Market Outlook Coming Off Its Worst Week In 7 Months

Hi everyone,

I have quite a bit to say about the rough week we just saw in the market. Before I do, take a look at our video explaining how a 401(k) rollover works…

In The Market...

The S&P 500 fell -4.1% last week. Let's look under the hood:

(price data via

The above table tells the story. Last week was the worst for stocks in seven months. Just when it looked like a new rally was underway — with the S&P index having risen nicely above its previous record high — investors had the rug pulled out from under them. The S&P is down roughly -6% from that peak, which begs the obvious question:

Now what?

Let’s start by revisiting the chart of the S&P 500 that I shared last week. My inclination seven days ago was that stocks were positioned to bounce coming off the prior week’s decline (see my notes in blue). This does not happen, as evidenced here:

(chart created via

The losses were quick and significant (see pink arrow). To the point that the S&P 500 fell to its 200-day moving average, which is that reddish shaded area. The 200-day moving average is a critical level for a lot of investors, including us. It is arguably the best reflection of the long-term price trend of any investment. In this case the S&P 500 index, which we believe most accurately represents the entire U.S. stock market.

It is no coincidence that the S&P finished the week right on top of its 200-day average because of how influential it is to so many investors. It often serves as a battleground statistical price-point between buyers and sellers, resulting in a supply/demand tug-of-war.

When the market is healthy, stock prices often bounce higher after falling to the 200-day moving average. When the market is unhealthy, stock prices can struggle to hold above the 200-day average, often falling considerably below it.

So right now, we want to see stock prices hold that 200-day moving average line. Additional losses could steepen fast if there isn’t a quick rally higher. Here are some of my thoughts, which hopefully provides insight into our process with the market entering this week at such a crucial level…

Near-term market outlook:

  • Best-case scenario right now is that we see stock prices rally back a few percentage points before getting hit with another wave of selling. This is how I thought the market would respond back in February after the S&P fell more than -10%. In that instance the market did exactly that — it rallied back, fell again, and ultimately took 3 months to regain its footing.

  • Worst-case scenario is that the losses are only beginning and that any rally attempts are quickly halted by more investors looking to sell.

Portfolio activity:

  • We selectively sold a couple investment positions last week, in effort to play a little defense. If stocks fall further in the next few weeks, playing defense will hopefully curb those losses. If stocks rally from here then we still have our other current holdings that should benefit from market appreciation.

  • If stocks prove that this past week was just a blip and quickly rally back to new highs, we will reinvest the cash from our recent sales and go back to being fully invested. I doubt this will be the case, but if it is, we will have zero regrets about having played some defense.

Bond market:

  • Normally we would look to the bond market as a potential hedge against stock market weakness. The problem right now is that the bond market is weak. Both short-term and long-term interest rates have been rising, which means bond values are falling. The lone bright spot (relatively speaking) has been high-yield bonds, which we continue to own.

  • In theory it is great to see higher interest rates, but not at the expense of a falling stock market. Rising rates and falling stock prices is a bad combination that we do not want to see because it means investors are pulling their money from both the stock and bond markets.

  • So, for now, rather than pivot and buy bonds, it is more likely we will sit tight in cash until either the stock and/or bond markets improve.

Additional thoughts:

  • We are unlikely to make wholesale portfolio changes. Part of the reason we mostly keep our investment sizes from 10% to 25% of the total portfolio is to give some flexibility when the market looks iffy as it does right now.

  • Most investors think of gains in terms of percentages earned and losses in terms of dollars lost. The larger your account the worse any short-term losses will feel, but stay calm. Focus on the longer-term view beyond the stretch of a few days.

  • I am sure that the media buzz will build in the coming days. What is written or said in the media has no bearing on how we manage money. You should not let it sway you, either.

  • Sometime soon there will be a nice buying opportunity. It could take a bit of time, but eventually it will come.

We are continuously assessing the long-term and short-term health of the market. We will stick to our process and make buying/selling decisions using our best judgment based on the data we employ.

If you have any questions, feel free to ask. Hopefully the above addresses some of the things you might be curious to know at this time.

In Our Portfolios...

Have a great week!

Brian E Betz, CFP®

Stock Market Finds It Tough To Stay On Top

We went from an uneventful week to one of the more memorable weeks of 2018.

The broad stock market has played out pretty much as I thought it might. The S&P 500 continued its ascent back up to its previous record high from late-January, only to reverse course and go backward Thursday and Friday. The area highlighted in the below chart shows how the S&P 500 got stuffed as it ran back up to that previous high:

(chart created via

It took six months but the S&P finally made it back to the peak. I figured it would have trouble staying on top if/when the S&P 500 flirted with that previous high and so far that has been the case. My reasoning was pretty simple: If investors were looking to sell the last time stock prices reached this point then they are likely to do so again. The question now becomes whether more losses are to come before the index potentially rallies to fresh highs. I suspect that stocks will be choppy in the next few weeks. It is too early to say how the market resolves itself from there.

We are in the midst of what has historically been the worst market stretch of the year. In fact, dating back to 1970, August is the only month in which the S&P 500 has registered a negative average return (down an average -0.6%). Even if you remove the particularly awful years of 2002 and 2008, where the S&P was down -11% and 9%, August still has a negative average return dating back those 50 years.

So we will see what happens as we roll into August. More on the market below.

In The Market...

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

(price data via

It sure does not feel like the broad market moved higher last week, considering how things ended. But it was a good week in the sense that the S&P index finished in the green. It was a tough week in that Technology -- which is one of our holdings and has been leading the market higher over the past two years -- was down -1.0%. Seven of the 10 stock sectors finished positive, despite the broad market losses to end the week.

We sold our Materials sector fund (XLB). That sector did not materialize as we thought when we bought it nearly two months ago. The price has been below its 200-day moving average, which is bad, among other price factors we do not like to see. We ultimately took a small loss on that position. The cash proceeds from that sale may be invested into the aforementioned Tech fund (XLK) for those accounts that do not already own it.

You will notice below that we purchased shares of Facebook (FB) for accounts that own individual stock. You may be aware that the Facebook share price fell roughly -20% following its quarterly earnings release. We bought Facebook after it announced earnings. Facebook had been on our radar for some time. The price drop is no doubt concerning for the long run, but in the near term it seems like an exaggerated loss. We will see if our opinion pays off.

In Our Portfolios...

What's New With Us?

I would encourage you to visit our Video Q&A web page. We will be posting short (2-3 minute) videos that answer many of the questions we routinely get. Here is one we recently put up about whether it makes sense to rollover your 401k to an IRA.

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

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®