inevitable. Our next car is to be determined, but I can say one thing for sure, as my advice:

    Lease, don't buy.

    I am not a "car person" so cars are not a big deal to me. I am a finance person and I believe the merits of leasing outweigh those of owning. The idea of owning a car outright may seem like the better financial decision. But I disagree.

    In terms of overall wealth, few assets depreciate quicker than a car. The only way buying trumps leasing is if you own the car for a really long time or you'll exceed the annual mileage restrictions tied to the lease. If you are able to get 15-20 years and 150,000+ miles from a car, then owning may win out. But the depreciation that occurs over time is money you don't get back when you eventually sell, which is likely equivalent to what a lease payment would alternatively be. Lease terms typically cover major repairs or malfunctions, so you reduce your financial risk, and if you end up loving the car so much you wish to own it there is usually an option to buy when the lease ends.

    What tips the scales for me is that I believe cars will become more obsolete in the years ahead. On-demand cab services and ride-sharing services will expand. In densely populated areas like Seattle, where the population is expanding but the infrastructure isn't, something has to give. If families merely cut back from three cars to two, or two cars to one, that will hurt auto demand. This means an even lower price for your used car when you eventually want to sell.

    If you are in the market for a car, consider leasing. You can negotiate the terms just like you're buying. You can relieve yourself of the financial risk associated with major repairs. And, if you save money by leasing you can use those savings in other ways -- retirement, other debt payments, vacations, etc.

    In Our Portfolios...

    Stocks: We purchased a Consumer Discretionary fund (XLY) for accounts that did not already own it. We also purchased a Real Estate sector fund (VNQ) for certain accounts.

    Bonds: No changes last week.

    Q&A / Financial Planning...

    Many of us grumble this time of year about how to reduce our tax bill. There is not much that can be done to affect 2016, so use this fuel to start planning for 2017. A few tax-deferral or tax-reduction options to consider:

    • Max-out your 401k contributions. Up to $18,000 if under age 50 or $24,000 if age 50 or older. I know many of you only contribute the percent your employer matches. Lets reevaluate.
    • Max-out your IRA. Up to $5,500 if under age 50 or $6,500 if age 50 or older. Lets first make sure you qualify, as you likely will be restricted from making tax-deductible IRA contributions if you also participate in your company 401k plan.
    • Exercise your stock options. If you have vested options that are in-the-money, meaning the current share price is greater than the strike price to buy them. Exercising starts the 1-year clock on capital gains, which could mean significant tax savings if you wait to sell one year (or more) from when you exercise.
    • Change your paycheck withholding. Reduce the number of exemptions you claim on your W-4. Fewer exemptions means more federal income taxes withheld, which increases your odds of owing less come tax season. (The lowest number you can claim is zero.)
    • Convert a portion of your IRA to a Roth IRA. Wait, what? I know, I know... Converting your IRA to a Roth means paying taxes on the amount/balance you convert, but this is a long-term play if the shoe fits. If your income will be lower in 2017 than most years, convert your IRA now while you can take advantage of a lower tax rate. That way your new Roth grows tax-free moving forward in perpetuity. Second, the Required Minimum Distribution (RMD) rules mandate that you withdraw a certain amount every year starting at age 70 1/2. This might force you to withdraw more than you need or want, increasing your tax bill against your will. RMD rules do not apply to Roth IRAs so you do not have to take anything out if you do not want (not to mention Roth withdrawals are tax-free if you do). Third, if you simply think your tax bracket will be the same (or higher) in retirement, consider a Roth conversion.

    What's New With Us...

    I covered the biggest news in the first part of this weekly blog. Again, if you have any questions regarding our choice of TD Ameritrade please call me. This is a positive move, following months of patience and due diligence on my end.

    Have a great week,


    Brian E Betz, CFP®

    And The (Real) Winner Is...

    In The News...

    Things aren't always as they appear. Last night's Oscars proved as much.

    U.S. stocks climbed for the 5th-straight week, as talk of fresh highs and bull markets swept headlines. No doubt the year has started out nicely for stocks, but last week felt slightly deceptive. I would argue that the bond market was the true winner.

    It has been a while since we've seen the bond market rise in unison like it did last week. Before going further, remember that not-all-bonds-are-created-equal. People use the word bonds to define an entire market, which is lazy and wrong. Some bonds live longer than others (1yr, 5yr, 10yr, etc.) and some are riskier than others (high-yield, investment-grade, treasury, etc.). Differing maturities and risk factors result in varying dividends and how each bond-type reacts to changing, overall market conditions.

    Here is a quick cheat-sheet:

    • U.S. Treasuries -- Safest of the bond universe because your principal investment is backed by the U.S. government, which is more reliable than any corporation or other nation's government. The longer the bond term, the higher the interest rate paid (e.g. 10-year treasury bond > 2-year treasury bond).
    • Investment-grade corporate -- Issued by companies that have a S&P credit rating of BBB- or better. These offer a higher interest rate than similar-term treasuries. The healthier the company, the lower the interest rate offered because the company can more reliably pay back the principal you effectively lent to invest in their bonds.
    • High-yield ("Junk") -- Issued by companies with a credit rating of BB or worse. They are structured like investment-grade corporate bonds, but are issued by financially weaker companies. In exchange for accepting a higher risk of principal default, these firms pay a higher dividend to entice investors.
    • Preferred stock -- We lump preferred stock into the bond family, despite technically being stock. The dividend is comparable to a high-yield bond (at least currently). Companies must pay preferred stockholder dividends before they pay common stockholder dividends but after they pay corporate bondholders. As such, preferred stock has less ability to appreciate than common stock but more ability to do so than corporate bonds.

    Low risk/low return bonds like U.S. treasuries and investment-grade corporate bonds got whacked post-election and have struggled to rebound in 2017. Meanwhile, higher risk/higher return bonds like high-yields have benefited from the stock market rally because of their stock-like characteristics.

    Last week, treasuries and investment-grade corporates quietly moved higher. Why does this matter? There is sometimes (not always) an inverse correlation between stock and conservative bond values. A rise in treasury bond demand often foreshadows what is to come within the stock market, often implying that stocks will flatten or fall in the near future.

    It can be dangerous to assume too much, but last week's bond gains are worth watching. As mentioned, the S&P 500 has risen five weeks in a row. Six weeks is pretty rare and something not seen since Oct. 2015. I hate using the phrase "it makes sense" because the market most often does not, yet it would not surprise me if stocks take a breather here. Even if only for a week or two.

    We will see if my analysis is right.

    In The Market...

    The S&P 500 climbed +0.7%. Let's look under the hood:

    Last week was no doubt solid, but the S&P index's positive return does not tell the whole story. Two things caught my eye.

    First, virtually all of the week's gains happened in the first two hours of the week. The index waffled the rest of the time and even looked to be losing momentum before rallying in the final hour on Friday. A really strange week, in a sense.

    Second, defense carried the load. Utilities, Consumer Staples and Health Care -- defensive sectors possessing less economic sensitivity -- led all sectors. This could point to a sea change at the sector level, where we may see a shift away from the sectors most sensitive to changing business conditions. A potential bond rally would likely boost these defensive sectors as well. We would gravitate toward these sectors if investors continue to play defense by migrating into bonds or cash.

    In Our Opinion...

    To avoid any confusion, we remain upbeat about the state of the market. I turned bullish late last summer and so far it appears the market has awoken nicely from its 18-month slumber. Recall this monthly chart of the S&P 500 index that I shared a few weeks ago.

    (source: stockcharts.com)

    The pattern has been that every 5-10 years the market simply flattens out for a stretch of time (areas shaded grey). Most recently the 2015-2016 period. The above chart of the S&P excludes dividends, and while those certainly matter, the picture remains largely the same.

    I think this is a good reminder because it is easy to get caught up in short-term market movement. There is always potential for lulls, dips and crashes but overall the market has a long-term bias to move higher.

    In Our Portfolios...

    Stocks: We sold our Nasdaq-100 fund (QQQ). This is less of a statement about the prospects of the tech-heavy index it represents and more to do with potentially better alternatives in other sectors. As such, the cash proceeds should be reinvested soon. We purchased a Consumer Discretionary sector fund (XLY) within large accounts and more aggressive accounts.

    Bonds: No major changes last week. We added to our high-yield bond position within certain accounts. High-yield bonds have been a strong pocket of the market these past few months.

    Q&A / Financial Planning...

    Someone reached out to me last week about helping him and his wife figure out which funds to select within their 401k plan. It can be a challenge choosing between the funds offered, depending on the number/types of funds offered and your familiarity with them. If you are struggling to decide how to allocate your 401k account, let us know. You should not make a hasty decision and you absolutely want to ensure that the funds you select are the best among those offered for your specific needs.

    What's New With Us...

    A quick reminder on text messaging: Please refrain from doing it.

    We prefer you call or email if you have a question. As a RIA firm we must archive all written communication we have with you and it is easier to do so via email as we automatically log all emails sent and received. I realize this can be tough to remember, but it makes our archival process easier without text messaging. Obviously if something is urgent then contact us the best way you can, even if that means texting, but generally please try to call or email when possible.

    Have a great week,


    Brian E Betz, CFP®