Big News From TD Ameritrade

Hi everyone,

**In this week’s blog below, we highlighted the fact that TD Ameritrade is cutting its trade costs from $6.95 to $0.00 on all exchange-traded funds (ETFs). We stated that trade costs would still apply for individual stocks. That is incorrect. Trade costs are going to zero dollars for individual stocks as well, which is great news.**

Click below to watch this week’s blog. Enjoy.

(video created in Camtasia)
(charts created in stockcharts.com)

Have a great week!

Brian E Betz, CFP®
Principal

Buy The IPO Or Just Say 'No'?

Hi everyone,

The ride-sharing service provider, Lyft, went public on Friday. This means you can buy shares of the company if you want to own an equity stake. Even if you exclusively use Uber, you have likely heard of Lyft as it is the second-biggest player in the industry behind Uber. The two companies have combined to render the yellow cab industry obsolete.

Which leads me to the question you may be asking…

Should I buy shares of Lyft?

My answer ranges between “no'“ and “I have no idea”. My rationale for saying no is based on the fact that there is no price history (unless you consider 1 day to be enough). For how we analyze stocks and funds we need to be able to assess some amount of price history — ideally a minimum of a few years.

Let’s set aside this rationale, because there are other ways to evaluate an investment and you may want to buy it regardless. An alternative rationale is to buy because you feel positive about the business fundamentals. On that basis, I really have no idea whether Lyft is a good investment or not.

And odds are, neither do you.

The reality is, most of the time someone wants to buy into a company that is going public, it is due to the sex appeal of, well…. simply the fact that the company is going public. The more you hear about it in the media, the more intrigued you become. This can lead to a fear-of-missing-out. You feel so compelled to buy it because, otherwise, you might miss out on owning a piece of the next Google.

Thing is, no matter how you end up at the point of buying a newly public stock, you are just guessing. If you disagree, then let me ask you:

  • Do you understand the company’s financials? More importantly, do you even know what to look at and what matters?

  • Do you know the company’s risks that could hurt growth and the future share price?

  • Do you know the company’s opportunities that could boost growth and the future share price?

  • Do you understand the company’s market share within its industry?

  • What is the future outlook for the industry as a whole?

And I have not gotten to my most important point, which is that if you plan to “get in on the IPO”, you actually are not. Unless you are able to obtain shares in the primary offering (highly unlikely) you are simply buying shares once they hit the secondary market. Meaning, once those initial owners — the ones who actually did get in on the IPO — turn around and sell those shares to you and the masses in the secondary market.

To be clear, you are buying through the secondary market when you log in to your account at TD Ameritrade, Fidelity, Schwab, etc. to buy shares. Even if you had bought first thing on Friday when it went public you did NOT get in on the IPO. I highlight this because you are likely going to pay significantly more per-share when you buy on the secondary market than you would if you were actually buying through the IPO.

If you are ever interested in buying shares on the secondary market in a newly public company like Lyft, let me know. As mentioned, we rarely look to buy companies that are going public, but we are happy to discuss.

In The Market...

The S&P 500 gained +1.2% last week. Let's look under the hood:

(price data via stockcharts.com)

A nice bounce-back week for stocks, which had tumbled to end the prior week. The S&P index gained +1.8% in March, which marks the 3rd-straight monthly gain to start the year. As far as last week is concerned, we wanted to see the S&P finish above 2,825, which was the closing value/high from two weeks ago. It did, ending the week at 2,834.

Home values slide yet again: Home prices fell -0.2% in January. Seattle homes declined for the 7th-straight month, down -0.3%. Year-over-year, home prices remain roughly +4.0% higher nationwide. Most major cities hover around that mark, with only Las Vegas still experiencing double-digit annual growth (up +10.5%). We have yet to see a city turn negative on an annual basis, although San Diego is close (up just +1.3% in the past year).

The leveling-out of home prices that I anticipated 18 months or so ago has reached its full extent of what I expected. It will be interesting to see if the Spring season boosts demand, and subsequently prices, or if prices will fade further. My sense is that we will see a modest uptick in the coming months.

Here is a complete city-by-city look of the Case-Shiller housing data:

Portfolio-wise we made some moves among portfolios that own individual stocks, but did not make any major allocation changes regarding the diversified funds we own.

In Our Portfolios...


What's New With Us?

We celebrated our daughter’s 2nd birthday on Sunday. Of course we delayed her opening presents until after the Duke-Michigan State game had ended. Priorities… (kidding). We took her to the zoo on Saturday as well, which was a lot of fun.

Have a great week!

Brian E Betz, CFP®
Principal

What To Make Of The Recent Decline In Home Values

Hi everyone,

With tax day quickly approaching, so too is the deadline for making Traditional IRA and Roth IRA contributions for 2018. This video explains the contribution limits for various types of retirement accounts.

If you have any questions regarding whether you qualify for a Traditional IRA or Roth IRA, please ask. If you plan to make either type of contribution (or both) you will need to do so not only before April 15th, but before you file your 2018 tax return.

Home values slide in December: The average home fell ever-so-slightly, down -0.1%, in the latest S&P/Case-Shiller home price index report. Seattle homes fell for the 6th-straight month, as home price appreciation slowed throughout the second half of 2018. The average home is up +4.7% annually, which is more in-line with historical averages but still a bit of a shock compared to the +7% to +8% growth we saw not much more than a year ago.

If you were reading this blog 18 months ago, this is exactly what I predicted would happen. I think this is perfectly normal, but as always, it helps to gain historical perspective before drawing any conclusions about what is next. Here is a look at the rise in home prices dating back 30 years.

(source: FRED Economic Data, via S&P/Case-Shiller HPI)

You can see how real estate has leveled-off as of late, so much so that you might argue a bigger decline is forthcoming. I am not so sure about that, but whatever happens, one thing I am pretty sure of is that the stock market will lead the way (for better or worse). Stock prices are the leading indicator that influences both hiring and real estate values. If company values rise, more people are employed and investor confidence rises, which directly boosts housing demand. If company values fall, the opposite occurs and housing demand will weaken.

Proof of this is what occurred last Summer. It is no coincidence that housing prices started to slow around June/July, just a few months after the S&P 500 had fallen roughly -10%. I can say with confidence that the shock of seeing stocks drop caused homebuyers to pause a bit in their housing pursuits. If you disagree I would be curious to hear what you think.

Here a complete city-by-city look at the latest housing numbers:

 In The Market...

The S&P 500 gained +0.4% last week. Let's look under the hood:

(price data via stockcharts.com)

It was another constructive week for the stock market, despite modest gains. The individual sectors were a bit mixed but the week ended strong, which is what we like to see. The S&P 500 finished the week just above 2,800, which many think is an important level for the index to hold given it represents the previous high from both November and December — instances where stock prices fell sharply soon thereafter. Will this time be different and see the rally continue into March?

Our cumulative analysis would suggest yes. However, there are two momentum indicators that give us pause, which were the same problems that occurred back in November and December when the S&P failed to hold above 2,800. These are shown in the chart below, which illustrates how Relative Strength (RSI) and the percentage of stocks that are above their respective 200-day moving averages are both lower compared to when the S&P 500 index hit its previous two highs back in Jan. 2018 and Sept. 2018. Take a look…

(chart created via stockcharts.com)

The large chart in the middle shows the actual price movement of the S&P, including the recent rally to start 2019. RSI is shown in the chart above that, where you’ll notice it is fading despite these price rallies. RSI compares the size of gains in periods when price rises and compares it to the magnitude of losses on days when price falls. The above is a weekly chart, so each period being considered is one week. The important takeaway is that we want to see RSI rise — or at least remain elevated — when stock prices rise. When RSI stalls or fades amid a stock market rally, it indicates that price momentum is weakening and a reversal may be near.

Additionally, the percentage of stocks that are above their 200-day moving averages is lower compared to those previous highs from 2018. Today, 61% of stocks in the S&P index are above their 200-day moving averages. That ratio was much higher during 2018. This measure of what is called market “breadth” statistically represents how well the stocks that comprise the S&P 500 are moving in unison or not. We would like to see this percentage higher, not lower. If the S&P 500 is rising, but this percentage is falling, it indicates that a few big companies are doing all the heavy lifting, which often is not sustainable.

While we remain bullish short-term, I wanted to highlight these two indicators as factors that we are closely tracking, as they influence our buying and selling decisions.

We were pretty inactive on the portfolio front last week. The bond market took a sharp negative turn, which may result in reallocating some of those positions in the coming days. We sold our Municipal Bond fund (PZA) for a modest gain within accounts that owned it.

In Our Portfolios...


What's New With Us?

It was a fairly relaxing weekend. The weather was nice, so I was able to get outside and do some yard work. I had to cut up a tree that had fallen last month as a result of the snowfall. The tree was decaying and the weight of the snow was its final blow. Luckily it did not cause any other damage, but it did take some time to saw it apart.

Have a great week!

Brian E Betz, CFP®
Principal

Is Another Historic Presidential Election On The Horizon In 2020?

Hi everyone,

This is random, but something so interesting that I wanted to share. There is a possibility, albeit a small one, that we may see a truly rare 2020 presidential election. What if I told you that the House of Representatives could decide the next U.S. President?

Following the 2016 election, I felt that President Trump’s success would open the floodgates for all sorts of independent candidates to emerge in 2020. Whether truly independent or loosely tied to their political party like Trump, more independent candidacies means more split votes.

If it happens where a handful of independent candidates garner enough votes, the result could be that no candidate — Republican, Democrat or otherwise — captures the majority of electoral college votes required to win the presidency. This requires winning 270 of the 538 electoral votes. If this were the outcome, the House of Representatives elects the president by voting among the top five candidates. Each house representative has one vote. Majority wins.

There is precedent for this but it was 200 years ago. These “contingent” elections occurred twice — first when Thomas Jefferson won in 1800 and again when John Quincy Adams won in 1824.

The last independent candidate to muster a legitimate presidential bid was Ross Perot in 1992. He won just 19% of the popular vote, carrying no states for a whopping zero electoral college votes. And that was considered remotely successful.

For this to occur today, it would effectively mean that the current two-party system is blown up, which a lot of people think is inevitable but has not come close to happening. So it seems unlikely that the above scenario would play out, but then again, after the 2016 election anything seems plausible.

In The Market...

The S&P 500 gained +2.5% last week. Let's look under the hood:

(price data via stockcharts.com)

Another nice week for stocks, which have now gained in five of the first seven weeks to start the year. Every stock sector was higher as rising momentum has sustained along the way. Bonds were more mixed, as Treasury yields rose (Treasury values fell) but not as much as we might have expected given the rally in stocks.

Last week I discussed how we incorporate the 200-day moving average into our analysis, highlighted by the fact that more stock prices were rising above their respective 200-day average prices. Last week, 50% of stocks in the S&P 500 were above that mark. Entering this week, 61% are above their 200-day moving averages.

This is encouraging because it reflects that the stocks that comprise the market (via the S&P 500) are rising together. If the S&P 500 index were rising but the percent of stocks above their respective 200-day moving averages was stagnating, it would indicate that the larger companies in the S&P index are doing all the heavy lifting (since the 500 companies in the index are weighted based on size).

However, there is a ton of potential price resistance ahead in the near future. In the chart below, I have circled the four previous instances over the past year where the S&P 500 tumbled upon trying to break out higher:

(created in stockcharts.com)

In comparison to the previous instances from this past October and December, stock price momentum is stronger today than it was last Fall. These statistics are not shown above, so you will have to take my word for it.

We sold the Cloud-Computing Tech fund (SKYY) and purchased an Industrials sector fund (XLI) across most accounts. While the software niche within Tech has been on a tear, prices were starting to bump up against previous highs. Industrials, meanwhile, appear to have more room to run before hitting resistance. As such, we rotated from one to the other.

Additionally, we purchased a Preferred Stock fund (PGF) for certain accounts, representing a bond position within those portfolios. Preferred Stock — and the broader bond market — continues to appeal on both short-term and longer-term time frames.

In Our Portfolios...


What's New With Us?

The snow finally cleared and the new highway-99 tunnel running through downtown Seattle has finally opened. Slowly our office hours are getting back to normal as we enter the thick of tax season.

Have a great week!

Brian E Betz, CFP®
Principal

Context, Context, Context

Hi everyone,

There is a narrative from this past week that I can’t let slide. I saw headlines Thursday afternoon praising the fact that January was the best month for the stock market in 30 years. Whether technically true or not, the reference lacks context. A more appropriate narrative would be something to the effect of:

“The S&P 500 is nearly even since the end of November, down -1.5% over that time.”

No doubt January was a strong month, but usually when we hear the “best” of something happened, we assume that great things are to come.

Is this the case? Will stocks zoom higher in February? No one knows for sure. But the story of January, in which stocks rallied more than +8.0%, cannot be told without realizing that stocks fell -10.0% the month before. Context matters. More discussion on my stock market outlook below.

Housing prices flatten: Real estate values were essentially unchanged nationwide in November and are up roughly +5.0% in the past year. Growth rates continue to level off, especially on the West Coast where homes in Seattle and San Francisco (both down -0.7%), as well as Portland (-0.5%) and San Diego (-0.6%) were all negative in the month.

Whereas Seattle and San Francisco used to lead the nation by a considerable margin in terms of annual appreciation, housing in both cities are only up roughly +6.0% in the past 12 months. I believe this is the fifth-straight monthly price decline for Seattle real estate. Here is a complete city-by-city look at this latest S&P/Case Shiller housing data:

In The Market...

The S&P 500 gained +1.6% last week. Let's look under the hood:

(price data via stockcharts.com)

Stocks up. Bonds up. All is great, right?

We are still not out of the woods. Here is the same long-term monthly chart of the S&P 500 index that I shared at the end of December. Stock price history over the past 6 months resembles three different points in time. These are the areas highlighted on the chart. Notice how in two of the three instances, stock prices fell a lot further in the months that followed. In the third (and most recent) instance, prices floundered a bit before starting a new, big rally.

(chart created in stockcharts.com)

No predictions here, just emphasizing the longer-term picture in terms of how recent market behavior plays into it. At the end of December, the market outlook was very negative. If we are to believe that is still the case, then January was just one big counter-rally inside of a larger downtrend. I will say that the short-term stock market outlook looks neutral-to-positive. New uptrends have to start somewhere, so there is a possibility that this is it. I would not count on that just yet, but certainly conditions have improved since one month ago.

Portfolio-wise we were really only active with our individual stock positions, for those accounts that own both stock funds and individual stocks. We captured a very nice gain selling Twilio (TWLO) and absorbed a modest loss on Microsoft (MSFT).

Heading into next week, the Software segment within the Tech sector continues to look strong. Health Care continues to look the best among all major sectors, while Real Estate (VNQ) made a big jump and is showing up on our radar as a potential breakout sector.

On the bond side, we will likely add Preferred Stock (PGF) sometime soon, as that asset class looks poised to continue its recent rally.

In Our Portfolios...


What's New With Us?

Going into Super Bowl Sunday I was really excited for what I thought was going to be a great game. I left being more excited about the fact that it had snowed 2 inches here, our first snow this Winter. I can appreciate a good defensive game, but it felt as much sloppy as it did a defensive struggle.

Have a great week!

Brian E Betz, CFP®
Principal

401k And IRA Contribution Limits Go Up For 2019

Hi everyone,

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

 A couple things to stress regarding IRA contributions:

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

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

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

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

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

In The Market...

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

(price data via stockcharts.com)

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

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

(chart created in stockcharts.com)

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

Now what?

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

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

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

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

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

In Our Portfolios...


What's New With Us?

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

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

Have a great week!

Brian E Betz, CFP®
Principal

Stocks Get A Santa Rally, Real Estate Slumps

Hi everyone,

Stocks and real estate sputter their way into the new year. Housing prices were flat again in the latest monthly report, based on the average of the 20 major cities tracked by the S&P/Case-Shiller report. Seattle home prices fell -1.1%, the worst among all major cities and the the fourth-straight monthly decline. Nearly half of the cities saw price declines, including San Francisco and Portland (down -0.7% and -0.6%, respectively).

The Southwest has seen a nice surge as of late, with Las Vegas homes up nearly +13% over the past year and Phoenix up nearly +8%. Despite recent declines, Seattle and San Francisco homes have still appreciated more than +7% annually, but those growth rates have tapered off compared to this past Summer. On average, homes are up roughly +5% nationwide in the past year.

Here is a complete city-by-city look:

In The Market...

The S&P 500 gained +2.9% last week. Let's look under the hood:

(price data via stockcharts.com)

The good news is that stocks bounced back somewhat coming off a three-week span in which the S&P 500 fell a collective -12%. Growth-oriented sectors led the way as most segments of the market were higher. This is nice to see. It appears the “Santa Rally” has been in effect, which is the seasonal tendency for stocks to gain over the last 5 trading days of the year plus the first 2 trading days of the new year. I don’t give much credence to seasonal tendencies, but it is fun to track nonetheless.

The bad news is that this recent rally could be short-lived. The period right around Christmas is the lowest volume time of the year, meaning it sees the least amount of investor activity. As investors come back from the holidays and volume picks up, we will have a better sense for whether the market has hit a bottom or if lower-lows are ahead.

Technically speaking, there wasn’t much improvement this past week. The end of the year tends to be a crap shoot too because many investors are looking to buy/sell solely for tax reasons. If I were to guess, I would imagine that there are a lot of investors who are looking to sell once the new year rolls over. That is a negative near-term outlook, based on nothing more than my gut opinion.

The bigger issue is the long-term view of the market. At the end of October, a month in which the S&P fell roughly -7.0%, I showed the below monthly chart of the S&P 500 index. I indicated that there were 5 points in history dating back to 1987 that resembled how the market looked at October-end. Two of those comparable points in time had positive outlooks, while the other three were starkly negative. The market was unable to rebound after the sharp October declines, making the outlook more and more bearish:

(created in stockcharts.com)

In terms of price movement there are comparisons to be drawn between today and the past two recessions. The most significant resemblance shown on this chart is that Relative Strength (RSI) is fading. This is shown in the smaller chart above the main chart. RSI has gone from a reading above 70 to falling below 50 in a few short months. As a reminder, we want RSI to stay elevated because a higher value means greater positive price momentum.

The one thing the above chart does not mean to indicate is that we should expect losses the likes of 2001 or 2008. The S&P fell more than -50% from those peaks, whereas today it is down roughly -20% from the recent peak. It does not mean we are in for an additional -30% decline. What it means is that the future long-term outlook is simply much more negative than positive, however negative that may be if it comes to fruition.

We added to our long-term Treasury bond position (SPTL) last week across most accounts. No other major changes on the week.

In Our Portfolios...


What's New With Us?

We enjoyed a fun Christmas hosting family. We mostly hung around our house, which was nice. Other than that it was a normal work-week for us. I hope you all have a safe New Year’s.

Have a great week!

Brian E Betz, CFP®
Principal

How Different Investment Accounts Are Taxed

Hi everyone,

Before I get into the latest housing numbers and last week’s stock market performance, watch our brief video explaining how different investment accounts are taxed. Hopefully this serves as a good resource as you start prepping for tax season in January.

Let us know if anything is unclear or if you want additional information regarding taxes.

Real Estate: Home values continue to stagnate nationwide. Home prices were unchanged in the month of September and fell for the second-straight month in Seattle, down -1.3% (per the latest S&P/Case-Shiller report). Seattle was the biggest loser among the 20 major cities tracked, of which 8 cities experienced monthly price declines. Year-over-year, Seattle homes remain +8.4% higher, which is above the +5.5% national average but a far cry from the +13% growth of just a few months ago.

Take a look at how each major city behaved:

Las Vegas has been on a tear, up +13.5% annually, while San Francisco remains in the second spot (up +10%).

In The Market...

The S&P 500 gained +4.7% last week. Let's look under the hood:

(price data via stockcharts.com)

The stock market was resilient last week, almost the exact opposite of what had happened the week before. Coming off a -4% weekly loss, the S&P index rallied nearly +5% as all 10 sectors gained.

There were some distinct positives about last week, including the S&P getting back above its 200-day moving average. The end of the week happened to coincide with the end of the month, for which the S&P gained +1.8% in November. It really was not a good month for the market considering stocks lost roughly -7% in October. Most of the same risks that I have been emphasizing since then still exist. Prices are likely to remain choppy, although the news on Sunday that there may be some trade tension relief between the U.S. and China seems to be boosting stocks to start this new week.

We finally added the Health Care sector fund (XLV) that I have mentioned over the past few weeks. By my estimation, Health Care is the strongest sector and last week’s rally has it poised for a bigger run. We will see.

Most client accounts are getting closer to being fully invested, although we are still holding some cash. The bond market continues to flail around, providing no good opportunity. Until that changes, any accounts that include an allocation into bonds will continue to hold cash instead. Contact us if you would like to discuss.

In Our Portfolios...


What's New With Us?

My family went to Safeco Field on Saturday evening, which was transformed into a holiday event called “Enchant Christmas”. From the light maze to ice skating to all of the other activities and vendors there, it was a cool event that apparently will be there all month. Our daughter loved it, as did we.

Have a great week!

Brian E Betz, CFP®
Principal

Housing Prices Come To A Halt

Something happened for the first time in a long time… Housing prices fell.

Not everywhere, just on the west coast. Seattle real estate dropped -1.6% and San Francisco homes dipped -0.3% in August, per the latest S&P/Case-Shiller report. Home prices were broadly flat nationwide during the month and are +6.0% higher compared to one year ago.

Here is a city-by-city look:

Despite the monthly loss, Seattle real estate has still appreciated +9.6% annually. Las Vegas remains atop all major cities, up +13.9% year-over-year, while San Francisco moved into the second spot (up +10.6%).

The annual growth rate has slowed just as I predicted a year ago or so. But growth is still growth, even if it is not the double-digit clip that most homeowners have come to expect over the past few years. I believe prices will slow a bit more, especially amid higher mortgage rates. I cannot speak to how loose or rigid the lending standards are compared to the past few years, but two factors working against housing demand are higher rates and a tepid stock market.

In The Market...

The S&P 500 gained +2.1% last week. Let's look under the hood:

(price data via stockcharts.com)

Last week was constructive, though not great. Most sectors rallied, which boosted the S&P 500 back above its 200-day moving average. This is a positive, but only if it sticks. Soon after the S&P eclipsed its 200-day moving average on Wednesday, selling picked up and pushed prices back down a bit.

These types of stalled-rallies are often the result of what many call “overhead supply”, where investors who held throughout a period of losses are looking for the first opportunity to sell their holdings once prices rebound. This amount selling (“supply”) overwhelms the number of investors looking to buy, which results in falling prices.

During strong markets, investors look to buy when prices fall. During weak markets, investors look to sell when prices rise. Is this a “weak” market right now? Tough to say. I tend to think so, but the next few weeks should bring clarity.

I do think the market will eventually resolve itself by moving higher, but right now I think investors remain a little too complacent coming off the October decline. The bet would be that this complacency leads to additional losses, until stocks have reached a truer “bottom” than the one we saw a few weeks ago.

We added a S&P 500 index fund (SPYD) that is weighted in S&P stocks that pay the highest dividends among the index components. We also added to our Utilities fund position (FXU). Health Care remains the top sector that we are looking to add when appropriate.

In Our Portfolios...


Have a great week!

Brian E Betz, CFP®
Principal

Seattle Housing Streak Comes To An End

Seattle's run is finally over.

For the past few years Seattle real estate has consistently ranked #1 in terms of annual price growth. That remarkable run ended when Las Vegas knocked Seattle from its perch in the latest S&P/Case-Shiller housing report. Homes in Vegas rose +13.0% year-over-year, compared to the +12.8% growth in the now second-ranked Seattle. San Francisco sits in third, up +10.7%.

On average, home values increased +6.0% in the past year nationwide, including +0.8% in the most recent month reported (June). Here is a full city-by-city look at the housing data:

Real estate continues to chug along, although the market here in Seattle does not seem as hot as one year ago. There are fewer homes for sale and those that are seem to be on the market longer than in 2017 and 2016. If we fast-forward one year I would anticipate we will see home values settle in to a +5% or so growth rate. So, slightly lower than what we see today.

In other news... here is something I never thought I'd see...

The ride-sharing service Lyft is reportedly preparing to go public in 2019, ahead of its rival, Uber. This seems crazy. Uber has become brand-synonymous, like Kleenex is to facial tissue. Uber has become a verb, like "Googling" has replaced "searching". Uber is much larger, both in terms of revenue and market share. Uber's most recent capital raise from Aug. 2018 valued the business at $71 billion. Lyft's most recent capital raise from June 2018 valued its business at $14.5 billion.

For Lyft to IPO before Uber it must be betting that it will continue to eat into Uber's market share in the coming years. Uber has had a slew of problems in recent years, which has opened the door for Lyft to carve out a bigger slice of the market. Whether Uber's problems have delayed its own IPO process is unknown. I believe so.

While most focus on Uber vs. Lyft, I have long contended that Amazon remains the biggest threat to both companies. I am not sure if Amazon will ever decide to enter the ride-sharing market, but if it does it would mean serious problems for both Uber and Lyft.

In The Market...

The S&P 500 gained +1.0% last week. Let's look under the hood:

(price data via stockcharts.com)

So much for seasonality? The S&P climbed higher for the third-straight week and fifth-straight month, rising +3.2% in August. The ascent to new all-time highs ran counter to the poor seasonality typically associated with August. Most sectors were positive this past week, which was a quintessential "risk-on" week with the growth sectors leading the way and the more conservative ones lagging.

Looking ahead, stocks appear primed to rally. Here are 3 reasons why:

  • The new record high for the S&P 500 is bullish because, well, new highs are bullish.
  • Market strength is well distributed across all 10 sectors, as 70% of the 500 companies in the index have prices above their respective 200-day moving averages. This is a very important metric to us. The ratio is 10% higher (69% vs. 58%) compared to the number of stocks that traded above their 200-day moving averages back when this rally started in April.
  • We are quickly approaching the fourth quarter, which is seasonally the strongest period of the market year. Given the contrary nature of how August just behaved this reason may seem less valid, but historically Oct/Nov/Dec. sees the best gains for stocks.

Of course, nothing is guaranteed so we will see. But right now the outlook is pretty good.

In Our Portfolios...


What's New With Us?

We stayed around Seattle this past weekend. We went to a bbq and took our daughter to the zoo. I did some work around the house, which included 4 or 5 hours fixing an issue with our refrigerator. The good news is I think I fixed it.

Have a great week!

Brian E Betz, CFP®
Principal

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®
Principal

Home Prices Plow Higher While Stock Prices Hit A Wall

As home prices surge, Seattle real estate clings to its lead.

Real estate appreciated by an average of +1.0% nationwide during the month of April and +6.4% over the trailing year. Seattle real estate blew away those averages, rising nearly +3.0% monthly and +13.1% annually. Seattle homes continue to lead the country, in what has been an impressive streak over that past couple years. But that streak may end soon as Las Vegas narrowed the gap even further, where homes have risen +12.7% yearly. San Francisco is back in the mix as well (up nearly +11.0%) and could reclaim the top spot.

All 20 major cities tracked in the Case-Shiller report were positive during the month. Here is a complete look at how home prices have changed across the 20 major cities:

This data is very encouraging considering that April is a telling month when it comes to home sales. There is a two-month lag on this data, so I am interested to see how the numbers look for May and June. An annual appreciation rate of +6.0% is nice and steady and just what we want to see. But with mortgage rates on the rise that growth rate is likely to come back a bit in the coming months.

In The Market...

The S&P 500 fell -1.3% last week. Let's look under the hood:

(price data via stockcharts.com)

The S&P index fell for the second-straight week. Only three of the 10 stock sectors were higher, with the defensive Utilities sector as the big riser. Half of the sectors lost more than -1.0% apiece on the week.

Bond values rose as well as interest rates have fallen in five of the past six weeks. After the 10-year U.S. Treasury Bond yield rose to 3.0% back in April it has gradually slid lower. In the long run I do think the 10-year yield will get back above 3.0% but this short-term decline is not a huge surprise following the spike that rates had gone through since the beginning of the year.

The S&P 500 gained +0.6% in June, which is good but the bigger picture remains pretty blurry. The losses over the past two weeks has resulted in a second failed attempt to reclaim the record high from January. I have circled these two instances in the following chart of the S&P 500:

(chart created in stockcharts.com)

The market has gone nowhere over the past five months. It is concerning that the S&P 500 has been rejected both times it has run up against those two price-points highlighted above. But perhaps more telling than this price movement is the fact that there are fewer companies whose individual share prices are above their respective 200-day moving averages. This is shown in the lower, smaller chart (red line). Entering this week only 55% of those 500 companies are above their 200-day moving averages. Should that percentage fall much further it could result in a much larger market sell-off. This was the case back in Aug. 2015, Sept. 2014 and July 2011.

It is too soon to know if history will repeat itself in terms of a sell-off. We did sell our Consumer Discretionary sector position last week (XLY) as our analysis indicated it could be topping a bit in the near-term. This frees up a bit of cash to take advantage of discounted prices, should the market in fact fall in the coming days/weeks.

In Our Portfolios...


What's New With Us?

I will be out of town this Thursday and Friday, but will be available remotely. I hope everyone has a fun and safe July 4th holiday!

Have a great week,

Brian E Betz, CFP®
Principal

Full Steam Ahead For The Fed

New Federal Reserve Chair Jerome Powell is wasting no time when it comes to raising interest rates.

The Federal Reserve decided to raise short-term interest rates for the second time this year and the 7th time since it started increasing rates back in Dec. 2015. It did so by upping the Federal Funds rate from 1.50% to 1.75%. This is the lending rate that most banks use as a benchmark for issuing short-term loans or deposits. That makes two rate hikes in the three Fed Committee meetings that have been held since Powell took the reigns in early February.

Steady economic growth and stronger employment were the chief reasons the Fed cited for the decision. This is a normal development as the economy expands, as a higher Fed Funds rate aims to keep inflation running at a moderate pace, rather than running too hot (risking "hyperinflation") or too cold (risking "deflation").

If it seems like rates are rising quickly, keep the following chart in mind for historical perspective. After 10 years the Fed Funds rate is finally back to a pre-recession level, following a prolonged stint of near-zero percent rates.

As you see, even at 1.75% short-term rates are paltry compared to almost any other point over the past 60 years. Powell and the other Fed committee members seem intent on raising rates further in the months to come.

Which state has the strongest economy? On a lighter note, WalletHub evaluated the economies of all 50 U.S. states (plus Washington D.C.) and ranked them based on economic activity, economic health and innovation potential. Guess which state ranked #1?...

Washington.

Washington ranked 1st in terms of economic activity, 4th in economic health and 2nd in innovation. What surprises me most about this list is the broad strength of the western states, specifically the Pacific Northwest. You can see which states ranked 1-10 here.

Bye bye "Head Tax": The Seattle City Council (wisely) reversed course on the "Head Tax" it passed just weeks ago that would have taxed large companies $275 per-employee to help generate funds for Seattle housing and homelessness. The City Council voted 7-2 in favor of repealing the levy, after a unanimous vote to pass it in May.

At the center of the debate was Amazon, which would have accounted for the lion's share of the tax given the hiring binge Amazon has been on over the past decade. However, nearly 600 other companies would have been subject to the tax as well. While the tax was more widespread, to me the bigger issue was that it seemed arbitrary and counter-intuitive. Apparently others agreed and there was enough push-back to make the Council not only reconsider, but undo its decision.

I am glad that the City Council righted what I believe was a wrong. If you want to read more about it, this is what I wrote last month.

In The Market...

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

(price data via stockcharts.com)

It was a mixed few days for the market, hence the S&P 500 finishing essentially unchanged for the week. Defensive sectors like Utilities and Consumer Staples were the big winners. A primary holding of ours, Consumer Discretionary, was a top-performer as well despite the fact that other growth-oriented sectors were in the red.

Over the past few weeks the Consumer Discretionary sector (XLY) has behaved as we anticipated. We have owned this sector fund within most client accounts as it has rallied during that time. Here is a look at how the price of the Discretionary sector has ascended to a new all-time high over the past two weeks, indicated by its move above the dashed pink line. This is bullish. Take a look...

(chart created in stockcharts.com)

Buying momentum has been strong for this sector based on Relative Strength (RSI), which is shown as well (the smaller chart on top). This helps substantiate the rally. If RSI were flat or falling that would make us second-guess how "real" this rally is. Put differently, if RSI were flat or falling right now I might be inclined to think that this rally would be short-lived. But it appears to have some legs behind it.

On the bond side we bought a Municipal Bond fund (PZA) for many accounts this past week. There are few areas of the bond market that we like right now. Muni bonds look relatively stronger than other bond types. The interest earned on owning muni bonds is tax-free. This may not be a long-term holding, especially for tax-deferred IRA accounts, but muni bonds present what I believe is currently the best bond option next to high-yield bonds (which we already own).

In Our Portfolios...


What's New With Us?

I will be enjoying my favorite sporting event, the World Cup, and hopefully watching some of the U.S. Open. Happy Father's Day to me and all you other dads!

Have a great weekend,

Brian E. Betz, CFP®
Principal

The Real Estate Reign Continues In Seattle

First, it was the renewed fear of a trade war with China. Then there was fear that Italy would leave the European Union (EU) following political instability. Then there was fear of a different trade war following tariffs placed on Canada, Mexico and the EU.

All three of these major developments happened this past week, and yet, U.S. stocks moved higher. Another reminder that there are news events and then there is how investors act. The two behave independent of one another and this was another example of that.

Despite the weekly gain stocks didn't exactly hit the cover off the ball. Overall the market is still moving mostly sideways, but it is optimistic how resiliently most equity sectors have held up lately. More on this below.

Two solid economic reports were buried in the news. Unemployment improved even further in May, falling from 3.9% to 3.8%. I won't spend time discussing this, but will refer you to what I wrote last month about unemployment dropping to a 50-year low if you want to see some historical perspective.

The other encouraging report, especially for us West Coasters, was the latest Case-Shiller housing numbers. Home values gained nearly +1.0% nationwide in March, rising in all 20 of the major cities tracked. Homes have appreciated by an average of +6.5% over the past year.

Seattle housing lapped most of the field yet again. Seattle real estate gained +3% in March and +13% over the past year. Las Vegas, where prices have risen +12.4% annually, may be primed to knock Seattle off its perch in the coming months based on the momentum building there. San Francisco is still in the picture as well, where homes are up +11.3% year-over-year.

Here is a city-by-city look at the latest housing numbers:

There is a two-month lag to these Case-Shiller numbers, so I will be interested to see if housing remains as hot into the Summer. I sense they will level off a bit more, as interest rates have risen and made financing more expensive. Speaking based on the areas I observe around Seattle, there appear to be fewer homes for sale than in years past. While reduced inventory is nothing new, I have noticed that homes have not been selling as fast compared to previous Spring seasons. Perhaps that is limited to my neighborhood or perhaps I'm mistaken, but that is my sense.

In The Market...

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

(price data via stockcharts.com)

At the sector level you will notice that returns were fairly split. Energy prices bounced back following a horrible prior week. Technology surged and continues to be the most attractive stock sector on all time-frames we analyze. The trade war and European tensions may have taken a toll on Financials, which were the worst-performing sector as interest rates dropped. 

The S&P 500 gained +2.4% in May but remains -5.0% below its all-time high. So there is still work to be done. I have been saying for the past few months that I felt a Tech rally would be needed in order to spark an entire U.S. stock market rally. If this past week is any indication we might see that very soon.

For now though the broad market is stuck in neutral. I had speculated that stocks would move sideways for a while coming off the big drop in February and unfortunately they have. We continue to own the two sectors that appear superior to the rest -- Tech and Consumer Discretionary.

In Our Portfolios...


What's New With Us?

Joshua Baird officially joins the team on Monday. I am excited for his arrival and the many contributions that he will bring to our firm in the future.

Have a great weekend,

Brian E. Betz, CFP®
Principal