Stocks Fall For A 3rd-Straight Week

Hi everyone,

Below is this week’s blog. As mentioned, we are transitioning this from the written format to video form. If you want to skip ahead to certain sections, here is a summary of what I discuss this week:

  • Josh’s blog on the Federal Reserve (0:30)

  • Did you receive a tax Form 5498? (1:00)

  • Weekly stock sector performance (1:50)

  • Analysis of the overall market via S&P 500 (3:20)

  • Portfolio activity (6:25)

  • Financial planning using Right Capital (8:38)

I mentioned it in the video but will say it again — I welcome your feedback. My goal is to ensure we’re providing useful information so if you have opinions, please share. (The quality will improve too over time as I get more accustomed to creating these.)

Have a great week!

Brian E Betz, CFP®

Unemployment Falls To A 50-Year Low

Hi everyone,

U.S. stocks climbed to fresh highs last week, but that was soon overshadowed by President Trump’s announcement on Sunday that tariffs on certain Chinese imports would be increased from 10% to 25% due to prolonged trade negotiations. The stock market fell sharply Sunday night and has opened the week in the red.

As you know, these types of events do not influence our investment decisions. It is foolish to react emotionally because you think that a current event will cause the market to behave a certain way. The fact that prices moved sharply is significant and it will influence our buying and selling decisions should current price trends shift, but it is too early to make that call.

Lowest unemployment in 50 years: The unemployment rate fell to 3.6% in April, which is the best/lowest rate since Dec. 1969. No commentary or opinion on this one. Here is a look at the unemployment trend dating back 70 years…

(source: U.S. Bureau of Labor Statistics)

No interest rate increase: The Federal Reserve left its benchmark lending rate (the “Federal Funds Rate”) unchanged at 2.5%. This is the rate that big banks use when they lend cash to one another. After raising interest rates four times in 2018, there have been no increases to the Fed Funds Rate in 2019. Rate hikes are likely to occur at some point in the future to prevent the economy from overheating, but the Fed has indicated it won’t budge interest rates anytime soon.

In The Market...

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

(price data via

As mentioned, the S&P index extended its record highs thanks to a small weekly gain. The S&P rose +4.1% in April, staying a perfect 4-for-4 in terms of its monthly winning streak to begin the year.

Despite the losses to start this new week, our stock market outlook remains neutral-to-positive. However, we are coming up on the Summer months, which tend to be flatter than the October thru March timeframe of the stock market year.

We shuffled some funds around, selling a S&P 500 index fund (SPLG) for a nice gain. We then took a partial position in a more Tech-heavy index fund (SPYG), which we aim to add to in the near future. On the bond side we reduced our Corporate bond fund position (SPLB) and still hold both High-Yield bonds (SHYG) and Treasury bonds (SPTL) for accounts that own bonds.

In Our Portfolios...

What's New With Us?

I am pleased to announce that Josh Baird has been promoted to Investment Adviser Representative! He will assume his new role starting in June and will be tasked with building his client base within our firm. If you happen to communicate with Josh in the coming days make sure to congratulate him on a position well earned.

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

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®

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:


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

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 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

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

    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

    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

    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®

    How The Federal Reserve Will Make $4 Trillion Disappear

    In The News...

    Nine years later, it appears the day has finally come.

    The U.S. Federal Reserve will begin to reduce its balance sheet by reversing the quantitative easing (QE) stimulus measures that began in the wake of the 2008 recession. For the past decade the Fed has been buying Treasury bonds and mortgage-backed securities, which has consequently injected new money into the U.S. economy. Such liquidity actions are implemented to promote lending/borrowing between banks and consumers during periods when the economy slows.

    What makes this Fed decision unique? What makes QE so unprecedented is that it has been going on for nearly a decade, to where the Federal Reserve balance sheet now holds $4.5 trillion in Treasury bonds and mortgage-backed securities. To begin the unwinding process and shrink its balance sheet to a more normal level, the Fed will let $10 billion of bonds mature and roll-off its balance sheet each month moving forward. That amount will gradually increase to the tune of $50 billion monthly.

    What about interest rates? This announcement came following the latest Federal Open Market Committee (FOMC) meeting this past week. The Fed opted to hold off on interest rates, keeping its benchmark federal funds lending rate at 1.00% rather than increasing it to 1.25%. The committee expects to increase rates once more in 2018. Fed leaders meet twice more before the end of the year.

    The decision to roll back QE means the Fed must feel comfortable regarding its two goals:

    1. Maximum level of employment
    2. Annual inflation growth of 2%

    The first goal is open to interpretation. The official unemployment rate is 4.4%, which has improved substantially from when it peaked at 10% in late-2009. A sub-5% unemployment rate appears to be within the Fed's target range, but that is hard to tell. The second goal of 2% inflation is also within range despite the fact that the Fed itself reduced its inflation expectations over the next two years.

    What do I think of the Fed's decision and what does it mean to investors? See the OPINION section below.

    In The Market...

    The S&P 500 was fractionally up +0.1% this past week. Let's look under the hood:

    (price data via Yahoo Finance)

    STOCKS: The S&P index was essentially flat, so it comes as no surprise that the sectors were nearly split between winners and losers. Interest-rate sensitive sectors were the biggest movers, which is also no surprise amid the Fed announcement. Financials were the largest gainer while the dividend-heavy Utilities and Real Estate sectors were the worst performers. This week was a net-negative for us, because despite the fact that many client accounts own Financials, all accounts own Utilities.

    BONDS: The bond market followed suit, although interest rates did not rise as much as you might expect in light of the Fed news. We are still sitting on a chunk of cash in most client accounts, ready to deploy it once bond market conditions oblige.

    In Our Opinion...

    What does the historic unwinding of QE mean for the market and investors? Right now, not much. But let's first remind ourselves how we got here...

    The Fed has two jobs: Monitor inflation and manage liquidity. Said differently, ensure that prices of goods and services do not rise too quickly or fall too sharply, while also ensuring that there is the right level of cash in the economy to promote steady lending/borrowing. The latter is precisely what QE aimed to accomplish. When the economy slows and both businesses and consumers turtle-up from spending, liquidity becomes an issue. Bond-buying programs help combat that by pumping new cash into circulation. As we have seen though, deciding when to turn that off is challenging. The Fed has taken a lot of heat for not unwinding QE sooner. To be honest, I do not know if this is the right time or whether it should have happened before now. Hopefully the market is stable enough to consume this gradual monetary tightening process.

    Which brings me back to what this means to investors... The stock market has moved higher over the past year without much volatility, which is just the way we want it. This needs to continue or else the Fed could deviate from its plan. We would expect interest rates to creep higher as well as the Fed raises short-term rates and as investors prefer stocks over long-term bonds (remember, weak bond demand means falling bond values, which means rising interest rates).

    But if there is one thing we know, the market is unpredictable. For years the herd mentality believed that interest rates would spike. If you turned on financial news you would hear that over and over. Let me be clear...

    That simply never happened.

    Yes, rates have risen over the past year. But these rate increases have been tepid and have occurred long after the time when "experts" predicted. The fact also remains that long-term interest rates will ultimately be determined by how investors react to the health of the stock and bond markets over time. If stocks fall in a sharp or prolonged manner I would bet that investors flock into Treasury bonds. This would send bond values up and interest rates down.

    In Our Portfolios...

    Q&A/Financial Planning...

    A reminder for those of you who are self-employed! Next week is your last chance to set up a Simple IRA for 2017 if you want to contribute this year. If taxes are a concern and you are able to contribute more than the $5,500 Traditional IRA annual limit, consider setting up a Simple IRA where you can contribute $12,500 (or $15,500 if you have reached age 50).

    There are other considerations though, namely the requirement to match what your employees contribute. Also, consider the long-term viability of the retirement plan and whether the parameters and restrictions of a Simple IRA align with where your business is headed in years to come. If you already have a Simple IRA plan then this deadline is moot. If you have a Simple IRA and feel you can contribute more than $12,500 for the year, consider graduating to a 401k plan. I am happy to expand on any of this, just ask.

    What's New With Us?

    As of Sept. 18th TD Ameritrade and Scottrade are now one, joint company. You may receive some notification on this, but no action is required. I expect that your tax forms for 2017 will be consolidated between the two custodians to ensure seamless Form 1099 tax reporting.

    Have a great weekend!

    Betz Signature 250px.png

    Brian E Betz®

    A New Richest Person In The World And A New Law In Seattle

    In The News...

    There was a new sheriff in town, for a moment.

    His name: Jeff Bezos.

    Bezos, the CEO of Amazon, had supplanted Bill Gates as the world's richest person following Amazon's earnings release. Amazon's share price rose and Bezos' net worth climbed to $92 billion, narrowly edging the Microsoft founder.

    But... by the end of the week, the stock price fell back and Bezos is again #2 in the world.

    It is only a matter of time though. Perhaps more impressive than Bezos' meteoric rise is the fact that Gates has been the world's richest man in 18 of the past 23 years (per CNBC). Not only that, but the fact that the two-richest people in the world reside in Seattle (within blocks of each other) is mind-boggling.

    Drop that device! Washington State passed a new law that went into effect last week, barring mobile device use while driving. The biggest change, which bolsters the existing law preventing drivers from texting or holding a phone to their ear, is that you cannot even hold your electronic device while driving. On top of that, you cannot eat or do your makeup while driving, either.

    The law obviously aims to reduce injuries stemming from collisions. I approve it. Traffic has become horrendous in Seattle as the population has exploded in the absence of additional roads/infrastructure. The traffic is bad enough, but it worsens when people pull out their phones the second they hit a red light or bumper-to-bumper traffic. This legislation will hopefully curb what has been a self-perpetuating problem. Even if traffic does not dramatically improve, it should reduce the number of crashes and injuries.

    In The Market...

    The S&P 500 was flat this past week. Let's look under the hood...

    (price data via Yahoo Finance)

    Stocks: Role-reversal occurred last week, as previously weak sectors such as Energy and Consumer Staples led and stronger sectors (Health Care, Tech) declined. The last two times we saw the S&P 500 stall on a weekly basis like this (In June and March) the following few weeks were flat-to-down, before again chugging higher. We'll see if history repeats itself here, entering what is seasonally the worst month of the year for stocks.

    Below in the Portfolios section you will notice that we bought Financials (XLF) and sold Real Estate (VNQ). This might seem funny considering my comments last week about patience. Sometimes things happen quick and conviction rises. That was the case here. Simply put, I believe Financials have a better technical outlook, led by the fact that Financials are knocking on the door of all-time-highs.

    Bonds: A down week for conservative bonds (TLT, LQD), but not terribly unexpected given the yo-yo behavior the past few weeks. High-yield bonds were positive on the week, which bodes well for stocks, I believe.

    In Our Opinion...

    On Wednesday the Federal Reserve opted to leave short-term interest rates unchanged, keeping the federal funds rate at 1.00%. It was the 5th time the Fed has met this year. It would have been the 3rd rate increase this year, had that decision been made.

    I always say to ignore the noise around the Fed. The below image typifies why. A lot of investors have grown so obsessed with finding clues within Fed statements and meeting minutes/notes that there are now side-by-side comparisons of current vs. previous Fed statements. Not just general comparisons of tone or major economic issues, but comparing Fed statements word-for-word. Take a look...

    (source: Michael Sheetz,

    The infatuation with the Fed baffles me. It has cooled a bit since the Fed began raising rates in late-2015, but nonetheless, the 24-hour news cycle and continuing narrative that the Fed dictates market returns attracts clicks.

    My advice remains the same: Know what is going on but do not let speculation over the direction of short-term interest rates guide your investment decisions.

    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...

    I was asked to present to a group of new parents (myself included) this past week, on topics most relevant to financial planning for kids. After soliciting feedback on topics they were most interested in, my talk centered on 3 main areas:

    1. College savings
    2. Life insurance
    3. Estate planning

    I realize most of you are not new parents, but many of the concepts within these categories may still apply. In no particular order, here were some takeaways I thought worth sharing...

    • Are you helping save toward your grandchild's college savings? If you use a 529 plan (the most popular option) make sure you understand how your eventual account withdrawals will impact, and potentially hurt, your grandchild's financial aid eligibility.
    • If you are already saving for college, have you run the math to know that you are saving the right amount to afford the type of school and number of years you want to accommodate? Most do not, which often starts with ignoring the fact that college costs increase 4-5% per-year.
    • Are you nearing retirement and in need of life insurance? Check to see what coverage you currently have with your employer, or what coverage you can obtain prior to leaving. It will likely be much more expensive to obtain a new life insurance policy in your 60s than it would to continue your existing policy held through work ("portability" feature).
    • If you own a permanent life insurance policy, does it still meet your needs? Do you need less coverage? More? How much cash value is there within the policy?
    • If you have a Last Will And Testament in place, how recently have you reviewed it? For example, if family dynamics have changed and you would prefer a different Executor to carry out your wishes post-death, you should update it.
    • Do you own a Living Trust? Among other things, a trust helps certain assets seamlessly pass to the intended heir, bypassing what can be a lengthy probate process. It also helps keep your personal/financial matters more private. A trust layers on top of your Will.
    • Are estate taxes a concern? The federal limit allows a married couple to pass roughly $10 million tax-free to their heirs, but you may still owe state estate taxes. Right now the WA State exemption is $2.1 million, a much lower threshold than the federal exemption.

    What's New With Us?

    There are a number of exciting things I have in the works. Sorry for being vague about it, but once I have more detail I will share it.

    Have a great weekend!


    Brian E Betz, CFP®

    Does The Lowest Unemployment Rate In 16 Years Make For A Healthy Stock Market?

    In The News...

    The last time the unemployment rate was this low I was still a month away from graduating high school...

    Unemployment fell to 4.3% in May, the best since May 2001. Here is how rare that is looking back 40 years:

    (chart created via

    Good news, right? Sure. Now take a look at the same exact chart, but with stock market movement plotted on top of it (S&P 500 index, green line):

    (chart created via

    Notice that stocks plunged roughly 1 year from when unemployment fell to levels similar as we see today (the shaded timeframes). As with most charts I share, I created this one. There is also a reason I did.

    I am not sure I believe it.

    It is not that I do not think the market could fall, it is that I do not believe a potential market drop would be because of unemployment. Correlation does not equal causation. In fact, I could shift those shaded regions forward in time just a bit and argue that the market's declines in late-2000 and late-2007 were what caused the unemployment rate to go up.

    The latter is what I actually believe.

    I bring this up because I read/hear a lot about how the economy is going to send the market lower. I believe it is the other way around, if it were to happen. This is how I believe it works:

    1. Shareholders aggressively sell a company's stock (for whatever reason)
    2. A lower share price means the company is worth less
    3. Companies whose values fall are forced to cut costs
    4. The biggest expense for most companies is personnel, which means layoffs
    5. Repeat steps 1-4 across enough companies and, eventually, economic production falls and unemployment rises
    6. If GDP - the total output of goods and services in society - is negative for two-straight quarters, it is deemed an economic recession

    That is how it works, or at least I think so. Do stock prices fall after companies announce layoffs? Absolutely. But most often those company stock prices have already been in decline. Two recent examples of this are Macy's and GoPro. You think their share prices plunged after a particular layoff announcement? Go look at their stock prices before then. Not good.

    What to make of low unemployment: I would be lying if I said I was not paying attention. But it does not influence our investment decisions. When unemployment reached similar lows back in 2000 and 2007 stocks continued to rise for the better part of a year before any major decline. Today, stocks continue to rise to new highs, which is bullish.

    They did it again: A bit to my surprise, the Federal Reserve raised interest rates for the second time in three months. I did not think this one would come so soon, but the Fed has done a good job of telegraphing its moves so it isn't a shock based on their previous clues.

    This is significant in that it reflects the Fed's view of a more stable economy, namely with regards to hiring and inflation. This was the fourth time the Fed has increased its benchmark federal funds rate since it began doing so a year and a half ago. Here is a brief history of those rate hikes:

    • Dec 2015: Up from 0.00% to 0.25%
    • Dec 2016: Up from 0.25% to 0.50%
    • March 2017: Up from 0.50% to 0.75%
    • June 2017: Up from 0.75% to 1.00%

    Despite its critics, the Fed has done what it said it would do, which is to gradually raise short-term interest rates as hiring improves and inflation steadies. I highly doubt there will be a third rate hike this year, but we shall see.

    In The Market...

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

    (price data from Yahoo Finance)

    Stocks: Two weeks ago I referenced how I felt the Health Care sector might be on the verge of breaking out. Two weeks later, it looks like we might be getting just that. Health Care was the runaway winner this past week, up +3.6%. Take a look:

    (chart created via

    We purchased this Health Care fund (XLV) for most accounts early this past week. It is nice to see its price move higher and our analysis prove accurate. I normally refrain from citing such short-term periods, because typically a few days is not indicative of what is to come. In this case though it might be telling considering our prior analysis. Health Care appears to be roughly where the overall market was back in November -- just about to rally following over a year of stagnation. If this is the case, Health Care has room to run. No guarantees.

    Bonds: Treasury bonds continued their ascent and long-term interest rates fell closer to pre-election lows. Investment-grade bonds similarly gained for the second-straight week while high-yield bonds were essentially flat. I remain bullish on the bond market, as I have for the past month or so.

    In Our Opinion...

    A client told me this week that they sold their shares of Tesla (TSLA). From here there are three possible future outcomes:

    1. Tesla stock goes up
    2. Tesla stock goes down
    3. Tesla stock goes flat

    It is natural to second-guess a decision as time passes. I cannot tell you how many times I have heard someone say, "I wish I had not sold my Amazon stock!" or whatever stock that they sold for a gain but did so prematurely, in hindsight, because the share price went on to make new highs.

    We have a tendency to look back on decisions like this to attain validation. If the share price falls after selling we feel validated, almost empowered. If it rises post-sale we feel regret. This behavior is instinctual. It is the same reason we check Zillow or Redfin to see what our house is worth. We want to get the best deal and make the right decisions.

    Social media has magnified this too. It has fostered a culture where you can easily see the decisions others make and benchmark yours to theirs. But why? Worrying about the past does little good. If you learn something tangible from it that you can apply in the future, great. Otherwise, it is toxic. When it comes to investments, a few key tenets to remember:

    1. You cannot change the past. Learn if you can and move on.
    2. You can always repurchase the stock or fund you sold.
    3. There is an ocean of investment opportunity out there. Whether you make 10% off shares of Tesla or 10% off shares of Proctor & Gamble, what difference does it make? Unless you work for the company and benefit in other ways, the stocks or funds you own are just names on a statement.
    4. Just because someone else bought or sold something does not mean you should too.

    In my years of doing this, I remove as much emotion from our investment process as possible. I try to stick to that process, no matter what, though I do try to refine it and improve it over time. In the same way I do not dwell on what might be perceived as mistakes made, I do not celebrate the wins, either.

    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...

    An annuity provider sent me an article last week entitled: "Have Indexed Annuities Become Too Complicated?"

    I believe this is old news, which is easy for me to say being so entrenched in the financial services industry. So I can see how this might be news. In short, yes they have.

    Annuities are a source of income for those who need a specific amount of money for a specific period of time in retirement. It is like creating a pension for yourself, except with your own money. The two main types of annuities are immediate and deferred.

    Immediate annuity: You put up a chunk of money today in exchange for a stream of income that starts now. That stream of income could last your entire life, the collective lives of you and your spouse, a set number of years, etc. The longer your timeline, the smaller the annual payments.

    Deferred annuity: You put up a chunk of money today, but your income stream does not begin until a point in the future (often 5 years, 7 years or 10 years later). While your money is committed, it ideally grows based on some investment strategy. The growth could be fixed (e.g. guaranteed 4% per-year) or it could vary (e.g. tied to the stock market). This is where it gets complicated, as investors seek for ways to grow their savings in the years just preceding retirement.

    Once upon a time, certain annuities had appeal, particularly a hybrid known as "indexed" annuities. These became popular in the wake of the 2008 recession. Indexed annuities provide the ability to earn up to a certain amount, or "capped" return, which is tied to the performance of a particular index (typically the S&P 500). In exchange for having a cap on the potential gain each year, you are guaranteed against loss. The latter having big appeal following the financial crisis.

    Indexed annuities were en vogue as investors wanted to invest but could not stomach any risk of loss. Because these annuities are not technically invested in the market - rather, credited interest based on market performance - they have been deemed insurance products. As popularity grew, more and more insurance companies created their own flavor of indexed annuity in an attempt to provide one more feature than the next. And because there are far more insurance reps than there are professional money managers, these annuities have had great distribution.

    Today, most indexed annuities I see are over-engineered. Their multi-page brochures are chock-full of confusing terms, a multitude of hypothetical scenarios explaining how the annuity might perform and a ton of fine print that often buries key restrictions. It would take me an hour to fully understand the product and another two hours to properly explain it to you. That may be a bit overstated, but the point is, if I cannot easily understand an investment how could I expect you to?

    Annuities, by and large, have a place for certain retirees who want to live off a known, fixed income. But they also face many headwinds. Just a few of them...

    • They can carry heavy commissions that are often concealed and go unknown until after you get the annuity, when it is too late
    • The market has a natural bias to rise over time. So while indexed annuities might look great coming off 2002 (tech bubble burst) or 2008 (financial crisis), what about all those non-recessionary years?
    • A lot of insurance reps (and annuity providers!) do not understand the annuities they sell. This often leads to clients making bad financial decisions, whether the insurance rep was intentionally misleading or just naive/uneducated.
    • If you change your mind, you will pay a sizable "surrender charge" to reclaim your money. This makes buyer's remorse costly. (In fairness, the surrender charge on a deferred annuity does typically go down over time.)
    • Most annuity owners do not need an annuity, they need proper financial planning that determines how they will generate retirement income and avoid running out of money. Oftentimes annuities provide an adequate solution for this, but not the best solution.

    Whether an annuity is immediate, deferred, fixed, variable or indexed, it can have its place for the right type of client. But you must cut through the confusion to fully understand how it functions, the restrictions involved and how it ultimately fits you better than the next-best alternative.

    What's New With Us?

    I will be traveling to Ohio to visit family all of next week. It will be business as usual, working remotely, but my response time may not be as quick while I am away. I return on Monday, July 3rd. I hope your summer is starting out well!

    Have a great weekend,


    Brian E Betz, CFP®

    Market Hits A New High As "Sell In May" Arrives

    In The News...

    Interest rates held - The Federal Reserve did not increase its target lending rate (Federal Funds Rate), opting to keep it at 0.75% rather than increase it to 1.00%. Language coming out of the Fed's meeting last week was apparently enough to boost expectations that a rate increase will occur in June. The Fed likes to telegraph its moves, so I would be inclined to believe it. The most obvious impact these actions have are on short-term savings or loans, as those rates most closely mirror the Fed's actions.

    Apple is cash king - For all the crap that Apple received in recent years for failing to innovate, we should admire their fiscal responsibility. Apple is notorious for hoarding cash, which has begged the question of what they would do with it. In the quarterly earnings call Apple announced a 10% dividend increase. The new, total dividend Apple will pay annually, $13.2 billion, is more than one-third of the companies in the S&P 500 are worth. Here is the full story.

    Know your Social Security - A recent article in Time showed that fewer people are tapping Social Security retirement benefits when they first come available at age 62. The survey of 61-year-olds, done by Fidelity, found that 28% planned on taking early benefits, compared to 45% back in 2008. Of course the economy was on the cusp of recession back in 2008, but the decline is still encouraging. The closer you get to age 62 or your normal retirement age (which is 65, 66 or 67 depending on the year you were born), be aware of your options as they are nuanced. It is important to maximize your payout in retirement.

    A lifeline for landline? A government study found that 46% of U.S. households have landline phones. I am not sure if this number is more or less than I would expect, but it's interesting. 50% of homes have cell phone service only.

    In The Market...

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

    (data source: Yahoo Finance)

    Stocks: Financials and Technology led the way, rising more than +1.0% apiece. Real Estate and Energy were again the lagging sectors. We own Real Estate (VNQ) in certain accounts, and while I do not like the short-term movement within the sector I remain bullish about the long-term view. The Real Estate fund we own also pays a 4.4% dividend, which helps soften the blow of a couple down weeks.

    New high: The S&P 500 closed just shy of 2,400, marking an all-time high that eclipses the previous high set back in February. This matters for a couple reasons. First, all-time highs are bullish. Second, the S&P index does not account for dividends, which makes a new high look even better. This sets up pretty for well for the coming weeks, although the summer months do pose some risk (more on this in Opinion below).

    Bonds: We did not learn much last week about the bond market. Most bond types were slightly negative, while preferred stock (we treat as a bond) did squeak out a small weekly gain. I still think Treasury bonds (TLT) will rally sometime soon. This would mean lower interest rates, as most predict rates to continue moving higher.

    Here is why... Below is a chart of a widely owned long-term Treasury fund (TLT). This current point in time sure resembles late-2013 and late-2015, periods right before the bond market staged a massive rally. Take a look:

    (chart created via

    To be clear I don't think Treasuries are a "buy" just yet. But we are close. It doesn't seem right that bonds would take flight again after years of historically low rates. Popular opinion believes rates will continue to rise, not fall again. However, the data is what it is. History suggests long-term bonds may become very appetizing in the near future.

    In Our Opinion...

    May has arrived, bringing with it the popular question: Sell in May and go away?

    This refers to the seasonal investing strategy of selling stocks this month, in anticipation that the market will tumble. While there is not a ton of statistical merit to support selling in the month of May, it really speaks to a broader seasonal trend that stocks perform much better in the fourth and first quarters, October thru March, than they do the second and third quarters, April thru September. (You will have to take my word on this -- I'll try digging up the specific stats in a future post. It is stark how superior Q4 and Q1 are compared to the rest of the year.)

    So, should we care about "Sell in May"? No, not really. For one, the market remains strong on a long-term basis, as defined by looking ahead in weeks and months. Second, if we did see a sell-off I would still be looking for opportunities to invest, most likely in defensive stock sectors and bonds. Third, and most importantly, I do not think buying or selling based on a seasonal trend alone makes for much of an investment strategy.

    Market volatility does tend to increase during the summer. Kids are out of school so families are on vacation, and thus, market activity slows. This gives sellers a bit of control. We will continue to evaluate market trends and adjust accordingly, as we always do.

    In Our Portfolios...

    Stocks: No changes last week. I really like the Industrials sector (XLI) right now, but do not feel it is worth selling any of our key stock positions to buy XLI just yet.

    Bonds: No changes last week. I remain bullish preferred stock (PFF) and high-yield bonds (JNK), two of our current holdings.

    Q&A / Financial Planning...

    What do I need to do about my TD Ameritrade account?

    A few of you have asked about next steps regarding TD Ameritrade. The answer is nothing. I will send you one more Docusign email that contains the transfer request, to move your account(s) from Scottrade to TD Ameritrade. Once that is complete I will provide log-in instructions for you to view your TDA account. I anticipate most accounts transferring over to TDA toward the end of this month.

    For taxable accounts (namely non-IRA accounts), the cost-basis information will transfer over soon after your holdings do. This should result in receiving just one Form 1099 at year-end. Traditional IRA accounts do not need to worry about cost-basis information, as only withdrawals are taxed. Roth IRA accounts do not need to worry about either.

    Let me know if you have questions.

    What's New With Us?

    I am mixing things up a bit. I am going to start sending these weekly recaps on Friday, as opposed to Monday. That way, for those of you who regularly read these, the market-sensitive information will be as real-time as possible. For those of you who occasionally read these but only as work/life accommodates, perhaps the weekend will present a bit more opportunity to do so. And for those of you who never click through to read these, well, you will not be reading this anyway... :)

    I am always interested in your feedback -- what you like or dislike, topics you would like me to discuss more, the day of the week or time of the day you prefer getting these, etc.

    Have a great weekend,


    Brian E Betz, CFP®

    Nuclear Fear Has No Place Here, But The Market Is Starting To Shake

    In The News...

    The U.S. market has spent much of the year at cruising altitude. It may now be nearing some turbulence.

    Last Monday I shared a chart of the S&P 500, showing how short-term market momentum was starting to fade. That continued into last week as the major stock indexes were down more than -1%. Stocks have stumbled out of the starting blocks in Q2, but nothing too dramatic as of yet. To a large extent this type of volatility is pretty normal and expected.

    Nuclear Fear: This happens to be occurring as tensions rise between the U.S. and multiple nations -- Russia, North Korea, China. Threats of nuclear force are back, particularly as North Korea vows to conduct its 6th nuclear weapons test - the first of such during the Trump presidency. The U.S. appears to be back at odds with Russia over the Syrian conflict.

    No one knows how these situations will play out, but this is a good reminder that news follows market prices. Meaning, market volatility usually shows its face prior to the newsworthy events that many use to explain the volatility. The point being, if you think a global event will influence the market it likely will do so before it happens, so investing in a reactionary manner is diminished. Also, the market has a way of surprising us, so even if you think stocks/bonds will respond a certain way you better be careful (two recent examples of this were Brexit and the U.S. Presidential election).

    As a result, we are not in the business of predicting world events. We do not manage investment accounts according to what we think may happen and we certainly do not let the news dictate our approach.

    In The Market...

    The S&P 500 fell -1.1% last week. Let's look under the hood:

    (data source: Yahoo Finance)

    Stocks: A rough week for stocks, which I wrote we might see coming off the previous week. Frankly, if we don't see a quick bounce I believe the S&P could dip another ~3.0% or so before finding some cushion and rallying back. Last week's activity was classic "risk off" investor behavior, meaning investors sold riskier investments in favor of more stable or defensive ones. Seven of the 10 stock sectors were negative, with only REITs, Utilities and Consumer Staples finishing higher.

    Bonds: Arguably the best week of 2017 for the bond market. The 10-year Treasury yield fell to 2.24% -- the lowest interest rate for a 10-year Treasury bond in 5 months. Which reminds me...

    Forget the Fed: I don't often go back and cite previous analysis, but this one is pretty glaring and important. Recall last month when the Federal Reserve decided to raise short-term interest rates on March 15th, I said that long-term interest rates may actually go down based on historical trends. Here is what I wrote at the time if you would like to see my reasoning.

    Fast forward to now and let's see how the interest rate on the 10-year Treasury bond has changed:

    March 15th: 2.60%
    April 14th: 2.24%

    Long-term interest rates not only fell as I had suggested they may, but are the lowest they have been since the presidential election. This is yet another reminder -- backed by facts -- that the bond market and interest rate behavior is dictated by investor supply and demand, not individual Fed rate hikes or anything else. In this case, investors have chosen to buy bonds (for whatever reason) and that has pushed interest rates lower, which literally and ironically started the day after the Fed raised interest rates on March 15th.

    For what it is worth: One of the things I do each day is scan the entire S&P 500 through a variety of statistical parameters. I do this to gauge the overall pulse of the U.S. stock market. If any of those 500 company stocks meet those parameters, they appear on my "buy list". This does not mean I actually buy them. It just puts them on my radar and helps me see which market sectors are leading vs. lagging.

    I particularly do this on Friday, as I focus on where the market resides at the end of the week. Normally there will be anywhere from 70-130 stocks that show up in my scan. The greater the number, the more bullish the reading (and visa-versa). Last week, only 25 stocks appeared on my scan, which is just 5% of the S&P 500. That is very low and a bit concerning, but of course things could rebound quickly.

    In Our Opinion...

    Utility hitter: We added a Utilities sector fund (XLU) to most accounts this past week. I thought I would share a look at why by getting technical here for a moment. Below is a weekly chart of Utilities. Each "candlestick" represents a given week dating back to 2011. Weekly charts are the foundation for our analysis because they represent our preferred investment timeline, which is weeks/months rather than days (too short-term) or years (too long-term).

    (chart created via

    There is quite a bit to like about Utilities. First, the obvious price uptrend. The rising price pattern is consistent, which aids predictability. Second, momentum has remained strong as measured by Relative Strength (RSI), which is the chart above the price chart. We like to see RSI hold above 50 and ideally float within the 60-70 range. Finally, I shaded three previous points in time where I feel the historical price patterns resemble where this fund is at today. In all three of those instances Utilities stocks have rallied higher. That is what I'm anticipating and these are some of the reasons why we chose to purchase Utilities.

    From time to time I like to share the analysis that goes into our buying/selling decisions. We have a well-defined process that relies solely on our own research and analysis. Hopefully you find this valuable.

    In Our Portfolios...

    Stocks: We bought a Utilities fund (XLU) across all client accounts. The allocation size of this new investment ranges from 13% to 35% of the total account, depending on your specific portfolio.

    Bonds: No major changes last week.

    Q&A / Financial Planning...

    Check your bank statements: What I am about to explain is petty, but hear me out. When I sold my car last month the buyer paid me cash. After I deposited the money into our bank account I was charged $15 for doing so. Think about that... I was charged money for putting money into my own account that is set up for the sole purpose of holding money.

    When I called to inquire, the bank rep said she could refund 75% of the charge, as that was the amount "the system would allow". Did I haggle over the remaining $4.00 or so that was not going to be refunded? You bet, purely out of principal.

    I'm not sure which was more shady: The fact my bank charged me a fee in the first place, or, their B.S. refund protocol. I am sure thousands of consumers would never notice this type of charge, and of those who do, many of them would likely accept the partial refund and consider it a win. After very little arm-wringing and the rep's effort to "escalate the request and override the 75% default", I was refunded the $15 in full.

    The bank probably assumes its customers will call, but they probably also assume that most consumers psychologically won't feel compelled to ask for the full refund if they can recover 75% of it. I couldn't have cared less about the $15 but the business procedure was so ridiculous that I had to call. I would encourage you to check your bank statements from time to time, especially as banks seem to be searching for new ways to generate revenue from their customers.

    What's New With Us?

    Individual tax returns are due this week (April 18th). Let Gale or myself know if you have any last-minute questions. Happy tax filing!

    Have a great week everyone!


    Brian E Betz, CFP®

    Fed Raises Interest Rates - What It Means And How Fed Policy Is Misinterpreted

    In The News...

    To my surprise, #3 came earlier than I expected.

    The Federal Reserve raised interest rates for the third time since it began "normalizing" rates back in Dec. 2015. This latest rate increase was another quarter-point rise in the Federal Funds Rate, boosting it from 0.50% to 0.75%. Following 7 years where rates were essentially 0.00% the Fed has begun slowly increasing them. Here is a look at how historically the Fed Funds Rate was:

    (source: Federal Reserve Bank of St. Louis)

    I emphasize Fed Funds Rate because people err by ambiguously saying "rates" anytime they refer to Fed policy. It does not represent all interest rates. The Fed Funds Rate is the short-term lending rate set by the Fed, which big banks use to lend to one another. That target rate trickles down and ultimately steers the interest rates banks apply to savings accounts and short-term loans. But there are two pretty big misconceptions about Fed policy in relation to interest rates, which I detail in the Opinion section below.

    The Fed has two jobs: Manage our money supply and manage inflation. Raising interest rates is one way the Fed strives to temper inflation. In textbook economics terms, the Fed will raise rates as the economy expands. This promotes steadiness and prevents economic overheating, or worse, market bubbles. In 2008 we saw the reverse, where the Fed aggressively lowered interest rates in order to encourage lending and borrowing at time when the economy needed it to stave off recession.

    Few entities have a tougher job than the Fed. Amidst the NCAA Tournament games happening right now the Fed is like a referee, where doing a good job is defined by making the calls everyone expects while remaining largely unnoticed. The only difference is that even if the Fed makes what appear to be the right calls, such as whether to raise rates, it's popular to go back and blame Fed officials if the market does not respond as anticipated. The Fed has an immensely tough and thankless job.

    In The Market...

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

    Most sectors were positive last week, yet the S&P 500 was up minimally as a whole. Bonds and dividend-heavy stocks fell leading up to the Fed announcement as it was presumed that interest rates would go up. Investors do not like owning bonds if they believe they can obtain a higher interest rate in the near future. The funny part is that investors jumped back into bonds and dividend stocks immediately after the Fed announced the rate hike at 11 a.m. last Wednesday.

    There is meaningful context relating to how long-term interest rates react following Fed rate hikes. Below is a chart of the 10-year Treasury yield, which differs from the short-term Federal Funds rate, but is more relevant when talking investments. Notice how the 10-year Treasury yield reacted following the previous rate increases, in Dec. 2015 and Dec. 2016. The 10-year rate yield actually went down

    (courtesy of

    If history repeats itself, this would be the third-straight time that long-term rates fall after the Fed announces a rate hike. Is this another coincidence or more of a trend?

    In Our Opinion...

    There are two misconceptions about how long-term interest rates behave in light of Federal Reserve policy.

    Misconception #1: Fed policy directly influences home mortgage rates.

    All rates are not created equal. The Federal Funds Rate best compares to a 1-month U.S. Treasury bill. A typical 30-year mortgage rate is going to channel the rate movement of a 10-year U.S. Treasury bond. Here is how closely the 10-year Treasury yield and 30-year mortgage rate move in tandem:

    (sources: Federal Reserve Bank of St. Louis, Freddie Mac)

    The correlation between the two is undeniable. If you look closely, notice that while the average 30-year fixed mortgage rate has risen a bit since the Fed began raising rates in Dec. 2015, the rise has been pretty tame. In fact, mortgage rates actually fell for the better part of six months after the Fed raised rates for the first time in 2015, as shown on the prior chart of the 10-year Treasury yield. How can this be?

    Misconception #2: Interest rates are set by the Federal Reserve and that's that.

    Interest rates, namely long-term ones, are driven by investor demand for bonds. They are not set by some monetary overlord. The Fed has a hand in guiding short-term rates, but investors collectively determine whether long-term rates go up or down, as bonds are traded within the market and subject to those forces of supply & demand.

    Here is how... Traditionally we think of buying a bond, earning its interest payment each year ("coupon rate") and receiving our full principal amount back at the end of the bond term (5 years, 10 years, etc). However, the bond market is more complicated than that. Bonds are traded every day in the market. As old bonds mature, new ones are offered through U.S. Treasury auctions, but not before being bought and sold along the way.

    Let's suppose you buy a bond and the next day investor demand is weaker for the same type of bond you purchased. Weaker demand means your bond is now worth less than what you paid. The interest you earn remains constant because the coupon rate is fixed at the time of purchase, but the yield fluctuates over time. In this case, your yield goes up because the value of your bond went down.

    (Fixed coupon interest payment) / (Lower bond value) = Higher interest rate yield

    The opposite is true as well. This is why bond values and their interest rate yields move in opposite directions. If demand increases for your type of bond in the future, the value of the bond you own rises. This means you now have a lower yield. It's this type of ongoing supply & demand that drives long-term interest rates. The Fed plays a role, but investors truly determine whether rates rise or fall.

    In Our Portfolios...

    Stocks: No major changes last week, although we did tweak some positions in certain accounts where funds were recently added.

    Bonds: We sold one of our high-yield bond funds (ANGL) within smaller accounts and accounts that previously held both high-yield positions we use (the other being HYG).

    Q&A / Financial Planning...

    Staying on theme, a couple people asked last week whether to lock in their mortgage rate before the Fed announcement. My feeling is always the same -- do not base the timing of your home purchase loan or refinance loan off of Fed policy or how you think rates will behave. Lock in the loan when you need it.

    In the case of a refinance, if you can save money and the math all ties out, just lock it in rather than getting greedy. Pigs get fat and hogs get slaughtered. I do think rates will slowly rise over time but they won't spike overnight or in the course of weeks. Again, investor supply & demand should keep them in check.

    What's New With Us?

    If you have trouble logging in to Morningstar, it is because the original login request timed-out (due to security reasons). No worries though, just let me know if you need your access reset. You will have 24 hours to login from the time you receive the password reset email from Morningstar. If you do not do so within 24 hours we will reset it again.

    Have a great week!


    Brian E Betz, CFP®