Stocks Top Out As China Trade Tensions Rise

Hi everyone,

China and tariffs are dominating the headlines right now. Trade tensions between the U.S. and China are being blamed for the recent stock market decline. The two sides are apparently far apart on a deal. as President Trump announced more tariffs going into effect on Friday. And so, because tariffs are bad for commerce, it logically follows that stock prices would fall.

But is this actually the reason stocks have fallen in recent days?

Maybe. But I have another take, which doesn’t involve leaning on the news in hindsight to explain why the market behaved how it did.

Before I go further, let me say that I remain bullish. One bad week doesn’t change that. In regards to last week, it is not surprising that stocks pulled back from recent highs. This is quite common when prices approach previous highs. Take a look at the following chart of the S&P 500 index. After it eclipsed the previous high set back in Sept. 2018, notice the trouble the market has had holding onto those gains (horizontal blue line)…

(chart created via

It is not unusual for sellers to show up near previous highs like they are doing here. This can occur independently of a trade war. There is no way to know what motivates each investor to buy or sell. Since we do not attempt to guess as much, we certainly would not peg a market rise or fall to the odds of a trade deal being struck.

There is pretty clear resistance around the 2,925 level for the S&P 500. It might take a couple knocks on that door in order to blow it open to more meaningful highs that actually stick.

If prices slide further from here, we may reduce certain positions if we believe that more losses will ensue. We did this a bit last week, but are still looking to buy if stocks can find some footing. As such, we are sitting on a decent cash position in most accounts. This should be temporary, but I believe it is prudent in the short-term given last week’s move.

As always, if you have questions about where the market is at or want to discuss your portfolio risk to check that it is aligned with what best fits you, feel free to contact me directly.

In The Market...

The S&P 500 fell -2.0% last week. Let's look under the hood:

(price data via

The S&P index had its worst loss since early March, as every major stock sector was in the red. The bond market provided a nice hedge of sorts, as investor demand to migrate into bonds pushed bond prices higher.

We were a bit more active than normal last week. A couple of our stop-loss orders triggered, which means a portion of a position was sold when its price fell to a specified value. Meanwhile, we purchased a Semiconductor sector fund (XSD), as we believe it has the potential to rally after falling some -9% from its recent peak. This is the same fund we owned a number of weeks ago and had sold near the previous top. Given its pullback I think it once again looks appealing to own.

In Our Portfolios...

What's New With Us?

I am going to switch up this blog in the coming weeks. Instead of doing a written post I will instead post a brief video containing our weekly update, narrated by me. I think it may be a bit more engaging so I welcome your feedback when we make that change.

On a personal note, we enjoyed a nice Mother’s Day that included going to dinner at Anthony’s along the waterfront. Since the weather was so great I stained our new fence, which is nearly finished.

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®

14 Things I Think About The Recent Stock Market Drop

Hi everyone,

Normally this time of year there is very little to write about. Not the case right now. I may have more to say right now than any time over 7 years and the 350 or so weekly blogs I have written.

I want to start by wishing you all Merry Christmas and Happy Holidays. I hope you are enjoying time with friends and family over the next few days.

I am going to break this down in 3 parts:

  1. What has happened in the market these past few weeks and the damage the market has incurred in December.

  2. My opinion in light of current market conditions.

  3. How we are currently invested, what we have done and what we plan to do next.

In The Market...

The S&P 500 fell -7.1% last week. Let's look under the hood:

(price data via

The -7% decline is the worst for the S&P 500 in more than 7 years. The S&P is down -9.7% for the year with basically one week left. Barring a Christmas miracle, it will be the first down year for stocks since 2008 (2011 and 2015 were essentially flat years).

Last week I posted a chart of the S&P and emphasized how stocks were teetering on the brink of a potential drop. That was not meant to be a prediction, but more so an illustration of the risks that persist. There are multiple risks that I have consistently highlighted dating back to October. Here is that same chart from last week, updated accordingly with the fat red candle on the end that reflects last week’s S&P decline:

(chart created via

The S&P 500 fell through the trap door of those two dashed lines (1 and 2). Those lines coincidentally converged at a price level that may have provided support for stock prices to bounce. It did not. When that support is not held, prices can fall quickly as they did last week.

The headwinds that led to this have been there for weeks. A variety of statistical measures implied that this could happen, from falling moving averages to dwindling price momentum (via Relative Strength). It does mean it was destined because the market has a way of surprising. But the warning signs were there and is the reason we have been sitting heavily in cash the past few weeks.

So now what?

There are two problems I keep coming back to, one of which is more short-term and the longer is more long-term. In the near-term, I get the sense that most investors remain too complacent. Whether that is because they are focused on the holidays or they think that stocks will quickly bounce back like they have at other points in the past decade or they simply do not want to think about it whatsoever. Whatever the reason, it feels like most people are not paying attention. This complacency is one of the reasons I think the market has further to fall in the weeks ahead.

The longer-term problem is that we have shifted from a market where investors are looking to buy when prices drop to a market where investors are looking to sell any rallies. This difference is stark. The whole idea of a rising market trend is that investors are itching to buy when stock prices fall. This leads to prices rising higher and higher over time. In contrast, when the market is damaged like it is, many investors cross their fingers that they can make back something before selling. This leads to prices falling lower and lower over time.

Mark my words, there will be rallies. Significant ones. But they are likely to be followed by more downside volatility.

Here are some of my other thoughts regarding current market conditions and investing behavior, in no particular order:

  1. If someone says they predicted this market drop, take it with a grain of salt. I won’t refute that they may have said it, but I would question how many other times they previously said as much in recent years, only to be wrong. On a long enough timeline any prediction can come true. Most people use hindsight only when it works to their advantage.

  2. Evaluate others not on what they say, but what they do. If someone has believed that the market would plunge, I would be eager to see what they actually did about it within their investment accounts. If they are still heavily invested in stocks or stock-heavy funds, they are contradicting themselves.

  3. If this month is causing you to reevaluate your risk tolerance, good. That does not mean you necessarily need to change anything, but it is important that the risk tolerance you say you are comfortable assuming is actually something you are willing to tolerate.

  4. Focus on the future. You cannot affect what has already happened. With investing, if you dwell on the past without learning anything tangible, it will likely result in making a poor, emotionally charged decision. This is why most investors buy high and sell low.

  5. Have a plan. Be ready for when the time comes. I spent time this past week generating a list of stocks and funds that are on our “buy list” for when market conditions improve. That way we can hit the ground running when it comes time to reinvest.

  6. Your goal should be to capture gains and limit losses. Your goal should NOT be to maximize gains and prevent losses. Notice the difference? For instance, if the market is falling you need to realize and accept that you will lose money. But it is about softening those blows, not eliminating them. If you focus on eliminating them you will be more apt to respond irrationally.

  7. Focus on the long term, which is months and years, not days and weeks. If you are watching your account every day or even every week, it accomplishes very little and will only stress you out.

  8. Do not stop investing. Keep contributing to your retirement accounts. It does not mean you should necessarily buy stocks right now, but it is good to keep the cash contributions coming so that you maintain a consistent behavior.

  9. Buy-and-hold investing is a fine plan if you are comfortable with the volatility associated with the investments you own. If you are not, then it may not be the best plan because when the market falls you rely on hope, not process.

  10. The market can fall -10% or -20% in a calendar year and it does not mean we are having a repeat of 2008. Different times. Different market conditions.

  11. Are we in a bear market? I don’t know and I don’t care. It doesn’t mean anything tangible. I say “bullish” and “bearish” to distinguish between positive and negative, but I don’t get into defining whether we are in a bull market vs. bear market.

  12. If you hear that stocks are “undervalued” or “overvalued”, disregard it. Supply and demand is the only thing that determines price and is the only thing that matters.

  13. Forget politics. In the same way that I did not credit President Trump when the market rose throughout 2017 I do not blame him for the market falling today. If you disagree with me that is fine, but you are wasting your energy because you cannot prove it. We have an innate tendency to want to explain why things happen. Politics are an easy target for that. But ultimately you cannot know what motivates buyers to buy and sellers to sell, so it is a fruitless exercise to credit/blame politicians.

  14. Guess what? In the long run, stocks do go higher. As I wrote back in February and again in October, it likely would be a bumpy ride for a while. But unless you refute 100+ years of market history, eventually the market will recover.

What we are doing: As mentioned we have been holding a significant cash position across most accounts, so December has not been as bad for us as it has been for others. Most accounts continue to be anywhere between 50% and 75% cash. With that said, we are not 100% cash so some level of loss is likely when the market tumbles like this.

We continue to hold a Health Care sector fund (XLV), which turned out to be a poor buying decision in hindsight. But I can live with it given the high percentage of cash we are holding and the fact that Health Care, relatively speaking, remains the healthiest segment among the 10 major stock sectors.

We cut our position in the high-dividend S&P index fund (SPYD) very early in the week. So, while half of that position bore the brunt of the full week, the half we sold was fairly unscathed.

The bond market has perked up in the past few weeks, as it often does when stocks decline. We added a small position in a long-term U.S. Treasury bond fund (SPTL) at the very end of last week. In the event that the stock market moves lower, there are relatively good odds that more investor money will flow into conservative investments, such as Treasury bonds. However, because the near-term odds of this are not quite as bullish as we would like to see just yet, we kept the size of the purchase pretty modest. We will look to add to this position if bond market conditions keep improving as we think it may.

For accounts that own individual stocks, we have had a couple misses in the past two weeks but have done an okay job of limiting those losses.

In Our Portfolios...

What's New With Us?

Enjoy the holidays. If you have any questions, we will be working all week (Christmas aside). I deeply appreciate the trust you all place with us to make wise investment decisions. In doing so we will continue to levy our best judgment based on the rigorous amount of analysis that goes into our investment process.

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 Biggest Mistake You Can Make

Top Of Mind...

I saw a news story the other day where supporters of President Trump were hailing him and his policies as the sole reasons for this persistent stock market rally. Ironically though, none of these people interviewed were investing themselves.

This got me thinking...  As the U.S. stock market just completed its 4th-straight weekly gain to start the year and its 17th among the past 20 weeks, most of the conversation is about how impressive this market rally has been and how much longer it will continue. For me though, there is a more relevant, tangible conversation that should be happening that supersedes our sentiment on the market...

How you put money to work.

This is the most important thing you can do. It does not just mean buying stocks and bonds. You could invest in real estate. You could pay down interest-bearing debt. You could invest in your skills/education in order to boost your future career earnings potential. You could start a business. There are many ways to effectively use money rather than stockpiling cash or spending it frivolously.

This concept is simple, but gets overlooked if we are consumed by the ebbs and flows of the market or the impact that one, polarizing political figure might have on the economy. As I wrote on this blog pre-election, no one knows how the market will react to uncertain, future events. So there is no point wasting our energy trying to predict as much.

Instead, focus on the biggest known risk: Inflation. It is a fact that the price of goods and services will increase in the long run. Always. Yes, some markets have experienced peaks and valleys, like real estate and stocks did last decade. But both of those have since rebounded and gone on to new highs. Meanwhile, there are other areas where prices have constantly appreciated, recession or not. Here are three I often cite:

Child care -- Because people have not stopped having kids
College tuition -- Because kids have not stopped going to college
Health care -- Because no one has stopped aging

Prices will continue to rise, so how do we at least keep pace with inflation? By putting money to work. Invest in such a way that you outpace inflation. Pay down debt so that you increase your capability to invest. Invest in yourself so that you maximize your single greatest asset for making money...  YOU.

It is important to maintain an adequate cash balance. In fact, this is one of the first things we address in financial planning because having cash means not having to take on debt in the event of a budget crunch or emergency. But cash is a little like Vitamin C -- the right dose of it is good for your health, but having more than you need will not make you any healthier.

I would recommend taking a step back and using tax season as a good opportunity to take inventory of how your assets and debts are dispersed. If you feel you are sitting on too much cash, are spending too much or are not investing enough, let's talk. The biggest mistake you can make is failing to put your money to work for your future. Most of us work years and years for money, but shouldn't that money work years and years for us in return?

In The Market...

The S&P 500 gained +2.2% this past week. Here is how the individual sectors performed:

(price data via

Another impressive week for the U.S. market. The S&P is now up +7.5% this month, which would be the best January since 1987 provided the bottom does not fall out in the three days remaining. This plays well for those who trust in The January Effect, which is a seasonality-based belief that however January goes, so goes the rest of the year. Historically, The January Effect has been more predictive than not, but the results are not overwhelming. In some ways it is self-fulfilling, given that the odds for the remaining 11 months will slant based on how January performs.

At the sector level this was arguably the best week of the year. Every sector was up more than +1.0%, This was good news for our positions in Financials, Utilities and the two growth-oriented index funds we own. It was also good news for the gains we recognized from selling our Technology sector fund (XLK) this week.

Somewhat surprisingly, bonds had a good week as well. I highlighted last week how long-term interest rates might be on the verge of a major breakout, which would be bad news for bond owners. The bond funds we own (high-yield, investment-grade corporate and long-term Treasury) managed to gain on the week despite the fact that the 10-year Treasury bond rate actually DID rise from 2.64% to 2.66%. It was a minimal increase, but an increase nonetheless. I am lukewarm on Treasuries right now and am actually looking for the right opportunity to sell that position (TLT) if it presents itself.

In Our Portfolios...

In Financial Planning...

One more note about tax forms (and hopefully my last)... As mentioned previously, TD Ameritrade tax forms will be available over the next month. In addition, for most of you there will be a second 1099 form for the time in 2017 that we held accounts at Scottrade. The following relates to how you will receive those Scottrade tax forms.

Your Scottrade Form 1099 -- whether for a taxable account or an IRA (or both) -- should be available in the next week or so. They will be sent to you using the same delivery method by which you were previously receiving Scottrade statements. For most of you this means email. For some of you the forms will be mailed to your home. For those of you who are newer clients and never had an account with us held at Scottrade, disregard this altogether.

In recent weeks I have said to ignore any notices you receive from Scottrade. Let me revise that... KEEP any notices you receive that resemble tax documentation. Unfortunately, I cannot call Scottrade on your behalf and request information because our firm is no longer a servicing firm to them. So, if for some reason you do not get the information you need or want to follow-up on something with Scottrade, you will need to contact them.

You can do so by calling: (800) 619-7283. Provide Scottrade with your old account number (which I can provide) and they should be able to put in a request with their back-office to provide you whichever forms are needed. I apologize that I cannot do this for you, but again, our firm is no longer authorized on those legacy accounts because they were closed out when the funds were migrated to TD Ameritrade back in May 2017.

Finally, if you deduct investment management fees as an itemized deduction in your taxes, I can provide you those fee numbers. This current tax season (2017) is the last year you can do so following the recent tax law changes.

What's New With Us?

I am a little under the weather, so I am hoping to be back in top shape in a day or two. My goal over the next month is to try and watch all of the Oscars movies nominated for Best Picture. Hopefully I can stream one or two of them this weekend. It seems like a good opportunity.

Have a great weekend,

Brian E Betz, CFP®

Social Security Recipients Are Getting A Boost In 2018

In The News...

It has been a pretty crummy couple weeks between Las Vegas, North Korea, the Napa fires, the U.S. missing the World Cup, and so on. But there was one bit of good news last week.

If you are one of the 66 million Americans receiving Social Security benefits, your monthly amount is increasing by +2% next year. This comes after a +0.3% bump in 2017 and no increase in 2016. Social Security benefits are supposed to link to the change in the Consumer Price Index (CPI) to ensure that retiree payments keep pace with cost increases that gradually occur over time. This is referred to as the "cost-of-living-adjustment" (COLA). Here is the history of benefits increases, showing that 2018 will be the biggest change since 2011 (note that each year's COLA affects the following calendar year):

If you have yet to start taking benefits you are unaffected. This only affects those currently taking Social Security. If you are still working, age 62 is the youngest age you can begin receiving Social Security, albeit an amount that is permanently reduced if you take them early. For most workers, age 67 is the "normal retirement age" as determined by the Social Security Administration. That is when you receive your "full" benefit. You may instead delay taking benefits until the latest of age 70, which would increase your benefits by +8% for each year you postpone taking them. This means you could increase your benefits by a whopping +24% if your normal retirement age is 67 but you wait until age 70.

If you are married but did not work, you can receive a benefit equal to one-half of your spouse's amount. If you are divorced but were married more than 10 years you can receive benefits based on your ex-spouse, so long as you did not remarry. There are other nuanced rules, including widow benefits. If you want to know more, just ask. Your goal should be to balance maximizing your total Social Security payout with delaying payments no longer than when you need the money.

In The Market...

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

(price data via

STOCKS: It was a quiet, mostly positive week for stocks. Seven of the 10 equity sectors gained and the S&P 500 index continues to ascend higher toward 2,600, finishing last week at 2,553. It was the fifth-straight weekly gain for the broad-market index. Our Technology positions (namely XLK and QQQ) and our Utilities position (XLU) nicely outperformed the S&P 500.

BONDS: Interest rates fell as demand for Treasuries and Investment-Grade Corporate bonds picked up. This was a positive development considering we continue to own both within most client accounts.

In Our Opinion...

There were two quotes from last week that I would like to touch on...

No tax reform anytime soon? Senator Ted Cruz (R-TX) was on CNBC last week, where he said he does not see tax reform happening until the end of this year or sometime in 2018. Two weeks ago I discussed President Trump's tax reform plan (at least the details provided) and indicated that it has a legitimate shot of happening. I cannot say I am surprised that it will not occur in 2017. We are only a few weeks from the holidays and for as stagnant as Congress can be, legislation particularly slows down near year-end.

Trump credits the stock market for reducing national debt. It is little secret that the U.S. stock market has done well since the election nearly one year ago. This is more coincidence than correlation. Politicians will credit themselves if the stock market performs well during their tenure. And perhaps they should, as long as it works for their agenda.

But the truth is, presidents and stock market performance are simply not correlated. For example... The internet took off during the Clinton administration. Should he get credit for the immeasurable positive impact that the world wide web has had on global economic growth? No he shouldn't, just in the same way that President George W. Bush should not be blamed because the tech bubble burst during the first two years of his administration and the S&P 500 fell some -40% from 2001-2003.

In order to properly explain why the market goes up or down you would have to know the motivation that every investor has for deciding whether to buy or sell, which is impossible. I have written about this before so I won't belabor that argument. But what is new is Trump's assertion that market gains have reduced the national debt. He cited that the U.S. government had borrowed $10 trillion during the Obama administration, bringing the total national debt to $20 trillion. He said that during his brief tenure the stock market has "in a sense" recovered $5 trillion of that $10 trillion in additional Obama debt due purely to market gains.

This is an outrageous statement. I don't care who the messenger is. This could come from any president, of any party. Not only is it inaccurate, but it is bizarre because it just doesn't make sense. Market gains will result in individuals paying more in the way of investment-related taxes and those types of capital gains and dividends taxes are sources of government revenue that drives the national budget. But such revenue increases are minimal when talking about $20 trillion in overall debt and a government that is adding to that amount by running a budget deficit most months.

In Our Portfolios...

Q&A/Financial Planning...

We are frequently asked, whether directly or indirectly, questions pertaining to what makes our firm's approach better/different than other options. I am considering hosting a webinar that details our investment process and philosophy, to help answer many of these questions. I can then save the recording and make it available on our blog at your leisure.

If this is something you would be interested in seeing, please share your thoughts. It will take some time to put this together so if I do it I just want to make sure that I cover the things you are most interested in learning about. Among the points of differentiation that I would include:

  • How we manage against risk -- How we use different types of bonds to truly diversify and mitigate stock market risk.
  • How we analyze the market -- We use technical analysis, namely price history and statistics that stem from price. This differs from firms that use other techniques.
  • Fees -- Warren Buffett famously said, "Price is what you pay, value is what you get." It can be difficult to compare fee structures between firms, but I believe ours is pretty straightforward and commensurate to the overall service we provide.
  • Financial planning -- This kick-starts the investment approach for most clients. Some investment advisory firms do not provide planning or provide it for an additional cost. We provide it at no additional charge so long as our $25,000 investment minimum is reached.

I welcome your feedback. I think it is important to know how we conduct business and ensure that we are consistent with your needs over time.

What's New With Us?

After six great years in our current office location I am likely moving our home office. I think it is good to mix things up every few years and this will be an opportunity to do that. We won't move far - in fact, my hope is to find a location that is more convenient for you to visit us here in downtown Seattle. If you happen to know of any available office space here in Seattle, please share!

Enjoy the rest of your week!

Betz Signature 250px.png

Brian E Betz, CFP®

Trump's Tax Plan Has Holes, But Also A Good Shot Of Happening

In The News...

Are major tax changes coming?

We got the first glimpse of President Trump's tax plan, and well, it told us a lot while telling us very little. Here are the notable changes:

CURRENT tax structure:

  • Income taxes: Today there are 7 different progressive tax brackets, ranging from 10.0% to 39.6%.
  • Standard deduction: $6,350 for individual tax filers and $12,700 for married couples who file together.
  • Itemized deductions: You can write-off many expenses, such as mortgage interest, donations and medical expenses exceeding 10% of adjusted gross income (AGI).
  • Corporate tax rate: 35% for C-Corporations.
  • Smaller biz tax rate: Varies for S-Corporation and Sole Proprietorship earnings as they flow through to the individual/family's personal tax rate.
  • Federal estate tax: 40% is applied to the value of assets left behind, if taxable estate exceeds $5.5 million.
  • Alternative minimum tax: AMT is paid by high-earners who receive what the IRS deems are too many deductions and exemptions.

TRUMP tax structure:

  • Income taxes: Reduced to 3 different progressive tax rates of 12%, 25% and 35%.
  • Standard deduction: Doubles to $12,000 for individuals and $24,000 for married couples.
  • Itemized deductions: Most deductions would be eliminated. Only home mortgage interest and charitable donation deductions would remain.
  • Corporate tax rate: Reduced to 20% for C-Corps.
  • Smaller biz tax rate: The maximum tax rate assessed on S-Corp and Sole Proprietorship earnings would be 25%, even if family rate is higher.
  • Federal estate tax: Estate taxes would be eliminated altogether at the federal level.
  • Alternative minimum tax: Similar to federal estate taxes the AMT would be eliminated altogether, without replacement.
  • Overseas income: Offshore income is given a one-time "repatriation" to come back to the U.S. at a low tax rate (currently, overseas income is only subject to foreign taxes).

Is the Trump tax plan good or bad? Unfortunately the devil is in the detail, which we do not have. We only heard what amounted to the positive tax changes, not the offsetting tax hikes or spending cuts likely needed to balance out the budget in future years. The argument will be made that economic growth will help subsidize lost tax dollars, channeling the age-old argument that...

Low taxes = More business production = Rising incomes = More gross income tax revenues

Is this true? I won't debate macroeconomics here. Besides, it may be a moot point anyway based on Trump's most probable path to passing tax reform. This path requires showing that his plan does not add to the federal deficit 10 years post-implementation. This refers to the "Byrd Rule", which essentially prevents laws from going into effect that will add to the nation's long-term debt. From what I have researched, Trump and the GOP would have to offset their various tax cuts with other sources of revenue (other tax hikes? budget cuts?) in order to comply with the Byrd Rule in the eyes of a non-partisan reviewer. Economic growth assumptions cannot be used as rationale to pacify the Byrd Rule. But we know darn well Trump will try to argue that, for better or worse.

So will tax reform happen? There is a legitimate chance it will, though like many people I am notoriously cynical and critical of Congress. This particular type of bill would only need a simple majority of 51 votes in the Senate rather than the normal two-thirds majority (60 votes). This has to do with the "reconciliation" clause that allows bills involving revenue, spending or the debt limit to pass with just 51 votes. This is a big deal because it simply means that a tax bill passes so long as all Republican senators approve it, rather than needing all GOP senators plus 8 Democrats to pass the bill. Republicans already control the House of Representatives, so any bill originating in the Senate would likely breeze through the House and quickly become law.

As for ensuring that any tax plan satisfies the Byrd Rule and does not add to the federal deficit 10 years down the road, it appears there are workarounds Republicans can employ. One option would be to sunset certain tax provisions as the 10-year mark approaches. Politically that would give the appearance of the "biggest tax cuts in history" while quietly allowing them to fizzle over time. Apparently this sun-setting technique was used 3 different times to implement tax laws under the most recent Bush administration.

A more likely scenario may be that there are, in fact, massive federal spending cuts or offsetting tax increases coming and Trump would rather let the air out of that balloon much more slowly.

So isn't tax reform a slam-dunk then? Like everything Congress does, it's complicated. Earlier this year Republicans applied reconciliation rules to the health care repeal/replacement. It seems because of that, some Republicans don't want to move forward with taxes until health care is completed. This led to the fumbled health care replacement vote back in July when the GOP could not muster 51 votes because a few Republicans (including AZ Senator John McCain) opposed it. Health care reform is priority to some Senate Republicans, who would prefer addressing that first before turning to tax reform.

(You might wondering... How did the health care bill qualify as a simple majority vote? Aren't the "reconciliation" vote rules reserved for budget-related bills only?

Great question. This is where I found myself digging way too deep into Congressional protocol. The best answer I have is that there is a disconnect between the spirit of the reconciliation rule and how it is used. Although the simple majority vote is technically reserved for budget legislation, many bills - including health care - can be argued to have budgetary consequence. If this is true, it seems like a slippery slope where more and more bills will avoid the normal two-thirds vote requirement over time because, well, what bill does not have budgetary consequences? This is a massive development considering Republicans could effectively pass any bill in the Senate if every one of the 52 GOP Senators are unified in their vote.)

One more roadblock: Additionally, a 2018 fiscal budget is necessary before tax reform can go to vote. While that should be easier since it will only need 51 Senate votes, we know it won't be. Similar to the failed health care vote, there is no guarantee that every Senate Republican will vote for whatever budget or tax plan is proposed. The longer this goes, the more fatigued Congress becomes and the longer everything drags on with little-or-no action. A movie we have seen before...

(Feel free to correct me on any of the above. Some of these procedures were news to me when I researched them this past week.)

In The Market...

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

(price data via

STOCKS: The S&P 500 ended the third quarter with a bang, closing the week, month and quarter at a new all-time high of 2,519. For the week, 9-of-10 sectors were higher, which continues to be bullish entering what is seasonally the best quarter of the year. Our Utilities position was unfortunately the lone loser last week, but only down -0.3%. Our positions in Financials and Technology both outperformed the broad market on the week by a nice margin.

BONDS: Long-term interest rates rose for the third-straight week. As such, conservative bonds slid while high-yield bonds and investment-grade corporate bonds were up mildly. We continue to own investment-grade corporate bonds in most accounts.

We invested the cash we had been previously holding by repurchasing bond funds. One of those, long-term Treasuries (TLT), is one we sold a few weeks back. At that time I posted the following chart here:

(chart created via

The first two notes on the above chart are what I wrote back in late-August. The shaded area highlights the weeks since then, showing how the price has fallen since we sold. We did so believing that Treasury bonds still posed a nice long-term opportunity. With the recent pullback I think bonds could be due to rally again. So we bought them again.

In Our Opinion...

Home prices appreciated +0.7% in July. Here are the notable price changes over the past year:

Seattle: +13.5%
Portland: +7.6%
San Francisco: +6.7%
National average: +5.9%

Seattle continues its reign as the hottest housing market, going on nearly a year now. Portland clings to its spot at #2, just ahead of a slew of major cities. This shows just how wide the gap is behind Seattle and everywhere else.

I often hear people say they will buy in the greater Seattle area when prices come back down. What they need to understand is that not everything that rises quickly in price is a bubble due to burst. I do think Seattle price gains will slow in the next 6-12 months, but prices slowing is far different from prices falling. I think San Francisco is a good reflection of this. Price growth in San Francisco ranks 9th among the 20 major cities in this latest S&P/Case-Shiller Home Price Index, whereas San Francisco was #1 for a very long time and was well ahead of the next-best city much like Seattle is now. I would suspect that Seattle will experience a similar arc.

But even if homes in Seattle appreciate at just 7% or 5% or even 3%, the point is they ARE rising. If you think timing the stock market is tough, good luck with real estate. Housing recessions do not come along often. In fact, 2009 is the only time over the past 60 years where prices definitively dropped. There were instances in the late-60's and early-90's where prices plateaued, but again, we're talking flattened prices not falling prices. I will side with history and say that, if anything, a price plateau is more realistic than a precipitous drop.

Here is a complete look at the monthly housing numbers by market:

In Our Portfolios...

Q&A/Financial Planning...

Quick comment in light of potential tax reform coming. If it looks likely that tax reform will happen and that new laws will dramatically impact how your investments are taxed (good or bad), we will work to make any necessary decisions before year-end.

I have not received any questions for a couple weeks. If you have any questions as it relates to financial planning, investing or our process, feel free to ask!

What's New With Us?

I will be trying to stay dry this weekend, with the exception of going to the Seahawks game this Sunday night.

Have a great weekend,

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Brian E Betz, CFP®