What A Year For Stocks... Putting A Bow On 2017

In The News...

2017 is in the books! Lots to talk about so let's jump right in...

Home sales leap: Sales of newly developed homes increased +17% in November. It was the largest volume of homes sold (on an annual basis) since July 2007. It also lowered housing inventory to 4.5 months worth of housing for sale -- the lowest in over 2 years. Development cannot keep pace, either. New construction has surged more than +25% in the past year, yet inventory remains suppressed.

Home prices leveling off? Year-over-year home prices (both new and preexisting homes) rose +6.2% nationwide in October. Prices increased in 16 of the 20 major markets. Seattle, Washington D.C., Detroit and Chicago all experienced minimal price declines. This was the second-straight month that home values declined in Seattle, something I predicted would happen based on prior trends. Seattle still leads the nation with home values up +12.7% annually, but that lead is shrinking.

Here is a complete city-by-city breakdown:

In The Market...

The S&P 500 fell -0.2% last week. Let's look under the hood:

(price data via stockcharts.com)

The S&P 500 index fell in the final week of the year, yet it was just the second losing week dating back to September. Dividend-paying sectors like Real Estate and Utilities led the way while growth sectors like Technology and Consumer Discretionary slipped. Bonds enjoyed a strong week, with Treasuries rallying +1.7%.

One change you will notice in the above Market Snapshot is that I reformatted the color shading in the "2017 Yearly Return %" column to better highlight which sectors were strongest this past year. As a whole you see the S&P 500 earned +21.8% (including dividends). Here are some high-level takeaways...

  • The +22% yearly return for the S&P 500 nearly doubles the annual average over the 100-year history of the U.S. stock market.
  • This was the strongest year for the market since 2013 and the second-best year since this current bull market began in March 2009.
  • Technology took the early lead in 2017 and never looked back, going wire-to-wire as the year's best sector with its +34% return.
  • Energy was the lone losing sector for the year, down -1%. How it got there was wild though, falling -15% in the first half of the year and then nearly making all of that back in the second half.
  • Amid the terrific year for stocks, bonds were up anywhere from +6% to +9%. This shows that investors kept buying safe bonds despite their thirst for growth via demand for stocks.

In closing, 2017 was a solid year for our investment management process. I believe we achieved strong results while still successfully managing against risk through our bond investments and occasional periods of cash. Let me know if you have questions.

In Our Opinion...

Warren Buffett famously says: Be fearful when others are greedy and greedy when others are fearful.

Is now a time to heed the first half of that quote?

Investor sentiment has been rising for six weeks. Investors are more confident about the stock market than they have been at any point in the past three years, according to the latest American Association of Individual Investors (AAII) weekly survey. This survey polls investors and asks whether they have a bullish, bearish or neutral outlook for the U.S. market. 52% of respondents are bullish, which is the most since Nov. 2014. Since the market recovery began back in March 2009, there have only been 7 other weeks where investors were more optimistic than they are now. Said differently, investors are more confident today than they have been 98% of the time in that span.

On the other end, the level of investor negativity is also historically rare. Only 20% of respondents were bearish, which is the lowest/best percentage since Nov. 2015 (bearish-ness has not dipped below 15% since 2008). The remaining 28% of respondents were neutral regarding the stock market.

The gap between optimists and pessimists is historically wide, as 52% are bullish and just 20% are bearish. There have only been three instances since 2009 where that gap has been wider -- Dec. 2010, Dec. 2013 and Aug. 2014. On each of those occasions the S&P 500 fell between -5% and -10% in the weeks ahead.

Will history repeat itself? Tough to say.

Market momentum is stronger today than it was at any of those prior points. However, I would expect the market to flatten out a bit. The U.S. market has gained in 14 of the past 16 weeks. The S&P 500 just completed its 14th-straight monthly gain. These are certainly bullish developments, but at some point a breather is likely. It may not be a -20% or even -10% decline, it could be a -5% drop that subsequently allows the rally to resume.

In Our Portfolios...

Q&A/Financial Planning...

You will notice that our PORTFOLIOS section above often references that we buy and sell individual stocks, in addition to owning diversified stock or bond funds. As a result, you may be looking at your account holdings and wondering, why don't I own any individual stocks?

We are willing to buy individual stocks for client accounts that are large enough to make the allocations worthwhile. Ideally that would be accounts above $100,000 but we can do it for smaller accounts depending on your specific situation. Part of the reason we refrain from owning individual stocks in smaller accounts is because it involves increased trading. We only pay for such transaction costs if a client's assets exceed $100,000. So if you are below this we prefer to limit the volume of transactions to minimize your costs incurred.

In addition to the cost factor there is the risk factor. Individual stocks possess greater risk than the funds we use. This disqualifies more conservative client accounts, meaning we as fiduciaries would not recommend stocks at all for those clients. If you would like to discuss whether owning individual stocks is something we would recommend, email me and we can talk.

What's New With Us?

One final, serious matter... One of our clients had his email account hacked last week (GMail, to be exact). As a firm we strive to stay ahead of potential security issues, but it is equally important that you do too. In this case, someone got into his email and sent us a request to wire a large sum of money to an account not in his name or anyone related to him. The nature of the request and the way the email read made it fairly obvious that it was illegitimate. We sniffed it out and ignored the request, but it was jarring to both us and our client, nonetheless.

This is the first time in 7 years where I have encountered this type of security breach. Here is a reminder of the steps we are taking to prevent theft/fraud, followed by some steps you can take as clients.

How WE help combat fraud:

  • If we email you sensitive information (DOB, SSN, account numbers, etc.) we send that information via secure, encrypted email so that it cannot be intercepted during transmission.
  • We also password-protect those emails, such that you must enter a specific code we provide in order to open the contents.
  • Computer devices used by our firm are monitored daily to prevent against viruses and malware attacks.
  • Client files, such as account applications, are saved in cloud storage. Backup files are saved monthly on a USB drive that is locked in a filing cabinet inside our primary office location.

How YOU can help combat fraud:

  • If you need to send us sensitive information, such as a SSN, use the "Send Me A Secure Email" link that is shown in the signature line of any email you receive from me or Gale. That link will allow you to send us such information in an encrypted manner.
  • Avoid having your web browser save your login ID/password credentials for certain websites like your bank account or TD Ameritrade account. If someone gets possession of your computer and is able to use it, they would be able to access your information.
  • If you travel for work, do not use public computers to access certain websites. A hotel lobby computer would be one example of this.

These are a few examples. If you have any questions or want clarification on how we promote client security regarding your personal information, let me or Gale know.

Have a great weekend -- HAPPY NEW YEAR!!!


Brian E Betz, CFP®