10 Interesting Market Stats Heading Toward Year-End

Three weeks left in the year and we are still awaiting a 4th-quarter rally. With the S&P 500 again negative year-to-date stocks acting pretty volatile, time is running out.

Some stats that might interest you:

  • If the year ended today, it would be the first time since 1990 that both stocks and bonds finished negative for the year (stocks as measured by the S&P 500 and bonds as measured by the 10-year Treasury bond). In 1990, the S&P lost -3.1% and the 10-year Treasury yield climbed climbed from 7.9% to 8.1%.

  • A down year for stocks would be the first since 2008, when the S&P 500 fell -37%.

  • Apple stock, which at one point was up nearly +40% on the year, is now only up +1% in 2018.

  • The biggest gainer in the S&P 500 this year? The clothing & accessory company Fossil, which is up roughly +115%.

  • The biggest loser in the S&P year-to-date? Auto part manufacturer Delphi Technologies, which is down roughly -70%.

  • Bitcoin, which many people had been asking me about this time one year ago, is down -76% in value in 2018 per the NYSE Bitcoin Index (NYXBT).

  • For what it is worth, the S&P went on to gain +30% that next year in 1991.

  • The yield curve is extremely close to inverting. More on this below.

  • General Electric is down -78% from its peak back in 2016.

  • 65% of stock prices among the S&P 500 are below their 200-day moving averages.

In The Market...

The S&P 500 fell -4.4% last week. Let's look under the hood:

(price data via stockcharts.com)

Stocks fell back to the lows from two weeks ago. The overall market continues to look weak. Nothing new there. The bond market was more eventful, as the yield curve gets closer to inverting.

A yield curve “inversion” is when shorter-term interest rates exceed longer-term rates. Specifically, we are looking at the 2-year Treasury bond yield potentially eclipsing the 10-year Treasury yield. Here is where they respectively enter the week:

10-year yield: 2.85%
2-year yield: 2.72%

So we are close. Inversion is totally ass-backward, in that it would mean you could earn a higher interest return lending your money for 2 years than you can lending your money for 10 years. That makes no sense and is not what anyone wants to see. Even if the yield curve does not invert, the fact that the spread between short-term and long-term rates is so slim is problematic enough.

So how does it happen that short-term rates could surpass long-term rates? I believe there are two reasons. First, the Federal Reserve has raised short-term rates aggressively, increasing the Federal Funds rate seven times in just the last two years. Second, long-term rates have sank lower due to renewed demand for long-term Treasury bonds over the past month (remember, higher bond demand means rising bond values, which means falling bond rates).

In an ideal world. the Fed would raise short-term rates as the stock market rises. Meanwhile, the demand for long-term Treasury bonds would weaken because investors prefer being in stocks over bonds. Weaker demand for long-term bonds means long-term rates go up as well.

But lately this has not been the case. Short-term rates have risen, but stock prices have fallen. Meanwhile, investors are migrating back into long-term bonds, which has pushed long-term rates lower. In my opinion, this is the worst trifecta of all: Rising short-term rates, falling long-term rates and stock market stagnation.

I’m not quite at the point of talking “recession”, but there are some signs out there that have me concerned. I’ll lay those out if it becomes appropriate to do so. An inverted yield curve is not required for a recession to occur. However, just know that there has never been a recession without one. It usually takes at least a year though for a recession to occur from the time when the yield curve first inverts, so there’s that.

We sold our Utilities fund position (FXU) last week for a modest gain, which consequently increased our cash position. We will continue to seek out new opportunities, however right now the market is so choppy that it is unlikely we will just yet.

In Our Portfolios...

What's New With Us?

It was a pretty rainy weekend, but despite that we went down to Green Lake on Saturday evening. The entire pathway around the lake was lit up, including a pair of giant hot air balloons that was pretty cool to see. It was a fun holiday outing.

Have a great week!

Brian E Betz, CFP®

The First Company To Reach $1 Trillion In Value Is...

There were so many interesting stories and reports that popped up this past week that I am going to quickly share them all.

Apple hits $1 trillion. Following its quarterly earnings release, Apple became the first company to reach a $1 trillion valuation. This is based on its market capitalization, which is the share price multiplied by the number of shares outstanding. Amazon is the next-largest company, but still sits roughly $100 billion behind Apple, followed by Google ($850 billion) and Microsoft ($830b).

Man rigs McDonalds Monopoly game. An absolutely crazy story about a guy who rigged the McDonalds Monopoly contest back in the 1990s. It is a long article, but if you have 30 minutes it is worth reading. Not soon after this came out, Ben Affleck and Matt Damon announced they will turn it into a movie.

Another solid month for housing. Homes rose by +6.5% on average across the country in May. Seattle maintained its lead on the rest of the country, with prices rising +2.2% during the month and +13.6% in the past year. Las Vegas (up +12.6%) and San Francisco (up +10.9%) held on to the second and third spots. Here is a complete city-by-city look:

What the heck is "blockchain"? Have you been wondering what "blockchain" means and is all about? Here is a good explanation, in basic language.

Capital gains tax change? The Treasury Department is weighing a change to capital gains taxes that would radically alter how investors calculate long-term capital gains. The proposal involves allowing investors to increase their cost-basis by adjusting it for inflation.

Here is roughly how it would work. So let's suppose you invest in something today for $100,000 and sell it in 6 years for $250,000. The capital gain would be:

($250,000 - $100,000) = $150,000 capital gain

Under the proposed change, the "cost-basis" (essentially the purchase price) is adjusted higher for inflation. Let's say inflation is 3% per-year. Your cost basis would increase from $100,000 to roughly $120,000. This reduces your capital gain by $20,000. So, instead of owing taxes on $150,000, you would owe taxes on $130,000.

More bad news for Wells Fargo. Following up on what I wrote a couple weeks ago, more and more details are coming out about the bad business practices that have occurred at Wells in the past decade.

Federal Reserve says "no change". The Fed decided to hold its target lending rate, the Federal Funds Rate, at 1.75% following its most recent committee meeting. It is likely the Fed will raise rates once more before the end of the year, pending stock market behavior.

The Fed Funds rate is the benchmark that banks use to lend more to one another and it is ultimately the rate that trickles down to consumer banks that you and I use when investing into short-term CDs or money market funds.

Unemployment back below 4.0%. The unemployment rate improved to 3.9% in July as +157,000 hires were made during the month. Unemployment remains right near the previous lows from 2000. Take a look...

In The Market...

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

(price data via stockcharts.com)

The S&P index rose for the 5th-straight week, while most sectors finished in the green. Real Estate made a big move, rising more than +3.0%, while Energy was the main loser, down -1.8%. Both of our sector positions performed nicely, with Health Care (XLV) rising another +2.1% and Technology (XLK) rebounding +1.2%.

July gains: The S&P climbed +3.7% in July, marking the 4th-straight monthly gain. Health Care (XLV) was the biggest winner, up +6.6%, while Tech (XLK) gained a little more than +2%. Including the early-August gains, the S&P 500 is still -1.0% below the previous high.

No-cost funds? Fidelity announced it will be rolling out some no-cost index exchange-traded funds (ETFs) in the near future. Fund creators are steadily lowering their fees as there is more and more competition. This move by Fidelity to a zero-fee fund is indicative of that.

ETFs are quickly replacing more traditional mutual funds, due to their reduced costs and greater tax efficiency. Mutual fund providers historically charged anywhere between 1% and 3% to investors for the ability to invest in their funds. Those costs have been driven down as ETF competition has provided largely the same level of performance at a fraction of the cost. Eventually, mutual funds will be very niche and few in number.

For context, we use ETFs that are either very low-cost to own, or, relatively low cost but carry no costs to buy and sell. I am happy to share more if you are interested.

In Our Portfolios...

What's New With Us?

I spent much of the weekend trying to locate and destroy a yellow jacket nest that is forming near the ground next to our house. I have learned more about bees in the past 72 hours than I ever cared to know. If anyone has a tip, I'm all ears. So far I have won a couple battles, but the bees are ultimately winning this war.

Have a great week,

Brian E. Betz, CFP®

When Heirs Cry: A Lesson Learned From The Death Of A Pop Icon

In The News...

When pop-icon Prince died in April 2016, he left behind a lot of things, totaling an estate valued at a whopping $200 million.

Unfortunately though, there is one thing he failed to leave behind...

A Will.

Nothing resembling an estate plan. Prince passed away without, it seems, having taken any estate planning measures whatsoever. The fallout has resulted in a long, drawn out series of court appearances and rulings to determine who his rightful heirs are, what they get and by how much. According to an article in Rolling Stone, a staggering 45 different people came forward as potential heirs, trying to stake a claim to his riches. Last week, the court finally deemed his sister and five other half-siblings as the rightful heirs to his estate.

How did this happen? Most of us know we need a Will, but do you actually know why? It isn't just about saying who gets what, it is equally about ensuring certain people do not get things. A Will safeguards against instances like Prince's heirs have experienced, where long-lost "cousins" are coming out of the woodwork following his untimely death.

What is "probate"? When you die your estate goes through probate, which is the process of proving the intentions in your Will. Probate can take quite a while (in Prince's case, well over a year) because the public is given an opportunity to stake claims against your estate. Said differently, probate is a period that allows anyone to challenge your Will.

(NOTE: In community property states, such as Washington and California, probate for married couples does not really play out until the second spouse passes away. Community property is defined as anything you or your spouse acquired during marriage (with some exceptions). This usually ends up being most of what a married couple owns. Community property is jointly owned, 50-50, between both spouses. When one spouse passes away, the surviving spouse instantly becomes 100% owner of the community property. So for the purpose of explaining the true purpose of an estate plan in a community property state, assume we're talking about a widow or someone single.)

It gets worse: The wealthier you are the more problematic these post-death issues become without proper planning. Assets are frozen while probate plays out, and worse, if you are really wealthy your heirs may owe a hefty estate tax bill (federal and state). Due to the 40% federal estate tax rate, nearly half of Prince's $200 million fortune will go to Uncle Sam (~$100 million!). Oh, and because of court appeals, his heirs may not be able to access his wealth for another year, if not longer.

The estate tax laws change every few years. Right now, with minimal planning, estate taxes are avoided if your married estate is less than $10 million. But that threshold is debated every presidential cycle and it wasn't long ago that the exemption threshold was only $1,000,000 (which sounds like a lot, but not so much when you add up all assets, including real estate). Also, state estate taxes may still apply (in Washington, anything above $2 million is subject to estate taxes).

More on this, including my recommendations, below in the Q&A/Financial Planning section.

In The Market...

The S&P 500 gained +1.4% this past week. Let's look under the hood...

(data source: Yahoo Finance)

Stocks: The S&P 500 did it. It finished the week above 2,400 for the first time ever (2,416 to be exact). This is a bullish development, although it may be met with some choppiness in the days ahead. Nine of the 10 stock sectors were higher this past week, led by Utilities (a current holding of ours). Only Energy was down and is the lone negative sector year-to-date.

Bonds: A pretty inspiring week for bonds considering the stock rally. Conservative bonds (treasuries, investment-grade) were only down minimally, which is better than I would have anticipated considering the S&P 500 was up more than 1%. High-yield bonds were up nicely, following the lead of the stock market.

We purchased a Utilities fund (XLU) a few weeks back, anticipating a potential rally. We may have gotten that this past week, as Utilities were up +2.5%. The following chart shows this breakout, following weeks of calm. (For reference, the last "candle" on the right, where the arrow points, represents this past week.)

(chart created in stockcharts.com)

This is certainly no prediction that Utilities will continue to gain, but we like the odds.

In Our Opinion...

Someone asked me this week if Amazon, whose share price is currently $995, might split its stock sometime soon.

In this instance it was not a loaded question, but oftentimes when I get this question it is. When a company "splits" its stock, anyone who owns it sees the number of shares they own double following the split. A lot of people are inclined to believe that they now have more money because they have more shares.


Yes, when a stock splits you double the number of shares you own. However, the share price is cut in half when it does. Effectively, you have the exact same value of stock that you had pre-split. For whatever reason, many people feel as though they become wealthier when their stock splits, when that is not the case.

Now, there is an argument that it helps the stock's future prospects because a split makes the per-share price more affordable for smaller investors to buy. In theory, this would increase demand, which would push the share price higher than if it had not split. There is some merit to this rationale but no real proof. Apple did a 7-for-1 split back in 2014 (7 times the shares received and price cut by one-seventh) and did that help its price moving forward? No one knows. The stock price sure was choppy for the following two years after that massive split.

Amazon may or may not choose to split its stock, but here is the thing to remember... If you have $1,000 and are interested in buying Amazon, purchasing one share for $1,000 is exactly the same thing as buying 5 shares for $200, 10 shares for $100 or 1,000 shares for $1. Do not let the absolute price alone dissuade you from buying a particular stock.

In Our Portfolios...

Stocks: No changes this week, but we are looking to add the Nasdaq 100 fund (QQQ) or S&P 500 fund (IVV) next week. The specific fund will be determined by account size.

Bonds: Investment-grade corporate bonds (LQD) were bought for certain accounts. Next week we will look to add high-yield bonds (JNK) to certain accounts that do not own them. I also continue to eye long-term Treasury bonds (TLT) as a potential buy, but am awaiting the price movement I would like to see before doing so. Some of this bond-jockeying comes after having sold our preferred stock position over the past two weeks.

Q&A / Financial Planning...

Revisiting the above story about Prince's estate, here are my recommendations:

  1. Establish a Will. If you already have a Will, update it if life circumstances have dramatically changed.
  2. Consider adding a Living Trust as well. The concept of a Trust is often associated with the ultra-wealthy, but that word association is wrong. A Trust adds an extra layer of security and peace-of-mind to your estate because assets in your Trust bypass the probate process. This means your heirs can inherit your property (real estate, stocks/bonds, cash, etc.) quickly post-death than if those assets pass through your Will and become subject to probate. A Trust is also a private record, whereas your Will is public record. I, for one, value the privacy a Trust provides.

There are other life decisions that basic estate planning can solve too, namely guardianship for your minor children and health-care directives for making those tough decisions that occur as you age. If your wealth is substantial enough, certain Trusts can help reduce the estate tax burden your heirs become responsible for paying.

Let me know if you have questions. I am clearly not an attorney, so do not misconstrue this as legal advice. With that said, I can certainly refer you to a qualified attorney who can assist you.

What's New With Us...

Most client accounts have transitioned over to TD Ameritrade. As we wind down our firm's relationship with Scottrade, do not worry about the empty, zero-dollar balance in the account(s) you left behind. I will handle that in the near future and let you know if anything is required.

Have a great, LONG weekend!

Betz Signature 250px.png

Brian E Betz, CFP®